Digitized by the Internet Archive in 2007 with funding from IVIicrosoft Corporation http://www.archive.org/details/accountingintheoOOIislrich ACCOUNTING IN THEOEY AND PKACTICE A TEXT-BOOK FOR THE USE OF ACCOUNTANTS, SOLICITORS, BOOK-KEEPERS, INVESTORS, AND BUSINESS MEN BY GEORGE LISLE, C.A., KF.A. LECTURER ON BOOK-KEEPING AND THE PRINCIPLES OF ACCOUNTINO AT THE HKRIOT-WATT COLLEGE, Edinburgh; author of 'book-keeping and forms of accounts FOR county councils,' chambers's 'elementary book-keeping,' ftp. EDINBURGH AND LONDON WILLIAM GREEN & SONS 190G All rights reserved .f3^^ V. PEEFAOE The object with which this book has been prepared is to supply the demand for a text -book dealing with the principles of advanced book - keeping and accounting. Accounting is a progressive science, and has made great strides within recent years. The cumbrous forms and vain repetitions of the older systems of accounting are giving place to improved methods which have been evolved through the desire to have the maximum of result with the minimum expenditure of time and labour. Accountants, solicitors, investors, and all business men should be familiar with these improved methods. In fact, a knowledge of the science of accounting is of use to all who receive or pay away money, either for themselves or in trust for others, and there is no condition of life in which it will not be found of service. An attempt has been made to define as exactly as possible the various terms used in accounting. Many of these terms are employed somewhat loosely, and this is most undesