UC-NRLF l»»>«HI>mil»MIIIWf M«jm<|lllllfM»«l>l»»«lttMII«»tMW4H>>'l 111! Ill I B M SD3 SbM CCOUNTS AND CCUIJNTING PRACTICI IIMII UK ittUO flift-l'IMniEMi ^tlT»»tt»t^«t|lW^t«*tIml»M^M^t^l^H^liw^^m*.Mi«MliMMW*nw«»«ii(•tlWl•tltl»«n^•rl(W^»n#»lua*1^lt»MUt#lHi^ ACCOUNTS AND ACCOUNTING PRACTICE ALBERT G. BELDING FIRST ASSISTANT UIGU SCHOOL OF COMMKRCE, NEW YORK FORMERLY DEAN OF DEPARTMENT OF FOREIGN COMMERCE HIGHER COMMERCIAL SCHOOL KOBE, JAPAN » • •. •. • . : •• • • AMERICAN BOOK COMPANY NEW YORK CINCINNATI CHICAGO 5b Copyright, 1915. bv ALBERT c;. BELDING Copyright, iqis, in Great Britain delding's accts. and accig. prac. w. p. I i'i 96 106 149 158 174 180 187 187 191 222 E.XLRCISES Exercise i. Illustrative Tr.\nsactions Exercise 2. Illustrative Transactions . Exercise 3. Illustrative Transactions . Exercise 4. Wholesale Shoe Business Exercise 5. Wholesale Shoe Business {Continued) Exercise 6. Wholesale Shoe Business {Continued) Exercise 7. Wholesale Shoe Businf.ss {Continued) Exercise 8. Wholf-sale Shoe Business {Continued) Exercise in Mental Postinc; Exercise 9. Wholesale Shoe Business {Concluded) Exercise 10. Wholf.sale Shoe Business, Sale ok . 5 35 38 42 49 57 59 63 67 74 75 77 CUNTIMS KXERCISE II. MoKfiAN'S BUSINESS. LlQirOATED . KXERCISE 12. Mf)l«iAN's HlSINKSS. HoOKS CLOSED E.XEKCISE 13. ReTAII, CoAL liUSI.NESS .... ExKKCisEs, Practice Exercise 14. Ii.listrative Tra.n'sactions . Exercises, Short, Invoi.vinc Merchandise Discount Exercise 15. Hardware and House Furnishlso Business Exercise 16 Orocery Hisiness Exercise 17. Wiioi.esai.e Drv Goods Business ExERCisics, Practice Exercise 18. Retail Shoe Businos .... Exercise 19. Single Entry liooKKKKiiNc; Exercise 20. Masons' Suimm.ies and Blilkini. Maim •3^' 142 149 '53 161 176 180 201 219 ACCOUNTS AND ACCOUNTING PRACTICE INTRODUCTION Development of Subject The stiidv of accx)UMts is begun h\ persons of widely vaiyinu; aj^es and capacities, and teachers hold different opinions of its value and pur- pose. This book is intended, accordingly, to give the widest possible latitude in developing the subject treated. Those who find that the sub- ject matter of the opening pages is beyond the grasp of beginning students are asked to turn to page 21, The Construction of Accounts^ and proceed from that point. Those who prefer to begin the study by writing and posting entries may turn at once to page 41 where very simple material in narrati\e form, and detailed instructions, are given for that purpose. Business Papers At just what point business papers should be introduced is also de- batable. Interpretation of busuiess forms is, ot course, essential to a working knowledge of the subject. Standardized business documents, however, have been developed through centuries of legal «ind business procedure, and they are too technical to be used at the beginning as objects of studv. It is enough for the beginning student to translate language within his own comprehension into accounting terms and concepts. The double translation would have to proceed from the unknown through the known to the unknown. In the beginning exercises of this book, there- fore, the facts nnoKed aie fulK and simply stated. Red Ink The use of red ink. for the purpose of closing and ruling accounts, is neither illustrated nor rec|uired in this book, in recognition of the now common and growing practice of bookkeepers and accountants, especially those connected with large concerns, to use black ink tor all account- keeping purposes. 1 he reason for this practice is obvious : it saves time by reducing the number of tools handled and the kinds ot material used, and is therefore a practical application of the principles of efficiency. Teachers who prefer the other method may, however, readily adapt the book to meet their views bv instructing the students to use red ink for making original cross entries and for all rulings. 7 8 ACCOUNTS AND ALCOUNTING PRACTICK Methods 1 he author lias conihincd the best features of both the account method and the transaction method ot development. Our problem involves the studs 3.So; Nov. 27, E. A. Hough for cash, 5 bbl. (« ^^2.50. Nov. 22 John Lord receives of Carl Hutchins ^93.75 in full settlement of Hutchins' debt. Nov. 23 Joseph McCall is paid in full for the purchase of Nov. 3. Nov. 30 John Lord pays other incidental e.xpenses incurred during the month ^58.50. A statement of ownership at the beginning of this business undertak- ing would appear as follows : ^a^ No\'KMBER I, IQ — Cash John Lord, Capital Investment 400 400 Ihis is a record of the fact that John Lord is the owner, Nov. i, 19 — , of i^400. Ihe record of a fact or of an event is called an " entry " ; and since the fact of ownership involves two things — the thing owned and the owner's property right — the entry has two parts, or items. And since one or more persons mav own many different things, such as money, goods, land, buildings, etc., it is necessary to have a class name for the things owned. 1 his name, we have already learned, is assets, or debtors. I'or the reason that the propertv rights o\' many individuals may attach to one thing or group of things, it is necessary to have a class name for owners, and they are called "creditors." Lhe rights of the legal owner — the one in whom the title vests — and the rights ol those to whom such owner is in dibt. .iie distinguished by the terms "capital" and "liabilities." It 1 1 12 ACCOUNTS AND ACCOUNTING I'K \< TTrp is hardly necessary to say that the pecuniary rights of the owner or owners equal the value of the things owned. 2. I he period of imu- during which transactions are recorded and at rlu- close i>l \\lmli anorhei ownership statement is prepared, \aries in business, hut this period is usually one year. Kach transaction, however, produces a change in the things owned. Money is exchanged for goods and other species of value, and goods are exchanged for nionev. Bu\ing goods for cash increases the supply of goods and correspondingh- decreases the supply of cash. Selling goods for cash has the opposite effect. Each transaction, therefore, transfers \ alue from one pait or department of the business to antjther. If the value of the things owned increases, either the proprietor's interest or that of some one outside the business increases accordingly. If for any reason the value of the things owned decreases, the proprietor's interest or that of some one outside the business decreases accordingly. For the purpose of illustrating the effect of the transactions in the busi- ness of John Lord upon the things owned and upon the owners' property rights, the following statements, beginning with the statement of Lord's ownership Nov', i, show the conditions immediately following each trans- action. The accounting procedure by which this outcome is accom- plished will be taken up later. {b) November i, 19 — Drl'.'nr Creditor Cash 400 John Lord 400 This is merely a repetition of illustration a in a different form. Nov. 3. Buy of Joseph .McC'all 200 bbl. apples ^ $2.75. Lord pays cash ^^300 and gives his oral inomise to pay the balance of ^^250 in 20 days. Apples valued at ^^550 have become owned ; cash amounting to 5^300 has been disposed of, or become unowned, and Joseph iMcCall has become a part owner of Lord's assets to the amount of ^^250. An ownership state- ment following this transaction would stand as follows : (0 November 3 Debtors Crfditors Cash Apples Joseph McCall John Loril Investment A BUSINESS ANALYZED 13 The supply of casli has been decreased ^^300, the assets have been increased (by the supply of apples) ^^550, or a net increase of ^^250, which is the amount of McCall's interest in the thnigs owned. Nov. 3. Hire the use of a storeroom until Dec. i and pay the rental in cash ^^35. That which has here become owned is called " rent." Cash is reduced ,^^5, and our exhibit now stands ((/) November 3 Debtors \-ticunur} • Joseph McCall -50 John Liird Investment 400 , 650 i 1 Cash .Apples Rent If you have difficulty in understanding^ how we can own rent, consider that ownership never means anythintj; more than the right to occupv or use and transfer the thing owned. If you had a knife and were not allowed to use, sell, or exchange it for something else, you would have none of the rights of an owner; ownership of the knife would mean nothing to you. If you hired the use of a knife one month, you would thereby acquire a part interest in the knife. For accounting purposes, rent is a part or temporary ownership of the thing rented. Nov. 7. Sell H. A. Miller for cash 10 bbl. apples @ $'!,-7S- 0"^ ownership statement now stands {e) November 7 Debtors Creditors Cash 102 SO Joseph McCall 250 Apples 522 50 John Lord 1 Rent 35 1 Investment I'roHt ' 400 lO 660 1 660 Compare illustrations d and t-. 1 lie apple supply has decreased $27.50 (10 bbl. (S. ^2.75). The cash supply has increased ,^37.50, which is a net increase in the value of things owned of ^10. John Lord is the owner of this increase which, it should 1h' noted, is separated from the original ownership, or investment, and is called " profit." Nov. 12. Sell Carl Hutchins 25 bbl. apples @ $3.75, on terms of ten days' credit. Receive in exchange for the apples Hutchins' promise to pay ^593. 75 in 10 days. Our exhibit now stands 14 ALCUUNTS AND ACCOUNTLNG PR.\CTICE (/) NoVEMUtK 12 Di-hlors Creditors Cash I02 50 Joseph McCall Apples 453 75 John Lord Rent 35 Invisrment Carl Ilutchins 93 ; I'rofit 250 400 35 68 c • The supply of apples has heeii decreased and Carl Hutchins has received the value. Hutchins is a dehtor here in practically the same sense that cash, apples, and rent are debtors. This debt of ^93.75 is a species of property — cash in 10 days. Pending the receipt of that cash, we employ Hutchins' name as a debtor. If he sends us a check in pay- ment, we shall call the check "cash "; but we shall still possess noth- ing more than a claim upon another's assets. I he difference between " Apples " and " Carl Hutchins " as debtors is that one is a possession, the other an expectation ; but to the business man all values are expecta- tions — expectations of pecuniary service. The question is : What will these things yield in money .' And this is the only question in the mind ot the business man with reference to all things owned. Compare illustrations e and/. What is the net increase in the value of the things owned r Who owns this increase ? \\ hat is an increase of the proprietor's ownership called .' What is the total value of things owned : (The fact that rent has decreased in value, owing to the expiration of a part of the time for which the storeroom was rented, may be disregarded at present.) What name is given to things owned r What is the amount of .McCall's interest in the things owned .' How much is Lord's interest : Explain the difference between McCall's interest and that ot Lord. Nov. 20. Sell D. D. Warne for cash 155 bbl. apples (« ^^3.50. The business involved in relation to those who have claims upon it now stands (g) November 20 Dr' Cash Apples Rent Carl Hutchins 645 27 50,; 35 93 75 801 2!; i Joseph McCall John Lord Investm< nt Profit Compare the value of things owned Nov. 12 (illusrr.ition /) with the value of the things owned Nov. 20 (illustration i:). \\ hat became owned A liUSINESS ANALYZED IS ill this transaction : \\ hat became unowned ? W hat has increased ? Decreased : What is the net increase in the value of thinj^s owned ? Who owns the thinns Hsted as debtors? What was Lord's interest Nov. 12? Wliat is his interest now? How much has l^ord's interest increased? What was the cost price of the apples ? Ihe seliiuL!; price ? What profit lesulted from the sale of 155 bbl. apples ? Define debtor and creditor. Nov. 22. Receive from Carl Hutchms ^()}.7^, in accordance wirh the terms of the sale of Nov. 12. Ilutchms' name is now dropjud from ihe list of debtors. Cash receives the value given by Hutchins, and we have Uo November 22 Debtors Cash 738 75 Applts 27 50 Rrnt 3 5 801 25 Joseph McCall John Lord Invtstmtnr ProHt Did this transaction of Nov. 22 increase the value of thin<;s owned ? What class of transactions does produce such an increase ? LJnder what circumstances would a sale decrease the value of things owned ? What is the source of profit ? Nov. 23. Pay our obligation to Joseph McCall, ^^250, in accordance with the terms of the transaction of Nov. 3. Cash is decreased by the amount of the payment. McCall's name is dropped from the list of creditors, and we have (i^ November z} Debtors Creditors Cash 488 ' 75 ' Jolin Lord Applf.s 27 50 hi\ tstinrnr 400 Rent 35 Lrotit '5' 25. 551 • 25 1 i 551 25 Joseph McCall has taken possession of his interest in the things owned, rherebv reducing our value token ^^250, with a corresponding reduction in McCall's pecuniary interest. It is thus seen that personal items, other than those of the proprietor, appear in the record only temporarily. 1 hey call for the receipt or payment of money, and operate to increase or reduce the cash item when payment is received or made. I he sales of Nov. 7, 12, and 20 resulted in an increase in the value of things owned, with a corresponding increase in the proprietor's worth. i6 ACCOUNTS AND ACCOUNTING PRACTICE We will now show how the value of things owned is decreased and how the owner's worth is decreased accordingly. Nov 27. Sell K. A. Hough tor cash 5 bbl. ;i|i|iles(fl J?2.50. Our cash tuiul lucoiiKs increased S12.50, our apple supply decreased ^^13.75 (5 hhl. (« ^^2.75), or a net decrease, hoth of rhings owned and of" owneishiji, of ,*^I.25, thus : ( 'A NnvrMinrR 27 Dfblors Crfditors Cash A |i p I cs Rent 501 ^5 I.^ 7> ^ - 1 II ;;o lotiii Lunl In\ I stimnr I'rxtit 400 I 50 Compare illustrations / and j. By selling apples that cost ^13.75 for 5^12.50, Lord has suffered a loss of ^^1.25, which reduces profit by that amount. Nov. 30. Pay ^58.50 for various things that have been purchased during the month — the services of workmen and teams, postage, tele- phone messages, and the like — things that have no tangible e.xistence, but ne\'errheless represent \alue received and, with other value recened, are included among the debtor items, thus : ik) November 30 Debtors Crrditnrs Cash 442 75 John Lord Ajiples 13 751 Investment 400 Kent 35 1 1 I^rofit 150 Expense 58 50 i 550 : 550 « i This transaction effected a transfer of value from Cash to L.xpensc. An article of wealth has value only because of its uses or services; and when we buy service of any kind, we are buying a part interest in the wealth which renders that service. The purpose of accountkeeping is to determine, in inonev service, the outconu' of things owiuil. \ccordingIv, there is no essential difference between the ser\ ices we call " Kxpense " and the services we call " Apples " or " Cash." The temporar\' use of land and buililmgs, calleil "lent ' ; the services of workmen, called "wages," "labor," or "salaries"; mail, telephone, and telegraph service, called "communications"; heat, light, and water service are things owned, have value, and involve property rights. A BUSINESS ANALYZED 17 3. We have now reached the third step in tlie process of recording business tacts and events; namely, the statement of ownersliip at the end (»f the period. In the preceding illustrations we have shown the effect of Inisiness transactions, ignoring for the time being all other considerations. Not only do transactions produce changes in the things owned, but changes result from the use, decay, and depreciation of such things. All wealth • is perishable, and all rights to the services of wealth e.xpire in time and lose their value. Many of the things with which a business is carried on, such, for illustration, as fuel and stationery, are consumed in one use. Other things, such as tools, ortice furniture, and machinery, are worn out bv re- located use. Still other things, such as telephone service, labor, and the like, e.xist not as possessions, but :is flozvs of value. If we would know to what e.xtent all these changes have affected the value of things owned, it is necessary to make a physical valuation of what remains at the end of the period. This physical valuation is called an " inventory." Let us assume that John Lord's inventory Nov. 30 disclosed only ^442.75 in cash. Ihe five barrels of apples unaccounted for have been culled out from time to time. Some have rotted, others were small and not sal- .ible. One month has elapsed, and his right to use the storeroom has expired. Nothing of value is discoverable to represent the expense item of ^58.50. " Rent," '' Apples," and " Expense " at this time represent value absorbed in running the business. Since they have lost their value, the owner's right to them has lost its worth. The}' must accordingly be dropped from the list of debtors and the profit item reduced b\' the same amount, ^^107.25. And we have finally' (/) Debtor November 30 Creditors Cash 44- 442 75 ^1 JdIiii Liinl Investment Profit (net) 400 42 75 442 75 1 Summary The business man keeps books to show (i) who owns, or owns an in- terest in, rhe things of his business, and (2) how and to what extent the things owned increase or decrease in value. We have learned that values received are placed on the left side and are called " debtors " ; that such values received arc (i) transferred to some one outside the business; (2) consumed or absorbed in the process of marketing the stock in trade; or (3) remain intact as assets, or things owned, at the end of the period. We l8 ACCOUNTS A\D ACCOUXTIN'G PRACTICE have also learned tliar rhost- wiio own, or own an interest in, the things of the husiness are entered i»n thi- right side and are called "creditors." Dkfinitions Value is the potential pecuniary service of a thing. AssHTS are things owned. I In bookkeeper includes as assets all things upon which the owner nia\' sufler a lt)ss. Profit is value increase — increment of ownership ; that which a thing yields in excess of its cost. l.ossKS arc consumed assets - the cost of a thing in excess of its \ieKl, or production. A LI.^BILITV IS a debt owed b\ us; a claim upon, or a jiarr interest in. our assets. Capital is the proprietor's residuary interest in the assets of a husi- ness; the difference between assets and liabilities. ibis definition of capital IS made to inclucK- iinestment and profit. "Capital" is emplo\ed in accountkeeping, however, m the sense of an investment, as distin- guished from the income upon the investment. A CRKDiroR is one who owns a right to the uses or services of a valu- able thing. A DKBTOR IS the thing to which a creditor's right attaches. Since things owned are expected to render a service commensurate with their cost, they (or their custodians) are charged with their cost, or services expected, and credited with the services they render. That which costs or receives value is, therefore, a debtor. 1 hat which earns or gives value is a creditor. An ACCOUNT IS a record b\' which a thing or person is cliarged with the value it costs or recenes, and credited with the value it yields or gives. Problems 1. It the capital of a business is ^loooo and its assets are J^nqoo, what are its liabilities ? 2. lones &: Belcher began business Oct. i, i<) , with an investment of )^ 1 7500. Oct. I, the following year, their assets are ^^26400 and their liabilities ^53 50. What have been their prortts during the \ear r 3. Nelson &: Noble have assets valued at ^2X760. Their liabilities are )^6S(;v Their gross profit since the books were last closetl is ,^9305, and their expenses ^^4256. What was their capital at the last closing r 4. I'ollowing are the assets and liabilities of the business of Perkins & Morgan, Dec. 31, 19 — : A nrsixr.ss analvzkd 19 ASSETS I.IA15I1.1TIES Cash ^5560. Accounts Payable- ^'375- Accounts Receivable 2450. Mortgage Pa\ able 4000. Stock of Merchandise 12000. 1 lorses & Wagons I-50. Office Furniture 550. Jan. 1, same year, their capital was ^13500. Show wlutlu-i rhc busi- ness was conducted at a proHt or at a loss. 5. If the assets of a business amount to ^^23450 and its liabilirirs are J^76;6, what is its capital .' 6. The capital, profit, and liabilities of a business are ^32650. \\ hat are its assets ^ 7. rhe capital of a business Jan. i, 19 — , is ^^34500. Its losses during the followmg \'ear are ^560. Its liabilities Dec. 31, same \'ear, are ^58397, What are its assets Dec. 31 : 8. The assets of a business Jul)' i, 19 — , not including stock of goods, are ^^8975. ^^^ capital Jan. i, same year, was )^2iooo. The records show a net profit during the first six months of the >ear of ^^3000. If there are no liabilities July i, what should be the value of the stock of goods .' Questions I. .Mention ten different things that are owned. Mention someriiing you own. 2. What is the meaning of ownership .' 3. What does the busi- ness man expect to get out of things owned by him : 4. W hat function has money in our system of exchange .' 5. Define credit. 6. W hat is a cred- itor r What right has a creditor? 7. What right has an owner? 8. What class name does the bookkeeper give to things owned ? 9. Do things owned sometimes lose their value ? How ? 10. What are things owned called when they lose their value ? 11. Do worthless things have owners ? 12. Dehne debtor. 13. Show the relatH>n between debtor and creditor. 14. Define assets, liabilities, capital. 15. What should an accounting record show ? 16. Albert Shire is in the business of selling newspapers. Nov. i, he is the owner of ^^7.50 and has no debts. Nov. 30, he is the owner of $18.20 and has no debts. What has happened in Shire's business experience? 17. DeHne profit. iS. Does " profit " indicate the thing owned or the ownership of such thing ? i<;. In the case of .Albert Shire's business ((]ues- tion 16), did rhe i^io.70 increase Nov. 30 exist as a thing owned ? Under what title was the increase shown ? 20. What is value : Docs value exist as a physical thing or an attribute of sonurhing ? I.xplam. 21. How are 20 ACCOUNTS AND ACCOUNTING PRACTICE valuable things, such, for illustration, as apples and oranges, originally produced : 22. Does the producer pur his service, or labor, into the thuig produced ' Can you think of any valuable things that are not the prod- uct of labor: Are such things owned r 23. What is meant by the state- ment : " Wealth is a depository of value " r 24. Does a child receive strength as it grows ? Does a calf receive value as it increases in size and age ? Does every article of wealth receive value in the process of its pro- duction r Does all wealth at some time yield or give back in some form of service the value it contains: 25. If a thing \ lelds to its owner less than cost, what is the difference called: 26. Mow are things of value ac(]uired in business? 27. If we exchange )^ioo in money for the same value in goods, what has become owned by us: What has become un- owned ' What recei\ed the value ? Gave the value : Which is a debtor : Which a creditor : W'hv : CONSTRUCTION OF ACCOUNTS VVe have thus far studied the husiness as a whole in relation to its owners. We have now to stud\ the different parts of the husiness in rela- tion to one another. Beginning, as hefore, witii the fundamental fact of ownership, inNoiving the thing owned and its owner, we shall make such a complete record of business transactions as will show the outcome in proHt or loss. 1 hings owned are debtors, and since things that become owned cost value, that zchich costs value is a dt'htor. Owners are creditors, and since owners become such by giving value, that zchich gives value is a creditor. Hence the rule : That zchich costs, or receives, value is a debtor; that zchich gives, or pro- duces, value is a creditor. Application of this rule will be made easier if we first classify all trans- actions with reference to time of performance. When we sell goods for cash, the transaction is said to be complete, or executed. W hen we sell goods on credit, the transaction is said to be incomplete, or executory. In entering executed transactions, w'e may disregard the other party involved, j debiting that which becomes owned, or costs value, and crediting that which becomes unowned, or produces value. In e.xecutory transactions, however, we must debit that which becomes owned and credit the one who gives the value; or credit that which becomes unowned and debit the one receiving the value. But it should be noted that the value received or parted with in executory transactions is sooner or later returned in settle- ment of the debt incurred ; in other words, executory transactions ulti- mately become executed. From these considerations, we derive the fol- lowing comprehensive rule : General Rule. — Debit that person, department of the business, or period of time that receives, or costs, value; and credit that person, department of the business, or period of time that gives, or produces, value. Since money is the medium through which other things are usually acquired — the thing with which other things are purchased — we shall I start with cash and buy other things, then exchange things for cash, and I finally state the outcome in profit or loss. i zi 22 ACCOUNTS AND ACCOUNTING PRACTICE Illustrative Transactions Jan. 2, 19 David lliirman Ihli.iii business with a cash investment of }52000. riif history of tliis business dates from the proprietor's investment. rile one who writes this history — the bookkeeper — is not concerned witli Mr. Hartman's private affairs; it is his duty to record and account for such portion of .Mr. Hartman's wealth as has been set aside as the capital of this particular undertaking. The fact of David Hartman's ownership jan 2, involving the owner and the thing owned, requires that two accounts be opened as follows : I^.wiD Hartmax, Capita I, Jan. D. Ilartman j 20CX) This record differs only in form from the ownership statements, pages II and 12, and merely shows the relation of the owner to the thing owned. One is a creditor, the other a debtor. Note that debtor items are entered on the lefty creditor items on the right, side of the account. Jan. 3. Buy of Henry Wilson merchandise valued at ^1000 This transaction effects a transfer of value from the cash fund to the goods fund ; cash has been decreased, goods increased. We can record the receipt of goods as follows : Merchandise Stock 19- II 1 i i Jan. 3 Cash 1000 1 But how shall we indicate the decrease of the cash fund : In arithmetic we should subtract the ^1000 paid from the ^2000 received, to get the "answer." The answer to our problem in accountkeeping, however, is not the outcome of a single transaction, but the result of a long series of trans- actions covering months or perhaps \ears. Kventually we shall subtract, bur at prr';iin we place the amount paid on the opposite side, thus: CONSTRUCTION OF ACCOUNTS 23 Cash Jan. :ooo I'; I..M. MJs... Stock 1000 What rcall\' happtiud in this transaction was tliat l)a\ul llaitinaii withdrew )^iOOO of liis cash investment and rciin cstcd the amount in ^oods. The cash was passed to lUniy Wilson and the ^oods were received from hini. We nii^ht ha\e debited Hartinan and creditii.1 (\i.Ji, for the cash withdrawn; then credited Ilartni.in aiul debited Wilson lor the cash paid by Hartman to Wilson, and Hnall\ credited W ilson and debited Mrrchandise Stock for the merchandise received from Wilson. I^iit the relation of Hart- man and W ilson to the business remains unchaiiiied. 1 he net result of it all has been to increase goods account and decrease (msIi account by J^iooo. We reason, therefore, that Cash has given value to Mrrrhnniliyr Stnrk\ and record the fact by one direct entry. Repeat the rule. Jan. 4. Make the following payments: rent, ^^50; office desk, and chair, .^^"^ ; telephone service (January), $j. Ihese are tvpes of things with which the business is carried on. Are thev all of the same kind ? They are all services to be rendered. Hut the value represented in the ^50 for rent and .^7 for telephone will be wholly consumed in one month, while the desk and chair will last, perhaps, 20 years. One exists as a flow of service while the other exists as a possession. Theoretically there is no difference, but practically there is a difference. Losses arise from the destruction of physical things, and to guard against those losses we usually keep them insured. For this and other reasons, which will be shown later, the desk and chair must be accounted tor sep- aratelv. " Short-lived " things ^ fuel, postage, stationery, car fares, rent, and the like — we charge to Expense account ; office desk, typew titer, filing cabinet, safe, etc., to Offi,ce Furniture account, thus : C ASH Iw 1 I'; J..n. : ' 2000 Jan. ; 1000 1 < )rtici- Furniture 28 4 Kxpcnsi- 50 I 1 Kxpcnsf " Of I '; Jan. 4 , Cash FICI 28 y I"l< \1 P Kl. ^4 ACCOUNTS .\M) ArrOT'VTTXG PRACTICE Expense 19 J:.n. Cash 50 7 il \':iliic to tlic ;inu)iinr of $18, $>,o, and ^y has been transferred from the Cash divisit)n of the business to the Ojfici' I'urniturt- and Expense divisions. Debit that which receives or costs value; credit that wliich irives or pro- duces value. Jan. 5. Sell A. J. Hunt for cash merchandise valued at ^^400. I his transaction shows why David Ilartman is in business. While rent and telephone service consume value, merchandise produces value. If we assume that these goods were sold at ^100 profit, the amount belongs to David Ilartman, and might properl\- be taken by him in cash. \ alue to the amount of ^300 would pass from Merchandise Stock to Cash. Or, if the proprietor did not wish to draw the profit. Cash might be charged with ^^400, Merchandise Stock credited with ^300, and the proprietor credited with ^100. But we are working on longer lines. We shall make other sales and purchases, and have other e.xpenses, and at the end of the period we shall sum up to determine the outcome in profit or loss. In the meantime, in order to record the selling price of all goods sold, we open a Merchandise Sales account, and give it credit for the value which this transaction yielded, thus: Cash 19— II 1 1 ' I'7- Jan. ^ 2000 400 1 lan. 1 1000 5 Sales 4 ■: 28 4 ■1 50 4 7 Mkrciia.ndise Sales J..n. C\.sll 400 T he value received by Cash and given bv Merchandise Saies ni the tore- going transaction, making the former a debtor and the latter a creditor, was borrowed from Merchandise Stock. CJoods were taken from stock by the one making the sale for delivery. Evcrv cash sale will eHect a transfer of value CONSTRUCTION OF ACCOUNTS 25 from Merchandise Stock to Merchandise Sales and tVom Merchandise Sales to Cash. The transfers from Merchandise Stock account to Merchandise Sales will he adjusted by one entry at the end of the accounting period. Jan. 6. Buy of Dwight Brothers for cash, merchandise valued at ^5350-^ \'alue moves from Cash to Merchandise Stock; Merchandise Stock is a debtor, (uish a creditor, thus: Cash 19 - 1 19 Jan. 5 2000 400 1 1 1 1 J:.n. 1 .1 4 4 4 b Mdsf. Stock 1 1000 28 50 7 350 1 19— J.Tn. 3 6 Cash Merchandise Stock 1000 350 1 1 1 Jan. 8. Sell Seymour Holbrook for cash, merchandise valued at ^^450. 1 he sales department of the business has given value, cash has received value. State the rule. Cash 19 19 Jan. 3 2000 ' Jan. 3 1 000 , 6 400 4 28 8 Sales 450 4 4 6 SO 7 350 Merchandise Sales 19 Jan. 5 8 Cash 1 450 1 26 ACCOUNTS AND ACCOUNTING PRACTICE Jan. 8. I'.iy Jnhn Stout, clerk hire, ,si^. I Ins crttcts a transfer of value from Cash to Expense. Debit the latter, credit the former, and we have Cash IV i'> .|:.M - ;ooo Jan. J lOOO 6 8 4CX) 4SO 4 4 28 50 4 7 6 350 8 Expense 1 15 ExPF-Nsr 19- Jan. 4 4 8 Cash SO 7 I ; It IS thus that acc(nints arc constructed. Each transaction effects a transfer of value from one part or department of the husmess to another. 1 he supply of one kmd of value can be mcreased only by decreasmg the supply of another kmd ; and a record by which we indicate both the in- crease of the one and decrease of the other is called a " double entry." In order to carry our accounting exhibit to its logical conclusion, with- out undue repetition, let us assume that the transactions of David Hartman during the remainder of January resulted as follows: Cash received i^icpo. Cash paid 1835 Goods purchased 1600. Goods sold I()00 OHice furnituii- bouulit for cash C)0. E.xpenses paid in cash 175- These transactions 111 rhe aggregate ha\e transferred value to the amount of ^^1^35 from Cash to Mrrchatuiise Stock, Office Furtiiture, and Expense in amounts of ;;^i^oo, ^()0, and ^^175, respectively, and value to the amount of J^n^oo from Mirchandise Sales back to Cash. I sing Ian. 31 as a focal date, our accounts will now stand CONSTRUCTION' OF ACCOUNTS 27 Cas II '9 1 i "^ Jan. 2 2000 Jan. t , 1000 6 400 4 28 8 450 4 50 31 Sales 1900 4 6 8 i 7 3 SO IS 1 31 Sundries iS^q Merchandise Stock iv 1 Jan. J 6 31 Cash 1 1000 350 1600 1 Mfrchandise Sales 19— Jan. ;, I Cash 400 450 1900 Jan. 4 31 Cash 19— Jan. 4 4 8 31 Cash (Office Furniture 28 60 EXPFNSE SO 7 15 1 175 1 II INTERPRETATION OF ACCOUNTS We li.'i\<.' thus t;ii illiistrarcd rwo steps in the process of iLL«»nJing busi- ness events. lust, we exhihiteil ;i statement of owneisliip on a j;i\en date, and mferpieted that statement m accouiitm^ terms. Second, we recorded transfers of \ ahie from one |i.iit ot thi husmess to another, and showed the effect n\ those transfers in terms of debtor and creditor. A .state- ment ot ownership holds j^ood only for the date upon which it is made, and we lia\e now to ascertain the facts and prepare a statement of owner- ship as of Jan. 31. Daxul Hartman's ownership Jan. 2 stood Cash $2000. David 1 lartman. Capital ;^2CXDO. The proprietor's one asset at the beginning w-as )^2000 cash. We have a right to assume that the one responsible for the record actually counted the cash, or considered evidences of its existence, and Mi. Hartman's right to its use. Nor can the assets on any subsequent date be determined from the record. The record is one of past events and does not show present condi- tions ; It may show w hat f)ur holdings ought to be, it does not sht)w what they are. Recourse must accordingly be had at this point, since these assets have a tangible existence, to the things themseKes. Cash must be counted, 01 the hank's record of cash on deposit consulted ; the stock of goods must be weighed, measured, or counted, and \ alued ; and all other property must be appraised. Determining the extent and character of a business man's assets at any given time involves considerable labor, and is justified only when it becomes necessary to ascertain the exact status of the business. Such an event marks the close of one accounting period and tlie beginning of another. If we assume that the stock of goods Jan. 31 inventories at i^975, office furniture at i^88, and cash at ^1465, these values represent what this period of time, m irs respective accounting divisions, passes on to the next period for its use and service. In a going business each accounting period p.isses on to tlu' next all its holdings, and .1 n conl ot this transtcr from the old period to the new requires us to debit the latter and credit the tormer. thus : 28 INTERPRKT.VTION OF ACCOUNTS 29 Cash 19— Jan. 2 6 8 31 I 1 Balance from Jan. 19— Feb. l.^l 20CX) ' Jan. 400 1 450 1900 i 4750 1465 4 4 4 6 , 8 31 I 31 Balance, cash on hand carried to Feb. acct. Merchandise Stock (January) Merchandise Stock (February) Feb. I Inventory 975 Office Furniture 1000 28 50 7 350 15 183s 4750 10 — 19- 1 Jan. 3 6 ICXX3 350 Jan. ^ I (joods on hand carried to j 31 1600 i i Feb. acct. 1 975 If; — Jan. 4 31 I Inventory 2S 60 8S 19 Jan. 31 \ aluc of office furniture car- ried to P"eb. acct. 88 88 Feb. 4. If David llartman's property J.m. 2 was ^2000, and His property now is ^^252^, something lias iiappcned m the meantime to produce this increase of ^^528. and this brings us to the fourth stage of our in(]uiry; namely, the source' of profit and the cause of loss. 30 ACCOUNTS AND ACCOUNTING PRACTICE Proht arises in ;i mercanrilt* business from the output of goods, and since goods pass out through the selling department. Sales account should show selling profit. It is the function of the Salts account, then, to exhibit the cost and selling price of goods sold. (loods to the value of ^^2950 were bought and placed in stock. We now hiul only )^975 worth of those goods on hand. The fact is that goods not now on hand ha\e been disposed of through the sales department, be- cause as sales were made from time to time, goods were taken from stock and deh\"ered to customers. We might have credited Mrrchandisc Stock and charged Merchandise Sales in each such transaction; but this would entail needless labor, as we may now record the total transfer of value from Merchandise Stock to Merchandise Sales in one entry, thus : Mfr rn \vri[«;F rrncK »Q 19— 1 j..n. 3 6 31 1000 3 SO 1600 Jan. .31 1 31 2950 i ! carried to l\h. acct. 31 Cost of poods sold, to Sales acct. Merchandise Sales 19— Jan. 31 Cost price, from Mdsc. Stock 1975 19— Ian. S (Sellinji Price) 8 tft 44 3» 44 44 400 450 1900 The value lodged in Merchandise Stock, then, has two outlets: That which is still on hand, since the January account is to be closed, passes to the I'ebruary account; the difference between that wliich was bought to sell and that which remains unsold, the cost price of goods sold, passes to the Merchandise Sales account. And since we h:id already credited Mer- chandise Sales with the selling price of goods sold, this account must now show the profit from sales. Hut there is an offset to this selling profit the cost of things used to run the business which we have lodged in the Expense account. I he net earnings of the business will accordingly be the difference between gross earnings and expenses. Since tlu' Merchandise Sales account shows one of these items, and the Expense account the other, we can find the difference, if we would obser\e accounting practice. onl\- h\ transferring both items to ;i third account /'"■/'' ■•"' Loss — thus: INTKRPRF.TATION' OF ACCOUNTS U Merchandise Sales 19— Jan. 3 1 Mdse. Stock 3 I Ciross profit, car- ried to Profit I is; Loss acct. 1975 775 2750 Jan. 5 8 31 1 Expense 19^ Jan. 4 4 8 31 19— 50 Jan. 31 7 15 1 -; -47 , 1 Profit &: Loss acct. Profit & Loss 19— Jan. 3 1 Expense 247 19— Jan. 31 Sales acct. 775 It is the function of the Profit i^ Loss account to exhibit on the one hand the earnings, and on the other the expenses and incidental losses, of the business. It summarizes the results of all accounts that show increases or absorptions of value. These accounts are the channels through which our fund of value is increased or decreased ; they measure, and the Profit y Loss account records, the earning power of the business. \ he conclusion to which the Profit ly Loss account leads is net profit. This is the proprietor's increase of ownership, and the Profit i^ Loss account is the medium through wiiich it is passed to his credit, thus: Profit & Loss Sales acct. I'J 1 19 Jan. 31 Expense ^47 Jan. 31 Net profit, car- 1 1 ried to David Ilartman 528 32 ACCOUNTS AND ACCOUNTING PRACHCE Dw 11)11 MriM W, C\\!MTAL •9-! I j.iii. 3 1 Present Capi- tal, c a r r i i d down :;28 I'; j.in. 2 Investment 31 Net profit, brought from I'roHt &: Loss 1 ,9— Fib, I I'nstnt Capital hrmiL'tit ilouii 2528 Asscnihlinp; npain the evidences of value in relation to the proprietor's worth, wc ha\e HnalK' Balance Sheet Assets : Cash Stock of Goods Office Iiirni- turc 1 1 1465 975 88 2528 1 1 1 1 1 David llart- nian, Capital 2528 :;:S As the Profit l^ Loss account shows the earning power of the business, the Balance Sheet shows \ts financial power — that wherewith it may meet its financial obligations — as well as the character and extent of those obligations. CLASSIFICATION OF ACCOUNTS The foregoing sumiiiary lias iiivoKed two considerations: First, the proprietor's investment (as shown by his assets at the beginning) in rehi- tion to his assets at the end of this business period ; second, rlie difference between tlie cost and the selhng price of goods sold, in relation to ex- penses. The business man determines his profit or his loss by the simple method of comparing what he had at some previous time with what lu- has at the present; Inir between these points in tinu- lies the source or the cause. These two phases of the situation ma}- be shown bv presenting in one group for comparison, the earnings and expenses of the business bctzvi-tu given dates, and in another its assets, liabilities, and capital 07i those dates. One is an experience in time, the other a record of facts at the beginning and at the end of that experience. One is a record of what has been done, in so far as events have contributed to the outcome in profit or loss ; the other is a statement and comparison of ownership in corrobora- tion. The end and aim of all business is to realize a profit. A necessarv outcome of this purpose is to suffer pecuniary disadvantages in the way of expenses and occasional losses. Accounts that enter into a calculation of the profit or loss of a business are called, variously, " profit and loss," " revenue," " w^orking," and " economic " accounts. Each of these is descriptive. Profit and loss is a clumsy adjective; and the use of ** loss," as including legitimate expenses of the business, is unfortunate. What are called losses by many writers on the subject are really the profit-earning agencies of the business. They are revenue accounts, as they indicate the channels through which revenue reaches the business; but this term seems to exclude outgo — the expenses and incidental losses. Fhev are zvorking accounts in that they show the work accomplished ; but this term is not very suggestive. This class of accounts reflects the thrift and economy of the proprietor in the management of his property; and the term economic seems to be more broadly descriptive than any of the others. An incident of profit making is meeting current business obligations (liabilities), and maintaining the credit standing and consequent purchas- ing power ot the business. Accounts that exhibit assets or liabilities are called, variously, " capital," " financial," and " specific " accounts. Thev are capital accounts in that capital is the difference between assets and 33 34 ACCOUNl.^ AMj AenaNTIXG PRACTICE liabilities. They iw^ financial accounts because they measure the financial power of the business. And they are specific accounts in that tliey specify the things of which the business is composed, and indicate the ownership of those thm^s. Mu- economic accounts uuhcatc business efficiency; the capital accounts, financial efficienc\ . Business efficiency is profit-earning power; financial efficiency is debr-paying or purchasing power. I he ratio of value production to value consumption is profit-earning power, or business efficiency. 1 he ratio ot means of pavment to liabilities is debt-paving power, or financial efficiency. Business and Financial Statement 1 he calculation ot profit earned, together with an exhibit of assets and liabilities in relation to investment in corroboration, should be presented periodically in the form of a statement. Such a statement should show the amount ot business done and the cost of doing it in one section, the condition ot the tinances the assets and tin- debts in another section, tliereby gning etfect to the dual aspect ot the business and presenting in compact form the operations of the concern during the period covered, as well as the means available for future operations. As business methods improve and competition grows keener, those responsible tor the success or tailure of business undertakings are stud\"ing more closely the problems involved. The Business &: Financial Statement is the basis of such study, and is called for at shorter intervals than formerly. Fiscal periods are shortening. 1 he laws in nearly all jurisdictions require banks, trust companies, and other financial institutions to publish annual or semi-annual statements of their financial affairs. Income statements are required ot all who are, under the law, subject to an income ta.x. Busi- ness and financial statements are often published ft)r advertising purposes, and submitted to commercial agencies to secure financial standing in them. '1 o the manager, a statement at frequent intervals is indispensable as a summary of past events and a guide to future policy. Because it is in- tended for those who may not understand accounting terms and forms, the Statement should be free of all technicalities; it should tell the whole truth in simple terms. (For form of Business &: Financial Statement, see page S4.) Personal Accounts Because the accounts to which personal relations give rise are only in- cidental and not strictly a part of the interior ;iccounting organization, they have been left to be treated separately. Debit and credit relations with individuals, other than the proprietor, are the outcome ot e\ecuror\' transactions. Based upon an agreement, ex- CLASSIFICATION OF ACCOUNTS 35 pressed or implied, to pay money at some future time, tliey have a definite relation to the cash account. Debts owed to us (debtors) mav be re- garded as " future cash " or things owned b\ us. Debts owed b\ us (creditors) must be jiaid m cash, and the\' represent a pecuniar\' interest in our assets (see pages 12 and 14). This does not nuan that jiersonal accounts are debited and credited only for cash pa\ nients. In a mercantile business customers are usually charged for goods sold them and credited when such charges are settled. Settlement may be made bv a return ot a part or all of the goods, by note, by acceptance of a draft, or by cash. 1 hey are often credited tor allowances, rebates, and discounts. These same conditions reversed create and extinguish accounts with those from whom goods are bought. One way in which personal accounts differ from all others is that they increase wirh the increasing number of people with whom a cud it business is done. One sales account will record sales aggregating )^i 00000 as easily as it will record sales aggregating J^ioo. But the larger business might involve accounts with 500 or 5000 customers. The transient nature ot many personal accounts — the rapidity with which new names often appear and old ones disappear — makes it necessary, where an v considerable number are involved, to handle them in separate groups and in a different way. \ he accounts of customers are referred to collectively as " accounts receivable "; those of trade creditors, as " accounts payable." Illustrative Transactions EXHRCISF' I I. T.et us assume that the following sales are made, all on terms of 10 da\ s" credit : Nov. 2, E. A. Watkins, ^5356; Nov. 4, \V. F. Thayer, ^76.85 ; Nov. 10, K. .A. Watkins, /112; Nov. 11, A. G. Gould, ;/^2 18.36; Nov. 20, A. CJ. Gould, ^^87.50; Nov. 26, \V. F. 'Fhayer, ^231.18. I his is material from which to construct the following accounts : Mkrchandisk Sai.ks Nov 10 1 1 20 26 I I :: 87 ! 50 231 18 36 aclxjunts and accounting practice E. A. Watkins, l^)rtlaIu^, Oregon 19- Nov. ■» Net, 10 days .»>' 10 1 I ; W. |- . riix^iR. Spokane, Wash. 19- Nov. 4 Net, 10 days i 76 851 1 ; 1 26 231 1 1 i8i A. G. GoL'i.D, Boise Ch\\ Idaho 19— Nov. II 20 I Net, 10 days ::i8 36 ^7 50 Copy the above accounts on a sheet of ledger paper. Assume that Gould returned j^oods Nov. 17 to the value of {i^ay ; that Watkins returned goods Nov. I I to the value of $18.50; and that all other indebtedness was settled HI cash at maturity. Credit persons for the value they give. Debit Merchandise Sales for goods returned by customers. Open a Cash account and charge cash for the value it receives. 2. - Make the following purchases on terms of 20 days' credit : May 7, Bossard &: Co., $436.57 ; May 8, The l^enham-Batcs Company, $650; May 15, Bossard & Co., $346.84; May 17, Voss &: Voss, $213.12; May 23, The Benham-Bates Company, $218.60; May 24, Bossard &: Co., $96.50. On a sheet of ledger paper open accounts with these persons and one with Merchandise Stock. In accordance with the general rule (page 21) group the above items in account form. 3.- Assume that, in the above exercise, Voss & \ oss made us an allow- ance on the invoice of May 17 for short delivery of $10.50, for which credit Merchandise Stock; and that all other items were settled at maturity in cash. Show how these settlements would aflect the accounts involved. 4. — Open a ledger account with Both &: Weston and show by entries in the account how it would be affected by the following transactions: Feb. I, 19- , we owe them $250. Feb. 7 we pay them $200. Feb. 9 we buy of them goods to the value of $325. Feb. 12 we return goods for credit, ^^J.^^,. Feb. 20 we give them our note at 20 days for $200 and cash for the balance due. CLASSIFICATION OF ACCOUNTS 37 5. — Write out in words at length statements of events that would give rise to the following entries on your ledger. Stephen K. Adler & Co., Houston, Texas 19— 1 1 19— 1 May I net 30 days 37 3 5^^ 40 May 31 43 , 35^ 40 27 68 117 63 June 10 52 i 35 60 June 8 net cash 72 35 60 26 61 117 63 17 net 30 days « 8; ■ r 1 ^ 10 ■ S z 30 Balance c/d \' 486 19 'I'i^ 82 19 — July I Balance b, d V 4" ' ■ 1 it BeNH AM Sons c\' Co ., 768 Broadway, New York ii; — May 12 46 342 87 1 ''^ Mar. 13 net 60 days 34 3 4- 87 15 Returns 12 125 25 it <( li 44 786 16 4S 212 16 April 16 " 30 '• 52 212 16 >7 Freight 4'> 18 50 27 " 60 " 57 345 74 -4 52 400 30 Balance c/d V 588 24 Ib8b 1686 77 19 June I Balance b/d V 588 -4 Classification and Comparison If the proprietor would know at the end of any stated period w hat have hcen his purchases, sales, expenses, and business in the aggregate during the period, and the outcome ot his business in profit or loss, transactions must be recorded in such groups as will e.xhibit the result of each business activity. In forming groups of items your knowledge of the principles of arithmetic in combining concrete numbers is a sufficient guide. ()nl\ like numbers may be added, and only like items may comprise the same group. The work of the bookkeeper is essentially a work of classification and com- parison. With these suggestions in mind, you may begin now with business transactions and collect, classify, and record tacts and e\ents in related groups, and tinallv determine the results to which such facts and events lead. 38 ACCOUNTS AND ACCOUNTIXC PRACTICE Illustrative Transactions P^XERCISi: 2 Jan. 2, 19 . 1' It tl (.- 1 ic k \\ aid is cn^a^cd in the husiiu-ss of Inivin^ and sellint: wluat, with an inNcstnunt of ^^5500 in cash. 2. lUi\ of \\ illtf l^rothers for cash 300 bu. ffi wheat fi 00(^. 3. Buy of \\ . \\ . Orr for cash 300 hu. ,«2 wheat ^ 8oe. 4. Sell Wilson ^ oLing for cash 2CX) hu. fji wheat (n. )?i.o5. 5- Buy of A. W . Gates & Son for cash 400 bu. ^i. wheat @ 95^. 6. Sell H. (). \ ooris for cash 100 bu. #1 wheat (a )^i.io. 8. Buy of Henry Wood & Co. for cash 500 bu. jfZ wheat (5, 85$^. 9. Sell Albert Cummings for cash 300 bu. jf2 wheat ^ $1. 10. Sell Wilson ^'oung for cash 200 bu. jfi wheat (n $1.10. 12. St.ll the Stewart Milling Co. for cash 200 bu. ^'2 wheat ^/. 98^*. 13 Buv of .\. W. Gates &: Son for cash 5000 bu. ••• i wheat @; 98jf. 14. Sell Dunn &: Dolan for cash 300 bu. -1 wheat (o 99^. 15. Stll 11. (). \c)oris for cash 5000 bu. --i wheat ^ i5i.o8. Procedure Record In one group all purchases of #1 wheat, and directly under- neath in another group the purchases of #2 wheat. State the total cjuantity of each kind of wheat purchased and the value of all purchases. In the same manner group the sales. I'lnd the total amount of cash received by the business, including the cash investment. I'lnd the total of cash paid. Find the amount of cash the business should have on hand. If you were the cashier of this business, how would you verify this calculation ? For what purpose was the wheat bought .' How many bushels of each kind ? How many bushels of each kind were sold r Should there be any wheat on hand Jan. i; r llow much : What is it worth (cost of last invoice, 98^) ? Do the facts that we bought so many bushels and sold so many bushels prove that we ha\c so much left : What might have happened to the wheat not sold: llow would a business man tletermine the quantitv and value of property on hand at any given time.' Assuming that Mr. W ard has the money and wheat that your records show he ought to have, what is Mr. Ward's capital Jan. 15' 1 low much did he invest ? The ditteience between his capital Jan. i and Jan. 15 must rep- resent what ? If vou find that Mr. Ward's business has earned a proHt or suffered a loss, you should now determine the source of such profit or the cause of such loss. L se the following formula : CLASSIFICATION OF ACCOUNTS 39 Source of proHt (or cause of loss) : Selling price of wheat sold $ Cost price of wheat bou .\<.iijlM1.NG PRACTICE -€ / ' , 'Ot^r O tJfJrtJS J /^- / I / G>^<^.^b.^^'>^.>d.^^ / -r vii'-rz-^' ;\ /a^i<^ A^!^*^^Z''6U^C^rd'^i.yLy'.//erv- ^^^'>iA ' rr ^ti.^t^'>T..^L.^ti.(^-t...^^ / / "^^>z;Z-<-'S2^ /.^^^-e^^'^^'Cl-^ ^T^^T-;--^^^ Z fo. 4-' ^.. '5 - -C..J ,^; ''^T.c-i^. / o :? I I '7 ^ /.''Ui ./■ /_ ■L--c^z-^cR...h.i. in\ i.ir«- Is'voicK rRou WAL'IKR ^:n^^■ & company- 2417 A All Bills Subject to Sight Draft if not Paid at Maturity Si . l.i.L .. . M . \<)\ . I. iv Sold to 1'. A. Morjian Address (Your place) Terms: Strictly 20 Days, less z'o No Discount allowed after 20 Davs Shipped via M. K. \ 1 . I'ackapes Cases 2 492 493 Stock No.|l-a.r,^j;.v-^.^. >''«>^"-'' S:. Eu! '"-» Plain T^ ^^''""i ''"^' ^'^""'" 442^,v, K. M KliCf M;.l I'hil 44^7' 44275 44277 IS 6 _6 43 \ix Cf Hill Tomorrow Vel " Lipt Hx Cf " Chic Cp 7 4 2.62' 4:. 2.66- 40. 1 10. 9. Sell S. E. Rodgers for cash 100 E @ 6o(^. 9. Pay salaries for the week: Win. Brown, ^^14; F. A. Jones, ^^13. 9. Pay for postage, stationery, and petties, $G. If the proprietor of the business should wish to know at this point the amount of business done, what the expenses have been, etc., we must take the facts recorded in the journal and sjroup them so as to bring related items, such as sales, purchases, expense, cash, etc., together. As explained heretofore, this grouping is done on another form called the " ledger," and the transferring of entries from the journal is called " posting." Posting An important function of the book of original entry is to serve as a postiiiii mi'dium, and con\enience in the work of posting should determine its form. Titles of accounts should be written in a large, pl.iin h.md, and UHOLLbALL bllOE BUbl.NLSS 5 I should stand out distinctly; explanations, m a small hand, should be kept away from the folio column. The books of ori<;inal entry should be footed before the posting begins. All books should be paged and the ledger care- fully indexed. (See Ledger Index, page 53.) A transaction is a transfer of value from one part or department of the business to another. Fhat which receives value is a debtor; that which gives value, a creditor. And since there cannot be a giver without a receiver, and vice versa, a record of each transaction comprises at least two ite'msy a debit item and a credit item. And since debit items must occupy the left page and credit items the right page of the ledger, you must know positively before you post an item whether it is a debtor or a creditor. There are no debit and credit positions in the book of original entry, ^'our only reliable guide is the rule : That person or department of the business that has received or cost value is a debtor; that person or department of the busi- ness that has given or produced value is a creditor, "^'ou must learn, under- stand, and rigidly observe this rule in posting each item. Posting an item comprises two distinct operations. First, transferring the required information, usually only the date and the amount, from the journal to the ledger ; second, indicating in the ledger the page of the journal from which, and in the journal the page of the ledger to -which, the transfer is made. 1 he student should concentrate all possible attention upon the matter of post-marking, and thus checking, an item at the time the item is posted. Omissions and repetitions can be prevented in no other way; and, because the indifferent student will neglect the post-mark, it is, for the beginner, one of the most important parts of the operation. In posting the accounts of customers and trade creditors, indicate in the NNide column of the ledger the terms of each sale or purchase, as the case may be. In posting closing entries write in the wide column of the Icdtier the name of the account from which or to which the transfer is niadi . If you have studied the directions for posting \'ou may now proceed to post the journal entries, Nov. i to 9. Transfer each debit item, the date :ind the amount, to the left side of the ledger account indicated m the journal entry, and each credit item to the right side. \\ hen you post a charge to a customer's account, or a credit to a trade creditor's account, remember to indicate the terms of the sale or the purchase, as the case may be, in the wide column of the ledger. After you post an item, remem- ber to enter the journal page in the ledger folio column and the ledger page m the journal folio column, ^'ou are less hkily to make mistakes if you make the posting of items of one account and to one side of the ledger continuous, although items do not occur in the journal in this order; other- wise your destination in the ledger changes with e;ich item, which is more or less confusing. 52 ACCOUNTS AND AcuUUNTING PRACTICE ^,/ firjf/ h/ fh t \\.« a V V >> v>v. : ^5VKV«\M»%( yv»\ \ v\».\» \\ // A.3'«-'i..*Z-««^ / /y^S'>7 ' .-c-/i-*w ^- (yj -7 \> C r».^' ^i- ^Jiy L-U^t^yi^^yi^ u■c^y^^'cCc^^, aC^a.^t/-t,^f/3J V 2: /'>• ft^/'J.'t^O^. (rj c. \\ '^f-rrC^^.'V-ir^ r^A^a^*'?--/^ ('2-) S' /fV2i-c/.-' ^7> ; '' ri^i..^^. /^t^t-'i-evC'«^- '' .-*Ui^^. -'-.'■ (/f) // . „-^l / / J 0-V <\-\v^ Ci^<^!^^i-^<:-i-7^*<. • '.--i,.^^ 0') J ^7^ J /^J^^T^Aa f^o c '' ^'- ct^n • (rj f i.r-' /-■-. (r) r 'V-V\-VS vv-x-vs-i C>r> - rr) 7 ''''.' ' (rj /- Ledger Index A kdiicr index showing the accounts you will operate in connection with the husiness of P. A. Morji;an, the ledger pages on which these accounts should be opened, and the number of lines to give each account is shown, pages 52 and 53. The number m parenthesis after the name of the ac- count indicates the number of lines' space required, but these numbers are not a part of the index. Copy this index on your index blank, and open the accounts accordingly. Number the pages of your journal and ledger. THE TRIAL BALANCE Purpose of the Trial Balance ( )li\ iouslv, if rccei\ers of vriliic in every case have been made debtors and givers of value, creditors, since debtor items should be entered on the left and creditor items on the right side, the two sides of the ledger should be ecjual. If mistakes have been made to destroy this equilibrium, they should be located and corrected before proceeding further with the work. Ir is the practice of bookkeepers to test the accuracy of theii' work imme- diately after the posting is completed by totaling the two sides of the ledger. This test is called a " trial balance." I he purpose of the trial balance is to test the accuracy of the book- keeper's work. It does not disclose all errors. If you had made a mistake in Frederick Austin's invoice of the 9th, charging him ^^65 instead of ^75, the mistake would aft'ect two accounts; namely, Frederick Austin and Merchandise Sales, and would not disturb the eijuation. If you had posted to the wrong account, but not to the wrong side of the ledger, the footings of your trial balance would still be equal. However, it does disclose errors in applying the law of debit and credit underlying each transaction, errors of posting to the w rong side of tiie ledger, errors of omission and repetition, errors in copying, adding, and subtracting, after the original entry is made, etc. You may now proceed to make a trial balance of your ledger in ac- cordance with the following instructions. Procedure With a sharp pencil, in small legible figures, write the footing, or footings, of each account in your ledger that has more than one item. 1 hese pencil footings should be w ritten close under the blue line on which the last item was entered so the\' will not interfere with subsequent entries. 1 he fiist addition should be from the top down ; then, if it becomes necessary to re- view the work, add from the bottom up. After the lootings of all accounts have been carefully stated write on a sheet of journal paper and in the order in which they occur 111 the ledger, the names of all accounts the footings of which are unecjual. .After each account enter its ledger footings debit footing in the left, credit footing in the right column. Indicate the ledger page of each account in the folio column at the left, and write the caption Tuill. B.II..ISCI:, together with the date on which it is taken, at the top of the page. State the footings 54 THE TRIAL BALANCE 55 of the trial balance in small pencil fif!;ures. If the footings are equal, single and double rule the columns, and enter the totals in ink. If the totals of the trial balance are unequal, a mistake has 1h(.ii math-, and nou should proceed in a systematic manner to locate it as suggested below. When the Trial Balance shows a Difiference In the matter of errors every precaution should be taken to prevent them. It often takes many hours to locate and correct mistakes that a little concentration and attention would have prevented. But if a mis- take does occur, you must review your work with systematic care to Hnd it. No dcHnite rules can be given for this procedure. The following general suggestions, however, mav be of service. To find Errors in Trial Balances In the first place, be sure that you understand :vhy there should be an equality of debits and credits. If you do not understand tiiis, vou are groping in the dark; no cut-and-dried formula can help you. Second, make sure that your additions and subtractions are correct. Few persons can add and subtract without making mistakes. Correct addition begins with writing the numbers to be added. If your figures are illegible, alterations frequent, and columns zigzag, there is no help for you in this work until you correct these faults. If you neglect to state the foot- ings and differences the first time over your work, as you have been in- structed to do, you have nothing with which to compare the results the second time over. ihird, mistakes commonly occur in copying numbers. Figures are transposed or transplaced ; 89 is called 98, or 75^ is written as ,^75, etc. Transposition of figures will lead to a difference in your trial balance which is exactly divisible by 9. Transplacement will lead to a difference exactlv divisible by 99. But it is doubtful if this method of locating an error has much practical value. Fourth, if you have posted an item to the wrong side of the ledger, the mistake will result in a difference of twice the amount so posted. I'ltth, if you have overlooked an item, either in posting or transferring accounts to the trial balance sheet, the mistake will result in a difference in the trial balance of the amount overlooked. I he surest way of locating an error, after you have made certain that the mistake is not in addition or subtraction, is to check back your posting. W ith a sharp pencil check (V) lightly each item in the ledger and each corre- sponding item in the journal, placing the check mark close to the double lines of the money column. Do not jump from one side of the ledger to the other; check all the debit items, then all the credit items. C'aielully scrutinize each item to see if you have transferrt d the exact amount to its proper 56 ACCOUNTS AND ACCOUNTING PRACTICE ^s^-'^i-j^gZ,^ X^^TPE-^^ce^^^^-'C-d-^, /(ytr. ( • ' T-CZ^^i^, k^-^-yt- ci,-j\ ^t W^f^^f^ '.^i>/. J-0 a c -^ 's** ^/i- 3 2.0 ^D 3 re A-n ^ ; p S8 WIIOLESALK SHOE BUSINESS 5O There are eleven transactions from Nov. 21 to 30 involving a credit to Merchandise Sales. If we journalize these transactions as you have been doing, we siiall have to post 22 items. By using the foregoing form you need post only 12 items, a saving of nearly 50 per cent of time and work. Turn to page 11 of the journal, write the heading Mt-rchandise Sales, and enter all sales under this heading. Compare this ruling with the form on which entries were made in the preceding exercises. L se the two columns on the left for the date, and the adjoining column for the ledger folio. Note that the month and year are written only once. WHOLESALE SHOE BUSINESS (Continued) E.XERCISE 6 Transactions in the business of P. A. Morgan for the remaining days of November follow. Nov. 21, 19 — . Sell A. J. Ackley, terms 2 ^10 n ^30, 200 A ^». $1.60. N\)Tii. — "2/10 n 30 " means that the term of credit is 30 days, but that a discount of iVc will be allowed for payment in 10 days. Attention is called to the wide variation in the terms on which goods are sold in these exercises. 1 his plan, although at variance with business custom, is necessary in order to properly grade the work so that the stu- dent will not encounter difficult problems at the beginning. 21. Sell Richard Grainger, net cash, 200 E @ 60 0. 22. Buy of Ely Abrams, i|/io n 30, 500 E @ 40 ^. 22. Sell Rulif \'. Lawrence, net 30, 100 C (n $}. 23. Buy of French Brothers, 2 10 n 30, 300 C @ $2.50. 23. Sell W'ickwire Brothers, 3 10 n/ 30, 200 A @ $1.60. 23. Sell R. S. Kingsley, n 10, 50 B (« ^2.50. 23. Pay Wm. Brown, y^i4; F. A. Jones, $1^,, salaries for the week. 23. Pay P. A. Morgan, personal drawings, $2^\ petty expenses, $'\. 25. Pay J. Dodd for signboard " P. A. MORGAN," $1^. (Charge Office Furniture.) 25. Sell John E. Steen, n/60, 150 E @ 62 ^. 26. Buy of David Dunn, 2/10, 200 B ^ $1.90. 28. Sell Isidore Isaacs, terms 30-day note, 84 C (■■ ^^3. Note. — Make no entry for the receipt of this note until there is a direct statement that the note has been received. 28. Sell John Bennett, 2/10 n '30, 100 A (a. )5i.25. Sell A. C Fontaine, net 10 days, 100 D (<> $\. Sell S. E. Rodgers, net 10 days, 75 E C" (yo ,2, in settlement of invoice of that date. Note. I lire we have a new species of value, called "notes receivable." Debit Notes Receivabtf when you receive the negotiable promises of others, which include the notes and accepted drafts of others, in 3'our favor. The entry for the foregoing is as follows: 29 C\ish Notes Receivable Isidore Isaacs Received of I. Isaacs cash for inv. 11 19 j?l50 and his loday note of Nov. 28 for invoice of thar date, $>z^z. 252 402 29. Give Ruhr \ . Lawrence credit for merchandise returned, 25 C @ $!>. What entry did you make when you sold these goods to Lawrence on the 22d inst. ? Smce the conditions are now reversed, the entrv must be reversed. Debit Merchandise Sales and credit Rulif /'. Lazvrence. 29. Sell Clayton Ensign, 3 '10, 150 H (<; /2.60. 30. Make the following payments: Mosler Safe Co. for ofHce safe, ^5250; Wm. Brown, ^^14; F. A. Jones, $13, salaries for the week; petty expenses, postage, etc., ^6; P. A. Morgan, personal drawings, ^35. Post all entries and take a trial balance of differences dated Nov. 30, 19 — . Foot and rule the items comprising the group of sales trans- actions, following the form given on page 58. Name the debtors in this group of items. Name the creditor. \\ hat is the class name for those to whom we sell goods .' Remember, we have set aside this group of items to save labor in posting. Post the total only to the credit of Merchandise Sales, using the date of the last transaction in the series. Read again the directions for posting and taking a trial balance and follow them implicitlv. This trial balance should include all items in November. Rrvirw QuFSTiONS, E.xfrcisfs 4, 5, and 6 I. What IS a business transaction.' 2. Show how each transaction gives rise to the relationship of debtor and creditor. 3. Does that rela- tionship exist in the beginning of a business before there have been any transactions ? Explain. 4. Show why there cannot be a debtor without a corresponding creditor. 5. Explain the meaning of the terms debtor and creditor as they are employed in account keeping. 6. State the rule to WHOLESALE SHOE BUSINESS 6 1 determine the debtor and creditor elements in a ^iven transaction. 7. In what chiss of transactions are persons involved in the entry ? 8. In wiiat class are persons not involved r 9. Show why we do not bring persons into all entries. 10. \\ liat considerations determine the content and form t)f an orio 5 40 62 WHOLESALE SHOE BUSINESS 63 A very simple rule to follow is to debit Merchandise Discount tor sales discount and credit the same for purchase discount when either is taken. For a fuller discussion of this topic, see page 158. WHOLESALE SHOE BUSINESS (Continued) Exercise 7 Transactions in the business of 1*. A. Morgan for the month of Decem- ber follow. With sales and purchases grouped under separate heads, con- tinue the jouiiKil (.ntries. December i, ig Receive of A. J. Ackley for invoice of the 21st ult., ^320, less 2%. Make the following payments : J. E. Dodge, agent, tor Hre msurance policy, ^i ^oo valuation (<; 1%, ^15- The Northcott Truck Co., freight and drayage for November, ^^23. 50. Benjamin Webster, December rent, ^100. Buy of Walter F.ddy &: Co., terms cash less i (',[, 500 A Qi ^1.25. NoTK. — thereafter rcjiard all piircliascs and sales of merchandise as e.xecutorv trans- actions; tfiat is, the sale or purchase constitutes one transaction, the settlement another. In a wholesale or manufacturing business, information respecting individual customers and creditors justifies the labor of opening accounts with them, whether or not cash is paid in settlement. liesides, strictly cash transactions in the wholesale trade rarelv occur; that is, customers do not come to the place of business with the money and carry awa)- the goods. The entry Cash to Merchandise is justified only when there is a mutual simul- taneous exchange of goods and money. In business, "terms cash" means anywhere from one to thirty days. Do not enter cash receipts or payments unless there is a direct state- ment that cash is received or paid. Dec. 2 Make the following sales : Rulif \'. Lawrence, n To, 10 doz. C @ ^36. Clayton Ensign, 5 10 n 60, 5 doz. B f/, ^36. 5 doz. C (a $\2. Receive the following checks : R. S. Kingsley, invoice 11 23, ^125. Wickwire Brothers, invoice 11 23, less 3*^, $310.40. (Combine these remittances in one Cash entry.) Make the following payments : Ely Abrams, invoice 11 22, less 1-4%. French Brothers, invoice 11 23, less 2%. (Consult their accounts for the amounts and combme the pa\'mcnts in one Cash entry.) 64 ACCOUNTS AND ACCOUNTING PRACTICE Dec. 3 Make the following payments: \\ ni. Brown ^^14, V. A. Jones ^^13, salaries. Postage, car fares, and petties, }?i2. Peckham &: Co. for 10 1 . egg coal C" $5. 50. P. A. Morgan, personal drawings, ^^35. (One Cash entry.) Dec. 5 Buy of Frencli Brothers, terms cash, less 3*^, 20 doz. C ^/ $30. Pay the Northcott Truck Co., freight and drayage, ^8. Dec. 6 Pay David Dunn for invoice of the 26th ult., less 2%. (Consult his account for the amount.) Buy of Kagan fie Kendnck, terms cash, less i ^, 10 doz. D ^ $g. Sell Henry K. Goodrich for delivery one half at date, one half Dec. 20, terms cash on delivery, 20 doz. E Qi $y.20. Pay 1 uska &: Co. for i duplicating machine, $>,o, and supplies, ^7. (Charge the machine to Ojfict' Furniturr, the supplies to Expense.) Dec. 7 Make the following payments : Ely Ahrams, in\oice Nov. 7, $200. \Vm. Brown, ^14; F. A. Jones, i5i3, salaries. Stationery and petties, $13.55. P. A. Morgan, personal drawings, $25. Sell Ruhf \ . Lawrence, n 10, 5 doz. D (o $15. Dec. 9 Return merchandise to Holbrook & Hayward, 25 C @ $2.50. (Credit Merchandise Purchases.) Receive checks of the following customers : Frederick Austin, invoice 11/9, ^^75. S. E. Rodgers, invoice 11/28, $45. A. C. Fontaine, invoice 11/28, i^ioo. John Bennett, invoice 11/28, less 2^\, ^^122.50. Henry K. Goodrich, invoice 12 6, ^^72. Receive of Clayton Ensign to apply on invoice of Nov. 29 the pa- pers shown on next page. Read these documents carefully. ( )ne is a promise to pay mone\' in 30 days; the other, a communication addressed to The Merchants Bank, asking that institution to pay money at once. One is called a " promissory note " ; the other, a '* check." What names do wc give to these things in recording their receipt on our books .' WHOLESALE SHOE BUSINESS 65 Cincinnati, Ohio, > ^.-^l\>- /.■- , j- ^ ^ 19 after date for value reccivcd-l:^!^ promise to pay to i^p, '^yf^^r f^^^^ vZ^^^. c- - ' Dollars S / f"- '" at the Merchants Bank of Cincinnati. N>^ l//^T~ Due r^i?^y. T-f, 19lr=L /- . ^, / The Merchants Bank Nn /v-T"^ zoo; but Hn- sign, m this transaction, has a right to demand an allowance of )^6. i<;, and his bookkeeper could be no more profitably employed than in making such calculations. And while con- ditions might arise to justify the shorter method of computation, the one stated above is employed in this book. Issue the following checks : Walter Eddy &: Co., invoice 12^1, ^^625, less I %. French Brothers, invoice 12^5, J^6oo, less 3%. Fagan &: Kendrick, invoice 12 '6, }^90, less i^^;. Is the discount involved in these transactions sales discount or pur- 66 ACCOUNTS AND ACCOUNTING PRACTICE chase discount ? State the rule for ckhitin^ ;iiul crt-clirlnii Merchandise Discount. Show how we c;iii save time and lalnn hv combining these payments in one enri\. Ha\e you been }iroupm, c - / /^'^r-^^ ^^^ "^ fe / ■j^ ^yi^ A c o* -^ 1 his form is given tc^r your guidance only. Do not copy it. Since you have been accustomed to the form of journal entry in which debit items are to the left and credit items to the right, you should exercise the utmost care in posting purchases. In this form the debit item stands to the right, the credit items to the left. Post your group of purchases in accordance with the above form. LABOR SAVING BOOKS (Continued) Cash Book In rec()iclin ^^4.80. Two tons of the coal purchased on the 3d mst. h.i\(.- luen ckli\rred to Mr. Morgan's residence. \\ hat account was charged with the cost ol this coal .' Should house- hold expenses of the proprietor be charged to the business ? \\ hat entry will adjust this matter? Sell Edward Davis, n 10, 10 doz. E (n $^.10. Remit Holbiook &: Hayward for invoice of the 14th ult., i^375. (For loiin of this entry, see page 69.) Name the debtor in this transaction. Name the creditor. Cii\c the 67 68 ACCOUNTS AND ACCULNTING PRACTICE ^ 'J /' ^ /^^l^:-zAt^^?z^ Oa\t jyz^. /J /J /^ c /a 2-0 u 2/1 3/ 3/ ^^orVktAiVort -< ^''^^(ayu^±c■'■nya^^ ' -=fiytyt^. '/i ~ 'o^yr.->';^^CJ^- /•>-/ '/^ rule. Note that economy of time and labor should determine the form of the record, and that this form is much shorter than the one we have been usin^ for this type of transaction. Buy of David Dunn, terms 30-day note, 50 doz. B O' }^-4- Dec. 13 Give David Dunn P. A. Morp;an's 30-day note for invoice of the iith inst., i^i200, making the note payable at your local bank. In the transaction of the iirh, when we purchased these poods, we credited David Dunn. Givinp; this note does not cancel the debt ; but it is accountmp practice to keep debts that arc (-\"idi'nccd bv notes and time drafts under a separate head. So we should transfer this item now from WHOLESALE SHOE Bl SINESS 69 ~^^^i^L-d^-'A^ A^^^.-^C-'e^ V)a\t f- A^. '9 2/ 1/ 23 \2f ,"/ 2f 3/ 3 VoV \i::^^nrC^-iyirtr^t'x:y/svy.^^ i\< tom\\t V"^V. "^.-«Z-(^<#C' "^ ^^U Vav\»tvi\arj Dunn's account to Notes Payable — debit the former and credit tin- latter - and write the following explanation: Gave David Dunn our jo-day note, dated Dec. 11, and payable at (your nearest bank) for inv. 12 11, $1200. Notes Payable is credited when you issue your negotiable promise, that is, w^hen vou give your note or accept another's draft, and debited when such promise is redeemed. This subject is more fully treated on pages 1 19 and 120. Sell Frederick Austin, n/io, 8 doz. D C" ^^S- P. A. Morgan makes an additional investment of J^ 500. (For form of this entry, see page 68.) Name the debtor in this transaction. Name the creditor. What form of entry did we make Nov. i when P. A. Morgan made a cash invest- 70 ACCOUNTS AND ACCOUNTING PRACTICE ment r That entry took four luies, and we have accomphshed the same result here in one hne. \\ hat considerations should determine the form of an entrv ' Does the form of the entry in any way affect the relationship of the dehtor and the creditor involved ' 1*. A. Morgan fiives his 30-da\' interest-hLarmj:; note for ^500 to \V. i' . Slocum, for a loan of that amount in cash. (For form of this entry, see page 68.) When is Notes Payable a creditor r W hen a dehtor : Dec. 14 Receive of Rulif \ . Lawrence for invoice of the 2d inst., $360. Make the followinu; payments : \Vm. Brown, ^14; F. \. Jones, J^i 3, salaries. Postage, telegrams, and petties, ^^8.50. Name the debtor. I he creditor. P. A. .Morgan takes from stock for his personal use 2 15 di $}. ("Credit Merchandise Stock.) Dec. 16 Complete negotiations with Franklin Lord for the purchase of the premises now occupied by the business, for $1 1000, on the following terms : Receive credit for unexpired rent, $50. Give a first mortgage on the premises of ^5000. Pay the balance in cash, ^^5950. Procedure First, make an entry in the journal debiting Rral Estate and crediting Franklin Lord, Vendor, for $\ 1000. Using your own address and the name of your own county, write an explanation of this entry after the following model: For purchase of business premises, known as No. J./5 Main Street, as per deed e.xecuied this day and recorded in the office of the clerk of the county of Kings, in Liber 1^6 of Deeds at page yS. Second, make a second journal entry debiting Franklin Lord, Vendor, and crediting Mortgage Payable for ^^5000. Substituting your own address and county, explain this entry as follows: Mortgage of P. A. Morgan to Franklin Lord for $^000, bearing interest at 5% per annum, payable semi- annually, and covering premises knozvn as No. J./5 Main St., which was executed this day and recorded in the office of the clerk of the county of Kings in Liber i8g of Mortgages at page 1 21. I bird, make an entry in your journal crediting E.xpense and debiting Frank! ui Lord, Vendor, for i^^O, with an appropriate explanation. I'ourth, make an entry under Cash Payments debiting Franklin Lord, Vendor, and crediting Cash. Explain this entry by reference to the journal page of the preceding entries. In the folio column place a check WHOLESALE SHOE BUSINESS 7 I mark (v') opposite each " Franklin I.ord, \ cndor " item, and do nut post these items. In a mercantile business, personal accounts are usually those of cus- tomers or trade creditors. And if a personal account has some other func- tion, it is wtll to indicate its character by some tjualifving word, as ** Capi- tal," " Private," " \endor " (seller), " Wndti- " (buyer), " Licpiidation " (settlement), " Loan," etc. Buy of French Brothers, terms 30-day note, 12 do/. C (« $t,o. The following invoice represents a purchase of 5 doz. F c« $-{2.. ?> THE ^ SHOE I \lll.l ADDRKSS ■• BARSAKI) IIIICAC." HIE BARNARD SHOE C0M1^\^^ MANIFACTIRJRS 180 to 187 Adams Street, Chicago, U.S.A., Dec. 14, 19 — Salesman Kinp Shipped by 20)Jz C. &: N. W . Terms Rr 2 per cent 30 days, net 60 days PAYABLE IN OnCACO OR NEW YORK FXCIIANT.E. WE CHARGE EXTRA FOR SINGLE PAIRS LOOK FOR THE NAME IN STRAP Sold to P. A. Morgan Address ("V'our address) Factory No. 1 Case No I Pairs In Kc-orilcriii^ t,ni 1 .n.U)ry Number 27442 ' 27441 27440 velvet Cf Butt zb velvet Cf Sm Butt velvet Cf Sm Butt penant Cf Blu 20 ptnant Cf Blu 20 Width C C D C I) Last Price Hippo ' 3 50 Cork IT 3 50 Cork I r 3 50 BustiT 3 50 Buster 3 50 60 Extension Total 42 00 42 00 42 00 42 GO 42 00 IC ocl 72 .^v...^ ,.. AND ACCOLXTING PRACTICE Make the following sales : George Graber, terms cash, lo doz. A ^ $19.20. L. L. Vance, terms 30-day note, 15 doz. A h J^ig.io. I'hn n.,>w i')r poods returned the yiii iii5i., ^2.50. i,- _:d Davis for invoir.- of the 15th u'f <\zn Dec 17 Make the f'^'^'^ing sales: S. E. I -_-rs, n 10, 20 doz. E ^. $7.10. R. S. Kingsley & Co., n 30, 10 do/.. B (n $}6. Receive of RulifW Lawrence for invoice of the 7th inst., ;S72.50. Allow him $2.50 on this invoice for imperfections in goods, in accordance with his representations and request. (Debit SaUs and credit Rulif /'. La'jc- f in the journal.) Dec. 19 Pay the Bell Telephone Co. for December service, $4.50. Receive of George Graber for invoice of the i6th inst., $192. Receive of L. L. Vance his 30-dav note, dated Dec. 16, for invoice of that date, .^288. Receive of Rulif V. Lawrence for invoice of 11 11^ $2i^. Give French Brothers our 30-day note, dated to-day, for invoice of the i6th inst., ;$36o. Dec. 20 Buy of Ely .Abrams, n 10, 40 doz. E % $4.80. Sell S. E. Rodgers, n^ 30, 100 E ^, 58 ^. Posting I he entries of this exercise have been recorded in five separate groups. In practice it is customary to keep these groups of entries under separate covers, or in separate books. I* or convenience in designating the different sections of the record, we shall hereafter refer to the several parts as the " journal," '* sales book," '* purchase book " and " cash book." the cash book to include the two groups of cash items — cash received and cash paid. If you are encountering any difficulty in getting these items to the ' that when the ledger is summarized in the trial balance there is an equality of debits and credits, you should study carefullv the following outline. Ju*' - f- ''1 rr.„. rion gives rise ' ■ ''^e relationship of debtor WHOLESALE SHOE liUSINESS 73 and creditor, so does each group of transactions give rise to such relation- ship, and present an ecjuahty of dehit and credit items, as follows : Journal Form (Account) Dr. (Account) Cr. PiRCFiASE Book Form (Accounts) Cr. (Account) Dr. 3 6 8 17 Sales Book For.m (Accounts) Dr. (Account) Cr. II 1 1 1 Cash Receipts Form (Accounts) Cr. (Account) Dr. ■»7 Cash Payments Form (Account) Cr. 1 lO 1 . 1 74 ACCOUNTS AND ACrorNTINC. I'KA( IKE Now, if we collect and arrange the debtor and creditor items, we shall have : DEBTORS CREDITORS S 5. S 5- •7- 3- 12. 6. 7. 8. 9. 28. 37- 25. 3- 2. 8. 6. 10. 4. 21. S108. S108. An KXERCISt IN MhNTAL PoSTING Turn to your cash received record, exercise 8. From whom is the value received in these items r Name the creditors. To which side of the ledger and under what captions are these items to be posted r Under what date is each item to be posted: To what pape of the ledger: W iiere is the cash book page to be entered : \\ here is the ledger page to be entered after the item is posted ? W hat purpose does the paging serve ? Ihis is a record of value received by what department of the business r Name the debtor. For what amount : lo which side of the ledger, on what jiagc and under what caption is this item to be posted : What date ? (In posting totals, always give the date of the last trans- action 111 the series.) \\ hat should be done to prevent posting an item twice or omitting it altogether .' lurn to your cash paid record. \\ hat department of your business is shown to have given value here.' Name the creditor. Ihe amount. To which side of the ledger must this item be carried : Under what caption ." \\ hat date : \\ hat page of the cash book and wjiere entered : W hat page of the ledger and where entered : 1 hese entries indicate value re- ceived b\ what persons and departments of your business .' Name the debtors, the dates, and the amount for which each is a debtor. To which side of tin ledger and under what captions must these items be posted ? I low many parts to a date: State again the purpose of the post-mark. Now turn to the purchase book. \\ ho gave the \alue in these trans- actions .' Name the creditors, dates, and amounts. On which side of the ledger ami uiukr what titles must these items be posted .' W here do you enter the page of the jiurchase bt)ok ? Fhe ledger page? Why: Hhcre \\'HOLESALK SHOK BUSINESS 75 in the ledger do you write the terms? Wliar department of the business received value in each purchase transaction : \\ hat is the total value received by this department r What name is ^iven to that which receives valuer On which side of the ledger is this total to be posted: What date? In what column and opposite what item should you enter the pur- chase book paj^e r W hen : \\ here do you enter the ledger page r With your sales book before you, answer the following: W ho receives value in a sales transaction r \\ hat class name is given to those to whom we sell goods ? Name all the debtors in the sales book. (Jive the dates on which th(.\ became debtors, and the amounts in\'oI\fd. 10 whicii side of the ledger and under what titles must these items be posted' Where should the terms be^ entered in the ledger r How do you avoid posting twice or omitting an item ' What department of the business gives value in a sale : Name the creditor. Cjive the amount, the date, the title of the account, and the page of the ledger to which this amount is to be posted. W Inch side ot the ledger .' I his transfer is made /rom what page ? Where is this page to be entered ? The transfer is made to what page .'* Where entered ? Turn to the journal. Name the debtors in these entries. The credi- tors. To which side of the ledger and under what captions are the debtor Items posted ? 1 he credit items .' Should this posting be post-marked .' Why ' WHOLESALE SHOE BUSINESS (Concluded) Exercise 9 Continue the plan of grouping cash items, sales, and purchases. Each entry should be fully explained, or specific reference to supplementary records should be made that will give a full explanation. Vhv December narrative of transactions is concluded in this exercise. Dec. 21 Pay Ely Abrams for invoice of the iith inst., i^i^^.. Buy of David Dunn, 2/10 n '30, 100 doz. B (a ^24. Make the following payments: Wm. Brown, i^i ^ ; F. A. Jones, ^15, salaries. Petty disbursements, ^8.50. P. A. .Morgan, personal drawings, ^40. Sell Richard (jrainger, terms cash, 10 doz. E f/ $y. Dec. 23 Pay the " Boot & Shoe Recorder " in settlement of their bill, 12 16, for advertising, 5^35.50. Sell A. J. Ackley, terms n 30, 3 doz. A (a, ^^19.20; 4 doz. B (ti, $2^. ^6 ACCOUNTS AND ACCULMING PRACTICE Return to David Dunn 5 doz. B C" $>2^, goods are not up to sample. Buy of Kagan &: Kendrick, 2 10 n 30, 10 doz. D % 9. Dec. 24 Sell John K. SicLii, terms i 5-da\ note, 15 doz. E (^ 2z/ IO — the order o(^ ' y>i^ ^^/:/l^^.<2^^^^^^ri^ (r^ - /• r-T-V? ^ . ' ; Dollars Value received - ''- interest, and payable at the First National Bank of Kansas City. Mr. Steen has written on the back of this note: Pay to the' order of P. .1. Morgan, John E. Steen Such a writing is called an " indorsement." The note is made payable to Jt)hn K. Steen, and this indorsement transfers it to P. A. .Morgan. \\ hat is the accounting name for this paper from our standpoint r What is the debtor.'' Name the creditor. State the rule involved. If W \. Morgan wished to pass this note on to David Dunn, he could do so by writing underneath John E. Steen's indorsemeiu. Pay to the order of David Dunn, P. .1. Morgan. Because of the \va\ notes, checks, and drafts may be transferred from one person to another, thev are said to be negotiable. Receive the following checks : I'.dward Davis for invoice of 12 11, ^70.56. Frederick .Austin for invoice of 12 13, i?i20. WHOLESALE SHOE BUSINESS 77 Note. — Refer to tlu- account of Edward Davis. Kvidently he has taken 2',' dis- count on this invoice. Mr. Morj^an will communicate with him with reference to the matter. In the meantime j;ive him credit for the amount of his remittance onl\'. Henry K. Cioodrich has asked tor the dehvery of the l^ihiiice of his order of Dec. 0, 10 doz. E (o, , 4 4 4 7 7 7\ 15! 16 19 23 23 23 30 30 31 Cash Dr. 5312 57 IT 268 H 19 Feb. I Bal. brought forward 1 9843 09 their accounts. Is this a purchase discount or a sales discount r Is Mer- chandise Discount a debtor or a creditor for this discount ? Mr. Morgan has settled the account of Edward Davis bv allowing him the discount on his purchase of Dec. 11. Adjust this by means of a journal entry. Jan. 3 Receive of Isidore Isaacs for invoice of 12 24, less 2 %, ^188.16. Credit IMr. Isaacs in the cash record and dispose of the discount through a journal entry. Jan. 4 Receive the following checks : Richard (Jrainger for invoices ii 21 and 12 21. ^190. Riilit \ . Lawrence in full of account, ^^672. W'lckwire Brothers for invoice 12 27, ^^142. 20. Henry K. Goodrich for invoice i2/2(), ^^72. MORGAN S BUSINESS LIQUIDATED 8i Cash V \\d Date Fol. Accounts Dr. Particulars Ittiiis lotal 19 — J;.n. 2 Fagan &: Kendrick Iiiv. 1 1 ^23, less 2% J. S8 20 2 BaiiKiicl Shoe- Co. "12, 24, less 2';; J. 7 205 Ho , 2 2 2 2 12 12 18 30 31 Cash Cr. 1425 05 31 ^a/. carried forward 9«4.> 09 /^ 1126S '4 Jan. 7 Receive the following checks : R. S. Kin<;sley & Co. for invoice 12/27, less 2 ^f, $411.60. Clayton Ensign, 5^566.01, to be applied as follows: Invoice 12/2, less 2 ^l, ^^382. 20. C. Ensign's note of Nov. 29, due 12/29, ^i^.v^t. Jan. 12 Pav \V. F. SlociMii in settlement of his note and nitercst due to-day. Face of note, i^^oo. Interest accrued 30 days, 6 *?(', ^^2.50. Interest is the right to the use of nionev, — a right that is bought and sold just as other rights are bought and sold. When you sell the right to use your mone\', credit th;ir which \()u sell Interest; when you buy the right to use another's money, debit that which you buy — Interest. BrieHy, debit Interest when it costs value, and credit Interest when it earns value. 82 ACCOUNTS AND ACCOrN'TIXG PR ACTirE In tills transaction Interest has cost ^"^2.50, and is, therefore, a dt-broi item for rhar ainouiu. Jan. 15 Receive of I.. 1,. \ ancc for his note of 12 16 due to-day, )?288. Jan. 16 Recei\e of R. S. Kingsle\' 6>; l"o. tm invoice 12 17, ^^360. Jan. 18 Pay French Brothers for their note due to-day, ^^360. French l^rothers were debited when you gave them iliis note; do not dehir them aj^am. Jan. 19 Receive of S. E. Rodgers for invoice of 12 20, ^58. Jan. 23 Receive the following checks : A. J. Ackley for invoice of 12^23, J^i 53.60. John E. Stecn, ^^201, to be applied as follows: Note of Dec. 24 due to-day, ^108. Invoice of Nov. 25, ^593. Jan. 30 Pay postage and petties, ^4.75. Receive check of David Dunn ^2010 to be applied as follows: Note of Dec. 31, due, ^2000. Interest 30 days, 6'!7, $\o. Has Interest cost or earned something: Is Interest a debtor or a creditor ? Closing the Cash Book If you have completed the January entries, you should now sum up the cash record, state the conclusion tt) winch this record of receipts and pay- ments leads, and carry such conclusion forward to Feb. i. (See form, pages 80 and 81.) I he title " Cash " includes not only currency (paper and metal money), but everything that passes current as mone\ in the course of trade. Checks, bank drafts, postal and express money orders are recorded as cash, because they can, or(linanl\, be converted into money immediately, if the holder so desires. An account is a depository of value. I he Cash account represents on your books the custodian of certain value; it is charged with the value it -V- MORGAN S BOOKS CLOSED S3 receives and is credited with the value- it yields. Ihe Cash account of exercise li has received isi 1268.14 and j^iven back. ^^1425. 05. It should accordinjily possess the ditt'erence between these amounts, t)r 5^9843. ck;. This result, however, is always verified by counting the cash on hand and determining the amount on deposit, assuming that a bank account is kept. An account is a record of events which is summarized and brou^^ht to a conclusion periodically. 1 he period of rime covered by this account ends Jan. 31. Closinj:; the account is merely di\esting it of its holdini^s. 1 he period endin»2; Jan. 31 gives to the period beginning Feb. 1,^^9843. 09. 1 he period giving the value (January) is a creditor; the pericni receiving the value (Februar\ ), a debtor. Ihe amount carried forward, being the dif- ference between the two sides, is called the " Balance," and is sometimes written in the old account in red, although this is not imperative. Closing entries are, m {■)rinciple, like all other entries - transfers of value from one account, or one period of time, to another. Always debit that which receives, and credit that which gives^ value. The cash book closing, exercise II, expressed in the form of a journal entry should be Jan. 31 Cash Account (Feb. i) Cash Account Cash on hanil carried forward 9843 09 984*^ "00 Do not journalize this closing, however. Post the cash book and journal, and take a trial balance of differences dated Jan. 31. 1 hi-.; trial balance includes the results of all transactions since Nov. i. Statement If t)n Jan. 31 .Mr. Morgan had called for a statement showing the out- come of his business venture, and the various factors involved in that out- come, such statement might have taken the form shown on pages 84 and 85. p. a. morgan's business, books closed Exercise 12 ^'ou were told in the earl\ pages of this book that the business man expects the things he owns to render pecuniary service; that such expecta- tion depends for its realization upon the v;ilue outcome of the things to which such ownership relates; and that such value outcome can In deter- mined if we debit that person or department of the business that receives value, and credit that person or department that gives value. \\ e have 84 ACCOUNTS AND ACCOUNTING PRACTICE Rl'SINKSS AND FINANCIAL STATEMENT For nil I'l rioo from Nov. i to Jan. 51, 19 — Trading Account Purcliasfs for the period Less rt'turnt-d purchases Add frcipht &; drayagc Deduct stock taken over by David Dunn" Cost of goods sold Balance, gross profit, carried to Pro tit &: Loss Sales for the period ' 7246 80 Less returned sales -j-j 50 >ales, net 7169 30 Profit & I -\ccor\T Kxpense Depreciation of Office lurniture v. A. Morgan, net profit, c, d 651 45^ 15 II25 09! 1 1 1 i79L Trading Account Interest Mdse. Discount P. A. AIORCAN Drawings Capital c d 282 9843 09 10125 09 Investment Profit brought down 8500 500 11;; OQ ' Stock appropriated by the proprietor for personal use is included with Sales. * In a K<>ing business this item is the inventory at date. MORGAN S I5UOKS CLOSED Sq Balance Sheet Cash w^i; r. A. Moij^.iii Capital w84^ 09 followed this rule in the business of P. A. Morgan, and it has brought us to thf results shown in the trial balance of Jan. 31, as follows: Trlal Balance, January 31, 19 — P, A. Morgan, Capital P. A. Morgan, Private Cash Interest Office Furniture Mdse. Stock Mdse. Purchases Mdse. Sales Freight &: Drayage Mdse. Discount Expense 282 1 1 9000 9843 09 1 7 .^0 15 9296 3962 7163 80 30 53 30 C^-.i 4' 7 24 20140 N 20140 ^} W hile we have followed the rule of debiting that which received, and crediting that which gave, value, it is apparent from the above trial balance that Merchandise Stock and Merchandise Sales must have received value of which we have, as yet, made no record. 1 ransfers of value have been made from time to time as goods were placed 111 stock, ami tlun takiii from stock and sold, which we must now record. And in making a record ot these transfers, we are moving step by step toward tiu- conclusion to which all business leads — namely, profit or loss. Profit in a trading business is the difference between the cost price and selling price of goods sold. The Sales account shows the selling price of goods sold, and the following procedure will dttermine the cost price of goods sold. The cost price of goods bought to be sold is made up of two items : the invoice price, which is recorded in tIu' Merchandise Purchases ac- count, and the cost of delivery, which is recorded in the Freight i^ Dray- 86 ACCOUNTS AND ACCOUNTING PRACTICE age account. Accordingly, the first step in marshaling the factors of cost is to transfer Freight i^ Drayage to Slerchandise Purchases. Tin- fol- lowing entry will effect this transfer: 31 Mdse. Purchases Freight &: Dray age Kor balance transferred ^^O 5-> .>' Post each entry as made. It should be evident that the value of the goods purchased is in- creased by the cost of delivery ; in other words, the goods have received the value of the services rendered in transporting them. We have, then, in this entry debited that which received the value and credited that which gave the value. Copy this entry in your journal and post it. The ne.xt entry should record the transfer of value from Merchayidise Purchases to Merchandise Stock, for the value of goods placed in stock, as follows : 31 Mdse. Stock Mdse. Purchases For cost of poods placed in stock 9349 i 30 9349 30 What became of the goods placed in stock ? The stock remaining Dec. 31 was transferred in lump to David Dunn, but this transfer has been recorded. Presumably all the goods placed in stock, except those taken over by David Dunn, were delivered to the customers of the business by salesmen ; and since Merchandise Sales was credited with the value given bv the sales department, it must now be debited with the value of the goods received from Merchandise Stock, being the cost of goods sold, as follows : 31 Mdse. Sales Mdse. Stock Cost of poods sold, charged to Sales :)j S(, 53R6 50 These three entries havt- eliminated three items of your trial balance of Jan. 31, and your ledger now stands as folK)ws : MORGAN S liUUKb LLUSKU S; P. A. Morgan, Capital P. A. Morgan, Private Cash Interest Office Furniture Mdse. Sales Mdse. Discount Expense ! 9000 2H2 09 ' 9«43 7 ;o »5 177^. So 651 45 7 -4 107-1 ^ 1 1 1 ^ \)iu" attentK)ii is a<;aui callttl to the tuiulaniental iiniKipIc luukrUing this perpetual equality of dehits and credits; namely, the simple fact of ownership. Ownership, of course, decreases as the value of the thing owned decreases. The item of ^^15, opposite Office Furniture, represents the sign- board which had value and was owned while the business continued ; but, since it no longer serves the purpose tor which it was ac(juired, we may regard it as having no value, and therefore no longer owned. Ihe same thing may be said of the Expense item. The various things, tangible and intangible — stationery, office supplies, postage, rent, services, etc. — which Expense represents, zcere things owned ; but the \alue of these things has been absorbed by the business. The credit items under Interest, Merchandise Sales, and Merchandise Discount represent the gross earnings of the business, or the increase in ownership. So there has been both increases and decreases in ownership, and if we take the difference between the items representing an increase and those representing a decrease, we shall arrive at a net result. Values absorbed, or things consumed in running a business are alwaws represented bv debit items and are called " losses." Items representing an increase in the proprietor's worth are always credit items and are called ** profits." The difference between these two factors is net profit or loss. The bookkeeper's method of making this deduction is shown in the following entries : 31 Profit &: Loss Office Furniture E.xpense Balances transferred 666 I ^51 45 88 ALLuLM.s AND ACCOUNTING PRACTICE 31 Mdsc. Sales Intticst Mdsf. Discount ProHt &: Loss Balances transfcrrcil 1776 80 7 50 i 7 24! «7Vi 54 Copy these entries in your joiiinal and post tluni, ami noui ledger u'l! then stand : P. A. Morgan, Capital P. A. Morgan, Private Cash ProHt &: Loss 1 282 9S43 09 9000 10125 1 09 TOT 2; ov 09 1 i 1 We find that the business has earned a profit of ^1125.09, but ot this amount Mr. Morgan has withdrawn ^282, which, of course, reduces the profit to his credit and ettects a corresponding reduction in ownership. This reduction is accomplished by means of the following entry, which copy in your journal and post : M Profit &: Loss P. A. Morgan, Private Balance transferred I 125 09 I I on And we have, finally Hai.anck Shhkt Cash 9843 09 , 'v 1'. A. Mor-an. Invest Hunt I'. A. MoFRan. Profit 09 OQ MORGAN S BOOKS CLOSED 89 The process by which tlie various factors of cost and production — the expenses and earnings of the business — are assembled and the Profit y Loss account constructed is called " closing the ledger." Not all accounts enter into a calculation of jiroHt or loss. If thi- whoh* or am' part of the value lodged in an account remains mtact as an asset, the account is brought to a conclusion, and the value ot the asset restated underneath the rulings, or under a new headmg. \ he cash account closing, pages So and Si, illus- trates this procedure. In the business of P. A. Morgan just concluded we disposed of all assets except cash and settled all liabilities before closing the ledger. If we had closed the ledger Dec. 31, prior to the sale of stock, office furniture, etc., to David Dunn, the merchandise stock account would have been closed as follows : Mfrcttandtse Stock Dec. 31 Purchases Inventory J 9349 30 30 80 1 '4 31 31 Inventory Sales acct. 7 V 3 b 3956 5386 80 SO w ^ 4') 3956 9349 30 19 Jan. I This account became the depository of value to the amount of ^9349.30, which was transterred trom Merchandise Purchases, hexw^xht cost of goods delivered and placed in stock. It accounts for this value in its exhibit of ^^3956. 80 of goods on hand Dec. 31, to be passed to the January account. Six dollars of this value had been previously taken out by the proprietor, and the balance of $5386.50, being the cost of goods sold, is charged to the Merchandise Sales account. It was made a debtor for what it received and is now made a creditor for what it has given back. Emphasis is given to this fact by stating the footings and underscoring them with signs of equality, and the account is said to be " closed." In this procedure, it may be repeated, we have followed the same rule of debiting that which receives, and crediting that which gives, value. Mer- chandise Stock received value from Purchases, and gave value (i) to the proprietor, (2) to the January account and (3) to the Sales account. In closing an account inxoKing an asset item, the procedure is alwavs the same; namely, debit the new account and credit the old. In closing an account inxoKmg a liability item we reverse this procedure. If we had closed the ledger of P. A. Morgan Dec. 31, before the December freight bills had been paid, m closing Freight l^ Drayage we should haw piocceded as follows : 90 ACCOUNTS AND ACCOUNTING PRACTICE 19— i Dec. ; I January acct. pRKIGHT AND DkAYAGE ly 1 ^} SO Dec. 8 21 So 1 19 Jan. ^ I I'lirchuM N .11 1 1. I Oiciiiibtr accr. Of course, this ^21.80 was owing the transportation company, and would properly stand to the credit of its account. 1 his expedient of hringmg current liahilities down to the credit of the account to which the item has heen charged, saves the trouhle of opening an account with the person to whom the money is owed. But the expedient is in keeping with the same rule we have followed in making all entries. \ his debt was contracted in December and will be paid in January. If January pays December's debt, the former is giving value to rlu latter. Hence, we credit the January account and debit the December account. In closing an account involving a liability item, debit the old account and credit the new for the amount of the liability. This expedient, however, is not practicable where there are many items of this character. TRADING ACCOUNTS Biiyinii; goods and stllmti; goods, in each case, calls for the exercise of different kinds ot ahilir\ . 1 he services of a compereiit bii\ er might be wholly or partially niillihed by the work of incompetent salesmen ; on the other hand, efficient salesmen might bt- handicapped by inct)mpetent buyers. It is, therefore, essentially the province of good accountkeeping to record the incoming and outgoing of values so as to reflect the services, good and bad, of diflerenr classes of employees. Furthermore, goods should be placed m stock at cost, and so recorded ; and there are usually several steps in the process of determining cost. The cost of goods at the seller's place is not the cost at the buyer's place ; the cost of transportation, which in some cases is the larger factor, must be included. Allowances and returns must also be considered in determining cost. Again, goods are bought at one price and sold at another, and a record of sales also involves returns and allowances. Manifestly the various functions of the trading department should be recorded separately. Trading activities comprise three main divisions: Purchases, Stock of Goods (merchandise stock), and Sales; and three accounts should be operated to correspond to these divisions. After " freight-in " has been charged to Purchases, and return purchases credited to this account, the result should be transferred to Stock of Goods. The value of goods placed in stock passes at closing time (i) to the future account-period (the inventory of goods in stock), and (2) to the Sales account (the cost of goods sold). The Sales account should be charged at closing time with " freight-out," returns, allowances, etc. This account will then show the cost and selling price of goods sold, and will lead to gross profit. 1 he student, however, will fre(]uently encounter the practice of com- bining stock, purchases, sales, freight and drayage, returns and allowances under one head called " .Merchandise. " 1 he result in profit or loss will, of course, be the same whether the various trading activities are recorded separately in the ledger and assembled when the ledger is closed, or whether such items are grouped in one account when the books are posted. But if the proprietor is a prudent man, he wants his books to show not only results, but the sources from which those results are obtained. Market conditions, for instance, may require dealers in commodities to sell goods at many different rates of profit. The seller, however, should know what 91 92 ACCOUNTS AND ACCOUNTING PRACTICE average rate per cent of profit his sales arc yleldinji. If the margin is insuf- ficient to meet expenses, dipreciations, ;iiul incidental losses, prices must be raised or expenses reduced. If conipetirors are undtisclling, prices must he lowered. 1 he matter ot pricing goods is much too important to be adjusted without tull knowledge of all the circumstances involved. A merchant, particularly when liberal credit is offered, is prone to buy more than his business justifies. The stock a dealer carries should al- ways have a dehnite relation to the amount ot business done by him. I nless the stock is turned over periodically, too much monev is tied up in goods, so that interest on capital and losses from depreciation will quicklv wipe out the earnings of the business. judicious buving is possible onlv when a separate record of past experience in that department is available. 1 hese and other considerations more than justify the extra cost of exhibit- ing trading activities in detail. retail coal business Exercise 13 The following exercise illustrates two inethods of recording stock purchases, and sales. Separate accounts are to be kept for the coal depart- ment, while the purchases, sales, and stock of hay and feed are recorded in one account, called " Hay & Feed." Study the two methods and be pre- pared, when the exercise is finished, to discuss their respective merits. Using cash book, sales book, and purchase book, a journal, and a ledger, record the following transactions. Use rulings employed in the preceding exercises. In opening the ledger, arrange the accounts in related groups. The proprietor's accounts (capital and private) should appear first. 1 he record of things with which the business is carried on, such as Cash, Real Estate, Office Furniture, and the like, may follow. Arrange the trading accounts — Stock of Coal, Coal Purchases, Coal Sales, Hay y feed — next. The expense accounts comprise another group, which may be followed by the Profit ^ Loss account. Open the customers' and the trade creditors' accounts last in separate groups and on separate pages. Give each account ten lines of space. No cash account, however, need be kept in the ledger in this exercise. Feb. 15, 19 — William Kingsley began a retail coal business with a cash imestment of 5^6977.60. Lease offices and coal pockets of McKvoy &: Sons, and pav rent, in advance, to March 15, in cash, )^ioo. RETAIL COAL BUSINESS 93 Buy of McEvoy & Sons, on account, c}uantity ot coal in pockets, in- ventoried at 50 T. chestnut, 75 T. stove, and 10 T. egg coal @ ^^5.40. Note. — This is not a purchase in xhv usual sense. Charj^e Stock of Coal. Pav Ernest Selkirk, cash to repair and adjust weighing scales, 5^12.50. Pav Ed. Norton, cash for team of dray horses, ^^425. Pav \\ . E. Suiter, cash for set of douhle harness, halters, etc., J565. Note. — Classify expenses in this business as " Dtlivcr\'," "Offtcc," and " (k-neral." Distinguish between things that are consunitil in one use and things of longer life. 1 he latter are insured and should be carried in sonic property account. Pav the Whitney Wagon Co., cash for two delivery wagons, $g^. Pay John Mitchell, agent, preniiimi on insurance policy, $2500, at ^ %, in cash. Feb. 16 Buy of the Lehigh Coal Co., i car egg, 28.18 T., i car stove, 30.19 T., shipped on the 14th inst., terms 10 days. (Charge Coal Purchases.) Price List Nut Egg Stove 1 Im Bags Less than 5-TON Lot* Buying price (f.o.b. mines) Selling price (delivered) 3 1 70 ! 3 7' ' 7 so' 3 50 7 7 2^ 7 25 Note. — In some localities coal is bought at wholesale by the long, or gross, ton of 2240 lb. and sold at retail by the short, or net, ton of 2000 lb. In other places the short ton weight is used both in the wholesale and the retail trades. Cars are weighed after loading, and the weight in tons and hundredweight (20 cwt. = i T.) is shown on the invoice and freight bill. Fhe two denominations are separated with the decimal point, but the fraction should be read as tivenlieths and not as te-nths or liinidredths. lo decimalize hundredweight, divide by 20, thus: I cwt. =.05 T. ; 10 cwt., .5 T. ; 19 cwt., .95 I. In weighing coal in carload lots, fractions of a hundredweight are disregarded. All coal weight in this exercise should be read as tons and hundredzveight. Pay Edward McGinn cash for team of horses, one douhle harness, and hlankets, ^435. Pay the Interstate Railroad Co. cash for freight hill, 2 cars coal, 59.17 T. (Qj ^2.40. (Charge inward freight on coal to Coal Purchases.) The Municipal Telephone Co. has installed a telephone for the use of the husiness. Pay service to March i, ^^4.50 in cash. Note. — Hereafter all payments will be made in cash, unless otherwise stated. 94 ACCOUNTS AND ACCOUNTING PRACTICE Feb. 17 l*.i\ Milton Webster for stationery and oHice supplies, )^i8.50. Make the following sales, terms cash : Mrs. Jane Moore, Cjrove St., 5 1. stove. j. \\ . Brower, Oak St., 5 I . nut, 5 V. egg. ISert Wilson, Kndicott Apartment, 10 1. nut in hags. Board of Kducation, High School, 20 1. egg. Note. — "Terms cash" does not mean that cash has been received. No entry should be made for cash received or paid unless there is a direct statement to that effect. All sales will he made "terms casli " unless otherwise stated. Feb. 18 Pay George Loeser's bill of the iqrh inst. for horse feed. ,*^I5.65. (Charge Delivery Expense.) Buy of John M. Reuter & Co., terms cash, i car 1 choice timothy hav, 182 bales, weighing 21458 lb. (a ^23.50 a ton. 1 his hay is bought for the use of the business and for sale. (Charge Ilay 5 a C. (Credit Hay & Feed.) Remit New ^'ork draft to the Lehigh Coal Cn. for iinoict- of the i^)th inst. Pav the Interstate Railroad Co. freight on 2 cars coal, 8.H.12 1 . (4 50 ^0 ! Feb 19— Feb. 1 I Inventory \ 1 ; v,-^ 10 Inventory 10 Sales acct. I 34 50 I 4 'O » ^ s. -, 38 I 80 19- 1 1 1 K; 1 Feb. 4 34 50 Feb. 4 I 34 50 7 I 16 25 8 I 4 iS 9 I ^.3 75' 10 Balance V 2> 1 . ; 19 Feb. 1 I Balance V ^^1 1 \ 1 3 80 20 j 70 ;4 ;o 19— Feb. 10 10 Stock acct. Profit & Loss acct. Sales 19 20 70, Feb. 7 9 s ^ ' ; _ •% 1 29 ' 2!; PRACTICE EXERCISES 99 Expense 19— Feb. 8 I 4 25 19— 10 Profit &: Loss — ^__ 1 1 acct. » 4 2? 1 Profit & Loss iq— II 1 Lo II Feb. 10 10 F^xpense acct. P.J. Hensler, ' 4 2? Feb. 10 Sales acct. I 8 55 iKt |irofit ' 4 .10 8 SS 8 ^ ^ A filial stattnuiit ot ownership would include the cash on hand and the unsold nails, as follows : Balance Sheet, Feb. 10, 19 — Cash Nails •% — 13 80 80 1 38 1 1'. Hensler. In- vestment 34 P. Hensler, Profit 4 Capital 50 30 This record shows (i) that Peter J. llensler's ownership ieh. 4 was ^^34.50 in cash ; (2) that his ownership Feb. 10 is ^^38. 80, consisting of 6 kejis of nails valued at ^13.80, and ^25 in cash; (3) that there has been an in- crease in values of ^^4.30, which we call " profit "; (4) that this profit is derived from the sale of 9 kegs of nails, costing ^^20.70, for ^^29.25, at an expense of ^^4.25. 2. Lewis Fairchild is a newsboy who has a cash capit.il ot ,^i. During the week l^eginning .\Lirch 10 (current year) he bought 225 copies of the Chicago Tribune (« i c, and 35 copies of the Saturday E:r?iinf: Post (ff) 3^^. He made sales for cash as follows, the Tribum's bringing 2C and the I^osts ^i each : March II, :;o Tribunes; NLirch 12, 28 Tribunes: NLirch 13, 33 Tri'^ 7/«rj,-. ALirch 14,29 Tribunes and 1: I'osts; NLirch i;, 4=; Tribunes and 8 Posts: NLirch 16, 54 Tribunes and 12 Posts. llis incidental expenses during the week for car fares, etc., were 57c. Assuming that the papers lOO ACCOUNTS AND ACCOUNTING PRACTICE unsold were worthless, find (a) the cost of the papers sold,(/^) the sellinji price of the papers sold, ic) the gross profit, and id) the net profit. What profit per cent was made on the tribunes i" On the Posts}' What was the net profit per cent on the investment : Show the foliowmji; accounts closed: Lewis Kairchild (Investment), Purchases, Stock of Papers, Sales, Kxpense, Profit & Loss, and Cash. 3. Joseph lackson, a dealer in grain and feed, huys Oct. l, 19 — , lOO bales hay (« ^y Oct. 10 he sells 20 hales ( 51 c; 150 bu. corn @ 77 C ; 10 T. # i timothy hay (o ^^24. 50. 5. Receive of Hiram Kennedy his check for ^^135, m full of his account. 5. Pay j. D. Hewlett ^^25, personal drawings. 6. Pay the C. B. &: Q. Railroad weekly freight account, ^^15.75. Note. — Fhis item is for frcinht on purchases, lalUtl *' Inwanl fni^lit," or " JTiinlit inward." It should be charged to an account of that name and closed into Purchases at the end of the period, or charged direct to Purchases, as it is a part of the cost of goods bought. In this exercise you may debit Purchases for freight inward items. I04 ACCOl'NTS AND ACCOUNTING PRACTICE 6. Pay \va{;es of employees for the week, ^35. 6. Pay postage and petty expenses, ^^3.65. 6. Sell B. A. Manion, terms Jan. i, 2 F. ground feed @ $35; S M^l- flour («. $6.50; 5 T. § 1 timothy, $2\. 6. Charge E. A. Barnes & O)., with ^^17 for hags returned to him. 8. Sell Hiram Kennedy, terms Jan. i, 200 hu. corn («. 65 c. 8. Receive ot Harvey Jerome, to apply on invoice of the 5th inst., $100. 9. Pay E. A. Barnes 6: Co., to apply on account, ,^311.60. 10. Pay W alter Chave, December rent of premises, ^^65. 11. Buy of the Central States Grain Co., terms 30 days, 150 hhl. patent flour («. i56.6o. 12. Pay for office supplies and petties, $1.75. 13. Give B. A. Manion credit, y^53.50, for hags returned hy him. 13. Pay the C. B. &: O. Railroad, weekly freight account, ,^37.40. 13. Pay wages of employees for the week, ^35. Determine the cash balance, close the cash book, and carry the balance forward to Dec. 14. Close sales and purchase books, and post all books. Take a trial balance, Dec. 13, and close the ledger. Inventories: Stock of goods, ^^2955. 35. L ne.xpired rent, one half month, ^^32. 50. Cash, Furniture & Fixtures, and book accounts at book value. Below are the assets and liabilities of James D. Hewlett Dec. 13, 19 — ■. Find .Mr. Hewlett's capital Dec. 13. Comparing this capital with Mr. Hewlett's capital Nov. i, what do you conclude has been the progress or decline of the business ? Prepare a trading and profit and loss statement that will account tor the profit 01 loss ot the business since Nov. i. Assets and liabilities of James D. Hewlett Dec. 13, 19 — . Assets: Cash, $4.55; Accounts Receivable, ^^482. 50; Stock of Goods, J^-955-35' lurniture &: Fixtures, ^265; Unexpired rent, ,^32. 50. Lia- bilities: Accounts Payable, ^^1603. 7. .\ssume that the items comprising the following accounts of cus- tomers and trade creditors are settled on their respectne discount dates, and make the re(]uired cash book entries. Copv the accounts on a sheet of ledger paper. Open additional accounts with Purchase Discount, Sales Discount, and Cash. Close and jiosr the cash book, and take a trial balance. The columns in the cash book are ruled for the following headings : Left page, Suiulries, Sales Discount, Net Cash; right page, — Sun- dries, I^irchase Discount, Net Cash. Purchase discount, when taken, is a credit item; sales discount, a debit item. 19— I I May 1 y i cash 10 net lo days 15 2% cash 23 i i/s PRACTICE EXERCISES Henry J. Colburn lO! John W . Ham.mund Wyckoff & Co. / 490 8 450 ro' 365 1 1 1 118 7S 1 Grouse, Egbert & Co. 19 May 14 18 27 Helena, Mont. 19 1 1 —"^ May 2 10 25 28 2/ 10 n 10 3/5 '' 3% cash 7| 8 12 1 345 ^50 3^5 400 70 i 1 lllLSVlLLL, 1*A. 19 May 5 9 18 20 3/10 n '60 i< it net cash 3/10 n/60 10 10 1-5 68 250 9(. 80 75 1 1 Herkimer, N. Y Tacoma, Wash. i/io n/30 Net cash i) 11^ 50 10 90 1 I ; ■? 00 ' Emerson &: Hoicih M. New Orleans, I. a. - 3% cash n jo S 165 50 ly 10 n9 21 << << << I 1 245 60 23 Net cash I 1 1 ; 4 - CREDIT INSTRUMENTS Notes and Drafts 1 he ultimate purpose of all business undertakings is to convert goods or services into money. This exchange of things for money is sometimes completed in one transaction, when the entry becomes Cash (Dr.), SaUs (Cr. i. \\ hen credit is given and payment is deferred, two entries are neces- sary to complete the exchange ; namely, Customer (Dr.), Sal^s (Cr.J, and Cash (Dr.), Customer{Cr.). When the customer gives his note or acceptance in settlement, there are three steps in the process; namely, Customer (Dr.), Sales (Cr.), NoUs Receivable (Dr.), Customer (Cr.), and Cash (Dr.), Notes Receivable (Cr.K Notes Rfti i\ *'i f Dcbited when we receive the written promise of another to pay money - notes and acceptances in our favor. Credited : I. At maturity. I. When redeemed (paid). 1. When renewed. (a) By new promise t(» cover old promise. {b) By part payment in cash and renewal for balance. 3. When dishonored (not paid). {a) Involving protest fees. (Jb) Not involving pf^"-- *-t fees. II. Before maturity (converted). I. When d' 'd. z. When t;. . ;-;red to st rrlr .t debt. 3. When the maker or drawee becomes insolvent, suspends payment, or assigns Because of the fact that notes and acceptances are often disposed of before maturity, often involve an interest item, and are sometimes not met at maturity and have to be charged back to the customer, the subject calls for special study. I he following problems are given for that purpose. Ihe solution of these problems will be much simplihed if the student will CREDIT INSTRUMENTS 107 keep in mind the fact that the customer's account, and that of notes receiv- able, are intervening steps in the process of exchanging goods for casli ; that when the contract ot sale is completed, these items are canceled, with a resulting entry of Cash (Dr.), Sales (Cr.). If interest becomes in- volved, this must be treated as an entirely separate transaction ; namely, the purchase or sale of the right to use money. This does not nuaii that interest necessarily should be adjusted in a separate entry. It does mean that interest is a property right, just as separate and distinct from notes as notes are distinct from money or goods. Jan. 2, 19 — . Sell i3enjamin Baker merchandise valued at ^^400, Baker to give his 30-day note in settlement. 1 his transaction would result in the following charge to Baker's account: Benj.\min Baker 19 Jan. -» N R 30 da. 11 I nn T 1 Jan. 5, 19 —. Receive of Benjamin Baker his 30-day note, dated Jan. 2, for mvoice of that date, ^400. No. H^ ~~e=:^-^^^J^^ ^'^^--rT? ^^i^ ..-T^^ the order wr-;gy--.. Value received, at the .. Cincinnati, Ohio, n 19 ^.^-^^.^-T^.^^^ . I promise to pay tu .Dollars The above promise differs from that which a book account miplics in that it is yiegotiable. If the Hnancial standing of Ilalpin or Baker is good, the holder, Halpin, may discount it (sell it) at his bank and receive cash or credit for the proceeds. (lood account keeping distinguishes that for which there is a certain demand at a Hxed price - " quick " or " current assets — and that which can be converted only as a cash customer is tt)und. Assets range in their convertible (juality all the way from cash itself to those io8 ACCOUNTS AND ACCOINTING PRACTICE fixed properties of :i business, such as office furniture, plant, machinery, etc., which are required for use and will not be sold unless the business winds up its affairs. Fixed assets are profit-earning agencies of the business, and are just as necessary in the conduct of its affairs as convertible assets; but money funds must be all the time available to meet current obligations and maintain the credit standmg of the business. Notes Receivable The universal purchasing and debt-paying power of money, and its near equivalents, distinguishes it as an asset of tin highest rank. Hanks are, ordinarily, cash customers for all good commercial paper; and because this paper is a step nearer cash in the process of converting goods into money, it is rated as a better kind of asset than a mere book account, and is accord- ingly recorded in a separate group of items under the caption XoT/'.s RlT.Eir.lBLK. A " notes receivable " may therefore be defined as the negotiable promise of another to pay us. \ his promise does not legally cancel tlu* debt. riie effect of giving a negotiable promise to pay only suspends the remedv for the debt until the maturity of the new promise; but we credit the giver, because he has given us, from a business standpoint, a more desirable form of value, and debit Notes Receivable, thus: 19— Jan. 2 I N R 30 da. Benjamin Baker 400 1 19 Jan. 2 Note 30 da. 400 19 Jan. H tiij. liakci Notes Receivari.e 400 The source of items on the left side of the Notes Receivable account is the journal (or notebook, when such a book is kept). 1 he following would serve as the original entr\' of the leceipr of Baker's dote. Notes Receivable Benjamin Baker 1 Ki(.ii\t.tl i)f Binj. I?nktr liis jo-cl.iy non- ! pa\:ihlr at tin- 0>ntiiu-ntal Nar'l liank, Cincinnati, .tikI daritl Jan. 1 for in\ . of that date, ^^400 400 400 ILLUSTRATIVE TRANSACTIONS lOQ The same situation, from an account keeping; standpoint, would have risen if Halpin had drawn a draft on Baker and Baker had accepted it, thus Nn 2-/,^ -^ ^*^> V Louisville. Ky., the order of This is a kind of letter addressed by Halpin to Baker, asking the latter to pay " Myself " (Halpin) the amount stated at the time specified. Ikiker promises to pay by writing across the face of the paper the word Ac- cepted^ the date, where payable, and his signature. This, like the note, is Baker's written promise to pay money, is negotiable, and on Halpin's books would be entered under the title " Notes Receivable." A note is a direct promise to pay, wiiile a completed draft is an accepted request to pay, called an " acceptance." The debit side of Notes Receivable^ then, records the receipt of the negotiable promises of other persons in our favor. Illustrative Transactions Exercise 14 Assuming that you are the proprietor and bookkeeper, journalize the following transactions and w rite a concise explanation of each entry. 1. Jan. 5, 19 — . Receive of Richter & Roche their 30-day note payable at the Pan-American Bank, dattd Jan. 3 for invoice of that date, )5i67.50. W ritf the note. (Use places of your own selection in this exercise.) \i.^i>^.y^L. 6ri(y^O, for m\'oice ot that date. W rite the note. 5. Oct. I, ic) — . Oliver Courtnev paid his note due to-day, ^6-:,o. 6. Aug. 4, n; Receive of I . \\ . llom his. 30-day note, dated Aug. 4, payable at our oHice, for nixoice of that date, ,^325.50. NoTF. — An entrv of the receipt of a negotiable paper .sIkuiIcI show the date, amount, and duration of the paper, from whom received, for what received and where payable. 7. Aug. 7, 19 — . O. F. Sheppard accepts our 60-day draft, payable at the Bank of Commerce, St. Louis, Mo., in full settlement of his account, ^450. Draft dated Aug. 4 and accepted Aug. 6. Write the draft, and the acceptance. 8. Sept. 3, 19 — . T. W. Horn renews his note of .Aug. 4, due to-day, by giving us his 15-day note, dated to-day, and payable at the Chemical National Bank, $325.50. Write the note. 9. Sept. 18, 19 — . T. W. Horn pays his note due to-day, $325.50. Note. — When a written promise to pay is redeemed, the holder writes across the face Puiil, the date and his signature, and returns the paper to the maker, or drawee, as the case may be. 10. Oct. 5, 19 — . O. F. Sheppard remits his check for $250 and his 30-day note for $200, to take up his acceptance due to-day. 1 his note is dated Oct. 5 and is payable at the Third National Bank. W rite the note. 11. Oct. 7, 19 — . Give Thomas Watson, O. V. Slupp.ird's 30-day note of the 5th inst. to apply on account, $200. Write across the back ot this note, left end. Pay to the order of Thomas fFatson, (yt)ur own name), and pass the note to Mr. Watson. NoTi;. — .A writing on the hack is called an "indorsement." I he foregoing is a "special indorsement," or an "indorsement in full," and is made to transfer the title of the paper to Mr. Watson. See Indorsements, page ic>6. 12. The following account on your books is settled ni accordance with the terms indicated in the wide column; make the recjuired entries. 112 ACCOUNTS AND ACCOUNTING PRACTICE 19— Ally. 8 N/ K 2 '5 20 30 da. 60 da. l)l \\ I I"I Sill "^ON ^- Co. 1^ -^(>7 7> 17 360 "ll 250 25 1 No. /.'s notv of Srii inst., ^567.75. W rite the recjuired indorsement. Sept. I, 19 — . Leave at the l^ank ot Ilhnois for collection De Witt Stilson & Co.'s acceptance of the I5tli of August. Should you part with this paper without gettinc; a receipt ? 14. Sept. iS, K) The Bank of Illinois reports acceptance of De Witt Stilson & Co., due the 14th inst., returned unpaid. Is a dishonored promise to pay any longer Notes Receivable .' Charge the note hack to Stilson's account. INTEREST AM) DISCOUNT II3 15. Sept. 20, 19 — . Receive of IX Witt Stilson &: Co. their check for )^i6o ;iiul their 1 5-cl;iy note for i^200. to cover their dishonored uiept.mcu due the 14th inst. Note is dated Sept. 14. 16. Oct. 5, i(> . Remit the Western National liank, Denver, ^^567. 75, to take up I)e \\ itt Stilson vS: I'o.'s note of .\n^. 8. This action i.s taken upon leceivinji; word that De Witt Stilson & Co. have failed. The note is payable at the Western National Hank. When we sent this note to Charles i^ettis, St. Louis, we indorsed it, and therehv made ourselves conditionally liable to Hettis :ind to subse(iuent holders for its payment. 1 he condition is that the holder at maturitv presents the paper where it is made payable and ^ives prompt notice of non-pa\!iient. We know that De Witt Stilson & Co. cannot meet this note; that .Mr. Bettis, and perhaps others to whom he ma\ h.i\e t r.msferreil tin- paju-r, will be put to trouble and inconvenience; that ultimately we shall have to meet the cost of protest and notice; and th;it, in a w.i\, Stilson ^- Co.'s failure to pay reflects upon us. \ o avoid the e.xpense and protect our credit and business reputation, we remit the amount invoKed to the Western National Bank, with inscructicMis to return the note to us. When this paper is returned to us, is it still Notes Receivable .' What entrv ? 17. Oct. 5, 19 — . When notice of Stilson & Co.'s assij^nment reaches us, we have their note of Aug;. 20 at 60 days, ^^250. 25, and their note of Sept. 14 at 15 days, ^200. What disposition should be made of this paper on our books ^ 18. On a sheet of ledger paper open an account with De W itr Stilson & Co., enter the charges shown on page 1 12, and post all items of a later date belonging to this account. Is gnmg a note payment or the suspension of payment r 19. Oct. 30, 19 — . De Witt Stilson &: Co. of I^enver have reached in agreement with their creditors to settle on the basis of ^06 on the dollar. Receive their 30-day note, dated Oct. 27, and indorsed by Stevens Brothers of Denver, for ^^509, in full settlement of their ;iccount. Wiiti- the note and the indorsement. Is this note Notes Receivable .' Why ' What should be done with the balance of Stilson &: Co.'s account .' The preceding transactions had to do solely with non interest-bearing paper. We have now to study tr;ms;ictions involving mtiicsr and discount Items. Interest and Discount A debt dr.iws interest (l) when there is an ;igreement to |iay interest, and (2) after the due date of the debt. I In- difference between ;in interest- bearing and a nonintcrest-bearing paper is that the former includes the words "U'ilh interest while the latter makes no mention of interest, or contains the words without interest. 114 ACCOUNTS AND ACCOUNTING PRACTICE Interest is a tenipor:ir\ right to the use of money. Tliis ri^iht. Hke all other rights, is actjuired h\ purchase and disposed ot by sale. 1 he right to another's services we call "wages," "labor, " or "salary"; the right to use another's building, " rent "; the right to ride on a railway train, "transportation," or "car fares"; to have our goods earned, freight, " or " e.xpress "; to use the mails, " postage," etc. Confusion often arises in the minds of students of business because they fail to make a distinction at the beginning between the right to use money and the cash with which that right is purchased and paid for. M()ne\ IS fcislt. Debts draw interest after they become due, and intenst IS a charge for deferred payment. In other words, interest is the ditter- ence between the cost of present and future cash. If you hire your neigh- bor's horse, the value of the work done by the horse is value received, the \ alue ot the money paid tor that work is value given ; one is a debtor, the other, a creditor. ^Ou must regard interest-bearing debts as viom-y at work. Your iiioneN working for some one else earns you something; another's money working for you costs you something. That which earns or gives value is a creditor; that which costs or receives value, a debtor. If you buy the right to use another's money, debit that which you buy, interct, but credit that which you pay, usually cash. If you sell the right to use your own money, credit that which you sell, interest; but debit that which you receive in payment, usually cash. Discount is the purchase or sale of the advance payment of a debt, that is, interest paid in ad\ance. 1 here is no reason why interest and discount should not be included in one account. 20. Assume that the following ledger accounts are settled in accordance w ith the terms indicated in the wide column. The paper of Ward 6c Helligas IS noninterest-bearing, all other paper is interest-bearing. Make the re- quired entries. Ward & Helligas 19— Oct. 13 21 Draft I mo. " 6ocla. 1 16 325 •7 455 50 # W^Hi: FLOCK & Co. 19 Oct. 7 25 Note 2 mo. 6 ' ,' *' 90 da. " i 1 »5 45^' 18. .1^5 7':> 40 1 BANK DISCOUNT US |. 6v: M. \\i)Ri:\vs IQ— Oct. 4 : Note 30 da. 6 ' , 14 13 mo. i Howard I.ambkrson .Nov. ::: Note 30 da. 6 :<; *' 10 da. ■ -4 ^5 iSo .:oo 21. Nov. 3, 19 — . J. ^ M. Aiulrc'ws pay tluir note ofOct. 4 due t<>-day, $350. Have they had rlu- usf otOuinioney ? H()\s loiij; r What docs this cost them at 6^i .' How iiuich does it earn u.s : Is Interest a debtor or a creditor: Make the entry. Bank Discount Procedure In ci)nipurinii; discount on interest-bearing, or noninterest-beaiing, notes receivable, proceed as tollows : 1. Find the maturity vakie of the paper what the paper will \ uld in casii at the due date. 2. Kind the date of maturity. ^. Kind the difference in time (exact number of days) between the date the paper is discounted and the date of maturity, called the " term of discount." 4. Compute the interest on the maturity value for the term ot discount. Deduct the interest for the term of discount from the maturity The difference will be the cash proceeds the cash received. - of the value. paper Kind the ditterence between the cash proceeds and the ' - ' which is the discount. Entry: (a) Debit Cash for the cash received. {b) Credit Notes Receivable for the face of tlu paper, because Notes Receivable has piven v.ihn (c) Debit or credit Interest ;jv: Discount for the diHerence between the cash proceeds and the face of the paper. If the cash received exceeds the face of the paper, interest has earned somethinj:. and should be credited ; if the cash received is less than the face of the paper. interest has cost sonuthinn. and should In- debited. 22. (Kf. 17, !•> Discount Ward &: llclli^.is" draft of Oct. 13. and receive credit at vour bank for the proceeds. Make the entry. Write the draft on Ward ic llilhgas, covering the item of Oct. 13. ii6 ALLULMS AND ACCOUNTING PRACTICE In tlu- transaction ot CXt. 17 the maturity value, 5^325, is the face of the paper; date of maturity, Nov. 13; term of discount, 27 days; interest on maturity value, 27 days (3.25 ^ 2 = 1.625 — i 10 of itself = i .46), i?l.46; $325 — ^51.46 =)^323.54, cash proceeds, and the amount for which Cash is a dehtor. Notes Receivable is a creditor for face value. Interest has cost i^i.46, and Wf have the entry. 17 Cash 1 323 54 Interest & Discount 1 4'' Notes Receivable Discounted Ward & Ilcllipas' draft due 11/13, 27 da., 6% 1 325 Boston, Mass., .19=^ the order of after date we promise to pay to .$JA. f)ottar^//^^-- ' ccJSc^.svith interest at L: ^ per 23. Oct. 20, 19—. Discount \\ hetlock &: Co.'s note of Oct. 7 at the Garhcid National Bank and receive credit for the proceeds. Maturity value (^^456. 75, plus interest on this amount for two months at 6%, $4.57), ^^461. 32 ; date of maturity, Dec. 7 ; term of discount, 48 days ; interest on maturity value 48 days (.46132X8=3.69), ^3.69; ^^461.32 — $3 69 =5^457.63, cash proceeds. Kntrv : 20 Cash Notes Recenahle Interest &: Discount Discounted note of Wlieeiocic iv: Co., due 12/7, 48 da., 6% !' 1 1 457 63 456 75 88 BANK DISCOUNT II7 24. Nov. I, 19 — . Discount Wheelock & Co.'s note of Oct. 25 and re- ceive the proceeds in cash. Has interest cost or earned sometliing : Find the proceeds. Make the entry. 25. Nov. I, 19 — . Discount Ward & HelH^as' draft of Oct. 21 and receive the proceeds in cash. Assume that this draft has not hec-n accepted, lind the proceeds and make the entry. Discountin: Helligas on terms, to which they oi' course assent, of " draft 60 days," which amounts, by implication at least, to an agreement to accept our draft when presented. Moreover, we make ourselves contingently liable for the amount of the draft when we indorse it to the bank. If we are discounting a large number of customers' bills, this contingent liability should be shown, which would be impossible unless all items of this sort are put through the Notes Receivable account. Note. — Many banks will not receive an unaccepted draft for discount, except when such draft is employed in a C. O. D. sale, and is accompanied by bill of lading and docu- ments necessary to give the bank a lien upon the goods in transit. 26. Dec. I, 19—. Discount Howard Lamberson's note of Nov. 22 at the Bank of Commerce and receive credit for the proceeds. Has interest cost or earned something.' Write the note. Find the proceeds. Make the entry. 27. Oct. 14, 19 — . Discount J. & M. Andrews' note of Oct. 4 and re- ceive cash for the proceeds. Find the proceeds and make the entry. The student should apply to an entry involving bank discount the fol- lowing tests : First, has cash been received or paid ; second, has interest cost or earned the business something; third, is our promise or some one else's promise to pay involved .' Interest-bearing promises to pav us will yield more than the face value if discounted at any time between their date and the date of maturity. If we have held an interest-bearing promise any length of time, interest must have earned us something. On the other hand a noninterest-bearing paper is worth its face only at maturity. If we dispose of it before maturity, it must yield less than its face value; interest must have cost something. 28. Oct. 27, 19 — . Discount J. & M. Andrews' note of the 13th inst., and receive credit at the Bank of Commerce for the cash proceeds. Make the required entry. 29. Dec. I, 19 — . Discount Howard Lamberson's note of Nov. 29 Il8 ACCOUNTS AND ACCOUNTING PRACTICE and receive cash for the proceeds. Has interest cost or earned some- thing .' Make the entry. 30. Dec. 8, 19 — . Send Howard Laniberson our check to take up his note of Nov. 29, ^200, which tails due on the i;th instant. I his note was discounted at our bank Dec. i and will he protested on the 9th it Lamherson tails to meet ir. I his will injure Lamherson's credit and reflect upon us as well. He has written us that he cannot meet the note and asks tor an extension, which we have granted. Charge l.amherson, not A'otts Ri-ceivablr, with the amount of vour re- mittance. 31. Dec. 10, 19 — . Receive of Howard Lamberson his 15-day note, dated Dec. 9, for i^200, in accordance with the arrangement e.xplained above. 32. Receive of John I.. Willard the following note: Nn 1 fC? Seattle, Washington, .19. the order of Z. O-T^^^^ / Lxi aiter date, for value received, I promise to pay to ' ^ ^ '^^"^ ^ -■ ■ Dollars at theZ^^^cC^kL^c - ---'., with interest atC?X~per annum. May 10, 19 — . Leave Willard's note of April 16 at your bank for collection. 33 May 19, 19 — . ^'our bank notifies you that John I.. Willard's note due yesterday has been returned unpaid. Is this any longer Notes Receivable r What entry t 34. April 19, 19 — . Receive of Walter Eddy, Robert Hrtiwnlee's 30-day acceptance, ^^450, to apply on Kddy's account. Write the draft, dated April 15, the acceptance, dated April 17, and the indorsement. M.ike the required entry. 35. April 20, 19 Receive of Henry Hughes, E. J. Phelps' 3-months' note, dated April i, for ^300, with interest at 6^, to apply on Hughes' account. Write the note, including Hughes' indorsement. What is the present value of this note ? W hat account, other than Notes Receivable, has received value and must be charged r Note that interest accrued may be an asset or a liabilit\ . NOTES PAYABLE 119 36. July I, 19 — . Phelps' note is presented for payment, payment has been refused and the note has been protested. Piotest fees, ^^2.50. Charge the maturity value of this note, and fees to Hughes. Has interest earned or cost soniethuig ? 37. May 17, 19 — . Rolnrr Browiiki- paid his acceptance- due to-day, J^450. What entry ? 38. July 24, 19—. Receive ot J. 11. lnirn)n 6c Co. to apply on account the following paper: No. .3A of ( y^.^^ St. Paul. Minn., 0.. -7- .19- the order of ( y.^^.-.A~ CyL-'^'y^ ^^^..-r>i:?^ }i '^^t^ Value received, and charge to thfe-^((^unb^f To pay to -Dollars rvV®/ ~C^i^^^Yi^*:i^.i^.*?-^Z-i>cyy. (l^^y:^/7/^.^J^.yy This paper shows the foUowmg indorsements: Pay to the order of J. II . Burton y Co.^ The American Trading Co. ; Pay to the order of Richard Ilalpin, J. II. Burton i^ Co. Where is the market for paper of this kind ? What method will he employed in arriving at the value of this paper July 24, in case Richard Ilalpm (student) offers it for sale .'^ In questions of value the market is conclusive. Find the proceeds and make the entry. Notes Payable As Notes Receivable is the written promise of another to pay us money, "Notes Payable" is o/^. ( Signed ) --1& . From W standpoint this is clearly In form a note receivable. B, however, has no intention of paying this note, which is given solely for the accommodation of A. Of course, the bank can com|'>el B to pay, in default of .A ; but A cannot enforce payment, aiul wc are now concerned \s ith this 122 ACCOUNTS AND ACCOUNTING PRACTICE document from As standpoint. Is it a fwte' receivable or a note parable? Manifestly it is a note payable in fact. When this paper is discounted bv A, he must debit Cash and Interest, and credit Notes Payable. Sight Paper 1 bus far we have considered only time paper: contracts, or promises to pay money at some future time. Notes are sometimes payable " on demand." Such a note matures whenever the holder presents it to the maker tor payment. Paper payable on demand, or " at sight," is also put in the form of a dralt. 1 he more common forms of sight paper are illus- trated below. No.^..L^^^ Fort Worth. TexM._64^- f; 19 - ZIZZ pay to the order of Dollars Value received, and charge to tnc account of To > '--' ^z, - Form I This form is called a " sight draft," and when used, it is employed between persons, hrms, and corporations, other than banking institutions, but it is now rarely seen in business. No P-? Qj ^ Seattle, Washington Northwestern National Bank Dollars To Chemical National Bank icr onii 1 SIGHT PAPER 12; This form is called a " hank draft." Althou2;li the words at sight are not emploved, it is nevertheless a si ^ ^^^^^/^^r7^''y r^tTr^^-c^^ '->7^ A ^ St. Paul, Minnesota ) Sc. Paul. Minn., X',. rfyfc^, J. 19.r::- Dollars Form 5 Form 5 is called a " certified check." 1 he bank upon which it is drawn has certified that the drawer, Franklin Peabody, has a sufficient sum of money on deposit, and the bank assumes responsibility for payment of the check when presented for that purpose. Certification is much the same in effect as the acceptance of a draft. No. J£^ Bay^ State National Bank if Boston /\^ ^i payable to the order of . Certificate properly endorsed. Not Subject to Check Boston. Mass.. J,. -^ ^ // IQ — have deposited in this bank — Dollars $ 'JT: on the stirrender of this -Cashier Form 6 Form 6 is in effect a demand note, but is called a " certificate of de- posit." C\Trificarcs of deposit are fre(iuenrlv made payable at some future SIGHT PAPER 125 time, and iisuall\ draw interest. They are used when a customer wishes to deposit a fund for safe keeping, or as an investment, and does not wish to draw it out by check. Otiier forms o( sight paper are the " express money order " and the " pt)stal money order." An express money order is the sight draft of one express ofHce on another of the same company. A poijtal money order is the sight draft of one post office on another, l^ecause of certain restrictions affecting their negotial^ihty, and rluir cost, these forms ot exchange are employed in business, as a rule, only tor small amounts. A sight draft calls f\)r the payment of money by the drawee to the payee when the latter presents the draft to the former. A time draft calls for the payment of money by the drawee to the payee at a specified future time. Follow the rule with which you are already familiar: Debit that which receives value; credit that which gives value. The drawee of a sight draft gives cash; of a time draft, a note payable. The payee of a sight draft receives cash; of a time draft, a note re- ceivable. The drawer of either a time or a sight draft receives value of the drawee, and gives value to the payee. Drafts are frequently made payable to the drawer; one person or firm acts in the capacity of both drawer and payee, thus: No. ^ t/4t sight pay to the order San Francisco, Ca\ -^?'^^. 2-/. IQ — of ( J ^yf^ ^,- i>? / ' ?.^~-<' ^^ C-t^^-T 'L^ ^^.^^^-^.^l^^y f-^,. Value received, and charge the same to account of :l>)llars $ 2-i~<^.> (^ ' A:X^L Form 7 It is very common practice for merchants to draw on delinquent debtors and pass the draft through the bank for collection. A recjuest of this kind IS usually more eftectixe than that ot a thinning letter as a means of col- lecting a debt. Frequentlv there is an understanding between debtor and creditor that the latter shall draw on a certain date. Assuming that the 126 ACCOUNTS AND ACt OINTING PRACTICE draft will be honored on presentation, the drawer sometimes deposits it in his bank and receives immediate credit, lianks, however, object to givinj; credit for out-of-town paper until the collection is reported. \ transaction involving a two-party drah should offer little ditftculty to the bookkeeping student. Since the drawer and payee are combined in one, the drawer debits himself as payee' in the account that receives value — Cash or Notfs Rrct'ivable — and credits the one who gives value, the drawee. Name the debtors and creditors in the following transactions: 45. Mav 2, 19 — . Jarvis Elliott, BuHalo, N. ^ ., draws on Henry Olds, Detroit, Mich., at 30 days' sight in favor of the drawer for the amount of Mr. Olds' account, ^356.50. Assuming acceptance May 5, 19 — , write the draft and acceptance. Give {a) drawer's entry; (h) drawee's entry. 46. Assuming the above draft is drawn " at sight " instead ot " at 30 days' sight," give {a) Mr. Elliott's entry; [b) Mr. Olds' enrr\. 47. Mav 5, 19 — . Henry Olds, Detroit, remits Jarvis Elliott, BuHalo, a New "\'ork draft for JS356.50, in settlement of account. What entry would appear on Mr. Olds' books.' On Mr. Elliott's books: Where would Mr. Olds procure this New "\'ork draft r Consult form 2, page 122, supplv information not given, and write the New York drah mentioned. 48. Receive of Taylor, Cooper & Co., ( ). M. Howard's 60-day accept- ance, i^iooo. The draft is dated July 7, 19 — , accepted July 9, and re- ceived by you, July 12. Give (a) your entry, {b) Taylor, Cooper & Co.'s entry, (r) O. .\E Howard's entry. Assuming the draft is made payable to order of " Ourselves " and indorsed by Taylor, Cooper &: Co. to you, write the draft and indorsement. Short Exercises Lnvolving Merchandise Discount The following short exercises call for the use of journal, cash book, purchase book, and sales book, as books of original entry, and a ledger. Transactions involving merchandise discounts are introduced. Discount allozved on a sale is a debit item. Discount taken on a purchase is a credit item. Sales discount adjustments are involved 111 the receipt ot money from customers; purchase discount adjustments are involved in the payment of money to trade creditors. It is therefore convenient to handle these items b\- running a sales discount column on the left page, and .1 jnirchase discount column on the right page ot the cash book. Use a cash book ruled as follows : Lfft page: Date ' F"o. ' Accounrs Cr. I'.irticulars Siintlrii-s Sales Net Dis. Dr. Cash HARDWARE AND HOUSE FURNISHING BUSINESS 12' Ri^kt page: Date ¥o. Accounts Dr. Particulars 1 Su ' 1; Siindrit s r.iid) Dis. Cr. Net Cash \ lu' tollowiii^ tonus wil books. ;ins\vt*r rlu- jniiposf toi rlu- s;ilcs ;iiul piucliase Sai.ks Rook Purchase Book Date Fo. Trade Creditors Particulars 1-ch. lO Harrison & Co., 2/10 I doz. I. C. Kreezers Date Fo. CusTouT.Rs Particulars III M ^ Imv. Value K)— Feb. ■* Frank l.ainlH-rt, 3 10 n 30 :; I'orc. IJarli lubs (a 85 I Thatcher Furnace I F. &: W. Range ^55 235 «5 50 , 575 i 50 Items i Inv. Value Use tlie ordmary form of journal for opening and closint:; entries, and for all entries not otherwise disposed of. HARDWARE AND HOUSE FURNISHING BUSINESS Exercise 15 Feb. I, 19 — . Andrew Hopkins began a hardware and house furnish- ing business, with the following assets acquired by purchase from James Curtis : Stock of goods inventoried at $5370.50, furniture and fixtures valued at )^2i5.70. Mr. Hopkins also invested cash, $200. 2. Sell James Phelps, terms 2 5 n 30, 3 porcelain bath tubs (o: $140; I Thatcher tubular furnace, ,*<23; ; i Fuller & Warren range, $45.50. 4. Buv of the Standard .Manufacturing Co., terms 2 10 n '30, 3 stand- ard vacuum cleaners ^ $65. 5. I'ay the News Printing Co. for blank books and stationery, $15.50. 126 ACCOUNTS AND ACCOl'NTING PRACTICE 6. Sell J. H. Weston, terms 2 i 5, 4 Arctic refrigerators @ $16.50. 7. Receive of James Phelps for invoice of the 2d inst.,i?700.50, less 2';. Enter the invoice amount in the Sundries column; the discount in the Sales Discount column ; and the net amount in the Net Cash column. This entry, in terms of debtor and creditor, reads : Cash 6S6.4Q (Dr. )y Discount 14.01 (Dr.) James Phelps 700.50 iCr. ). Analyze each entry involving dis- count until you are entirely familiar with this procedure. 7. Cash sales 2d to 7th inst., inclusive, ,^437.20. 9. Sell .Marshall 6t Thomas, on their note at 10 davs. ; doz.^'ale locks @ $6.25; 2 doz. bronze butts ^ $3.20. 10. Pay postage, telegrams, and petties, $9.75. 10. Buy of Gilbert & Co., terms 2 10, i doz. ice cream freezers ^ ^^24. 11. Receive of Marshall &: Thomas their 30-day note, dated Feb. 9, for invoice of that date, ^^37. 65. 13. Buy of Cleveland &: Co., on account, 5000 ft. wire fencing c^ ijc. 14. Indorse Marshall 6: Thomas' note in full to Cleveland & Co. and send it to the latter to apply on our account. Write the note and the indorsement. Note. — A full, or special, indorsement is one that specifies the indorsee, thus: Pay to thf order of Clevfland If^ Co., (Signed) Andrrx Hopkins. This designates Cleveland & Co. as the new payee of the paper; and if the note should become lost in the mails, it would be worthless in the hands of a third party. 14. Pay the Standard Manufacturing Co. for invoice of the 4th inst., $195, less 2^0. 14. Pay wages of office help to date, ^65. 14. Cash sales for the week, $150.20. 16. Buy of Smith Brothers, 2 10 n/30, 5 porcelain bath tubs @. $97.50; 2 Thatcher furnaces (a. $175. 18. Andrew Hopkins, proprietor, draws $150 for personal use. 19. Pay J. C. Adams &: Son for i Standard typewriter, $105. 20. Pay Gilbert &: Co. for invoice of the 10th inst., $24, less 2<~^. 20. Marshall &: Thomas, w-hose note we received and passed to Cleve- land &: Co., have made an assignment for the benefit of creditor*^. Cleve- land Sc Co. have returned the note for credit. Charge the note back to Marshall &: Thomas. Failure on the part of a customer to meet his obligations should show in his account, not in Notes Receivable. 20. Remit Cleveland fie Co. for their invoice of the 13th inst., $75. 21. Receive of J. H. Weston for invoice of the 6th inst., $66, less 2*^;. 21. Pay Albert Gould, salesman, salary to date, $54. 21. Pay postage and petty expenses to date, $7.65. 21. Cash sales for the week, $79.60. GROCERY BUSINESS I 29 Close all books of orijiinal entry, post, take a trial balance, prepare a statement, and close the ledger. Give Sales, Expense, and Profit & Loss seven lines' space; all other accounts five lines' space. Inventories: Merchandise stock ^^5312, fLirnitiirc and fixtures at cost. Cash on hand, ^^921.65. The account of Marshall 5>: Thomas is considered worthless. grocery business Exercise i6 Richard F. Vale is in the grocery business June i, 19 — , with the follow- ing assets and liabilities: Cash, $268.75; stock of merchandise, $5513.50; furniture and fixtures, $365. Customers' book accounts considered good : H. (J. Wheelock, $96.40; Davis k Co., $136. Note of R. F. Yale favor R. Moe &: Co., dated May 21 at 30 days, $230. Accounts with trade creditors: Ihe Pacific Grocery Co., invoice dated May 23, terms 3 10 n 30, $2^0; Watson Brothers, invoice dated Mav 25, terms 2 10 net 30, $236.75." Use journal, cash book, purchase and sales books, as books of original entry, and a ledger. Employ the usual form of journal, sales book, and purchase book. The cash book is ruled as follows: Left page: "Sun- dries," " Sales Discount," " Sales," "Net Cash " ; right page : " Sundries," " Purchase Discount," " Expense," " Net Cash." What is Notes Receivable ? Notes Payable ? When is Notes Re- ceivable debited and when credited ? When is Notes Payable debited and when credited .' Repeat the rules for debiting and crediting sales and pur- chase discounts. If special columns are employed in the cash book for merchandise discount, on which side should the sales discount column be found .' On which side the purchase discount column r Why ? Determine Richard F. ^ ale's capital June i, open the ledger in ac- cordance with the data given in the opening paragraph above, and enter the following transactions for posting. June 2, 19 — . Pay the Pacific Grocery Co. for invoice of the 23d ult., $250, less 3^;. 3. Buy of the Pacific Grocery Co., terms 3/10 n 30, 10 ess. gold soap @. $3.40; 450 lb. mocha coffee @ 24^^. 4. Richard F. ^'ale invests cash, $100. 4. Cash sales ist to 4th inst., $230. 4. Pay Watson Brothers for invoice of the 25th ult., $236.75, less 2%. 5. Stll Walter Carr, terms 2/5 n/30, 25 sacks flour @ 70 (^, 150 lb. pearl tapioca (g. 34 C. 6. Buy of Smith &: Wesson, terms n 30, 60 bx. Gordon's codfish ^ $2.50, 8 bx. boneless codfish @. $2.85. 130 ACCOUNTS AND ACCOUNTING PRACTICE 6. Pay clerk hire to date, ^^46. 50; postage and petties, ^^5.75. 6. Cash sales 5th and 6th inst., ,^S6.40. 8. Receive of H. G. \\ heelock his 30-day interest-hearing note dated June 4, in full of account, ^^96. 40. 9. Discount II. (I. W heelock's note of the 4th inst. at the People's National i^ank and receive credit for the proceeds. Note. — In many -states a note maturing on a holiday becomes due and payable the Hrst business dav followinf;. Follow this practice in discounting the notes in this exercise. Notes fallinK due on Saturday, because of the half-holui;i v f'£^z. f ^/ i/-t3^^y7^ 6 7' . »^ r^, • , -/. ^• OQc>L. ^'/J- ■ A^'^? ^j. 24, terms 15 davs, less 3 9o 20 CSS. percale, gingham, galatea, 1' rench flannel, women's suit- ings, mousseline, chiflon, etc., !f>io(i^. (Enter this in the purchase book as invoice No. i. ) 1. Pay A. II. Ilaynes & Co., agents, March rent of business premises, 2. Pay James Foley cash for i othce desk, ^^45. 2. Sell P. v. Miller, terms 2 5, lO pes. Shaker flannel, 250 yd. ^ 8] c ; 10 pes. 1- rench flannel, 520 vd.C" 32p; 20 pes. unbleached cotton, 510 vd. <«' 7\ <"• 2. Pay .Marshall Field & Co., for invoice of 20th ulr., less 2%. 2. Pay postage and petties, $3.75. 3. Sell .Morse & Munro, 3/10 n/30, 12 doz. ladies' hose @ $450; 12 doz. children's hose (a i§2.i6. 3. Pa\ Heyson &: W'illet cash for office supplies, ^58. 15. 4. Sell Hommel &: Hertrich, net 30 days, 15 pes. crepe de chine, 360 yd. (a $1 ; 10 pes. mousseline, 100 vd. (n 50 (^ ; 10 pes. chitton, 100 vd. 5. Receive check of S. N. Durlaiul \ Co. for invoice of the 3d ult., less 2%. 5. Pay Roy Devendorf cash for blank books and stationery, ^^18.73. 5. Pay James Andrews cash for rubber stamps and oflice supplies, $6.50. 5. Receive check of George A. Beebe for invoice of the 24th ult., less 2%. 5. Sell TUq Alexander Olsen Co., 3/10 n/60, 10 doz. La Reine corsets @ $20; 10 doz. chamois gloves (?/ $1^. 6. Pay car fares and petty expenses, ^^2.30. 6. Pay D. Weyant & Son cash for 5 'F. egg coal (« $y. 6. Pay wages of clerks and oflice help for the week, ^^65. 8. Buv of Marshall Field &: Co., 3 10, invoice dated March 8, 10 ess. piece goods (invoice No. 2), ^867.50. 8. Pay O. J. Sullivan's acceptance favor Scott. Carpenter ^ (.'o., due to-day, ^400. 8. Receive of S. N. Durland &: C^). rlnir cluck for iiuoice of the 2^th ult., ^218.50, less 3%. 8. Pay n. H. Claflin &: Co., for invoice of 26th ult., ^^450, less 3*;*;. 9. Discount Harold Mott's 30-day note of Feb. 27 at the Shoe &: Leather Hank, and receive credit for the proceeds. 9. Pay postage, telegrams, and petties, ^4.35. 9. Sell David Kubie &: Brother, net cash, 50 rolls liberty ribbon (a. $2.90; 25 rolls tafl'eta ribbon (« ^3. 9. Sell Salkin &: Bernas, net 10 days, 10 pes. percale, 420 yd. C" 12', c; 13 pes. gingham. ^30 yd. (« 10 (^. ' WHOLESALE DRY GOODS BUSINESS I35 Close the cash book, sales book, and purchase book. Post all books and take a trial balance, dated March 9, 19 — . In openinj; the Sullivan y Tanner kd^er arrange the accounts in the following order: O. J. Sullivan, Capital, O. j. Sullivan, Private, W. A. Tanner, Capital, W. A. Tanner, Private, Notes Receivable, Notes l^iyable, Ortice Furniture, Stock ot (loods. Purchases, Sales, Merchatulise Discount, Interest, General Kxpense, Shipping Kxpense, Drayage, Profit &: Loss, cus- tomers' accounts (alphabetically arranged), trade creditors (alphabeticallv arranged). Post inward freight direct to Purchases. No Cash account is to be kept in the general ledger. Give Stock ot Cioods, Purchases, Furni- ture is: Fixtures, Sales, Merchandise Discount, Expense and Profit & Loss each eight lines' space; all other accounts, five lines. Exercise 17 {Continued) March 10, 19 — . Pay petty expenses, $\.2^. II. Pay B. Altnian &: Co., for invoice of the 24th ult., {^1065, less 3%. II. Receive of David Kubie 6: Brother check for invoice of the 9th illSt., i?220. 11. Draw sight draft on P. F. Miller for invoice of the 2d inst., ^224.01, and leave the draft at your bank for collection. Allow him 2% discount. 12. Buy of Samuel Meyer, 3/100/30, invoice dated March 8, 10 doz. ladies' suits, ^^^978. 80. 12. Pay Charles \'opelak, carpenter, for repairs and alterations, labor and material, ^^105. 65. 12. Make the following sales: McCarthy Brothers, 2/5 n/30, 12 doz. suede gloves (3 $24; 20 doz. linen handkerchiefs (o ^2.50. Brooks & Son, 2 10 n 30, 12 pes. crepe de chine, 288 yd. (« i^i.io. 12. Pay car fares and petties, $5.60. 12. Pay Robt. Shaw, agt., insurance policy, ^^7000, @ \%. 13. Receive a check of Morse & Munro for invoice of the 3d inst., $79.92, less 3%. 13. Pay wages of clerks and office help, $65. 13. Pay McGinn Brothers printing account in full, bill 3 11, ^^24. 60. 15. Receive of Kenneth Cornell his check for invoice of the 15th ult., 15. Receive of The Alexander Olsen Co. their check for invoice of the 5th inst., $350, less 3%. 15. Sell the \\ arner Dry Goods Co., terms note at 30 days, 50 doz. cotton thread (« 52 p; 50 gross ocean pearl buttons (11 $2.25; 100 gross hooks and eyes (o 52 (5. 15. Pav the Union l^acific 1\. 1\. Co. h^i^ln account ist to 1 qtli inst., $26.75. 136 ACCOUNTS AND ACCOUNTING PRACTICE 15. I'av the Brooke Smith Mt^- Co. cash, less 2^, for packing cases and materials, 5^125. (Charge Shipping Expanse, C. B. entry.) 16. ^ our bank reports collection of draft of the nth inst., on P. K. Miller. 17. Buy of the Mohawk Cilove Co. ladies' and misses' gloves, invoice dated March 12, terms 3 10 n 30, $i\^.Go. 17. Receive ot McCarthy Brothers their check for invoice of the 12th inst., /33H, less 2';,'. 17. Pa\' postaue, telegrams, and jietties, ^^5.40. 17. Pav the .Middlestates Telephone Co., March service, ,^14.50. 18. Receive of the Warner Dry CJoods Co., their 30-day note, dated .March iv for invoice of that date, ^^190. 50, and payable at the Shoe &: Leather Bank. 18. Pay Samuel Meyer for invoice of the Sth inst., J^QyS.So, less 3%. 18. Discount the \\ anur l)i\ (ioods C'o.'s note of tlu' i ;rh mst., at the Shoe 6c Leather Bank, and receive credit tor the proceeds.. 19. Pav Thomas Chesterton drayage account .March i to 18, ^^8.75. 20. Pa\' wages of clerks and ofHce help to date, $(i^. 20. Pay petty expenses, ,"^3.65. Close all original books of entry, post, take a trial balance, prepare a statement, and close the ledger by means of journal entries. Inventories: Stock of goods, ^8106.40; furniture & fixtures, J^iooo; cost of 20 days' lighting, Edison Light &: Power Co., unpaid, ^^14. 50 (esti- mated) ; packing cases and materials, )5ioo; 4', T. egg coal (n ,^7. Practicf-: Exf.rcisfs I. Items on the left side of an account representing a department <>t the business indicate value received. When the value so received is parted with, the fact is recorded by an entry or entries on the right side of the account. Consider (i) that the value received by one department ot the business might be transferred to another department; (2) that it might In- carried forward to another period of time; (3) that it might be absorbed in conserving or advancing the business welfare; (4) that it might be lost in the destruction of a valuable thing; (5) that it might be transferred (st)ld) to some one outside the business; and (6) that an error nnght have been made 111 making the entry, which would have to be rectified by a cross entry. \\ hen the v;ilue recei\id bv an account is transtern-d. consumed, or disposed of, and proper entries thereot an- ni.ide. the credit side ot the account must eciu.il ihi debit, and this equilibrium is marked by double- ruled footings on the s;ime horizontal line. Tlu- ;iccount is then said to be " closed." PRACTICE EXERCISES 137 Copy the followino; accounts and show by proper entries several ways ill winch t-ach account iiiitiht bcconic divested of the value h)dged in ir. Foot and rule the accounts so closed. PlRCHASKS 19— Dec. 31 47^' I 19— Dec. Stock ok Goods 8900 Offick Furniture 19 — Dec. I 25 325 25 Cash 19— Dec. , 3 I 1 6453 40 I') Dec. 3' Inward Freight '4- 1 ^7 HoRSHS 1 ; ' Dec. I , 760 1 18 17.^ 1 li FxiMNSK 19— Dec. 3' 418 138 ACCOITNTS AND ArmfNTING PRAC IRL Date otOrdcr January jj, ig — No. of Hales Om- Hundred Offices Austin, Texas Shrevt-port, La. New ^'ork Wei^lit ot ()n(- Hundred Bales of C'orron siiippcci l)\- 1- . Cj. Smith &: Co., tor account and risk of ./. /., A'-;;v Landed at Hoston via Galveston S. S. Pleiades I v^« 1 I 541 11 ^ ^ "N 31 570 41 :; 1 600 •- ;6o 22 495 '^: 570 42 >3 7 13 588 23 -■70 ;6; 4.^ 4 =^23 >4 558 24 ' >4 ;Si 44 A L K > M4 I ; 521 25 537 35 565 45 F. C. (. > "* 16 545 26 571 36 522 46 01 ; Smith -- ; ;o 17 531 ^7 557 37 556 1 i +7 56 > s >4'' is; 565 28 585 38 557 1 ' 48 ;87 <; 5'7 i "9 497 29 496 39 520 1 49 l/lOO lO 590 _ *--' ;^)0 30 ;6o 43 8. ^O" 50 53'-' -X '-.6 61 530 71 545 521 91 555 > - ."! J .5 '>2 570 72 576 82 551 92 553 53 540 ( ' 531 73 605 83 575 93 590 54 533 ; 64 547 74 617 84 553 94 57 ^ 55 555 ' 6q 515 75 557 ' 85 542 95 517 56 608 66 621 76 562 86 537 96 500 57 555 67 537 77 565 87 530 97 so; 1 58 555 68 585 — ^ : 1". ■ V Q 506 98 547 1 i;6o ' 59 575 69 547 7-i ^ , ^ .^-V 515 ! 99 6o 1 5'4 70 1 594 80 608 , 90 550 i 100 48; . Total Weight March r^s JQ — I". Ci. Smith &: Co., \ er ./. //'. T PRACTICE EXERCISES 139 2. The weight-note on page 138 represents a quantity of middhng up- land cotton purchased by A. L. Kane (« 10.6 p ( lOj^^j ^) a pound f. o. b. Aus- tin, 1 ex. i'lie numbers in the hrst and alternate columns indicate the num- bers of the bales, those in the second and alternate columns, the weight in pounds of the bales. When A. L. Kane received this cotton April 2, he paid transportation charges, ^^125, and later made the following sales: April 4, bales Nos. i to 20 (ii 13.4 (^ a pound ; April 9, bales Nos. 31 to 50 ((/ 13.6 ^ a pound ; April 15, bales 51 to 70 (« 13.5 (^ a pound ; April 24, bales Nos. 81 to 100 @ 13.7c a pound. Kane's expenses for storing, in- suring, and handhng the cotton were as follows : April 2, insurance, ^^27. 50; April 16, petty disbursements, i?i2.50; April 30, storage, ^25; April 30, wages, $Go. April 30 Mr. Kane inventoried the cotton unsold at cost, and calculated the result of his venture. Note. — Manifestly', rlic cosr of this cotton should include freight. .Since 20 bales — one fifth of the cargo — are 011 hand, ^^25 freight may he included in this inventory. Set up the toUowmg accounts : Stock of Cotton, Sales, Expense, Profit y Loss. Close the accounts. 3. At the close of business Aug. 31, 19 — , the following footings appeared m the accounts of Joseph Kahn's ledger: Pai^e I 19 - Aug. , 31 Cash 6870 13 19 Aug. 31 5400 1 1 Stock of Goods 19— Aug. 4420 16 19— Aug. 31 I 1 PURCHASHS 3425 1 70 19— Aug. 31 Returns 4'- =;o I Sales I'; 1 Aug. 1 3 1 5S90, :o I40 ACCUlMS AND ACCOVMING PRACTICE Aug. 31 19 Aug. 131 Pagt 2 19— Aug. 31 19— Aug. 31 19— 19" Aug. , 31 19- Notes Receivable 2500 I Aul;. \l NoTFS P^YMU K Expense 456 80 I ! Mfrchandise Discount 196 19— 13 n Aug. 31 Tntfrest 35 «: 19—1 Aiii:. 1 1 I I A. P. Hill & Co 3958 19— 76 f Aug. 31 Strong Brothers 19— Aug. Profit & Loss Aug. I ;oo IW 1800 Aug. 3« 43< tl 1 i 1 '1 3'- 75 15 41 I II 4;o 4>^ -5 112 16 PRACTICE EXERCISES 141 The proprietor's investment account is omitted, (a) F ind the amount of Joseph Kahn's investment, supply his account, and enter the investment under date of Aug. I, 19 — . {b) Copy this ledger on kdfier paper, and take a trial balance, (f) Make a balance sheet, Aug. 31, 19 — , and close the ledger. Following are the inventories : Stock of goods, i^zSSi. 20 ; interest accrued on notes recenable, ^^8.25 ; interest accrued on notes pa\able, i^i6.45. 4. James and .Malcolm Andrews, equal partners, own an ice plant Jan. I, 19 — (current year), valued at i^i2000, and delivery equipment valued at ^^6700. During the winter of 19 — they cur 1 acre (43560 sc]. ft.) of ice 16 in. rliick. at a labor cost of cutting and storing of 12-2^ per 100 lb. (Assume that ice weighs 56 lb. to the cubic foot.) The cost of packing materials is ^^150. During the summer the following sales were made: April, ^^709. 25 ; May, i^i 263.45; J'Jne, ^^2778. 75 ; July, $3986.55; August, $3941.25; September, $2840.50; October, $869.30; November, $581.31. The selling price of the ice was 60 C per 100 lb., and the labor cost of delivery, 6^ per 100 lb. The cost of feed and care of horses was $2456.76; horseshoe- ing, repairs, and incidental expenses, $467.80; depreciation of delivery equipment, 8%; 5% of customers' accounts proved worthless. Assuming that the business required a cash investment of $5800, find (a) the profit or loss per cent; (b) the loss per cent from shrinkage in the weight of ice between harvesting and marketing. Set up and close the following accounts: James AndrezvSy Malcolm Andrews, Stock of Ice, Sales, Shrinkage, Expense, Profit iff Loss. 5. R. D. King and George Shone are engaged in farming as equal partners. During the month of April, 19 — , they plant ten acres of potatoes, with the following expenditure of labor and materials: Plowing, $2.50 an acre; harrowing, four times at 35^ an acre; fertilizer, 5I tons (n $40; seed, 125 bu. (o 73 c; disinfecting seed (labor and material), $6.75 ; cutting seed at 6c a bushel; planting, 25 hours (horses and men) at 65c. Ihe ground is harrowed three times before the crop is up, at a cost of $11, and cultivated 8 times during the season, at a cost of 35 ^ an acre. 1 he potatoes are sprayed 6 times, at a cost of $10 each time. Hoeing and weeding costs $1 .50 an acre ; harvesting and hauling, $15 an acre. The yield averages 220 bu. an acre. They sold 1500 bu. at 55 c; 500 bu., at 45 c. The land rental is $35, and the cost of storing and marketing the crop, $65. Allow 10% for depreciation of implements, valued at $325. Construct and close the following accounts: Cost oj Planting, Cost of Maintenance, Cost of Harvesting, General Expense, Stock of Potatoes, Sales, Profit U Loss. There is on hand at the time of closing : 165 bu. of potatoes, 50 bu. of which have been sold at 65 d a bushel, 142 ACCOUNTS AND ACCOUNTING PRACTICE and paid tor hut not diliM-nd. I Ik- remaining; 115 hu. are appraised at 65 c a LhisIkI. Open accounts witli partners, and transfer to each his share of the proHt or loss. RETAIL SHOE BUSINESS EXKRCISK 18 A. I . Knapp commenced a retail shoe husiness Oct. i. \() — . May 31, the following \ear, the hooks were closed and a statement was prepared. The halance sheet showed the followmj:; assets and hahihties: ASSETS Cash on deposit in Second Nat'l l^ank, Accounts Recen ahlf, considered good. Stock of boots, shoes, trunks, and hags, Real estate (husiness block). Store and office fixtures. Five shares Second Natl Bank stock, Insurance unexpired. $ 968.90 467.50 19768. 29000. 975- 500. 40. ^$51719.40 LIABILITIES Notes Payable : Smith Shoe Co., Aprd 15, Oo days, int. 6%, Rice Brothers, May 20, 30 days, int. 6%, Interest accrued on notes payable, Trade Creditors : Dunn &: Douglas, inv. 5 '22, terms 20 davs, less discount of ,^i per dozen (89 pairs), Ililliard & Co.. inv. 5/15, terms .j ',0 n 60, Ililliard &: Co., inv. 5/2, terms 2/30 n /60, nines &: lluid, inv. 6/1, due 121, less 5%, Verdon & Mott. inv. 5/25, 2 10 n/30, )^200. 250. ^2} I .50 94.40 -5 .60 241 .92 lOI .10 ^450. 2. ^^694. 5 2 RETAIL SHUE BUSINESS 1 43 Petty Accounts Payable : G. H. Younj;, inv. 6 i, terms 2 '10 n 30, i^i8.50 na^«2; Brothers, inv. 5/5, terms n/30, 4.18 22.68 Ciintiu l>iabilities : $1169.20 Mortgage Payable i,co\ering busi- ness block, due June i, 19 — , and bearing interest at v^%, payable Dec. i and June I ; interest paid to date), J^gooo. ;^ioi69.20 Find A. L. Knapp's present capital, and open accounts in the ledger. A general ledger will be kept, and a loose-leaf binder will be used as a cus- tt)mers' ledger, (joods are sold for cash and on credit. All sales will be entered on a duplicate sales slip, marked " CASH " or " CHARGE." All goods not returned or paid for at the end of each week are billed in duplicate; one copy of the bill is filed in a self-indexing binder, and the other is sent to the customer. At the same time Accounts Receivable account is charged with the total of such sales for the week and Sales is credited. \\ hen these bills are paid, the duplicate bill is removed from binder, marked Paid, with page of cash book, and transferred to the perma- nent Hie for reference. At the same time Accounts Receivable is credited. Unpaid expense bills at the end of the month are charged to the appro- priate expense account and Petty Accounts Payable is credited. When such accounts are paid, debit Petty Accounts Payable and credit Cash. Cash book, purchase book, and journal only will be used as original books. The headings of cash book with rulings to correspond are as follows: Left page: "Sundries," "Accounts Receivable," "Sales"; right page: "Net Cash," "Purchase Discount," "Expense," "Sundries." In opening the ledger give Profit & Loss and Fire of June 16, each 15 lines' space ; Stock of Goods, Sales, Purchases, Expense, Wages, and A. L. Knapp, Capital, each 10 lines; A. L. Knapp, Private, Accounts Receivable, Notes Payable, and Interest & Discount each 8 lines; all other accounts, 5 lines. June I, 19 — . Remit Hilliard & Co. for invoice of 2d ult., less 2%. 1. Pay United States Telephone Co., June service, {^7.50. 2. Buv of tlu- Hudson Rubber Co., invoice dated May 27, terms 30 days net, rubber goods, }^i 57.25. ■ 2. Pay petty expenses, $2.75. 2. Cash sales ist and 2d inst., $286.78. 2. Receive customers' checks as follows: W. S. Burns, $18.65; ^^"i- Pettit, $7; A. K. Burtis, $24.30. (Credit Accounts Receivable.) 144 ACCOUNTS AND ACCOt'NTING PRACTICE 3. lUiv of (joodniaii RiihlH-i Co., invoice dated June i, terms, " Due Dec. I, di.scouiu allowed for prepayment at the rate of 6% per annum," rubber good.s, $12}. 3. Cash sales for the day, )^i 76.40, 4. I'.i\ \\ni. Knri^iu, freight and cartaj^e, i^3. 55. (Chiirp^c Purcliasrs.) 4. kiiuif Ha^j; Brothers for mvoice of 5th ulf. (Consult Petty Accounts for the amount ot this item.) 4. Recei\e cash and checks from customers as follows: J. Conerty, $l.y^\ Albert Jones, ,^^10.25; Lawrence Kubie, ^^6.35. 4. Pay \ erdon &: .Mott, invoice 5/25, less 2%, 4. Cash sales for the day, J^i 22.85. 5. l'.i\ iHit\ expenses, ,^4.75. 5. Remit Cioodman Rubber CO. lor invoice of June i, J^I23, lessdis- count. (See terms of this j->urchase.) 5. (\ish sales for the day, i^i20. 6. ;\. T.. Knapp, proprietor, appropriates shoes at cost, 5^9.75. (Charj!;e .7. /.. Knapp\< Prhate account, credit Merchandise Stock.) 6. E. C. Knapp, clerk, takes i pair shoes at cost, ^^3.60. 1 ake Knapp's " I. (). U." for ^3.60. Ibis will be placed in his pay envelope on pay day when the amount will be deducted from his wajjes. At the present time charge Wages and credit Stock of Goods in the journal. 6. Receive cash and checks from customers: Edw. Cassidy, ^15.65; Sarah Gamsu, $5; Mrs. Carl Williams, )^3.40. 6. Pay postage and petties, ^^3.76. 6. l*ay w^ages per pav roll : E. C. Knapp, ;si6.4o; 1* red Randolph, $\?> ; Margaret Marsden, ^15; Richard Callahan, ;^io. (Charge Wages.) 6. A. L. Knapp draws for personal use, i^ioo. 6. Cash sales for the day, $318.22. 6. Sales on approval for the week, ^^51. 50. (Charge Accts. Rec.) Close cash book and purchase book. Post all books and take a trial balance. Exercise 18 {Continued) 8. Ruy of RadclifFe &: Son, inxoice dated Jure 4, teinis 2 10 I 30, ladies' shoes, ^^62.90. 8. Buy of Cincinnati 1 runk C\)., invoice dated May 24, " as June i, 19 — ," terms 2/10 net 30 days, suit cases, bags, etc., 5^79. (>o. 9. Receive cash fioin sale of 5 shares 2d Nat'l Bank stock @ $IlO. 9. Cash sales for Sth and <;th inst., ^^245.60. 9. Prepay following notes: Smith Shoe Co., due June 14; Rice Brothers, due June 19. 10. Pav Cincinnati Trunk Co. for iinoice of Srh inst., less 2^. RETAIL SHOE BUSINESS I45 10. Remit G. H. Young Co. for invoice of ist inst., less 2% (Charge Petty Accounts.) 10. Casli sales for the day, ^^87.10. 11. Remit Dunn &: Doughis for invoice of May 22, less discount. (Consult the terms of this purchase.) II. Pay Herald Puhhshmg Co. advertising account in full, ^^16.75. (Ch a rge Advert is in^.) 11. Cash sales for the day, $125.60. 12. Pay Bagg Brothers for invoice of to-day's date, wrapping paper, >i 1.56. 13. Pay postage and petties, ^^9.27. 13. Pay wages per pay roll, ^^63. 13. Advance E. C. Knapp on salary and receive his I. O. U., $1^. (See note to transaction of the 6th inst. Carry this I. O. IL as currency until pay day. No entry reciuired now.) 13. Sales on approval for the week, $536. 45. 13, Cash sales 12th and 13th, $318.50. 15. Remit Milliard & Co. for invoice of May 15, $94.40, less 4%. 15. Mines & Hurd ofler us a special discount of 2% for settlement of invoice of June i. Make remittance to cover their account in full, less 7%. 15. Buy of Field & Potter, invoice dated June 10, "as July 15," terms 2/20, 30 days net, men's shoes, $534.40. 15. Buy of Grant & Whitman, terms 3% for cash, show case, $48.50. 15. Remit Radcliflt* k Son for invoice of 4th inst., less 2%. 15. Cash sales for the day, $124.05. 15. Pay Grant & Whitman for account of 15th inst., less 3*^^). Instead of opening an account in the ledger with Grant & Whitman, check the item in the folio column of the journal by using the letter C (cash hook), and the page of the cash book on w^hich the payment is entered; and in the cash book, the letter / (journal), and the page of the journal on which the entry for the purchase was made. Close all books, post, and take a trial balance. ExERCiSF. 18 (Continued) 16. A neighboring fire damaged our stock of goods and building. A claim is filed with the agent of the Phoenix Insurance Co. for $850 damage to stock, and $1500 damage to building. (No entry.) 16. Return to Field & Potter men's shoes for credit, $69.15. 17. Donated $50 to family of W. M. Smith who lost his life in the fire of the 1 6th inst. Should the proprietor's private account or Expense be charged for this r 17. Pay petty disbursements, $8.65. 146 ACCOUNTS AND ACCOUNTING PRACTICE 17. Pay W ni. I'.mi^lit, frci^lu wnd cartage, ^^9.75. 17. Cash sales i6th and lytli inst., is240.i2. 18. Make the following purchases: Hoyt Shoe Co., invoice dated June iH, terms 2 ' 10, net 30, ^l 10.40; \\ illianis, Brown & Co., invoice dated June 10, net, )^l.30; Durland Brothers, invoice dated June 16, terms 60 days, 1/30, ruhher goods, ,"^44. 40. 18. Cash sales for the day, ^^200. 18. Settled with I^hfrnix Insurance Co. by accepting iIrm orfer of i^750 for damage to stock, and y>i lOO for damage to building. iNo entry.) 19. Close contract with J. Kaiser &: Son to repair building, repairs not to include cost of painting and tin work ; contract price, 5^850. (Debit Building Re-pairs and credit Contract Account ij. Kaiser ^ 5>ow).) 19. Stock damaged b\ heat, smoke, and water appraised at J^i8oo. Set this stock aside and advertise a " fire sale." Open Fire oj June 16 account. Charge this account, and credit Stock oj Goods with the invoice value of damaged goods. The purpose of segregating these goods is to keep the result ot this fire out of the regular ProHt &: Loss account which should show the earn- ing power of the business. \\ hile a Hre is at all times possible, and the cost of protection under insurance is a legitimate charge against the earnings of the business, if a fire occurs, its cost and outcome in profit or loss are wholly apart from the regular trading activities of the business. These damaged goods should be accounted for under a separate head, and the result brought into a sub-section of the Profit & Loss account. 19. Cash sales for the day, $100. 20. Pay telegrams, car fares, and petties, ;^ 13.50. 20. Receive from Phoeni.x Insurance Co., in full settlement of our claim on account of fire of June 16, draft on New York, )?i850. Credit Building Repairs i^iioo; and Fire of June 16 account ^^750. 20. Receive cash and checks from customers: Maud Helmer, {^13.40; J. G. Walker, ^^5 ; Charles Wright, 90 c ; Bernard Gutwillig, ^7.85; Mrs. 11. L. Mark, ^^10.15. 20. Pay wages per pay roll, ^^48. (Don't forget E. C. Knapp's I. (). L'. of I qrh to be included now as cash.) 20. Advance J. Kaiser &: Son, on contract ot 19th inst., i^200. (Debit Contract Account {J. Kaiser l^ Son).) 20. Credit sales for the week, ^^55. 43. 20. Buy of Bagg l^rothers, terms cash, less 2<^,, invoice wrapping paper, ^^20.90. 20. Cash sales for the day, ^^375. So. (Credit Fire of June 16 account wirh ;f^i64.30 and Sales account with the balance.) 20. Pav IKnrv Whitman, cKrk hire, ,*^;, lames Prour, bov, ♦^1.25. RETAIL SIIUE BUSINESS I47 This extra labor resulted from increased business on account of the fire sale and should be charged to tht- Fire of J line 16 account. 22. Remit Bagg Brothers for invoice of 20th instant, less 2%. 22. Cash sales from regular stock, J^i 17.60. 22. Cash sales from fire sale goods, ;i^i 86.50. 23. Pay petty expenses, ^^3.45. 23. Remit Williams, Brown &: Co., for invoice of i8th inst., ^1.30. 23. Cash sales from regular stock, ^98. 23. Cash sales from fire sale goods, )^i 12.20. 24. Receive cash and checks from customers: C A. McCreary,$7.50; Ruth Bull, i^5; Bartlett Brothers, ^18.50 ; Mrs. J. Hinckley, ^^2. 75 ; Mary Curtis, ^\} ; John Andolscheck, ^^3.75. 24. Cash sales from regular stock, J5i 30.90. 24 Cash sales from fire sale goods, ^$86. 54. 25. .Make the following purchases: Dunn & Douglas, invoice dated 6 12, terms 20 days, less a discount of ^i per dozen (108 pairs), shoes, $268.25; Hilliard &: Co., invoice dated June 15, terms 4/30 n/60, shoes, $246.50. 25. Cash sales from regular goods, $155. 25. Cash sales from fire sale goods, $65.75. 26. Receive cash and checks from sundry customers: Ed. Rich, 50 f^; Myrtle Greene, $1.25 ; George W. Stewart, $13.50. 26. Pay \Vm. Enright, freight and cartage bills, $12.65. 27. Bert Phelps returns defective shoes. We give him a new pair of five-dollar shoes m exchange for the old ones, which we return to the manu- facturer. Field &: Potter, and charge them with the cost, $3.60. 27. Cash sales regular stock 26th and 27th, $240.95. 27. Cash sales fire sale goods 26th and 27th, $165. 27. Sales on approval for the week, sundry customers, $18.50. 27. Pay parcel post charges on parcel to Field & Potter, 35 ^. 27. Pay wages per pay roll, $63. 27. Pay postage and petties, $4.75. 27. Buy of the Hoyt Shoe Co., invoice dated \n\y i, terms 2 10 net 30, children's and misses' shoes, $86.50. 27. A. L. Knapp discounts his 90-day note for $4000 at the Nat'l Ex- change Bank and receives credit for the proceeds. Mr. Knapp gives the bank his check for the amount of this interest. Enter the face amount of this note in the " Sundries " column and charge Interest and Discount on the right side of the cash book. 29. Pay the Hoyt Shoe Co. for invoice of iSrh inst., less 2%. 29. Sell the balance of fire sale goods to A. Dobrosky and receive cash for the sale price, $275. 148 ACCOUNTS AND ACCuUNTING PRACTICE 29. Cash sales for the day, reguhir stock, ^^195. 29. Mary Nellis returns two pairs shoes, not satisfactory. Refund the purchase price in cash, ^4. 75. 30. Pay John II. Lawrence in full satisfaction of the mortpage held on the husiness jireniises, ^^9000, with interest to date. 30. Receive cash and checks from sundry customers: \\ . W . Murray, $8.75; 1'. L. Brown, J^2.50; N. ^^ Construction Co., ^23; .Mrs. Frank Jones, ,*^i.50. 30. Cash sales for the day, )^ 148.50. 30. Pay petty expenses, 50 ^. 30. Pay I nited Cias & Electric Co., li^htinp for June, i^li.70. Close books of orijiinal entry, post, take a trial balance, prepare a statement and close the lidj;er. Inventories, June 30, 19 — : Stock of merchandise, ^16642.50; in- surance unexpired, i^33 ; book account of John Muller, J^iS.yq, is con- sidered worthless; cash account is short $i, probably mistake in making chan^;e; all other property is appraised at book value. Liabilities incurred and values consumed during June, which have not been recorded on the books: Salaries, two days, i^2i. (Credit Ji'agcs July Account.) Advertising, Herald Pub. Co., account of fire sale, $18.25. (Credit Petty Accounts Payable.) July I, 19 — . A. L. Knapp transfers to his son, E. C. Knapp, a one- third interest in his retail shoe business, after withdrawing from the capital of the business the premises in which the business has been carried on. \ he partnership shall be known as A. L. Knapp &: Son. The new firm is to pay a rental of $100 per month for the use of the first floor and basement now occupied by the business. Mr. E. C. Knapp agrees to give his whole time and attention to the business, and it is agreed that the personal draw- ings of neither partner shall impair the present capital. Make the required entries. SINGLE ENTRY BOOKKEEPING Exercise 19 The record of a business transaction by which we indicate both the giver and the receiver of value is called a " double entry." 1 lie equation to which the relationship of debtor and creditor gives rise enables the bookkeeper ro test the accuracy of his work by means of a trial balance. But many business concerns of the smaller class do not keep complete records of their busmess transactions. Such records m busmess offices vary all the way from a complete record, called "double entry," to the proprietor's vest-pocket memoranda of what he considers important events. Oftentimes only such records are found as are necessary to prove executory agreements with customers and trade creditors — charges and credits to those from whom a concern buys, and to whom it sells, goods. The cash register is often employed as a check upon irregularities in the money account, and the cash book is dispensed with. Anything less than double entry, for want of a better name, is called " single entry." It cannot be defined, because it means nothing definite. As the term " single entry " is employed in textbooks and referred to in examination questions, it usually means the ledger accounts of cus- tomers and trade creditors, together with the source book or books from which items comprising these accounts are posted. The purchase, sales, and cash books may be kept ; the original entries may appear in a journal in chronological order; or the book of original entry may be dispensed with altogether, and postings made from loose-leaf memoranda. Items com- prising trade creditors' accounts may be taken from their invoices, from the check stub, or from the notebook. When customers' invoices are made on a typewriter or billing machine, charges to customers may be taken from carbon copies of these invoices, and credit items from the counterfoils (stubs) of the note and check books. If the journal only is employed as a posting medium, it may take the form shown on page 150. Of course, if a cash book were kept, personal items would be posted from that book; and all items might be segregated and the journal practically dispensed with if the purchase, sales, and note books were also kept. One familiar with the procedure of double entry bookkeeping should have no difficulty in handling a set of single entr\- books. 140 i=;o ACCOUNTS AND ACCOUNTING PRACTICE William \'. Smith, Dr., net 20 days 2 ; bbl. applfs (g. 3.25 3 r. \\ . \\ inkier, Cr., net 30 days I car clipped wliite oats, 1600 bu. (<» 401^ William V. Smith, Cr. Rccfivcd cash for invoice of 2d inst. ?EB. 2 T. W. Winkler, Dr. Gave hiin our 30-day note, pa\ abk- at Corn i.x- changc Bank, for inv. of Jan. 2, $640 «I 640 81 640 52 Such exercises as the following, however, often arise in e.xaminations. 1. 1. D. King, whose books have been kept by smgle entry, decides Nov. I, 19 — to change to the double entry method. An inventory of his possessions discloses the following: Stock of goods, J57865.50; notes re- ceivable, )^i2i8; ofHce furniture, ^^325; real estate, i^Sgoo. He has notes outstanding amounting to ^^975. His ledger shows customers' accounts considered good, $2365.78, and creditors' accounts amounting to )5i 764.50. Open accounts necessary to change to double entry. The situation you have to meet is that which confronts you in every opening entry, it matters not how the books have been kept, or whether any books have been kept ; namely, that certain persons own, or have a pecuniary interest in, certain things. However, if some of the things owned and some of the owners are alread\' recorded in the ledger, which is to be converted into a double entry ledger, obviously the record of things already there should not be repeated. The simplest way under such circumstances is to make an opening double entry in the journal exactly as you would at the beginning of a business, and check-mark the items of customers and trade creditors as having been posted, as shown in illustration, page 151. If the facts require you to indicate the additional accounts to be opened to effect the change from single cntr)' to double entry without mak- ing a journal entrv, exhibit all accounts except those of persons outsule the business. 2. How should you determine the profit or loss of a business if the books have been kept by single entry .' Again, it matters not how the books have been kept, the calculation of profit or loss has to be verified by comparing the proprietor's equity (capital) at the beginning of the period covered, with his e(]uity at the close of such period. And this is the method employed in single entry. Kvidence of SINGLE ENTRY BOOKKEEPING 151 Nov. 19 — Notes Receivable, Sched. A Accounts Receivable, per ledger Stock ot Goods, Sched. B Real Estate — deed to business premises Office Furniture, Sched. C Notes Payable, Sched. D Accounts Payable, per ledger F. D. King, Capital Tlie business of K. D. Kinu;, Nov. i, 19 — , con- sists of the foregoinf; assets and liabilities as inventoried and appraised by himself I218 2365 7865 8900 78 50 975 1764 17934 50 78 assets, other than book accounts and notes payable, exists wholly apart from the record, whether the books are kept by single entry or by double entry. And the value of a book account is not in the record, but in that which underlies the record; namely, the financial ability of the debtor. Any method of calculating profit involves, as a first consideration, the valuation of assets ; and while a complete double entry record may aid in such valuation, recourse in every case must ultimately be had to things to which the record relates. There is, then, only one way to determine profit, and that is by com- paring the value ot things owned on one date with things owned on a sub- secjuent date, always having regard for the interests of those outside the business. This is the method employed in the construction of a balance sheet when books are kept by double entry. Double entry, however, when supplemented periodically by a revaluation of assets, shows not only what the profit or loss is, but it shows the source from which the profit is derived, as well as the factors of cost (expenses and losses) that tend to impair or wholly absorb the earnings of the business. 3. Compare the merits of single entr}^ and of double entry bookkeeping. Single entry has the " merit " of showing our relati(Mis with persons outside the business, which are really incidental to the main purpose of trading. If it were not that the practice of giving credit has become a firmly established custom in connection with merchandising, we might safely say that the matrei of financing sales and purchases, and the risk which such financing entails, are activities separate and distinct from those of trading. 1 hey relate to capitalization rather than to trading, and at best are onlv a fragment of that which double entry exhibits. Single entry provides no means of testing the accuracy of the bookkeeper's work, which 152 ACCOUNTS AND ACCOUNTING PRACTICE IS not .1 sciious objection where calculating machines are emploved. And, while net proHt or loss may be shown as m double entry, the factors involved cannot be exhibited. 1 he business man without information respecting the details ot his business is fortunate if he long escapes financial disaster. 4. 1 rank DeGroot and J. I*. Mitclull are partners, sharing equally in profits or losses. 1 heir books have been kept by single entrv. I lu fol- lowing facts are derived from different sources: Ledger accounts show: Irank DeCji'oot investment, J^i0500; |. P. Mitchell investment, ^^10500; sundry accounts pavable, ^5500; sundry accounts receivable, J^Scxx). Other assets and liabilities are : cash on deposit in bank, J^45CKD ; notes receivable, J^3 300 ; stock of goods, 5^17500 ; full paid stock of the Great Northern Bank, valued at 5^3000; real estate, 555500; notes payable, ^2500. Determine the outcome of this business in profit or loss. Distribute the net result between the partners. Formulate a journal entry that will, when posted, convert the single entry ledger into one of double entry. 5. 1 he open accounts in the single entry ledger of W. F. Hildreth show the following footings : Dr. Cr. W. F. Hildreth, Proprietor ^^7865. Charles Carman $625.87 Kaufman Brothers 345-76 879.50 B. (). Rich & Son 100. 647.30 R. P. Howard 550. 320.65 His bank account shows a balance of J?967.io; notes and acceptances in his favor amount to $860 ; inventory of stock shows goods on hand valued at ^()jH^.T,o; furniture and H.xtures, ^^380. Flis own notes outstanding amount to $^yS- Show, by means of a statement, llildreth's assets, liabilities, and c.iji- ital. Open such aiklitional accounts 111 tlu ledger as are necessary to change it to the double entrv system. 6. A set of single entry books are to be changed to double entry June 30, 19 — . I' rom different sources the following data are obt;iined : cash on deposit, ^^7300; currency on hand, ^30; notes receivable owned, 5^4960; book accounts receivable considered good, $6320; notes payable, 5^2276; mortgage payable, j5i2000; interest accrued on mortgage, 5^150; merchan- dise purchases during the past year, ^^40480; sales, $49820; expenses, $3052; rent due and unpaid, $240; goods in stock at date, $8130; real estate owned, $26400; A. B. Williams, investment, $24300. (a) Prepare a statement to show whether these data :ire complete. (b) Show which method of determining profit or loss is c(Miclusive. (f) Make entries necessary to change the books to double entry. masons' supplies and building materials 153 masons' supplies and building materials Exercise 20 Jolin R. Parker is a dealer in masons' supplies and luiilding material, April 30, 19 — , Incomplete records of his business transactions have been kept ; but from different sources the following facts are obtained : Mr. Parker's check book shows the following: Jan. i last balance in bank, ^^425.07 ; deposits Jan. i to April 30,^^3940.75; checks drawn and issued Jan. i to April 30, ^54100. 40. There is ^^34. 73 in currency on hand. As a part of the business assets, Mr. Parker produces the following: No. /^ (^ the order of "^7 f^^^C^v ^-^.^f^^^ ^ nfter date I promise to pay to ^tj;^^!^^.: : " Value received, payable at the. " Dollars ^ J ''/'- -^^ /, f^^-t-^y-TT ? 1 -TL ^ - . A small ledger is produced containing the following open accounts : H. B. VVhitlock 19— l'> Jan. 7 n/30 1 - -i > ! ! Feb. s 4 200 I\b. 15 << 4 6q Mar. 1 5 120 Mar. I <( 5 146 >o Apr. 2. 6 146 50 Apr. I « 6 212 60 Stewart Trf.at I'; 19— Jan. 21 n/30 -> 765 So Feb. 20 4 765 80 28 4i ^ 1 50 Mar. 27 r, 50 Mar. i; (i .s 75 (>; Apr. 10 Returns 10 50 .Apr. 7 17 41 6 7 1 100 65 .0 17 7 65 15 154 ACCOUNTS AND ACCOUNTING PRACTICE 19— Mar. I 1 1 I n/30 Apr. lis'! " W . I. ('Rrx^Nfw 1'/ 3^5. Apr. I Returns 6 1 « 1 i 10 1 1 Returns 6 7 ' 317 8 John R. Parkhr (Investment) I Ian. I Present Capital I : 13000 Mr. l^arker produces a schedule of goods in stock as inventoried by himself April 30, anioutning to ^7168.35. He also produces a deed to the business premises which he values at )^8ooo, but which is covered by a mortgage of ^'^3500, held by the People's Savings Bank, and drawing interest at the rate of 6% per annum. Interest on mortgage has been paid to April 30. The other business effects of Mr. Parker are appraised as follows: Horses, i^900; wagons and harnesses, ^465; office furniture, ^^125; horse feed, ^135. Ihc invoice hie contains the following unsettled invoices: ""-»- 4S.0 MH.KO.B ,-1^7,'- r.rr^TaiHT -■—■ ■"= John R. Parker Chicago, .-Xpril 16, 19 — (^'our Place) FISHER c\- COMPANY SALES AGENTS KOR THE GENKRAL FIRi;PR(X)FIN(; COMPANY Terms: Net jfn days V. O. \i. freight allowed Piircliasir'.s Order .No. No discount Via C. B. & Q. Our Order No. 1080 Factory invoice #28277 Material I'rick ,[ Auiu SI 34 hM. HH galv. Herrinpbone, 76^ yd. Less freipht 2}]C 179178 1 1. '■' -^ MASONS SUPPLIES AND BUILPING MATERIALS 155 Juhn K. Parker. (Your Place) 30 Rivi:r Street Kansas City, Mo., April 9, 19 — Bought of REED &: RICE MANLKACTURKRS OK THE STANDARD AMIKKAN HRAND "ADAMANT PORTLAND" Terms : jo days net or One Cent per bbl. discount for cash paid within 10 days from date of invoice Works at Portland, On-. Coplay, Pa., and Hannibal, .Mo. Remit in New ^'ork or Chicafjo funds ALT. rt.\t\fs FOR DVT''- - -'.'•; - \ii"-;t nr. \i\nr. w nuiN ten days akii ; Hbl. Adamant Portland Cement, in wood, (a per bbl. 150 Bbl. Adamant Portland Cement, in cloth, C" 1-57 per bbl. Bbl. Adamant Portland Cement, in paper, Qi, per bbl. F. (). B. ('^'oiir place) Less freight (o: 80^ per net ton Quotation No. 3/16 Our Order No. 6889 Your Order No. 20 3/25/10 Checked by A. B. (Bill of lading attached) NO DISCOUNT ALLOWED ON FREIGHT CHARGES, NOR UNLESS PAYMENT IS MADE WITHIN 10 DAYS IRdM DATK OF THIS INVOICE. ^35 22 50 80 212 70 The wages of workmen, amounting to ^^18.75, are unpaid. Find l^arker's profit or loss smce Jan. i, 19 — . Assume that you are to take charge of Mr. Parker's hooks and keep them by double entry. Make a journal entry that will include all the assets and liabilities given above, and show what Mr. Parker's capital is May i, 19 — . Open the necessary ledger accounts, giving each six lines. Plan the grouping of these accounts in accordance with previous instructions. 1 he promises of others to pay us money are called " Notes Receivable ' ; land and buildings are called " Real Estate " ; our promises to pay secured by mortgage, " Mortgage Pavablr." Open an account with Horses, one 156 ACCOUNTS AND ACCOUNTING PRACTICE with Wagons iff Ilanu.i^ and one with Feed. Credit IVages for the amount due workmen, and m the following narrative-, drl^r H'lgt's for amounts paid workmen. I'ost the opening entry. Using cash book, ruled to meet the conditions involved in the transac- tions, sales book, purchase book and journal, enter the following transactions. Post and take a trial balance May 21, 19 — . May I, 19 -. Buy of Fisher &: Co., net 30 days, 2% 10 days, 40000 #1 hard brick c« ^S-'S P^r ^^^ 2. Sell \\ . J. Crossman, net 30 days, 2^0 10 days, 2 T. adamant in jute bags Qi $2^. 3. Receive of Stewart Treat 600 jute bags @ 7^. (Charge this item to Rfturned Salt's.) 3. Receive of H. B. Whitlock in full of his account, )^2 12.60. 3. Pay wages of workmen to date, ^}6. (Debit Wages for this item.) 5. Pay postage, petties, and stationery, $6.50. 7. Sell Smith Sprague, n '30, 100 bags lath mortar (f?; $6.75. 8. Buy of the Ogden Cement Co., terms 30 days net, less i^ per bbl. discount for cash in 5 days, 150 bbl. Portland cement in cloth (n ,^1.55, less freight on 22' tons (« 82 ^. g. Return to Reed & Rice 1000 empty bags @, 7 ^. (Credit Returned Purchases.) 9. Remit Reed & Rice cash in full of their account. 10. P.iv Hiram Smith, Collector, state and county tax, ^26.75. 10. Pav weekly pay roll, wages of workmen, $36. 10. Pay your local railroad company freight account, $49.75. Charge the Ogden Cement Co. for freight allowed on purchase of the Sth inst. (Charge Inzcard Freight for the balance.) 10. Remit Fisher & Co. for invoice of the 1st inst., less 2%. 12. Receive of W . J. Crossman for invoice of the 2d inst., $48, less 2 %. 12. Pay J. E. Thompson for wagon repairs and horseshoeing, $11.75. 13. I*av the Ogden Cement Co. for invoice of the 8th inst., less discount. (See the terms of this purchase.) 14. Pay William Chave, agent, fire insurance premium, $48.50. 15. Receive of Howard Lamb for his note due to-day, $300. 15. Receive of Stewart Treat his check in full of his account, $165.70. 15. Stewart Treat has overpaid his account $42. Send him a check for this amount in adjustment. 16. Buy a Chicago draft at your local bank and remit it to Fisher & Co. in full of their account. 16. Pay postage and petties, $8.96. 17. Receive the following from the National Gypsum Co. : MASONS SUPri.IES AND HI ll.DlNG MATKRIALS 157 NATIONAL GYPSUM CO. CREDIT MANIFACTURERS OF SALES OFFICE MEMORANDUM GVPSL.M PRODUCTS St. Louis CHICAGO , ILLINOIS MILL To John R. Par kcr Oak field # 2 DATE May 13. 19 Allowance for material supplied to Ered Krebs , Sprinjifield, as per your bill of May 8, 19 — , and in accordaTice with arrangements with this office : 500 Plaster Boards at I2d eacli = ^60 Lender our agreement with this Company we receive credit for all sales in our territory whether the material passes through our hands or not. (Credit Commission for this item.) 17. Pay wages of workmen, weekly pay roll, ^36. 19. Sell the Rockaway Construction Co. 100 bbl. Portland cement @ $1.80. Terms, 30 days net. 19. Receive of \V. J. Crossman his 30-day interest-bearing note in settlement of his account. 21. Pay office help, ^1^45. 21. Pay postage and petties, $3.45. After having taken a trial balance and made a statement, close the ledger. Following are the inventories May 21, 19 — , Inventories: Merchandise, $6694.25; horse feed, $98; cash, $1435; interest accrued on mortgage payable, 21 days at 6%. MERCHANDISE DISCOUNTS It is a general custom in the wholesale, jobbiny;, and manufacturing businesses to sell goods at prices that art- subject to a discount if payment is made at once or at an early date. This discount is usually a certain per cent of the invoice price, for payment on a date specified ; as, an allow- ance of 2% for payment within ten days from the date of the invoice. Occasionally, when the term of credit is of several months' duration, a certain per cent per annum is allowed for prepayment at any time. In rare instances the discount is based upon the cjuantity sold ; as," 1 erms,30 days, less a discount of i?i per dozen." \\ hile there is no uniformit\ in the various businesses as to the term of credit or discount oftered, each invoice is usually specific in regard thereto. " This account is due in 30 days from date of invoice, but subject to a dis- count of 3 % for payment in 10 days," or the formula, " lerms 3 10 n 30," are different ways of indicating on the invoice that the term of credit is 30 days, with a discount offering of 3% for payment in 10 days. The discounts allowed in manv businesses are greatly m excess ot the prevailing rate of interest. Two, three, and even five per cent for payment in ten days, when the full amount would be demanded if payment were deferred thirty days, is not unusual. Two per cent for the use of money twenty days amounts to 36% per annum; while 5% for twenty days is equivalent to 90% per annum. Maiiifestlx. a man who could borrow money at the legal rate would not fail to take discounts on all bills. Sales Discount The question arises. Why does the seller, when he can borrow money at the legal rate of five to seven per cent, allow a customer so large an amount for prompt payment of bills r Three theories are advanced in connection with this question : First, it is an old and successful expedient of business men to persuade a customer that he is the object of some special consideration 1 he practice of giving discounts is, doubtless, in a measure, an outgrowth ot this mode of appeal, although ir is doubtful whether in any case goods are offered any cheaper on account of the custom. Second, business men do not ordinarily have enough capital to enable them to carry a large amount m customers' debts, and discounts are allowed to induce payment in order to get working capital. Third, prompt payment shortens the period of indebt- edness, and accordingly decreases the risk of loss from bad debts. .Ml ot these reasons probably obtain in most cases. 15^ MERCHANDISE DISCOUNTS 159 Since the purpose whicli a thing serves determines the account to be char«i;ed, it is necessary to assume that discounts are allowed customers either (i) as a selling expedient, or (2) as a means of collecting customers' debts, or (3) to avoid the necessity of borrowing money to meet current obligations. Regarded as a selling expense, the item should be deducted from sales, or charged to the trading account; regarded as an operating expense, it is properly charged to Profit l^ Loss; regarded as a means of procuring available capital, it is equivalent to interest on borrowed money, and should be treated accordingly. If we conclude that sales discount is offered to get additional working capital, the purpose of this forfeit to customers is very largely to meet the accounts of creditors from whom the goods were bought, and thereby take advantage of discount ofterings and maintain the credit standing of the business. If, however, discounts are taken all around, the advantage gained on purchase discount is partially or wholly lost on sales discount ; the one largely or entirely cancels the other. Under such circumstances, one account might serve to cancel the two elements, thus : Merchandise Discoi N I' Purchast- discount ofFtrcd Sales discount taken 245 162 407 Purchase discount taken Sales discount offered Failure to take purchase discount would result in a loss due to insuf- ficient capital, thus: Merchandise Discount Purchase discount offered Sales discount taken 24s 162 407 Sales discount offered Balance, capital charge 162 24s 407 The failure of customers to take discounts (assuming in this case that all purchase discounts were taken) would result: Merchandise Discount Purchase discount offered Balance, capital income 24s 162 407 Sales discount offered Purchase discount taken 162 245 l6o ACCOUNTS AND ACCOUNTINC PRACTICE Purchase Discount It an invoicf of j^oods for J^^oo, bought on ttrnis of 90 clays, with dis- count ottcrin^s of 3 ';; in 10 days, 2% in 30 days, and i ^", in ()0 days, is paid in 60 days, what is the vahie of the goods r This purchase involves an outlay of ^^495. If cash were paid in 30 days, there would he an outlay of )^490 ; and if cash were paid in 10 days, there would he an outlay ol $^S^. If the value of a thing actjuired by purchase varies with the vary- ing terms of credit, what should he the hasis of valuation when the inventory is taken r If goods are to be inventoried at cost, obviously cost should not niclude discount ofternigs. A, who has limited capital, buys goods for ^500; B, who has sufficient capital, buys the same goods for ^^4^;;. B covers up his deficiency by in- ventorying the goods at J^^OO, and apparenrlv suffers no disadvantage m comparison with A. ()i. A buvs goods iiiNontti at }^500, witii a discount ottering of 3';; in 10 days, and settles the account for ^4Ss. It he charges his goods account ^^500, and credits Purchase Discount $1^, he has ap- parently made a proHt of ^^15 by buylti^ goods for what they are worth. Notwithstanding these considerations, the practice of charging Pur- chases, or Mrrchauilisr, with the gross, instead of the net, price is well-nigh universal. Some bookkeepers credit Purchases with discounts taken; but this is not practicable when discounts are taken on purchases other than merchandise. And if it were practicable, matters would not be remedied unless all discounts were taken and goods were inventoried at the net cost. Manifestly goods are worth what they cost in cash and no more. Purchases should accordingly be charged with the net amount when the pur- chase entry is made, and Purchase Discount should be charged with the discount offered. When discounts are taken. Purchase Discount should be credited, as usual, through the cash book. The balance of this account, it any, will be the amount forfeited by failure to take discounts. The logic of the situation requires us to show, not what an adequately capitalized business makes by buying goods to the best advantage, but what one of insufficient capital loses in consequence. Moreover, a loss from this source should be charged, not against the earnings of its trading ac- tivities, but against its capitalization. Purchase Discount, as well as Sales Discount, should be closed into a subsection of the Profit ^ Loss account after the net proHt has been stated. This view is illustrated in the pro- cedure of the ne.xt exercise. Whether or not the matter of segregating purchase discount and sales discount regarding tiiem as activities wholly apart from trading — is of sufficient practical importance to justify the reciuiied extra labor, is another question. The accounting student, however, should be aware of the extent to which practical considerations require him to ignore accounting principles. FURNITURE BUSINESS l6l Freight Allowed In some lines of business, notably those of furniture, luml)er, building materials, ere, materials arequoted at prices that include the cost of delivery, -that is, f. (). b., buyer's place, — with the understanding, however, that the bu\er will pay the freight when the shipment arrnes and chaige the payment back to the seller. Payment of freight amounts to a part payment of the invoice. Under such circumstances, each freight bill must be entered separately in the cash book, and posted to the personal account in\'olved, unless some means is devised to avoid this labor. If the freight bill can be procured with each delivery, the seller may be credited with the invoice amount less the freight^ and Freight Allozved account credited with the freight. When freight is paid, charge Freight Allozved for the amount. This method necessitates the use of a " Freight Allowed " column both in the^purchase book and in the cash book. The method explained above is illustrated in the following exercise. FURNITURE BUSINESS Exercise 21 March 31, 19 — . The following trial balance, covering a period of six months, is taken from the ledger of Henry l^rewer who is the proprietor of a furniture business. Trial Balance, March 31, 19 — Henry Brewer, Capital 20000 Henry Brewer, Private 437 10 Cash 654 85 Accounts Receivable, Sched. A 312 50 Stock of Furniture 161 12 Office Furniture and Fixtures 457 89 Delivery Kcjuipnunt 4805 56 Purchase Discounts Offered 20 07 Trade Creditors, Sched. B 1003 50 Petty Accounts Pa\able, Sched. C 50 I'urcliasi-s 12136 32 Sales 17124 70 Freight Allowed 20 Selling Fxpense 1051 General Kxpense 800 71 Delivery Expense 1 193 70 Advertising 216 50 38198 20 ?Sro^ 20 l62 ACCOUNTS AND ACCOrNTING PRACTICE The following schedules are an exhibit (.-/) of the unpaid customers' accounts, and {B, C) the unpaid creditors' accounts, and ( D) the inventories, March 31. SCHKDULE A Albert Austin, inv. 2 '26, Henjaniin lirooks, inv. 2 30, Charles Conerty, inv. 2 18, 52.50 5^312.50 SCHKDUI.K B Donald &: Dwight, inv. 3 '28, terms 2/15, 1^. J. Eagan & Co., inv. 3 20, terms 2 30 n/6o, 1 . \V. & A. Furges()n,in\ . 3 3, terms 2/30 n '60, 188.50 }?ioo3.50 U7S- 85. 52. 50 $486. 329. 188. 50 $32. 50 17- .^o $16265. 14 30. 000. 000. Sen HDL' IF C 1' rank R. \\ ilson, 5 1\ coal, John ^ ouni:, stationery and office supplies, i7>o $50. SCHEDULI: I) Stock of furniture, Une.xpired insurance, charged to Expense, Delivery equipment, book value, less 10%, Office furniture, book value, less 5%, $0000.00 Prepare a business and financial statement. From Henry Brewer's balance sheet of March 31, open the ledger. Arrange and space accounts as directed below. The numbers in parenthesis indicate the number of lines required. If space is not indicated, give eight lines. Page I, Henry Brewer (Capital), Henry Brewer (Private), Cash, and Stock of F'urniture; page 2, Purchases, Sales (10), Freight, Purchase Dis- count; page 3, Selling Expense (10), Deliverv Expense (10), General Ex- pense (i 5) ; page 4, .Advertising (5), Insurance &: Taxes, Upholstery Supplies, Repairs &: I pholstermg. Delivery Ecjuipment (5); page 5, Office lurniture (5), Pay Roll, Reserve for Depreciation (5), Reserve for Bad Debts (5). Profit & Loss (15); pages 6 and 7, Accounts Receivable (5), customers' accounts (5 each); pages 8 9, and 10, trade creditors (6 each); page 10, Petty Accounts Payable (15). The books employed are cash book, sales book, purchase book, journal, and ledger. Enter the followmg transactions : FURNITl-RK BUSINESS 1 63 (Your place) April, 19 — 2 Open cash book with the cash balance, ^^654. 85, and enter the amount short. Sell Lewis Lincoln on account : 2 f 3 brass beds ^ $26, 5^52. 2 #12 hair mattresses ©$15.50, 31. $83. Pay F. W. & A. Fur»i;eson for inv. 3d ult., less 2%, Cash sales for the day, i^^oO Apr. 3 Buy of Wright Brothers, terms 2, 20: I doz. G. O. dining chairs @ $3.25 ea. ^^39. \ doz. G. O. dining tables @ $22.50 ea. 67.50 $106.50 Less freight allowed, 5.76 $100.74 Pay United States Telephone Co. April account 8. Apr. 4 Receive of Albert Austin for invoice of 26th ult., $175. Pay Frederick Long, agent, April rent of store and outbuildmgs, $100. Apr. 5 Sell Nassau Hospital, terms cash on approval of furnishings (contract signed April 2), furniture and furnishings, $6875. Apr. 7 Pav W. Jones, bookkeeper, $18; H. Macy and G. Hinds, salesmen, $20 each ; Fred Burch, assistant, $10, $68. (Charge bookkeeper's salary to Office Expense; salaries of salesmen and assistant to Selling Expense.) Apr. 9 Pay Central Railway weekly freight account, $25.76. Buy of the Holdridge Furniture Co., 1/15 n/30: ^ doz. china closets (r?. $9.50 each, $57. Freight allowed, 3. $54. Pay postage and petties, $2.50 Apr. 10 Sell C. A. McTigue on account : 6 reed rockers @ $2, $12. I #46A bedroom set, 78. $90. Cash sales for the day, $65. 164 ACCOUNTS AND ACCOUNTING PR.\CTICE Apr. 12 Pay Donald &: Dwi^lu for invoice ot 28rli ult., less 2%. Cash sales for the day, ^^8.50. Apr. 13 Sell Albert Austin on account : \ do/. ,«S3 tables (a, i^n each, J^66. \ doz. j^i09 tables ^1 $13 each, 78. ^^144. Apr. 14 Pay wages of salesmen, ^50; ofHce help, in full to date, ^18, $68. Apr. 16 Receive of Benjamin l^rooks for invoice of 30th ulr.. .^85. Pay petty e.xpenses — car fares, office supplies, etc., $3.50. Pay Central Railway weekly freight account, $3. Cash sales for the day, $86.70. Apr. 17 Pav accounts of I'raiik R. Wilson, ,^32.50, and John "\'ounp, ,^17.50, ,^^50. Nun;. — 1 In sc items were jnircliascd in M.ircli and charged to Expense, March 31. Vou should nnu iharpc Petty Accounts and credit Cash. Apr. 18 Receive of Charles Conerty for invoice of 30th ult., $52.50. Cash sales for the day, $4. Receive of Nassau Hospital on contract of April 2, $1000. Apr. 19 Pay E. J. Eagan & Co. for invoice of 20th ult., less z%. Apr. 20 Buy of Donald & Dwight, terms 2/10 n/30: \\ doz. saddle seat rockers ([i $2.50 each, $45. \ doz. veneer seat rockers ^. $3 each, 18. $63. Freight allowed, 1.55 $61.45 Buy of Barnes Brothers, net cash, less 3%: I roll -iS blue F tissue paper, I roll jfU) blue F tissue paper, 76;, (^ 5 ^ f , $4.18. Apr. 21 Pay National E.xprcss Co. charges on parcel of paper 4/20, 50 fi. FURNITURE BUSINESS 165 Sell James Wilson, net cash : I #104 dining room set complete, ^225. Pay wages of salesmen ^50, office lulp ,^iS, in full to date, $6S. Buy of the Daily Herald advertising space, terms net cash, ^53.75. Apr. 23 Receive of Lewis Lmcoln for invoice of the 2d inst., ^^83. Pav Central Railway weekly freight account, ^1.55. Pay Wright Brothers for invoice of the 3d inst., less 2%. Apr. 24 Buy of Frazer & Gibbs, hospital furnishings and supplies, n/30, ^1800. Pay the Holdridge Furniture Co. for invoice of the 9th inst., less i %. Receive of the Nassau Hospital on contract of April 2, ^1000, Sell Walter Carr on account : I #34 W. O. Morris chair, lea. uph., $^6. 6 #877 lea. uph. diners, @, ^5.50, 33. I #38 ex. table O. E. finish, 42. ^iii. Hicks Garage renders bill for storage and repairs, $16. (Charge Delivery Expense.) Buy of McEvoy & Son 50 gal. gasoline @ 16^, $S. Cash sales for the day, ^25.75. Apr. 25 Receive of C. A. McTigue for invoice of loth inst., ^90. Sell Benjamin Brooks, terms cash ^100, balance on account. I tap. uph. parlor set 9 pes., ^175- I bird's-eye maple bedroom set, 104. ^279. Cash sales for the day, i5io. Apr. 27 Receive of Benjamin Brooks to applv on invoice 4/25, ^100. Pay Barnes Brothers for invoice of 20th inst., less 3%. Note. — Folio this item as having been posted from the purchase book to the cash book, i.e. write in the folio column of the purchase book C i, and in the cash book P I. Receive of James Wilson for invoice of 21st inst., ^225. Receive of Albert Austin for invoice of 13th inst., ^^144. Apr. 28 Pay wages of salesmen, j^^o; office help, in full to date, J5l8, ^68. Buy of Goodyear Brothers, cash less 2%, i auto tire, $30. Pay National Express Co., charges on tire, 75 d. t66 ACCOUNTS AND ACCOUNTING PRACTICE April, 19— Purchase Inv. No. Day Fol. ' Creditors Tirms 2 20 Particulars 3 Wright Brotliers Dimnj; room chairs 9 Holilridm- Fiiinirurc Co. I 1 5 n '30 China closets 20 Donalil vk Dwi^lit 2, 10 n 30 Roclcers 20 Ci Barnes Hrorlu-rs (P. A.) yi Cash Paper 2! Ci Daily Htrald (P. A.) n/c Advertising 24 Frazer &: (jihbs n 30 Hospital furniture -4 McEvov & Son (P. A.) n/c 50 pal. pasoline 24 Hicks Garage (P. A.) n c Storage and repairs 2.S Goodyear Brothers (P. A.) 2<[ Cash Tire Journal page I .1 4 5 6 7 8 Ikiiry lirewer draws from the luismess tor personal use, }?ioo. Pay the Daily Herald advertising account of 21st inst., ^53.75. Cash sales for the day, $86. Apr. 30 Pay 1- . Smith $60, J. Adler ^^75, wages for month of April. Si 35. Charge Delivery Expense. Pay petty expenses postage, car fares, charity, sundries, $5.25. Pay Donald &: Dwight for invoice of 20th inst.. less 2%. Determine the amount of cash you should have on hand. Close all books of original entry. Exhibit the summary of the purchase book in the form of a journal entry. Post and take a trial balance. Prepare a business and financial statement, and close the ledger. Inventories: Stock of furniture, ^513432; delivery equipment, ,^4325; office furniture, ^^435; prepaid insurance. ,^^15; cash, $1950.35. Book accounts are considered good. I he following items unpaid .should be taken into account : Wolverine ( )i! Co., for gasoline and lubricants, $100.60; Municipal Lighting Co., lighting bill for the month (estimated), $9.75; salesmen's salaries, $8.33: office help, $3. Goods to the value (cost) of $1235 have not been delivered to the Nassau Hospital on our contract of April 2. Expense items that represent values consumed in April must be charged to the April account, regardless of the date of settlement. The Sales account received credit for the Nassau Hospital contract ot .\pril 2. Goods undelivered on this contract are, of course, included m rURNITURE Bl'SlXESS 167 Register (Henrv Brewer) Sundries Cr. 1 Freight Cr. 1 I'urchases 1 Dr. Purchase Discount Dr. Sundries Dr. Fol. ' 1 100 74 5 7^.' 104 4^; 2 01 54 3 ^^> 46 54 1 1 61 45 I 55 61 77 I 23 1 1 4 18 U 4 05 53 7S 53 75 1800 1800 8 8 16 16 30 2128 12 4 1 60 29 40 20 10 31 2022 72 51 1 1 1 1 1 1 t 1 Fol. Sun. Accts. Dr. Gen'l E.xpense Advertising Delivery Exp. Delivery Exp. Delivery Exp. I the inventory of April 30, thereby decreasing the charge to the Salt's account h\ the cost of such goods. 1 his item may be adjusted by debiting Sales (.April account) and crediting Sales (May account) for the amount involved. During the following month (May) wages and salaries will be handled in a different manner. All payments on account of wages and salaries will be charged to Pay Roll. When the books are closed, this account will be transferred to the various expense accounts involved. Pay Roll should ac- cordingly be credited in closing the April ledger with the unpaid wages noted on page 166. May, 19 — The narrative for May is a continuation of the furniture business of Henry Brewer. An upholstery department is to be conducted. It is thought that one experienced man can do all the work at present, besides refinishmg goods that come by freight in a slightly damaged condition. .An account is to be opened with the upholstery work to determine its cost and earnings. Materials and supplies purchased for this work will be charged to Upholstery Supplies. At the end of the month the workman in charge will report the cost of material used, at which time this account will be given credit, and Repairs and Upholstering account will In- charged. 1 his latter account will also be charged at the end of the month with the cost of labor, and given credit from time to rinu- for what ir earns. 1 he student will assume that the sales book is being kept bv the assistant bookkeeper, and that accounts with customers are kept in a separate ledger. To take the place of these accounts in the general ledger. l68 ACCOUNTS AKD ACCOUNTING PRACTICE open an Accounts Rfctivahlf account. (Sec pa^c iS8.) Do so at once and charge this account with the total of customers' balances, ^5165, as shown by your April statement. Hereafter, as payments are received from customers, credit .Iccounts RecfivabU by entering the amount in the " Accounts Receivable " column on the left page of the cash book. At the end of the month the total of credit sales will be given you, at which time you should charge Accounts Receivable and credit Sales. This treatment will require that the left page of the May cash book have special columns as follows: ".Accounts Receivable." " Cash Sales," " Cieneral Ledger." In opening the May cash book enter the cash balance short. May I I.niploy J. Rose, experienced upholstcui, .it >22 a week. Pa\ annual automobile tax, }^20. Cash sales for the dav, S;:/>o. May 2 l*ay (loodyear Hiotheis toi invoice of zSth ult., ^1^30, less 2%. iUiy of Rochester Supply Co., 2 10. upholstery supplies, $187. (Charge Upholstery Supplies.) Pay car fares and petties, i^i.6o. May 3 Pay F. Long, agent, rent for May, i^ioo. Buy of Cireene Hrass Bed Co. 4 10 n 30: \ doz. #678 3/ beds i^i8.75each, ,^112.50 X do/. «'679 4 6 beds fe. ^520.50 each, 123. $235.50 Freight allowed, 6.90 $228.60 May 4 Pay Municipal Lighting Co. .April account, ,^';.75. Pay the United States Telephone Co. NLiy service, $S. Pay McEvoy & Sons, invoice 24th ulr., $8. Pay Hicks Garage, invoice 24tli ult., $16. Cash sales for flu- day, $82. May 5 Henry Brewer draws cash, $100. Buy of the Michigan I'urniture Co. 3/5 n/30: 1 doz. #ioiA bookcases (a\ $14 each, $84. 2 doz. #5''' n. R. chairs (« $2.40 each, 57-6o \ doz. 1^87 oak rockers C" $8.65 each, -5-95 ,^167. 55 Freight allowed, 18.20 FURNITURE BUSINESS i6q Buy of Saks & Peet, net cash, invoice upholstery suppHes, )5i26.50. Pay wages, office and store pay roll, ^586.33. (Debit Pay Roll.) May 7 Receive of Nassau Hospital on ct)ntract of April 2, yJzooo. (Credit Accounts Receivable.) Buy of the Empire Varnish Co., invoice upholstery materials, $46.75. Cash sales for the day, ^596. 75. May 8 Buy of F. W. & A. Furgeson 3/10 2 30 n/60: 2 doz. felt mattresses #1234 @, $6.60 each, $158.40 2 doz. felt mattresses #1230 @i $5.40 each, 129.60 1 doz. hair mattresses #1240 @ $8.25 each, 99. $'!)'^7- (These prices are f. o. b. shipper's place.) Pay telegrams and petties, $3.20. Receive of F. Abbot in full of account, $86.45. (Credit Accounts Receivable.) Receive cash for upholstering and repairs, $22.50. (Credit Repairs l^ Upholstering.) May 9 Pay Central Railway freight account to date, $38.40, Buy of Edward Scott, net cash, upholstery supplies, $16.85. Return to Green, Brass Bed Co. : 2 #679 beds (damaged) @ $20.50, $41. Note. — Set aside 7 lines at the end of your Purchase Book for returned purchases. Since Purchase Discount was charged on the 3d instant when these beds were bought with 4'; of cost, it must now be credited at the same rate. Debit the Greene Brass Bed Co. with the gross amount; credit Purchases with the net amount. Pay Saks & Peet for invoice of the 5th inst., $126.50. Cash sales for the day, $5. May 10 Buy of Donald &: Dwight 2 10 n 30: \ doz. veneer seat rockers ^. $3 each, $18. Freight allowed, .90 Buy of the Mall Manufacturing Co. 4/10 n/30: I do/. Hoosier kitchen cabinets ^/. $18.50 each, $222. Freight allowed, •6.75. Pay Michigan Furniture Co. for invoice of the 5th inst., less 3%. May II Receive of Benjamin Brooks balance due on invoice of 26th ult., $179. IJO ACCOUNTS AND ACCOUNTING PRACTICE Pay postage and petties, i'>3.75. Cash sales for the clay, 5^128.40. Receive cash on upliolstery account, Uj.^o. May 12 Recfivi- of Nassau Hospital for invoice of 3d inst. (extras), $176.50. Buy of the Standard lurniture Co. 3/10: \ doz. oak ortice desks (« ^^47. 50 each, ^2^>,. I doz. oak ortice desks (a $56 each, 336. $621. I'rcipht allowed 3^-50 $584.50 Pay Rochester Supply Co. for invoice of the 2d inst., less 2%. Pay wages, office and store pay roll, ,^90. May 14 Pay the Greene Brass Bed Co. for invoice of the 3d inst., less 4%. Deduct from this invoice the returns of 9th inst. Receive of Mr^. I' . W. King on account. ^100. May 15 Charge Donald & Dwight repairs to rockers, material, and labor, ^^3.60. (Credit Repairs b"' U pholsliring account for this item.) ''"^ of John ^'oung stationery and ofHce supplies (Pt'tty accounts), Receive of the Palmer House in full of account, ^5268. May 16 Hu\ ot tile llorncks Sprinj; Co., net cash f. o. b. : I doz. #34 springs (r» ^^5.50 each, i^66. I iloz. §6y springs (a J?6.25 each, 75. ^^141 Pay Central Railway weekly freight account, ^^58. 85. Receive of (1. E. Slocum in full of account, ^^18.50. May 17 Receive of the Nassau Hospital (M1 contract of April 2, }^2000. Pay \ . \\ . &; A. lurgeson for invoice of the 8th inst., less 3%. Cash sales for the day, $112. May 18 Buy of Thatcher Manufacturing Co. 4 10: ^ doz. #2435 refrigerators (<; ^^14. 75 each, ^^88.50 \ doz. l>2.\yo refrigerators (« ^^23 each, 138. }^226.50. 1* reight allowed, I 2.30 Pay c;ir fares and petties, yii.40. Return llorricks Spring Co.: I K7 spring (cotr for invoice of Mav 9, J^i^.S^. Pay the Wolvtrint- Oil Co. in full of account, J^ioo/)0. Pay V. Snnth ^60, J. Adler ^^75, wages for the month of May, !^l}S- (Charge Delivery Expense.) Cash sales for the day, ^296. Pay postage and petties, ^5.80. Charge Pay Roll account with i^6o unpaid wages (4 days) and dis- trihutf wages for the month as follows: Office Expense, ^81; Selling Expense, ^^225 ; and Repairs and Upholstering, ^^99. Credit June Pay Roll with liability of unpaid wages, }^6o. Credit Sales, $i\C^. I'pholstery work on credit, <^^. ( Debit ./<- rmmts Receivable for these items.) Close books of original entry, post and take a trial balance, dated May 31, 19 — . Prepare a business and financial statement, and close the ledger. Inventories: Stock of merchandise, ^^13406. 20; upholstery materials in stock, 5^296.86 ; delivery equipment has depreciated 2'(,and office furni- ture, 1*;^. Reserve 5^7 of accounts receivable for possible b;id debts. Municipal Lighting Co.'s bill for May service, ^^7.50, unpaid. WOlverine Oil Co.'s account for gasoline and lubricants (estimated), ^^87. 50. Assume that other assets and liabihries are as indicnrrd hv the nrrounrs. Reserves Selling goods on credit almost always results in a loss from bad debts. The extent of this loss depends upon the credit policy of the business. If, however, under a uniform credit policy covering several years, a certain per cent of customers' debts has proved worthless, it is reasonable to assume that, under a similar credit policv, approximately the same losses will result. If we had the foresight to tell which of our customers will fail to meet their obligations, losses might be prevented. But, since we are certain that losses will occur, it is our dutv to anticipate those losses as nearly as possible antl charge them to the period responsible for the credits mvolved. I his mav be doni' bv charging Profit U Loss and crediting Reserve RESERVES '73 for Bad Debts with such an amount as our experience justifies us in believ- ing we shall lose on outstandinjj; customers' debts. In the foregoing exercise this figure is placed arbitrarily at 5%. The book value of these debts we know to be in excess ot their real value, and the reserve prevents overstat- ing our profit. Reverting to the fundamental law of debit and credit; namely, that things owned are debtors and the owners thereof creditors, if, for practical reasons, we are unable to show decreases in the value of things owned when such decreases actually exist, we accomplish tluir reduction by setting up on the opposite side a dummy owner, who is later charged with actual shrinkage, and whose "property right" is thereby canceled. This dummy owner we call a " Reserve." As losses occur from bad debts, they are charged to Reserve for Bad Debts ; and if subsequent events show that we have reserved too much or too little, the error may be rectified by decreasing or increasing the amount of the reserve. In the same way, shrinkage from discounts, depreciation, etc., may be anticipated, and the loss charged to the period in which it really occurs, by set- ting up a reserve. The function of the Reserve account, then, is to properly allocate losses that each fiscal period may be made accountable for its own shortcomings. STATEMENTS riurc are many different forms of the business and financial statement, just as there are many different ways of ^i\in^ concrete expression to any order of facts. It is cjuite impossible to prescribe one form that will ade- quately meet all conditions. So ion^ as the form used brings out clearly just what the one for whom it is intended wants to know, the purpose of the statement has bn-n accomplished. I wo points may be emphasized: hirst, the statement should tell the whole truth ; ir should anticipate and answer questions that the proprietor is likely to ask concerninji the details of his business. Second, technical forms of expression that a bookkeeper may readily interpret may suggest nothing to the proprietor, or manager. Account Form I he torm ot business and financial statement used in the preceding work, called the " account form," is the one most generalK used, with some modifications or expansions, by accountants. Report Form The following form of statement, called the "report form," is perhaps more easily interpreted than the account form and seems to be growing in favor with business men. BUSINESS AM) 1 INA.NCIAL SIAILML.NT (Charles Ford) Period Endfd Jan. o. 19 — Trading Section Sales for the period 87462. Deduct returns and .illowances ; i 2 S4 Net sales ~ 87149.16 (loods on hand at beginning Jan. 1 . 19 -) Purchases for the period 61897.6s .Add inward freight and express 1013.92 62911.57 Deduct returns and allowances 746. 12 62165.45 90649.75 Deduct invcnt()i\ .n date 26563.47 Cost of goods sold 64086.28 Gross profit on trading 23062.88 174 28484.30 STATEMENTS 175 Profit and Loss Section Selling Expense : Salesmen's salaries 4472- Advertising 426.93 Delivery expense 918.65 Liability insurance 73-40 Miscellaneous 98.60 5989.58 General and Administrative En :pense : Office help Office supplies Fuel, light, and water 1850.40 463.82 609.68 Rent 1200. Insurance and taxes 987-75 Depreciation of furniture and fixtures 27-47 51 [39.12 Bad debts ] [12. 50 Sales discount taken 978.44 12219.64 Net profit ASSKTS 10843.24 Cash, on deposit 2675.84 Currency 243.16 2919. Notes receivable, considered good 4312. Accounts receivable. (( 6418. 12 Stock of goods at date 2 6563- 47 Furniture and fixtures 2746.89 40212.59 Less depreciation _ 27.47 2719.42 Insurance and taxes unexpired 289.30 Total Liabilities 43221.31 Accounts payable 2136. 12 Salaries unpaid 1- uel, light, and water 193-33 36.50 Miscellaneous expense items 112.30 34^- •3 2478.25 Capital Charles Ford invested 36211. Deduct drawings 631 1. 1 8 Add net profit 29899.82 10843.24 Charles Ford's present capital 40743.06 176 ACCt WD ACCOUNTING PRACTICE Six-column Balance Sheet I Ik- following form of statement is called the " six-column balance sheet." This is a convenient way of tabulating results and may in some cases answer every purpose. It is also used as a " working paper " by auditors when auditing the books of business concerns. S I V _ I lit I \ I \ f> ^ 1 ■■^' ' *^!ni'r I>K ( K. I'norrrs Assets LlABrUTIKS E.C. Sloant, I'roprictor 200, 4737 -> i~,fl 78 25 60 750 : 40 1! iS5^ 45 E. C. Slnnni-. Net Investment 45S7<^- " Profit 760.45 Capital :rr, 1 45 i 5^S7 ^ ' 300 1 50 1 -75 20 1 120 78 O70S i^i 1470 78 * Amount is entered in red ink. ;298|o7 6768 In the busmess illustrated above the trading activities — stock of goods, purchases, and sales — have been kept under one head. If the Mirchan- dise account were broken up, as it should be, this form of statement would not show the cost and selling price of goods sold, and the resultant gross profit. Moreover, the method of expression is much too technical to be readily understood by one not familiar with accounting procedure. 1 hese detects seriously impair the \aliie of this form for practical purposes. Exercises in Prkparing Statements I. Ironi the following data prepare in report form a trading and profit and loss statement and a statement of assets and liabilities. Assume that the business covers a period of six months, ending on the current date. C\is!i on deposit, ^^51. 25; personal accounts receivable, ^^415. 60; ac- counts payable, )^3^)S ' notes payable, ;^25o; merchandise inventory, at the beginning of the period, ^^4465 ; purchases, ^^^iijMi ; sales, J^45S6.I7 ; freight and express inward, ^^93. 42 ; returneil purchases, ^^167. 85 ; purchase discount. EXERCISES IN PREPARING STATEMENTS 177 $53.27; sales discount, $23.44; interest on notes payable, $33.60; selling expense, $218.45 ; salaries, $120 ; general expense, $315.1 2 ; office furniture has cost $125 and depreciated 6%; losses from bad debts, $76.84. The proprietor, Henr\ L. O'Day invested $4188.65 and lias drawn out $205.40. Ihe stock of merchandise on haml at date is imcntoried at cost, $4189.79, less 10 ' ('. 2. For the period of tliree monrlis, ended Dec. 31, 19 — , the trading and profit and loss accounts in the ledger of Owen Redheld show the follow- ing balances : Stock of Goods, Sept. 30, 19 — . . 10345.20 Sales 5765.41 Returned Sales .... 92.64 2126.90 112.85 46.82 10.20 Purchases Inward Freight (on purchases) Purchase Discount .... Sellmg Expense 238.40 Office Expense 216.50 Interest & Discount Insurance & Taxes 16.50 Inventories Dec. 31, 19 — : stock of goods, $7713.76. Prepare a trading, and profit and loss account. If Owen Redfield's capital Sept. 30 was $23245, what is his capital Dec. 31 ? 2. What is the cost of goods sold .'' 3. The goods were sold at what per cent above cost ^ 4. What rate per cent of profit does Redfield's investment yield ? 5. How many times during the year would Redfield turn over his stock ? 3. From the following trial balance and inventories, prepare a six- column balance sheet (see form, page 176). The business which this trial balance represents covers a period of one month. Trial Balance, May 31, 19 — Thomas Cheshire, Proprietor . . . 8626. Merchandise 4158.50 1218.45 Furniture & Fixtures 73--50 Notes Payable 618. 923. Interest & Discount 5.38 Mdse. Discount 4.93 2.97 Profit &: Loss 22.40 Cash 6454.24 986.66 Expense '4' 13 C. W. King 580. Albert Perkins 200. 178 ACCOUM> \M' u I MINTING PRACTICE Inventories: stock of ^oods, ^^3465; furniture and fixtures, ^^700; unconsunied articles churned to expense, $25.30. Criticize the urranpement of the accounts in the above trial balance. 4 The following trial balance is taken from the books of Jackson & Verity, partners, Dec. 31, 19 — . Tri \i lUi Andrew Jackson William N'erity ktal Ksrate i'uri.liascs Sales Stock of Merchandise (July i, 19 — ) Salaries I'raveling Expenses (Salesmen) Interest Stationery & PrintinR Rrnts & Taxes MiIm. Discount Insurance (one year from July i, i<> — ) Inward Kreipht (ieneral Kxpenses Hank Overdraft I rade Creditors Accounts Receivable Cash on Hand Loan Account 40000 i|20000 '-'■>---. 1 1 95000 15000 1 6000 1 1 2500 60c 1200 1 3500 ' I 2 50 1 1 ;o 1500 1 600 1 1 ;ooo 1 4000 25000 700 ,1 7000 1 I II I II Stock of merchandise Dec. 31, 19 — , $^23000. Depreciate real estate lO*^, and allow 3'"; on book accounts for possible bad debts. Take un- expired insurance into account. Allow interest on Capital at 6% per annum and divide the profit or loss equall\-. Prepare the business and financial statement. Set up and close the followinp; accounts: Stock of Merchandise, Real Estate, Insurance. 5. The followinti trial balance covers a period of six months ended June 30, 19 — . Use the report form ot statement and show ( i) the cost ot floods sold, (2) net sales, (3) gross profit, (4) net profit, and (5) present capital. rRiAi. Balan'ck, June 30, 19 — E. P. Iracv, Capital E. P. iracv. Private 61 6760.76 ;o EXERCISES IN PREPARING STATEMENTS lyy Cash 314.80 Notes Receivable 150. Stock of Merchandise (Jan. i, 19 — ) 6540.25 Sales 5480.76 Returned Sales 112.15 Purchases 42 11. 61 Inward Freight i35-i^ Salaries 98.50 General Expense 512.30 Interest on Notes Receivable 38.90 Purchase Discount 87.95 John W. Way 3' -.83 Nelson Sherwood ^54-7- Victor Degroot & Co 786.45 Inventories: merchandise, ^6844.12 ; unpaid salaries, ^11.50 ; unpaid expense items, ^17.85. 6. The following data are taken from the books of F. R. Hildreth : Jan. I, 19 — , stock of goods, ^^24217. 89; Dec. 31, 19 — (same year), stock of goods, )^237i2.4i ; purchases during the year, ^37512.20 ; sales, $58922.07, of which goods costing $1890 have not been delivered; returned sales, $1275.32; operating expenses, $6758.47; insurance and taxes, $314.50; outward freight, $615.50; interest on notes payable, $213.14; commission earned, $1253.49; reserve for bad debts, $850. Provide for an income tax of I f f of net profit, less the legal exemption of $3000. Set up and close the following accounts : Inventory, Sales, Profit &: Loss. COLUMNAR CASH BOOKS I lirec considerations sIk)uIc1 ilctci iiiiiie the form of a cash hook : (l) convenience in auditing the cash account; (2) convenience in posting; (3) a means of sunini;in/.ing ;jnd testing tin- ;iccuracy of tin- record ;ind check- ing irregul:irities in the nK^ney ;iccoiint. A prudent husiness man will reiiuue a voucher for ever\ dolhir of cash paid, and a memorandum of e;ich receipt given for cash received. Items in the cash book m;iy then be compared from time to time with the vouchers, as a check upon theft and other irregularities. Another valuable means of checking error or dishonesty is to operate the cash account in such a way that the bank's record of deposits and withdrawals will correspond, in the aggregate at least, with the cash record. All cash received should be deposited. C\irrcncy should be drawn from time to time as needed for pettv cash by check. 1 hese important purposes can be accomplished onl\' hv running columns on the right and left pages that record respectively actual disbursements ;ind receipts of c;ish. Convenience in posting is always a consideration in designing any book of original entry. 1 he advantage gained by the use of columnar books is to some extent offset by errors resulting from entering ;imounts in the wrong columns ; ;ind a coIumn;ir book that admits of a trial b;dance test as a check upon such errors has a marked :idvant;ige over one that can be tested only in the final trial balance. K;ich division of the book of original entry — journal, sales book, purchase book, c;ish received, c;ish paid, etc. — presents an equality of debits and credits, which affords :i means of testing the accuracy of each group of entries if the books are properly designed. Exercise 22 T he f<)llj)wing scries of narratives is intended to make the student famil- iar with dirtereiu forms of c;ish books employed in connection with auxiliitrv ledgers ;ind controlling accounts in the gener;il ledger. Korm i meets the re(juirements hiid down in the preceding p;iragraphs, ;ilthough some ac- countants prefer the " Net Cash " ;ind " (Kner;d Ledger " columns trans- posed. No one form c;in be ad;ipted to ;ill conditions; and the student should become faniili:ir with as many different expedients as possible, lb should, ;iccordingly, rule the prescribed forms, in;ike the entries, summarize and dose the cash book called for in each exercise. I So COLUMNAR CAST! ROOKS iSl It is not thought necessary to repeat here the date, foHo, account and particuhir columns, as these usuall\' occupy tlie same relatht- positions. The foHo column is sometimes placed next to the amount column for convenience in postmg, and when cash vouchers are numhered and filed numerically, a " \'oucher No." column is included on the ri^ht page. Form I Lejt page: Net Cash Sales Discount Accounts Receivable General Ledjicr Right page: Net Cash Purchase Discount Accounts Payable General Ledger In a business involving daily cash sales to transient customers, this form might include a '* Sales "column after Accounts Receivable; and if no pettv cash book were kept, or if the expense items paid by check justified it, an " Expense " coUnnn might be included on the right side after Accounts Payable. Compute all interest at 6%, unless otherwise directed. Narrative Oct. I, 19 — . Balance, cash on hand, ^765.45. (This item should be entered short. See model, page 182.) 2. Receive of (). (). Brackett for invoice of the 23d ult., ^^365, less 3%. 4. Pay office salaries for the week, ^125. 6. PayWillard &: Judd for our (student's) note due to-day with interest. Face of note, ^^250; interest 3 months at 7%. 7. Discount Harold McVeigh's 60-day note in our favor, dated Aug. 1 5, for ^460. Note. — Enter the discount item in the "Sales Discount" column in red, or mark, it with an " / " in the space to the left, and debit Interest i^ Discount for the amount when you close the cash book. (See model, page 182.) 8. Pay Strauss & Co. for invoice of the 29th ult., $218.50, less 2%. 9. Draw check for petty cash, ^^25. (Charge Petty Cash or Currency.) 10. Receive of J. L. Wagner his check for )?200, to apply on invoice of the 31st ult. for $500, on terms of 2% 10 days, net 30 days. 11. Pay Kent & Caldwell for invoice of 25th ult., due to-day, $950. 14. Harold Mc\ eigh's note of Aug. 15 due to-day is protested for non- payment. Protest fees, $2.50. 14. Discount your own 30-dav note at the Portland National Bank for ,^500 and receive credit for the proceeds. Compute the discount at 7%. (See note to transaction of the 7th inst.) 15. The proprietor (student) draws $50 for personal use. Foot all columns and ascertain the cash balance. State the summary in the form of a journal cntrv, as shown on next page. l82 ALCULMb AND An. 'L'NTINC PRACTICE -I '■ Sal es Net Cash. Net C.-ish. COLUMNAR CASH BOOKS 183 V>o\«. cu iJ /S V\v\. kVvvv....«V? V^« \ Ky.\ \kk>-\\\\\ i -,-/ ' ^~-«^tc^^ 57 j"^- -££1 / j^ ^'^r ll.lll^.ll I loll iM.iilil i.ill li>i I >\.. » Hi i 11 > . I irst, ill 1)11 . > •; . ^ Receivable atui credit U ikox i: Co. in tlie note bk or journal; second, debit Cash and Interest 6c Dis- count, and credit Notes Receivable in the cash b3.75. 9. Receive of Amos Whitney check for ^^225 to applv on inNoice of Nov. 30. Allow 2';, discount. 10. Pay John Dufty & Co. J^450, one half of invoice of the isr inst. 1 ake 3' ; discount. 11. Receive of William Lord in scttknieiu of his note due to-d.iv wirh interest. Kace of note, 5^365. Interest 3 months at 6%. 13. Prepay our 30-day interest-hearing note of Nov. 28, for ^^850. 14. Receive of .A. \\ . Manning for invoice of the 3d inst., ^^212.50, •ess 4%. 15. Pav office salaries to date, ^^125. 15. Pav telegrams and petties, ^^^65. 15. P.i\ the Great Northern Railwav freight account to d.itc, f>\X.jz,. COLUMNAR CASH BOOKS 185 15. Draw a sij^ht draft on Arnold \\ est for ^200, and receive credit tor the same at your bank, less collection and exchange, yii. Ascertain the cash balance and close the cash book. Form 4 Left page: Mdse. Discount Accounts Receivable General Right page: Mdsc. Discount Accounts I*a\able Expense General Narrative June I, 19 — . L. K. Perkins begins business with a cash investment of $5000. 1. Pay Frederick Frankfort June rent of premises, $175. 2. Huy of Mullen & Buckley, for cash, office furniture, ^165. 2. Pay postage and petties, ^^7.65. 3. Pay Robert Mill &: Co. for invoice of the ist inst., $(^7^- 4. Pay Mills & Manning for invoice of the ist inst., $'SGo. 6. Pay June telephone service. Bell Felephone Co., J^io. 7. L. K. Perkins makes an additional investment, J^iooo. 8. L. K. Perkins discounts his 3-months' note for $1000, at the Tacoma National Bank, at 7%, and pays the discount in cash. Note. — In practice the bank mij^ht deduct three months' interest. There is no reason, however, why interest for the exact number of days should not be deducted. Ihe difference, 39?, in the result certainly justifies the additional labor involved. 9. Buy for cash of the Western Sales Stables, i team dray horses, i$6oo. 10. Receive of Willis Ogden for invoice of 4th inst., ^^165, less 2%. 12. Pay Herbert L. Smith & Brother for invoice of 2d inst., ^1000, less 3%. 13. Pay telegrams, car fares, and petties, ^9.60. 14. Discount Henry Newcomb's 30-day note, dated June S, for J^38o, at the Tacoma National Bank, and receive credit for the proceeds. Pay the discount in cash. 15. Receive of Gilbert Hopkins for invoice of the loth inst., ^^^416. 90, less 3 ''[,. 15. Pay wages June i to 15, ^^^5. 15. l*ay the Tacoma Register advertising account, ^§64. 15. Pay legal expenses, l^urke & Kirlicks, 'f>\>^. 15. Pay the Cortland Wagon Co. for bill of the 9th inst., ^156. Ascertain the cash balance and close the cash book. 1 86 ACCOUNTS AND ACCOUNTING PRACTICE Form 5 111 a \s holtsalf tradinj; business three ledgers are operated : a general ledger, and auxiliary ledgers for the accounts of customers and trade credi- tors. (See Auxiliary Ledgers, page 1H7. i'urchase and sales discounts are involved. All cash is hanked, and a petty cash hook is operated. A cash account is kept in the general ledger. {a) Rule a main cash hook suited to the needs of this business, having regard for the following considerations: (1) Convenience in auditing the cash account. (2) C\)n\enience in summan/ing and juoNing cash. (3) Convenience in posting the cash book. {b) Enter the following transactions in the book as called for in (a). Narrative Dec. I, 19 . Balance, cash m bank, ^675.89; petty cash tuiul, S30. 2. Pay Wilbur Smith for invoice of the 23d ult., ^^213. 50, less iV.c- 3. Discount at the People's Bank, \. I.. Burt's 60-day interest-bearing note, dated Nov. 17, 19 , for $346.50, and receive credit for the proceeds. 4. Pay Haynes & Co., agents, Dec. rent of business premises, ^^150. 4. Receive of Curtis & Co., their check for ^^300, to apply on invoice of 26th ult., $456.84, on terms of 2 10 n 30. 5. Draw a 30-day draft on McGraw &: Smith for $225, and discount it at the Pet)ple's Bank, receiving credit for the proceeds. 5. Prepay our 2-months' note of $200, favor Andrews Brothers Date of note Nov. 23, 19 — . 6. Draw check for petty cash vouchers, $27.40, and distribute the amount as follows: Office expense, $13.50; stable expense, $12; selling expense, $1.90. (f) Summarize and close the cash book. AUXILIARY LEDGERS For the same reason that we have grouped related facts to construct accounts, it becomes necessary to group rehired accounts to form summary or conrrolhng accounts. Many trading concerns ha\e from one thousand to ten rht)usand or more open accounts with customers. Obviously so many could not be conveniently kept in one ledger with the general accounts. Moreover, a large accounting system calls for a large force of bookkeepers, and consequent division of labor, which necessitates ledger subdivisions. Customers' Ledger Customers' ledgers vary in form with the nature and extent of the business involved, as well as with the permanent or transient character ot its customers' accounts. Where the personnel of such accounts is con- stantly changing, as a result of securing new customers and losing old ones, the ordinary form of bound ledger is not as satisfactory as are some of the other forms. The loose-leaf customers' ledger, which consists of detached leaves locked together by means of a mechanical device, is in very general use. This device enables the bookkeeper to extract leaves containing " dead " accounts, and to insert new ones as occasion requires. Customers' accounts are often kept on cards of a convenient size and ruling. These cards are filed in alphabetic or numeric order, as their num- ber and extent determine. But winle accounts in large numbers are con- veniently operated in this way, there is an objection to the card system, viz., unless these detached fragments are carefully filed and handled by a competent person, they become misplaced and sometimes lost. Controlling Accounts Manifestly if any number of accounts are taken out of the general ledger, the equilibrium of that ledger is destroyed, and it can be restored only by restoring the items segregated, or their equivalent. This is accom- plished by posting to the general ledger the totals of items posted to the auxiliary ledger. \ he general ledger account, which summarizes items posted to the customers' ledger, is called variously, " Accounts Receivable," " Sales Ledger Account," and "Customers' Controlling Account." Anyone of these titles indicates the function of the account, but the first one is in most general use, and, for the sake of uniformity, this title will be employed in this work. 187 l88 ACCOUNTS AND ACCOUNTING PRACTICE Analvzing a custonu'i's account, wc fiiul that it is charged with: (l) credit sales; (2) casli reinihurstnunts for returns and allowances; (3) cash advances to take up matured paper (previously discounted), which the customer finds himself unahle to meet and which sometimes includes protest fees; (4) a customer's notes or acceptances held hy you and dis- honored either at maturity, or (by implication) on suspension of payment by, or insolvency of, the customer. A customer receives credit for : (l) cash received from him on account plus discount allowed, if any; (2) his prom- issory notes and acceptances in our favor; (3) returns, allowances, and rebates; and (4) items charjjed to Bad Debts account or to Profit \^ Loss. It follows, then, that the customers' controlling account in the general ledfier would be made up of items from the following sources : Accounts Receivable (i) Total of sales book. (l) Total of "Accts. Rec." column left (2) and (3) Credit side of cash book, i page of cash book. (4) Debit side of journal. j| (2) Customers' bill book, or credit side of jiiurnal. (3) Returned sales book, or credit side of journal. (4) Credit side of journal. \\ hile the foregoing analysis covers practically all cases, the chief sources of this account are the sales book, the left page of the cash book, and, if settlements are made by notes or acceptances, the credit side of the journal. I here is always a special column on the left page of the cash book for items belonging to Accounts ReceivabUy and such a column may be ruled on the right page of the cash book, on the right or both sides of the journal, or wherever the items to be grouped are sufficiently numerous to justify it. Creditors' Ledger l*or the sake of clearness, the customers' ledger and the content and source of its controlling account have been described as illustrating the auxiliary ledger and its relation to the general ledger. For the same pur- pose, and with ecjual facility, trade creditors' accounts may be segregated and kept in loose-leaf volumes or on cards. 1 he use of a creditors' ledger would necessitate a creditors' controlling account in the general ledger. I his account is variously called *' Accounts Payable," " Purchase Ledger Account," and " Creditors' Controlling Account." These all are descrip- tive titles, but rile naim 111 most general use is Accounts Payable. The student, however, should become familiar with the different names employed in accountkeeping to designate the same thing, as he will encounter dif- ferent names in examinations set bv different examiners, and in business life. CONTROLLING ACCOUNT 189 Since the Accounts Payable account should be charged and credited whenever a trade creditor is charged and credited, the sources of the various items comprising this account should be understood. They are as follows : Accounts Payable (l) Total of "Accts. Pay." (.olumn, right page of cash book, which includes cash paid and discount allowed. {z) Creditors' note book, or left side of journal. (3) Returned purchase book, or left side of journal. (1) Total ol the purchase huok.. (2) Left page of cash book (cash receipts from creditors for returns or allow- ances). (3) Credit side of journal (for items not included in (i) and (2) which might be journalized). In a business where settlements with creditors are frequently made by issuing to them your notes or accepting their drafts, a note book should be kept. In the absence of such a book as a principal book, a special ".Accounts Payable Dr." column could be run conveniently in the journal. Such a column is sometimes justified on the left page of the cash book, fhe frequency of items belonging to one account always determines the practicability of a special column. An au.xiliary ledger may accordingly be operated for any related group of accounts, and when so operated, calls for a corresponding controlling account in the general ledger. Shipment and consignment accounts, detailed expense, and manufacturing cost accounts, all lend themselves readily to this treatment. Advantages of the Controlling Account 1 he controlling account (i) greatly reduces and simplifies the trial balance, by eliminating the details of accounts which lead to the same or related conclusions ; (2) it serves as a check upon errors in auxiliary ledgers, the presumption being that the controlling account, as a part of the trial balance, is correct, and auxiliary ledgers should accordingly be brought into agreement ; and (3) it brings all the factors of the trial balance within the covers of one volume, and enables the responsible head of the account- ing department to check the work of subordinates, and to have exclusive knowledge of matters of a confidential nature. In the next exercise four books of original entry are to be used ; namely, sales book, purchase book, cash b(wk, and a journal. Two ledgers w'lll be operated — general and customers'. A customers' controlling account — Accounts Receivable — will be operated in the general ledger. Whenever a trial balance is taken, the aux- iliary ledger must be brought into agreement with its controlling account. The names of customers will not appear in the trial balance, but these 190 ACCOUNTS AND ACCOUNTING PR.\CTICB items NNill l)c represented in the trial balance by the .-Iccounts Receivable account. Stud\ carefully tin- source of items comprising this account Csec pa lies 1S7 nnd iSS). Review Questions 1. What is the function of an .luxihary ledger: 2. Show how the use of an au.\ihar\ ledger aftects {a) the trial balance, {b) rulings in books of original entry. 3. What classes of accounts are conveniently kept in auxiliary ledgers .' 4. W hat is a controlling account .' 5. Give in detail the sources of items comprising {a) the accounts receivable account, ib) thi- accounts payable account. 6. Illustrate, by means of a statement and using data of your own invention, how you would show an agreement be- tween the accounts in an auxiliary ledger and its controlling account. 7. Under what circumstances would you use special columns in books of original entry .' S. {a) Rule a special column journal for a business whose purchases and sales are largely settled by notes, assuming that cus- tomers' and trade creditors' ledgers are kept, {b) Illustrate the use of this journal by means of six different entries. Close the journal. 9. Define a promissory note. A New York draft. A check. 10. De- fine and illustrate four kinds of indorsements. 11. What indorsement would you use in {a) transferring a check to your bank for deposit, {b) send- ing a paper, payable to your order, through the mail or by messenger .' Why : \i. What is the effect of a blank indorsement .' 13. Describe a convenient and economical method of making remittances so that the remit- ter may have a receipt for the money paid. 14. lO what extent mav local checks be used for making remittances : 15. To what form of exchange is a creditor entitled in satisfaction of a debt ? BUSINESS PRACTICE AND PROCEDURE Practically all data in a business office have their origin in some form of business document. W ritmg, mterpreting, and properly disposing of these documents largely constitute the ofHce assistants' work. The following e.xercise is intended to give the student practice in han- dling and interpreting the more common forms that arise in office routine. The benefit derived from this study will he in proportion to the thoroughness with which the student does the work prescribed. And in order that he may approach the exercise with some understanding of its main features, the following preliminary discussion should be carefull}' studied. Consignment Goods The business illustrated differs in one important particular from those we have previously studied. The stock in trade of Samuel Holbrook & Co. is carpets, rugs, linoleums, and mattings. Aside from carrying a stock of these commodities, they are selling agents of the Burt Carpet Co., manu- facturers of a.xminster, chenille, and tapestry rugs and carpets. Orders received for any of these lines are passed to and siiipped from the factory. The shipment is reported back to us on a form, called a " consignment invoice," in duplicate. We enter prices on this form, make extensions and prepare the customer's invoice. At the same time we charge the customer and credit Consignments., for which a special column is provided in the sales book. The consignor gives us the same terms of settlement that we offer the customer. Our compensation for selling the goods of the Burt Carpet Co. is a commission of 6*70 which is computed on the invoice amount, less the discount offered. Whenever we make a remittance to cover the pro- ceeds of a consignment sale, we debit the consignment for the invoice amount and credit Merchandise Discount, Commission, and Cash. Detailed instructions will be given as transactions arise until the student becomes tamiliar with the procedure. Books to be Used The journal, main cash book, petty cash sheet, sales book, and pur- chase journal will be used as principal books, and the note book, bank pass book, and check book, as supplementary records. The accounts of cus- tomers will be kept in a separate customers' ledger; all other accounts, in the main ledger. \ he journal differs in no respect from those we have hitherto used. In it are recorded all transactions not otherwise disposed of. IQI 1C)2 ACCOLM^ AND ALLULNTrSG PRACTICE The purchase journal will contain all merchandise purchases, as well as all purchases of supplies for which an invoice is rendered, such as ship- ping cases, horse feed, traffic supplies, office furniture, etc. 1 wo money columns are pro\icled " Mdsr. Purchases," and *' Sundries." Items other than merchandise are entered m the " Sundries " column, and posted to the various accounts charged. The sales book differs in no rcspcci trom those with which you an- familiar, except that an additional column for consignment sales is added. K.xtend all sales of consignment goods to this column, and post thr '- ';/ to the credit of Coy:signments account in the general ledger. An light-column cash hook will he emplo\ed. I he net cash columns shouKl record actual amounts of cash received or paid. I he " Accounts Receivable " column will assemble amounts for which customers are credited — the net cash plus the discount, if any - on account of their cash pay- ments. All amounts to be posted to the general ledger are entered in the general ledger column. This includes items for which trade creditors are charged on account of cash remittances. In recording remittances of the proceeds ot account sales, tour columns are involved; namely, "Net Cash," " Purchase Discount," " Commission " and " Cieiieral Ledger." The Petty Cash Record It is necessary in a business of any size to remove from the main cash book the record of numerous currency pavments of small amounts. I hcsc payments are made on behalf of, and must be charged to, various departments of the business. The method adopted in this exercise is (i) to deposit in the bank all cash items received ; (2) to draw by check an amount sufficient to cover petty disbursements for one month; (3) to charge the petty cashier with this amount in the petty cash record, but to make no entry at the time in the main cash book; (4) to require the petty cashier to submit vouchers at the end of the month, initialed by one of the partners, for all disbursements. He is then given another check in exchange for the vouchers, which restores the fund, called " imprest fund," to its original capital. When the petty cash record is closed for the month, the results are brought into the main cash book, and are posted from that book to the general ledger. 1 he advantages of this plan should be apparent. All cash is banked, so that the bank deposits will correspond in total with cash received, while the main cash book and the b;mk pass book must coincide in the matter of payments, when all checks issued are recorded in both books. Kmbezzle- ment usually begins with misappropriations of postage, car fares, and the like, and an office that docs not have a check upon petty disbursements is needlessly tempting its employees and opening the wav to loss from pettv BUSINESS PRACTICE AND PROCEDtJRE 1 93 theft. Moreover, from an accounting standpoint, this method clears the main cash book of numerous small items, thereby reducing its volume, and summarizes these items so that the totals only may be carried into the general ledger. The Note Book For the reason that notes and acceptances payable must be met promptl\- at maturity to avoid the embarrassment and expense of protest, and that receivables of this character must also be attended to promptly at maturity to prevent loss, the record of such promises given and received should be complete in every detail. The note book is designed to record the particulars of negotiable paper issued or received by us. The matur- itv of paper is shown in such a way as to be a daily reminder of items that need attention. The note book is used in this e.xercise merely as an aux- iliary, or memorandum, record, and all transactions involving the issue or receipt of time paper will be journalized as usual. Ihe only explanation necessary in the journal, however, is reference to the page of the note book on which the details are recorded. The Bank Account Xo business of importance is conducted nowadays without the use of banking conveniences. As a means of collecting checks, drafts, and notes that a business will receive from its patrons, as a means of re- mitting money by the use of checks and drafts, and as a safe depository, its services are indispensable. Banks will not do business with strangers. They must know who you are, and they must know the signature by which the payment of your money is authorized. In a partnership business either partner may sign or indorse the firm's drafts, checks, or notes. Another person may obtain authority to sign and indorse such paper by means of what is called a " power of attorney." Accordingly, if you wish to open a bank account, you should be, or become, known to the bank's officials, and should leave with It a facsimile of the signature that will go on your checks. It you are acting as the agent of another, those whom you represent should give you a power of attorney, which will set forth in detail the things you are author- ized to do. Banks ordinarily provide blank forms to be used for this purpose. Three records are made in connection with bank deposits and with- drawals; namely, the deposit ticket, the bank pass book, and the check book. Deposit Ticket The deposit ticket shows the name of the depositor, the date, amount, and character of your deposit. When you are ready to make a deposit, indorse all checks in full (see Indorsements, page 196), classify and properly 194 ACCOUNTS AND ACCOUNTING PRACTICE arranpe specie, currency, checks, and drafts for the teller's convenience in counting and checking. List the diHVrent items separatel\ on your deposit ticket, and strike the total. Present these to the receiving; teller, together with vour pass hook, and recei\'e credit. Pass Book The pass book is the bank's receipt for your deposits and record of vour drawings, and is usually kept in your possession. In this book you receive credit for deposits and collections. As often as once a month the pass book should be left at the bank to be " written up." At this time the bank will charge you with all checks drawn against your deposit, which are at the time returned to the bank, with all notes and acceptances which you have authorized them to pay, and with interest and collection ' charges, if there are any. 1 lu- canceled checks, notes, and drafts so charged against your account, together with a list of the amounts involved, will be returned to you with your pass book, which will now show the amount remaining to vour credit, or your balance. Proving Cash As soon as the pass book is received, ha\ing been balanced to date, you should " reconcile " the various records that have to do with the receipt and payment of money. The following formula is suggested as a means of reconciling the various records : AIf?norandu?n Bank balance at beginning (give date), ^1200. Receipts deposited, 2460.90 5^3660.90 \ oucIkts returned, per pass book, ,^1276.80 Checks outstanding, 474. Total payments, 1750.80 Hank balance (give date), per check book, $1910.10 Imprest fund, 50. Cash balance, per cash book, 1960.10 F'irst, arrange your checks in numerical order. (All checks should be numbered when drawn.) Compare these canceled checks with the check book stub, ticking each item as you pass it. In the same way verify items ' I Iktc arc at present three different nicrhods in operation in different hanks for handUnji collection items. In some cases tlic customer paj's the collection charges in currency at the time the paper on which such charges accrue is offered for deposit or collection. Another method is to charge the customer exchange when the deposit is made. A third method is to render a statement of collection charges monthl\-. or as often as the pass hook is halanced. BUSINESS PRACTICE AND PROCEDURE 195 not vouched for bv a check. When you are through, the unticked items, if there are any, will show cliecks outstanding ; that is, checks not yet returned to the bank and nt)t charged against you in the pass book. Add the amount of checks outstanding to the vouchers returned, and the result should agree with the balance shown by the check book, assuming, of course, that all items have been included, such as interest and collection charges for which there may be no voucher. Having regard for the office cash fund (imprest fund), the bank balance should agree with the cash balance as shown by the main cash book. Check Book The check book counterfoil, or stub, should be a complete record of your transactions with the bank kept by yourself, and should show at all times the amount to vour credit in the bank. This record should contain, there- fore, not only all deposits and the amount of all checks, but the proceeds of all notes discounted at, or collected by, the bank, as well as all notes and drafts which the bank has paid on your account, and collection charges and interest items, if there are any. In making this record you have only to keep in mind that charges against the bank are added to your bank balance, while all payments by the bank for your account are subtracted therefrom. See illustration following: O^aOmt. Z 19=^ HoMmJ- 2-0 c Coo So- l-Coo CKtf £^//>^ 7, 19.=- ~^>±^, :" . Vr 10/ lm> ^j /rao I ^a.JAn-L. ■fo; '. P«Y fo rhc . » or order ol InduiupoUs. l~< J^^f^^^^y^ 2. M — The Second National Bank i Q:?^.-i^-^^ /:/f/^.yt^^^ _ ^y-.,^^mi. ' ^^f"^ :Dolkn C^^yy^^^y.A,y.- f ^~r^)^X^- s<^ The check book is opened by entering the bank balance on the stub at the top of page i. Do not neglect to carry forward results trom the bottom of the page to the top of the next page. 196 ACCOUNTS AND ACCOUNTING PRACTICE Writing Negotiable Paper 1 lit- utmost cm- shouKl l)t rxerciscil in wntuiji checks, dr:ifts and notes. It is not so nuicli a (jiRstion of yoiii ability to write one ot tiiese papers correctly by jjiN'inK it your undi\ulecl attention; \()U slioulii repeat the operation until accuracy and correct form become habitual. !)'> imt leave a blank space either before or after the amount. .Adopt a plain signature one that can be easily read. The notion that illej;ible signatures are less easily imitated by forf^ers is erroneous, lill in the stub Hist, and number all checks consecutively. Do nor destroy or mislay a blank that for any reason is not used. .Mark across the face of the blank Canceled, or /'ou/, and attach it to the corresponding stub. Observe the same instructions in writing notes and drafts. Discounting Time Paper . iMtlier because the holder needs the monev which good paper will yield at the bank, or because the one responsible for its payment is less likely to ask for a renewal if the paper has been discounted, a great deal of it reaches the bank before it matures. Ihe business man applies two tests to everything that is offered him in the course of trade. Me wants to know- how he can use a thing, or where he can dispose of it, and what it will bring. I here is practically but one market for negotiable paper, and that is the bank. So if the business man accepts such paper, his only criterion of its present value is what the bank will give for it. Wholly apart from the financial standing of the parties to a note receivable, the bank will not accept it after maturity. It does not care to handle renewals, and is exceedingly cautious in the matter of discounting accommodation notes; that is, notes for which value has not been given in due course of trade. I he \alue of such paper as the bank will accept is computed by the method known as " bank discount," which was very fully treated on pages 1 15 and i 16. Indorsements Negotiable paper — notes, drafts, and checks — calls for the payment of a certain sum of money to a designated payee, or to bearer. \ he party designated as pa\ee may either receive pa\inent himself or order the money paid to some one else. The payee directs payment to another by a writing, usually on the back of the paper, called an " indorsement." Besides trans- ferring and passing title to the instrument, an indorsement makes an indorser responsible, with certain conditions, for the amount named in the paper, unless words are employed in the indorsement to exempt the indorser from such liabilitv. It the paper is made payable, cither originally or by indoisement, to bearer, that is, to the holder, it may be passed thereafter from one part\ BUSINESS PRACTICE AND PROCEDURE 1 97 to another without indorseincnt. Init, since nej^otuihle paper is received, at least to some extent, on the responsibihty of the one offering it, and since such responsibihty may be fixed only by indorsement, a prudent person will ordinarily require indorsement in any event. With reference, then, to the intent and responsibility of the indorser, indorsements are classified as " blank," " special," " ciuahfied," and restrictive." All indorsements, of course, ie(|uire the signature of the indorser. Rubber stamps are very generally used by business firms and banks with which to indorse, and they seem to answer every requirement. When the indorsement consists of the name of the indorser only, it is said to be " in blank." Such indorsement designates no indorsee and makes the paper payable to bearer. When the indorser specifies the party to whom the money shall be paid, as, Pay to the order of John Doe, Richard Roe, the indorsement is said to be in full," or " special." If the indorser wishes to transfer the instrument without assuming liability as indorser, he may employ the words zvithout recourse, ox theire(]uivalent, as, Pay to the order of John Doe, zvithout recourse, Richard Roe. Such an indorsement is called " qualified." An indorsement with delivery transfers the ownership of the paper to the one to whom it is indorsed and delivered, unless words are employed to show that the indorser does not intend to transfer such ownership. Pay to the order of the Corn Exchange Bank for collection, Richard Roe, makes the bank the agent of Richard Roe for the purpose of collecting the paper, and is a " restrictive indorsement." Many banks, however, will not accept this form of indorsement, but will require a blank or special indorsement, without the restrictive words /or collection. 1 he prudent business man will always make use of the special, instead of the blank, indorsement as a matter of precaution. Paper is usually sent to the bank by messenger, whose carelessness or dishonesty may result in loss to the owner unless the paper is fully indorsed. 1 he same consider- ation makes it imperative that paper payable to bearer should not be sent through the mails. A further consideration that should weigh in the matter of drawing and indorsing commercial paper is, that such paper, after it is paid and canceled, should be available as evidence of all the parties involved as givers and receivers of %'alue. Ordering Goods All sales and purchase transactions originate in some torm ot order. Orders are usually sent bv mail. If the telegraph or telephone is used, such communication should be promptly confirmed in writing, so that if a mistake is made in transmission, it may be rectified at the earliest possible moment. 198 ACCOUNTS AND ACCOUNTING PRACTICE In the exercise following, all orders will be written in the order book ill triplicate, and nunilured conseciiti\ely. 1 he original white copv will be mailed to the supplier, and the \ ellow triplicate will be placed in the book- keeper's Hie for checking the invoice when it arrives. The duplicate tissue will remain m the order book. Handling Customers' Orders \\ hen .in order is received from a customer, it shouKl In copied in triplicate on the order form provided. 1 he original white copy is passed to the credit man tor his approval, and is placed on Hie for reference. The duplicate is passed to the warehouse or factory to be executed, while the third copy is forwarded to the customer, accompanied with a form letter of acknowledgment. W hen an order is taken by a salesman on the road, two copies will ordinarily be received on the order form, the third having been left with the customer. Invoicing ()rd;Ts sent to the warehouse will be filled by the shipping clerk, and reported back on another form called a " shipping order." The shipping order will contain, besides the data given on the customer's order, register and bale, or case, numbers. Ihe bookkeeper enters prices on the shipping order and makes extensions. It is then passed to the invoice clerk, who prepares and mails the invoice in an " outlook envelope." Orders sent to the factory are filled and reported back on a form called a " consignment invoice " in duplicate. Prices are entered, extensions made, and the customer's invoice prepared. One copy of the consignment invoice is returned to the factory, with our remittance for the proceeds, at the tune of settlement. Terms L niess otherwise specihcd, tiu terms of each sale in the following exer- cise include a discount oflermg of 4',' for payment within ten days from the invoice " dating." Invoices, particularly in the carpet trade, usually bear two dates. One has reference only to the date of shipment, and is taken from the shipping order, or consignment invoice. 1 he other indicates the term ot credit offered, lor illustration, an invoice made Jan. 7, " March I dating, terms 4'( 10 days," may be paid as late as March 11, with the discount deducted. The long terms of credit which obtain in the carpet trade, obviously cannot be adopted in a text book without extending the narrative over a period of time much too long for school purposes. Ihe terms ot credit, theretore, have been arbitrarily shortened to give the student a \ ariety of practice without undue repetition. Claim Adjustments I here is in \ iitually every business involving the transportation of commodities, numerous claims against transportation companies for the BUSINESS PRACTICE AND PROCEDURE 199 loss of, or damage to, goods in transit. 1 he shipper (seller) usually takes the attitude that when he delivers the goods to the transportation com- pany " in apparent good order and condition " and receives a " clean " hill of lading, his responsibility ends. Invoices often hear notices to customers to this eflecr. Customers, however, often ignore this provision, accept short dehxeries, damaged goods, etc., and deduct the \alue of short delivery, or damage, as the case may be, from their remittances. Because the seller docs not wish to ottend a customer, however unreasonable, he accepts the situation, aiul attempts to reco\er from the transportation compan\'. Before the transportation company will consider a claim it usually requires a copy of the bill of lading and a certified copy of the seller's in- voice. Not until the traffic department has in hand documentary evidence of the loss suffered will settlement be made. Filing Papers ^ ou will find in your supplies various receptacles which are labeled as follows : " Shipping Orders," " Bookkeeper," " Letters," " Paid Invoices," " \ ouchers," " Outgoing Mail," " Bank," and " Safe." It is not sug- gested that these will give the student a knowledge of how papers are filed in a business office. Some orderly disposition of your papers is necessary as you pass over them for the time being, so that you may refer to them as occasion requires. These devices, however, will test the student's aptitude for order and system. The slovenly and disorderly individual soon comes to grief m handling documents involved m office routine. If you aspire to success in any business position, cultivate orderly habits. Numbered transactions in the text, when instructions are not fully given, refer to a numbered document, or documents, from which the facts involved must be largely inferred. This is an exercise in the interpretation of business papers, and facts of which documentary evidence is available will be largely neglected in the text. Study each situation as it arises, and do not go ahead until you have a complete understanding of the cir- cumstances involved. Form Letters Manv of the connnunications sent out of a business office are, tor the most part, repetitions of former communications on the same subject. In making and acknowledging remittances, acknowledging orders and the like, the language employed, except for the date, address, and amount involved, is practically the same. Manifestly, if these stereotyped forms of expression are printed, leaving blank spaces lor such pair of the com- munication as varies in each case, much time and labor are saved. 200 ACCOUNTS AND ACCOUNTING PRACTICE ^MIJNC I'R RK LLST Ki. » low Axminster 2 .? 4 1.2: •5 1.23 <5 1. 25 7 ' - 1 8 9 10 1.28 ..23J «-34J 1. 31 I.2>2 /<5 1.27!. 17 1 u 18 1.27 132 20 1.29 21 '•34 25 ,.2.i '•352 1.22 25 1.26 26 '•35 27 1.26.1 28 1.285 29 1.30 JO '•33 Oil Cloth I .20 2 •2l2 4 ••7-i 5 .232 •20J 7 .18 8 9 .231 10 .Zl\ It .^o\ ..8} •^4i •^-/ •172 15 •241 16 .ix\ 17 .21] •t9l .18.^ 20 .24 21 •23 2^2 .20^ 2J .22I 24 .11 ^5 •192 26 .19 27 •23§ 2,y • 19I 29 .222 .182 Inlaid Linoleum / .46 •3^81 3 •44§ 4 •4«2 5 ■44I <5 •4«1 7 •44 8 .41 P •43] 10 402 It 43 J 72 •44? •40^ •452 •431 7d •4O4 ^7 •45^ 7c? •43 /P .40 20 •451 21 .425 22 •391 •45 ^•/ •39^ 25 2<5 •39l 27 •42I 28 •39 20 .42 4«2 Plain Linoleum / .62^ 2 ■(>7\ 3 .54-V .69 5 •56^ 6 .S9h 7 .68 .J 8 .67 P .63 i •55 II .61 12 .68 .66.\ 14 .6.' 15 .-1 •.•>.") 2 16 .60J 17 .66 7J? .56 19 .60 20 21 65. i 22 62 23 •59 •57 25 •63 2d .58 27 .64 28 •65 20 •>-7' JO .64J Matting — Empress / 16 .19I .? •>4J •# •«7J 5 .13} 6 .19 7 .12 •152 P 10 .14 II •2I 72 ..5.J /.I •>7 /•^ .181 15 .iz\ .14^ ^7 ..62 7c? • ' 5 /P .18 20 •^1 22 •'32 .16.^ ■i7-i 25 ..3i 26 27 28 .18; 20 •«4} JO .13 WHOLESALE CARPET BUSINESS 20T Matting — Lotus ■3-1 2 .151 3 .i4 4 ■ i4 5 .11! <5 .12I 7 •13 •I3f P •xsi 10 •14^ II I2| 12 .I2| .III •148 13 .14 /<5 ■Ill •IS •Mi 20 •12f 21 I3l 22 23 .i3l 24 ■I2f 25 .14^ 2<5 ■13^ 27 .12 28 .I3f 2p .12^ JO ■I4I wholesale carpet business Exercise 23 Samuel Holbrook and C. B. Rutledge are enp;ap;ed in the wholesale carpet, niartinp;, and linoleum trade as partners, under the Hrm name of Samuel Holhrook 6: Co. Mr. Holbrook owns a two thirds' interest, but proHt and loss are shared equally. The investments of partners are equal- ized by allowing each 6 % interest on his capital investment, which is to be adjusted before profit is stated and distributed. The books are closed Aug. 31, 19 — and the following balance sheet is submitted. Balance Sheet , Aug. 31, 19 — ASSETS LlAlilLlTIES Casli : On deposit 3840.45 Notes Payable, Sched. C 2359 12 Office cash 50. 3890 45 Interest Accrued on Notes Pay- ' Notes Receivable, Sched. A 2798 16 able '4 S9 Interest Accrued on Notes Re- Accounts Payable, Sched. D 2502 12 ceivable 5 61 Consicnments (Burt Carpet Accounts Receivable, considered Co.) 4252 53 good, Sclied. i^ 8450 20 Wages and Salaries unpaid Stock of Merchandise, per in- Shipping Dept. 42 ventory 27675 60 Traffic IXpt. 42 Office Furniture 1200 675 Office Help Total 31 13 Warehouse Equipment 9243 99 Traffic P^quipment 7540 Sam'l Holbrook, Office Supplies 165 Capital 29988.31 1 Shipping Supplies 630 C. B. Rutledge, Traffic Supplies 275 369 45 Capital 14994.16 44982 Salesmen's Account lirm's Capital 47 Commission Earned 244 94 1 Prepaid Insurance and Ta.xes 30:^ ,-4: Oq 1 14-26 46 202 ACCOUNTS AND ACCOUNTING PRACTICE ScHEDui I A (Notes Receivable) l"he New EnKland Furniture Co., datid June 5 at 3 mo. 'I"he InRham Linoleum Co. " |ul\ i " 4 Henrv W. StronR " |ul> 17 " ;, riie J: K. Keith Furniture Co. \u^. i " (>o days Place & Pelton An;;, i^ " <)0 " Davis ic Mlackhurn " An^. :; " 50 " ScHFDULH B (Accounts Rixkivafjlk) 465 386 1 553' 31K 66 700 375 i SO Russell Sprague, Inc. In\ ..^ ut June 5, Sept. i dating, terms, 4% 10 days 386 j 50 Invoice of July 7, Sept. 15 dating, terms, 4' ', 10 days J. M. Fiagg &: Co. ' Invoice of May 7, 4 mo. dating, " June I, Sept. I July 5, 60 days «< National Furniture Co. Invoice of Jiil\- .:o, 60 dars dating " Aug. 12, Sept. I " 25, 30 days 7, Sept. 1 5 44 44 << 4t Hemstrect Furniture Co. Invoice of Aug. 18, 30 days dating 11,30 " 44 44 Ingham Lmokum Co. Buttcrworth & Co. Carter Brothers Invoice of lune 27, 90 da)s dating " July 7. Oct. 15 " •' " 30, 60 days " Invoice of July i, 60 days dating Invoice of Aug. 7, Sept. I " 25, 30 days 798 , 04 ^ Q76I t;o 1774 ' ;;4 OpHNING TUV Hooks Procedure 1. Compare the notes and acceptances in your possession wirli SchecliiK .•\ items. I'ind the maturitv of each paper and enter the details in thi- notes receivable record. lile all notes, drafts, and clucks in the ** Safe." 2. Compare the unpaid inv(Mces with ScheduK- I) items, and Hie such invoices, together with consignment invoices and orders, in " HiH)kkeeper ' file. ' Terms on all invoices 4 % 10 days. WHOLESALE CARPET BUSINESS 203 ScHF nr I r C (Notis Pa^aiu.e) National Fiber Matting Co., dated June 5, at 4 mo., with interest at 6 ',(, per annum St. Louis Floor Covering Co., dated July 17, at 4 mo., with intere.st at 6 ',( per annum Frank II. Spencer & Co., note dated June n, at 3 mo. " " Auk. 24, " 3 " The Cliicai;() Ruj; Co., note dated Aujj. 20, at i mo. with interest at 6 % per annum Note. — All notes, e.xcept that of Jul}' 17 favor St. Louis Floor Covering Co., are pa\able at the Second National Bank, at 3'our address. ScHEDiir D (AccorxTs Payable) James E Simnuuis .x Co. liuouc of Aug. 30, lu i r.ish " " July 7, 60 days' dating, terms, 4% 10 days The Hartford Carpet Co. Invoice June 15, terms, 3 mo. net " Aug. 23, 4% 10 days, or 4 mo. net The J. W. Hawthorne Co. Invoice of Aug. 25, Sept. 15 dating, terms, 2 '^ 10 days J. \V. Stilwell & Sons Invoice of July i, Sept. i dating, terms, 4 % 10 days 752 83 334 7« 1087 314 21 30s 10 619 392 402 61 31 50 70 3. Find the maturity of all Schedule C items and enter the details m the notes payable record. 4. Foot Schedule B items and compare the footings with the Accounts Receivable account m the balance sheet. Open the customers' ledger. Enter each invoice separatel\' and indicate the terms in the wide column. Give the National Furniture Co. ten lines; J. M. Flagg & Co. and Ingham Linoleum Co., eight lines ; all other customers, six lines. 5. Open the general ledger with the accounts listed in the balance sheet, except .Iccounts Payable. In place of this account open an account with each trade creditor (Schedule D), gning to each six lines. I nless transactions with a creditor are continuous, you should avoid, if possible, opening an account with him in the ledger. Several expedients are resorted to in order to save the labor of opening personal accounts with transients: (i) So far as practicable make no enti\ until the transaction is executed; (2) when credit has been given in the purchase book and settlement is made 204 ACCOUNTS AND ACCOUNTING PRACTICE bcfoif rht |">>im^ i> icaclu'd, use cross-reference post-marks ; (3) if transient items have to be posted at the end of the period, ^roiip them under the cap- tion ** I'ransient Accounts I*ayahle," or some such descriptive title; (4) in closinji expense accounts iinoK inj; unsettled items, credit the new account instead of the person owed, although this latter expedient is condemned by some accountants. (iroup accounts with reference to the source book in which they originate and to the conclusions to which the\ lead. I'or the purpose of this exercise, the following order is suggested. The number in parenthesis indicates the number of lines' space the preceding account recjuires. If the space is not intlicated, give the account .six lines. Samuel llolbrook (Capital), Samuel Uolbrook (Private), C. I^ Rut- ledge (Capital I, C. B. Rutledge (Private), Cash, Notes Receivable (10), Accounts Receivable (10), .Merchandise Stock, Merchandise Purchases, Merchandise Sales, Consignments (lo). Profit iS; Loss, Commission, Selling Expense, Shipping P^xpense (10), Traffic Kxpense (10), Office Expense (lo). Shipping Supplies (10), Traffic Supplies fio), Office Supplies (10), General Kxpense, Insurance & Faxes, Interest & Discount (10), Interest on Capital, .Merchandise Discount, Reserve for Sales Dis- count, Office Furniture, Warehouse Equipment, Traffic Ecjuipment, Sales- men's Account, Notes Payable (10), accounts with trade creditors, Tran- sient Accounts Payable. 6. Open your cash book with the cash balance, entering the amount short. F^nter the bank balance on the check book stub at the top of page I. Assume that your bank pass book was written up .Aug. 31, at which time checks aggregating ^434.90 had not been returned to the bank, and were consequently not charged against you at that time. What balance should the pass book show ? Flave this amount entered on the left page of the pass book, first line, by your teacher, or by some one designated by him, as follows, ^-lug 31 {current year) Balance $, I he pass book is the bank's record of your transactions with it. ^ Ou should make no entries in this book. 7. Fjuer the transactions set forth in the following narrative and accompanving documents. In dating transactions and documents, use the current year. Complete all records and file all papers relating to a transaction before you proceed with the next. 8. In the following exercise the student will be recjuired to send repeat- edly at least three types of letters; namely, those accompanying and acknowledging remittances, ;md those acknowledging orders. He should accordingly prepare ;it the beginning, and submit for ;ippro\ .il. three form letters that may be used for the purposes mentioned as occasion arises (See Form Letters, page 199.) WHOLESALE CARPET BUSINESS 205 September Narrative (Samuel Holbrook. & Co.) September i, 19 — No. I. — Give James Simmons & Co. check for invoice of Aug. 30. Among your supplies you will Hnd a power of attorney authorizing you to sign or indorse the name of Samuel llolhrook & Co. to all i-)apers that go to the Second National Bank. All other papers ma\ he signed "Samuel Holbrook & Co. by (your own name)." Write your name in the proper spaces in the power of attorney, fill m the date and file in "Safe." Remove the invoice from " Bookkeeper " file and consult their ac- count in the ledger. Fill out the check stub first. Number the checks consecutively. Deduct the amount of the check from your bank balance to show the new balance. Consult model (page 195) and exercise the ut- most care in writing checks. Have you prepared the form letter of remit- tance .' (See Form Letters, page 199.) If not, do so now. Fold the check in form letter and file in " Mail." Mark the invoice Paid, with the date and check number, and file in " Paid Invoices." Enter in cash book. (5-8) Note. — For the student's convenience in allocating items in the cash book, he may number the money columns in lipht pencil figures from left to right across both pages. The niiinbers in parenthesis indicate the mone}' columns involved in making the entry. Do not lollow these numbers blmdly. Know the reason \vh)' they are used in each rnst-. These index numbers will be given in a few transactions only. No. 2. — Leave the New^ England Furniture Co.'s note of June 5, last, at the Second National Bank for collection. Read again the paragraph on indorsements (page 196) and properly indorse this note. Have the amount entered in the back of your pass book as a receipt for the paper you deliver to the bank. File the note in ** I^ank " file. Where must this note be presented for payment : How will it reach the bank at which it is payable r Does making a note payable at a bank authorize such bank to pay it .' W hat is necessary to be done by the maker of this note to meet It at maturity, and what will happen if the note is not paid .' No. 3. — Order of Frank 11. Spencer i5c C\)., Detroit, Mich., the follow- ing: 9 Kar. W ilton Rugs, pattern 4025E, size 6 " " " " 4016H, 3 Spec. " " " 03S6L, 6 " " " " 0486K:, Enter this order on your order book. Use carbon paper and make three copies. (Jive shipping instructions. Mail the original white copy ze 9 X 12 (( 83 X io« (( lO'"' X 15 (( 9 X 12 2o6 ACCOUNTS AND ACCOUNTING PRACTICE to Frank II. Spencer &: Co. File the yellow triplicate in "Bookkeeper" rile. I he ri.ssue copy reniain.s in the order hook. Beginning with 4002, nuniher orders con.seciifi\tly. lo distnigm.sh orders for niercliaiidise from those for supplies, mark the former J and tiie latter G, as " No. J4CX)2,'* .\o. (14005," etc. No. 4. I his is a consignment invoice. These goods have heen shipped hy the Burt Carpet Co. on your customer's (jrder No. 275. Take the order from the " Bookkeeper " Hie and check ort shipments, placing the date of shipment, "8, 31," after each item. Write the customer's invoice as follows : WE RESERVE THE RIGHT TO ADVANCE PRICES AT ANY TI.ME ON TEN days' notice SAMUFL IIOLBROOK iv CO • ESTAIil.lSHKU IS54 KURS Carpets Mattings Linoleums The Keystone Furniture Co. Madison, Wis. Tel. 7890 .Main Terms : 4 % 10 days 60 days extra doling ^'our No. Refer to this fol. Mail 7089 (Your address) Aug. 31, 19 — PAYABLE ONLY IN NEW YORK OR CHICAGO FUNDS 251 2 3047 8007 V 3745 46 47 48 4'' a M D 1 I I 30 3 vX 12 Super. Axm. 3 18.85 36" Khor. A.\m. 2.65 8/3 X 10/6 Cand. A.xni. 12.65 C&NW 56.5s 79.50 37w; •74- Study this invoice carefully, as it should serve as a model in writing invoices later. Note that it hears the date of the consignment invoice — the date the goods were shipped. Copy this invoice on a hiank pro\ided. Fnter in the sales hook, extending the amount to " Consignments ' column. W hen you enter a charge in the sales hook from the consignment invoice or shipping order, mark the paper frcmi which the entry is made ** S. B. I'ol. — " (the page of your sales hook). Attach the customer's order to the consignment invoice and return hoth to " Bookkeeper " Hie. Mail the customer's invoice to the customer in an outlook envelope. Fold the invoice so that the address may he read through the " window." WHOLESALE CARPET BUSINESS 207 No. 5. — This shipping order shows goods shipped from our warehouse. Check this shipment witli customer's order No. 276, " Bookkeeper " file. Foot the " ^'ards " cohmin, entei t hi- price troni your price hst, which \our instructor will assign, in the " Price " column, and make extensions to the " Net " column. I he *' Gross " and " Discount " columns are to be used when trade discounts are involved, l^repare the invoice. Enter in the sales book, crediting Mt-rchcnulist' Sales. Mail all invoices in outlook envelopes without further instructions. After marking shipping order as instructed in No. 4, attach the customer's order No. 276, and Hie in " Ship- ping Orders " file. Note. — Routine instructions will nut be repeated. Whenever a warehouse shijiping order or a consignment invoice, from tlfe Hurt Carpet Co. turns up, you are to prepare and mail the customer's invoice, and enter and file all papers. When prices are not given on the shipping order, consult your price list. The columns on the shipping order to the left of the " Price" column are for the use of the shipping clerk. No. 6. — All invoices covering supplies bought are passed upon by the stock clerk, W. O. Kendrick. His initials indicate that the goods specified have been received. ^ ou should compare each invoice with the original order on file, verify extensions, and enter in purchase journal, indicating the page of that book on the invoice. Charge this purchase to Shipping Supplies^ as follows : Date Fo., Fkom Whom Bought Dating Accounts Dr. Fo. Sundries Mdse. Purchases 19— 8/27 Leonard, Cor- nell & Brown 3/1011/30 Shipping Sup- plies 1 25 36 File unpaid invoices in " Bookkeeper " file for future reference. Sept. 2 No. 7. — Discount Davis &: Blackburn's note of Aug. 23 at the Second National Bank and receive credit for the proceeds. C^ompute the discount and enter in cash book (1-3-4). Enter all interest charges involved in discounting paper in the "Sales Discount" column m red. When you close the cash book, state two totals, an Interest total and a Sales Discount total. Enter the proceeds of this note on your check book stub. What is your bank balance now ^ Have the bank give you credit in your pass book. Indorse the note in full and file in " Bank." No. 8. Give the Hartford Carpet Co. a check to cover invoice of Aug. 2} and take the discount. I'Ollow instructions given in No. i. 2o8 ACCuLMb AND All<'LNT1NG PRACTICE No. Q. Follow instructions given in No. 6. (jive the entry the in- voice date. (Charge Shipping Supplies.) No. ID. — Follow instructions given in No. 5. (Credit Merchandise Sales tor all warehouse deliveries.) No. II. Write a check to the order of Salaries i^ Wages, and dis- trihute as follows: Shipping K.xpense, ^63; Traffic Expense, $6}; Office K.xpense, !f>^J. Cash ht)ok (5-8). File the check in " iiank." No. 12. - Open the petty cash record by entering the cash on hand Sept. I, ^50, in the " Receipts " column. All currency payments are entered in the " Amount " column and also in one or more of the columns under " Distribution," so that a trial balance of this sheet may be taken when the summary is carried to the main cash book. Carry the items from the petty cash voucher to the petty cash sheet, charging the accounts indicated. No 13. — Discount The J. F. Keith Furniture Co.'s acceptance of .Aug. I, at the Second National Hank. loUow instructions given in No. 7. \\ liom did we credit when this acceptance was recened .' \\ hat should we credit now .' (1-3-4) No. 14. — Order of the New England Specialty Co. for immediate freight shipment : ^_. j^.^j^.^ .. p^,^^j^,,.^. .. ^^.,j^ p^^j^ 10 " pat. J, carpet lining 146 yd. " 5001 cable napier Write the order in triplicate and make disjiosition as directed in No. 3. Sept. 5 No. 15. — Prepay our note of June 5 favor National Fiber Matting Co. Although this note is payable at the Second National Bank, we have an understanding with the payee that we may take up notes in its favor at anv time when our funds will permit. \\ rite a check for the proceeds and mail with form letter of remittance. \\ hom did we charge whi n we gave this note? What should be charged now? (5-8) Sept. 6 No. 16. — Order of the Penn Carpit .Mills. P|-.iladelplii.i. I'.i.. prompt freight shipment : ^ ^^,„ ^.^^^^^^^ ^^^ j^^^^^ I " " 809 " Make disposition as previously instructed. No. 17. (live Leonard, Cornell &: Hiown a check for invoice of Aug. 27, less discount offered. (5-6-8) Note. — Avoid opening an account in the ledger with this firm by using cross-reference post-marks. WHOLESALE CARPET BUSINESS 209 No. 18. The pattern number letters — K, C, and S — indicate Kiiorassan, Candaliar, and Superior grades, respectively. Make extensions and invoice, dating invoice Sept. 4 — the date of shipment. Credit Con- signnit'uts for all consignment sales. File both copies of this consignment invoice. ^ ou will need them later. NoTH. — 1 he customer's order in sales transactions will hereafter be dispensed with. The procedure in every case is the same. Sept. 7 No. 19. — ^ Give the Manila Burlap Co. a check for invoice of Aug. 28. (5-8) How can we avoid opening an account in the ledger with this Hrm .'' (No. 17) Follow previous instructions in every particular. No. 20. — Find total quantity in yards and make extensions. Indicate shipping directions, marks, and terms of sale on all invoices. No. 21. — Prepay the following items on the shipment to M. Meyer &: Son (No. 20) by check, payable to Cairns & Co., agents : Freight, 3070 lb. (n 75 per cwt. Insurance, y^i.55 State toll, .15 Send M. Meyer & Son a separate invoice for these items, terms net cash, and charge Accounts Receivable (M. Mever & Son) for the amount. (5-8) No. 22. — Refer to No. 15. What is this document? Name the parties. Of what value is this paper to you now? Compare this letter acknowledging a remittance with the one you have written. File note in Vouchers. Sept. 8 No. 23. — Refer to No. 2. Whom did we credit when we received this note? What should we credit now? (1-4) What is your bank balance now ? Does your check book stub show this balance ? No. 24. — Order of the Household Hardware Co. (your place) for immediate delivery : j j^eg 6 D coated nails @ ^2.20 I " S D " " (S $2.10 Are you writing these orders as you were instructed in No. 3 ? No. 25. — Refer to the remitter's account to see what item this re- mittance covers. (1-2-3) What is our regular discount allowance? lile all checks in " Safe." No. 26. — Send the Hurt Carpet Co. a check for the proceeds of con- signment of July I, No. A459. "i'ou are allowed the same terms that arc given the customer; namely, 4% 10 days. Deduct the discount from 2IO ACCOUNTS AND ACCOUNTING PRACTICE the invoice amount, and then deduct your commission of 6 %, whicli is based on the invoice amount, less the discount.- (5-6-7-8) Remove the copies of this consignment invoice from the " Bookkeeper " file, note de- ductions on them. Note the date of your remittance and check number on the pink copy and Hie in " \ ouchers." Mail tlu- white original Nsith \ our remittance to the consignor, the Hurt Carpet Co. I his document, when completed, is called an " account ot sales," or an ** account-sales." It is the report of the selling agent to the consignor of the sale of a consignment of goods. No. 27. Deposit check of Buttenvorrh &: Co. in the Second National liank. Read the paragraph on making deposits ( {deposit licket, page 193), and follow instructions. Enter the deposit on your check book stub. What is your bank balance now ' Sept. 9 No. 28. Prepay our note favor St. Louis Moor Covering Co. of July 17. \\ rite a check in favor of the payee for the proceeds and mail, (5-8) Is Interest a debtor or a creditor in this transaction .' No. 29. — Order of riie Connecticut Carpet Co., New Haven, Conn., for prompt shipment b\ freight : 2 rolls pattern 359sP Axminster 2 " " V^9oF 2 " " 3606P No. 30. - Read the letter accompanying this shipping order. Take an order bill of lading — three copies — from your supplies. Use carbon paper and write in triplicate. Both the shipper and the agent of the trans- portation company receiving the shipment must sign the original (yellow copy) of this B I., which should be drawn to thr order of National Furniturr Co. Notify J. J. Mason Co. Mail the original with your invoice. Kile the " Memorandum " in " \ ouchers." The " Shipping Order " must be delivered to the freight agent. In writing this invoice include prepaid freight, 395 lb. Qi 30^ per cwt. Charge the National Furniture Co. with the t. o. b. cost only. I he freight will be charged through the cash book when it is paid. No. 31. Write a check to the order of Salaries <5 11 ai^es, ^174, and distribute as follows : Shipping Expense. ^64 ; Traffic, ^^63 ; Office Expense, Sept. II No. 32. Make disposition as pre\iously instructed. No. 33. (ii\e J.W. Stilwell &: Sons our cluik to c '>^-^5 8/3 X iO;6 3 26.75 03S9L 9 X 10/6 3 27.05 0472 F 10 6 X 15 3 48.30 No. 76. In settlement of our CO. 1). shipment to W. M. Grav. \\ horn did we charge for the value of this shi|iment .' \\ horn should we credit now .' Make disposition and Hie. Sept. 20 No. 77. Consult your notes pa\able recced and make proper dis- position. No. 78. 1 his material \m11 be consumed by our drayage trucks. \\ hat account should be charged r No. 79. .Make disposition as usual. No. 80. - Remit the Penn Carpet Mills by check in settlement of their invoice of Sept. 1 1. Write them a letter accompanying this remittance and ask them if they will accept our 30-day interest-bearing note for j^200, and cash for the balance, in settlement of their invoice of Sept. 18, allowing us the 4'^( discount. Look up your a\ailable assets and assign some reason foi- this request. No. 81. I.xpi.iiii tlu- inacnce of (luoting tiade discounts. Dif- ferentiate trade discount, cash discount, bank discount. No. 82. In settlement of our invoice of Aug. i i . \\ ho is the drawer .' Drawee .' Payee ? Under what title should this be recorded on your books ? How can Samuel Holbrook &: Co. make use of a paper payable to the Ilemstreet Furniture Co. .' How does this paper differ from a check : No. 83. - Remit the Burt Carpet Co. in settlement of their consign- ment of .Aug. I I, No. 1547. I'ollow the usual procedure. Sept. 21 No. 84. Discount tlu Inuh.ini Linoleum Co.'s note of JiiK i, and receive credit for tlu proceeds. \\ hat is your bank balance now ? No. 85. Order of the L W . Hawthorne Co., Philadelphia, Pa., for prompt freight delivery . WHOLESALE CARPET BUSINESS 21 5 Pat. 606F 25 9 X 12 Spec. Bruss. Rugs @ $15.70 612A 25 9 X 12 " " " 15. No. 86. - One of your accounts must be settled to-day to take the discount. Attend to it. No. 87. Refer to No. 61 and make proper disposition. No. 88. Deposit all cash items on hand. Sept. 22 No. 89. — For invoice of jul\ 5. Define a promissory note. Name the parries. \\ hen does a note draw interest .'' Verify the amount of this paper and make usual disposition. No. 90. W hat is the meaning of " Anticipation allowed at the rate of 6% per annum only " : Are we in a position to take advantage of this offer .' Why .' Make usual disposition. No. 91. — In settlement of our invoice of Sept. 17. Verify and enter. No. 92. — Note shipping instructions on this consignment invoice. Shipments are always made m car lots, if possible, to obtain a lower freight rate. Make usual disposition. Sept. 23 No. 93. — Order of the Jennison Manufacturing Co., St. Louis, .Mo., for shipment by e.xpress as soon as possible : 3I M shipping tags @ $1 50 tubes art paste @ 7 ^ No. 94. — Verify. What is the meaning of " f. o. b. Cincinnati".'' W ho pays the freight ? Study the accompanying documents — 94^, 94/?, and 94r. What is a bill of lading? How many kinds are there .^ What is a freight bill .' What is a delivery receipt ? This " Dustout " is to be used in sweeping the office. What account should be charged ? No. 95. — Make usual disposition. No. 96. — Write a check to the order of Salaries i^ fVages, $175, and distribute as follows : Shipping department wages, $64; wages of drivers, $()} ; salaries of office help, $^S. No. 97. — Charge accounts indicated. No. 98.- — Remit i^200 to each of your traveling salesmen; 1'. O. Dowd, Birmingham, .Ala., and John S(]uires, Portland, Ore. What exchange should you use to enable your agents to procure currency with- out inconvenience ? Where is such exchange procurable at your place .'' Decide what exchange is desirable, and ask your bank, or instructor, to supply it. Charge Salesmen s Account foi this remittance. No. 99. We paid charges on a telegraphic order from J. B. Johnstone &: Co., St. Paul, Minn., Sept. 12, and invoiced his shipment on net cash 2i6 ACCOUNTS AND ACCOUNTING PRACTICE terms. F^c has not remitted. W hat is the most effective method of collect- ing this iiccount .' 1 ake such action as the circumstances require. No. 100. Make proper disposition. No. 1 01. Shipments by parcel post may he insured. Insurance com- panies issue open pohcies covering all .shipments. I iu insured is pro\ ided with a book of coupons, each of which, when attached to the parcel or invoice, covers the risk up to a certain amount I he government will also insure parcels, not to exceed i^5oin value, on the payment of a small premium. No. 102. — Send the J. \\ . Hawthorne Co. a New ^'ork draft in settle- iiuiit of their invoice of Aug. 25. \\ rite \()ur check to the order of Xt'w )'ork draft for the amount and have- the draft made payable to the order of Samiifl Ilolbrook l^ Co. What must you do to transfer it to the J. \\ . Hawthf)rne Co. } No. 103. Ihese boxes are for the shipping department. No. 104. Remit the Standard ( )il Co. a check for the invoice of Sept. 15. Sept. 26 No. 105. Make proper disposition. No. 106. - Horse feed. This freight bill will be charged through the cash book when paid. No. 107. — Post J. M. Hagg &: Co.'s account to date. Make a tran- script of the account on the statement form among your supplies, and mail. Give complete information respecting each item. No. 108. — Return to A. \\ . Bowman &: Co. the 30 bags charged to you on their invoice of Sept. 21. Ship on a straight bill of lading, freight collect. Mail them the bill of lading with letter of advice. Ask them to give credit. \\ hat account should receive credit for this shipment .' No. 109. - For invoice of Aug. 7. \ erify and make proper dis- position. No. no. — Remit the Hurt Carpet Co. in settlement of tluii *.G\; traffic, JS63 ; office, ,^48. In favor of your lf)cal railroad compaii\, ,^I2<;.74, to cover freight charges for the month, and distribute as follows : Office, )^i. 05 ; traffic,i?3.6o ; accounts receivable, )582. 19 (National Furniture Co. and McCJraw & Elliott) ; merchandise purchases, ^42. fp. In favor of the Hurt Carpet Co. for the proceeds of their consignment of Sept. 20, No. A462 In favor of Ojficc- (.uj/i (<» cosii |Htt\ c.isli scmcliers tor the month, l.nier in petty cash book. No. 139. Our salesmen report the following expenses for the month : Dowd. ,'si04.6o; Squires, i^i20. 1 heir salaries and commissions for the month are: Dowd, ;^i<')0.40; Squires, )^i46.io. Charge these items to Selling Expense and credit Salesmen's Account. No. 140. Make the necessary computations and an entry to adjust the interest on partners' capital one month. No. 141. Deposit all cash items on hand. No. 142. ^'our collection charges for the month of September at the Second National Bank are ^^4.85. Draw check to cover. Procedure loot and close the petty cash book, and bring petty cash disburse- ments into the main cash book. Charge the items in " Sundries " column as follows: .Iccounts Receivable (J. B. Johnstone &: Co.), ^.60: Cnsign- ments, $\-7S- Have your bank book written up. Ascertain your cash balance, and prepare a reconcili:jtion statement that will bring the main cash book, pass book, check book, and petty cash record into agreement. (See form, page 194) Summarize all books, post, take a trial balance, prepare a business and financial statement, and close the ledger. After the posting is completed prepare an abstuict ut the customers' ledger (w list of customers' :iccounts and balances shewn) and compare the total with the balance of the Accounts Receivable account in the gener;il ledger. If there is a discrepancy, locate and correct the mistake. Inventories, Sept. 30, 19 : Stock of merchandise, ^25,568.32; shipping supplies, $()J0.\0\ traffic supplies, ^400; office supplies, ^^150; prepaid insurance, ^^255 ; commission recoverable, ^^206.79. Reserve 4'^ of accounts receivable for merchandise discount offered. ACCOUNTING PROBLEMS Exercise 24 1. P. R. Higgins began business Feb, i, 19 — , with assets valued at J^yooo and liabilities amounting to ^1500. After having been in business two years, 1 liggins's assets were $9500 and his liabilities ^$12600. (a) Show these facts in Higgins's account, and close the account, (b) Assume that Higgins's assets shrink 10% in licjuidation and that liquidation expenses are ^927, how many cents on the dollar will his creditors receive? (c) A. \\ . Strauss, one of the creditors, has a claim of ^^789.45. How much will Strauss receive in settlement ? 2. Jan. 15, 19 — . Howard Cheston and Willard Mills are equal part- ners trading under the name of Cheston & Co. The partnership is dissolved by mutual consent. Mr. Cheston agrees to take over all the assets and assume all the liabilities of the business, and to give Mr. Mills a promis- sory note due in one year without interest for Mills's interest. The assets are valued as follows: bank account, $865.40; notes receivable, $2000; accounts receivable, $3165.80; office furniture, $325 ; horses and wagons, $865; stock of goods, $14650; good will, $500. The liabilities are as follows : notes payable, $1875 ; interest accrued on notes payable, $87.43 '■> notes receivable discounted, $850; accounts payable, $2176.75. Find the amount due the retiring partner, (a) Make necessary entries to close the books of Cheston & Co. (b) Make the entry or entries necessary to open the books of Howard Cheston. 3. Mar. I, 19 — . (With reference to the preceding exercise. No. 2.) Howard Cheston sells a two-fifths' interest in his business to Forest Grant for cash. Assume that the busmess has earned a net profit of $450 since Jan. 15, and make the required entr}' or entries to admit the incoming partner. 4. A. Rosenblum keeps an incomplete record of his business transac- tions. His records show that he owes Edward Horn $1700 on book account and that he has outstanding notes payable amounting to $1400. An ac- count with Morrell Smith shows a debit balance of $600, and a consignment account shows $625 due the consignor, W. A. Brady. Goods valued at $900 have been shipped to Herman & Co., Louisville, from which no returns have been received. His bank book shows a balance of $2300 and a note in the bank for collection of $200. Two other notes in the safe amount to $950. A third note of .Michael Cassidy for $200, which is in Mr. Rosen- bl urn's possession, has been protested for nonpayment ; protest fees, $2.25, have been paid in cash. His stock of goods is appraised at $1800. 219 220 ACCOUNTS AND ACCOUNTING PR.\CT1CE juhii Ka|>l.in is aclmitttd as an e(iual partiur, invcstinj^ cash J?36oo. The IKiitiicTsliip a^rtcnunt provides thar the Hrm of Roscnbluin & Kaphiii shall take over all the assets of A. Rosenbluin at book value and assume all liabilities. Mi. Rosenbluin. however, guarantees the payment of all notes and book debts. .All ilebts are ultimately collected except a note for ^^150. It is then agreed that the good will item shall be reduced by the amount of this bad debt and charged to A. Rosenbluni. Assume that the pannership books are to be kept l\\' double entry and make all entries necessar\' to record the above facts. 5. Hinit 6c Hill, merchants, operate the following books: cash book, sales book, purchase book, journal, general ledger, customers' ledger, and creditors' ledger. 1 he footings of the various columns in books of original entr\' are as follows: journal debtor, accounts payable, $1216.80, accounts receivable, $127.82, general, ^^3407. 16 ; journal creditor, accounts payable, ,^312.18, accounts receivable, $1864, general, $2575.60 ; cash book, left page, accounts receivable, $2418.79, sales discount, $212.45, general, $876.40, net cash, $3082.74; cash book, right page, accounts payable, $i;i7.6o, purchase discount, $48.72. general. $1292.18, net cash, $2761.06. 1 he total sales are $4563.20, and total purchases $3287. On a sheet of foolscap paper rule the journal prescrdied above. Enter therein the journal totals, and after makmg journal entries which sum- marize the other books of original entry, close the journal. 6. The following items appear in a trial balance Dec. 31, 19 — : sales, $34567. S9; machinery, $18760; office furniture, $1012.50. You are directed to reserve 2% of sales for b:id debts :ind 2% of sales for discount ottered, to reserve io% for depreciation of machinery and 5% for deprecia- tion of office furniture. Make the entries necessary to accomplish this. Subsecjuently discounts ;imounnng to $146.82 are taken by customers, and there are losses from bad debts amounting to $956.87. Give entries show- ing proper disposition of these discounts and losses. 7. riie following facts are t;iken from the books and inventories of H. A. \'aii<:lin, Dvc. 31, 19^. Things owned: cash, $345.70; notes re- ceivable, $S(/); accounts receivable, $1565.80; stock of goods, $16028; office furniture, $3 50; shipping supplies, $90. Unpaid items: notes payable, $1150; accounts payable, $i 325 ; wages, $26.50 ; interest on notes payable, $13.25. Business done since the last closing, Sept. 30, 19 — : purchases, $15875; sales, $22940; returned sales $1145; inward freight, $438.65; purchase discount taken, $187.67; shipping supplies bought, $640.20; wages paitl. $565; selling expense, $1789.10; office expense, $1156.60; interest paid, $<;8.3o; office furniture has cost, $400. Stock of goods on hand Sept. 30, $13500. The proprietor's capital at the last closing was $13000, and he has since drawn $193.32. ACCOUNTING PROBLEMS 221 Prepare in report form, trading account, profit and loss account, and balance sheet. 8. Ironi tIk- tollowinj:; trial balance and inventories prepare in state- ment torm a business and financial statement, dated Dec. 31, 19 — . Trial Balance, Dec. 31, 19 — H. A. Land, Capital H. A. Land, Private W. R. Ifarland. Capital W. R. Harland, Private Cash Storage Shipments Purchases Sales Freiiiht Inward Kxpense Rent Insurance Horses & Wajions Furniture &; Fixtures Real estate Merchandise Discount Notes Receivable John Mills W. B. Grant Notes Payable R. T. Greene Commission Consignments 25000 500 22000 500 22450 so 3500 1000 4100 1600 250 300 250 250 500 500 15000 200 500 3500 2000 7500 2000 3500 500 4500 3000 5000 150 3000 4500 1 1 Inventories and adjustments : Stock of goods, ^^3212; prepaid insurance, {^45. It is estimated that horses and wagons have depreciated io^(, furniture and fixtures 8%. Accounts and notes receivable are considered good ; but there is one ship- ment of goods costing $850 that will probably not yield more than 75% of such cost. Interest accruals on notes receivable amount to ^23.64. December rent of premises owned b\' H. A. Land (partner), amounting to )^ioo, has not been paid or adjusted. Allow 6*^; interest on capital and distribute the outcome in profit or loss equally. Charge consignments ^% of consignment sales, ^1500 for commission earned. Set up and close the following accounts : shipments, storage, consign- ments, and commission. INDEX Acceptance, dating of, 120; discounting drafts hrfon-. 117; efTcct of, ICXj; form of, ICa Account, dihmd, 18; account-sales, 210; capital, 32; liquidation, 71; loan, 71; profit and loss, function of. 31 ; traduij;, 84, 1)7; vi-ndee, 7 1 ; vendor, 71. Accountinp. compared with bookkeepmj;, 3; economic basis of, 9; periods, 12, 28. Accounts, capital, 33 ; classification of, 33; closing, 136; construction of, 21; economic, 33; financial, 33; groupinR in ledKcr, 204; interpretation of, 28; payable, 35; personal, 34; petty ac- counts payable, 143 ; profit and loss, 33 ; receivable, 35; revenue, 33; specific, 33; trading, 91 ; workinp, ^^. Accuracy, importance of, 45. Asset inventories, disposition of, 89. Assets and capital, 9; current, or "ipiick," 107; defined, 18; fixed, 108; as posses- sions and expectations, 14; valuation of, I^I. Bad debts, treatment of, 172. Balance sheet, defined, lO, 42; forms of, 85, I7v 176; function of, 32, 34; as owner- ship stateniinr. I7. ;:!. SS ; siv-ioliimn. Bank, account, how opened, 193; banking conveniences. 193; check book, 195; deposit ticket, 193 ; pass book. H)^, 204; proving cash, 194. Bill of lading, straight, 212; order, 210; express. 211; with draft attached, 117. Business, analy7.cd, 11; aim of, 106; busi- ness man's expectations, 14; li(iuidated, 79- FJusiness practice, 1 91-2 18. Capital, .uioiiiits, 33; charges to, ii;9; compared with profit and liabilities, 9, 1 1 ; defined, 18; equalized by in- terest allowance, 201 ; mcome, 159. (See Capital account.) Cash account, closing, 29, 83 ; construction of, 22-27; handling petty cash, 192; proving cash, 194. 218; what consti- tutes, 82. (See Cash book.) Cash biKik, closing, 80-81, 82; columnar, forms of, 180-186; function of, 79. Certificate of deposit (see Deposit). Check book (see Checks). Check-mark, form of, 56; use of, 55. Checks, cashier's, 123; certified, 124; check book, 195; compared with bank draft, 123; parties to, (see Sight draft); voucher, 216, 217; writing negotiable paper, 196. Claims, for damage to goods in transit, adjustment of, 19s Closing entries, journalising, rule to deter- mine, 86-88. C. O. D., sales, 117, 211. Columnar books, cash books, forms of, 180-186; journal, 190; purchase books, 166, 192; sales bix'k. !o:. Commission. 157, 191. Consignment, account, content of, 191 ; goods, 191 ; invoice, 206. (V)ntrolling accounts, advantages of, 189; content of; 188, 189; in the trial balance, 189; purpose of, 187. Cost, factors of, in trading, 39; of goods .sold, 30. 39. Credit instruments. 106; acceptance of draft, 109; disposition of, at maturity, no, III; market for, 108; maturity value of notes and drafts, 117. Credit memorandum, 157. Creiliror, and owner, Ii ; defined. 18. CustcMin r-, ■• -ounts of, how to handle, 143. Dating invoices, 198, 206. Debtor, defined. 1 8. Deposit, certificate of, 124; ticket, i')'. Depreciation (see Reserves). 322 INDKX 223 Discount, bank, formula for computing, 115 ; clchnccl, 114; track-, 211, 212; dis- counting time paper, 196. (Sec Mer- chandise discount and Interest.) Drafts, acceptance of, 109; bank, form of, 122; Chicago, 123; New ^'ork, 123; parties to, no; rules to journalize, 125; sight, forms of, 122; time, forms of, 112, 119; use of, in collections. Ilfficiency, business, 34; financial, 34. Kntry, content and form of, 41, 44; de- fined, 11; double entry defined, 26; final entry, 42; opening entry, 10, 132; original entry, importance of, 41 ; single, 149. Errors, how to prevent, 55; in trial balance, how to locate, 55. Expense account, closing, 3 i ; content of, 23. Expenses, defined, 10; and losses, 9, 23; as services of wealth, 16, 17. Filing, 199. lire sale, treatment in accounts, 1 45- 1 46. Form letters, 199. Freight, allowed us, 161; inward, 103; outward, 91 ; hill, 215. Imprest fund, 194. Index, ledger, form of, 52. Indorsements, classified, 197; purpose of. Ink, red, 7. Interest, accrued, 118; compared with other rights, 114; defined, II4; and discoimt, 113 ; rule to debit and credit, 114; when debts draw, 113. Introduction, basic principles, importance of, K; business papers, use of, 7; de- velopment of subject, 7; ink, use of red and black, 7 ; methods of develop- ment, 8. Inventory, asset, treatment of, in ac- counts, 29, 89; defined, 17; liability, treatment of, 90. Invoice, mailing, 198; handling, 206; as supplementary record, 49; terms of, 198; writing, 198. I. O. U., carried as currency, 145. Journal, columnar, 190; defined, 10, 41; entries, 46; content and form of, 41. Journalizing, closing entries, 86, 88; de- fined. 42; illustrated, 46; general rule for, 21. Ledger, auxiliary, 187; card, 187; closing the, procedure, 86-88, 136; customers', 187; defined, 42 ; illustrated, 47; loose- leaf, 187; trade creditors', 188. Liability, current liabilities, 108; defined, 18; inventor)', disposition of, 90; com- pared with cajMtal, 11. Loss, cause of, 16, 29; compared with ex- pense, 9; defined, 18. Merchandise account, 91. Merchandise discount, origin of practice, 158; rules to journalize, 63; treat- ment of, in accounts, 158-160. (See Sales discount and Purchase discount.) Merchandise stock, closing of account, 29-30, 89; construction of account, 22-27; valuation of, 160. Mortgage payable, 70; interest accrued on, 157- Negotiable paper, 107. Notes, accommodation, 121 ; demand, when due, 122; discounting, 115; forms of, 112, 116, 118; interest-bearing, 113; noninterest-bearing, 1 1 1 ; note book, 193; jiarties to, no. (See Notes receivable. Notes payable, and Credit instruments.) Notes payable, account, content of, n9; defined, n9; interest accrued on, 179; rule to journalize, n9. Notes receivable, account, content of, 106; defined, 108; discounted, nq; life of, 1 10. Office furniture, account, content of, 2} ; closing of. 29. Order, express money, 125; postal money, 125; shipping, 198. Orders, handling customers', 198; order- ing goods, 197. Original entry, book of, 41 ; content and form of, 41 ; correction of, 41 ; erasures of, 41 ; importance of, 41. INDEX Ownership, statements, ii, 12. 1?. 14, !^. 16. I'arcel p<»st insurance, 216. I'arintTship, i)|H-ninn intrii-s of, 132. adnutting |iartiur. 14S. 21^ 220; dis- solution, 219. Pass book (see Hank). I'ersonal accounts. c1om:>;;, j7, customers, 34-35; expedients to avoid opening, 203 ; functit)n of, should be shown, 71 ; trade creditors, 35. I'etty cash, b(M>k. l<;l, 192; handlinR, 192; imprest fund, 192; relation to main cash book, 181, 183, 192. Posting, defined, 42; post-marks, use of, 51, 203; formal steps in, 51. Post-marks, cross-reference, 203; impur- tance of, 51. I' iwt r of atfornev, 205. ri"tit, and capital, 9; defined, iS; source of, 29-30; two methods of finditiL, 38-39. I'rotit and loss account (sec Account). Proprietor, account, closed, 32. Protest, protested notes and drafts, how- treated, 106, 183. I'urchase accoant, closing, 86; content of, 91. i'urchasc book, closing, 66; form of, 166, 207; posting, 62, 73, 74. Purchase discount, 160. Record, content and form of the, 41 ; scope of the, 10; why kept, 9, 10, 17. Rent, as a thing owned, 13 ; defined, 13. Reserves, for had debts, 172; for depre- ciation, 173; purpose of, 172; treat- ment of reserve account, 172. Sales, account, closing, 30, 86; account, construction of, 24-30; account, func- tion of, 30; undelivered, 166. Sales b\ 150-152; compared with double entr\ . 151; finding profit when books are kept by, 150; how to keep b(X)ks by, 149; journal, form of, 150. Statement, account form, 84; business and financial, purpose of, 34; forms of. 84, 174; exercises in preparing, 176, 220; report form, 174; six-column form, 176. Terms, "dating" invoices, 198; meaning "^ 59; posting of in personal accounts, 51- Trading accounts, 7I , "merchandise" ac- count, 91. Transaction, as a transfer of value, 12, 26; classified, 21; effect of, 1 1 -1 7. Trial balance, errors in. 55; f«)rm of, 56; of cijncrete results, 56; procedure in taking, 54, 56; purpose of, 54. Value, accounts as depositories of, 26, 82; defined, 18; transactions transfer, 12. \'oucher checks (see Checks). Wealth, services of, 16; perishable nature of, 17. Weight note, 138. THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW AN INITIAL FINE OF 25 CENTS WILL BE ASSESSED FOR FAILURE TO RETURN THIS BOOK ON THE DATE DUE. THE PENALTY WILL INCREASE TO 50 CENTS ON THE FOURTH DAY AND TO »1.00 ON THE SEVENTH DAY OVERDUE. ru v^o^f y 313155 UNIVERSITY OF CAUFORNIA LIBRARY / ' tM^t^^^MMMOMa t^m ^au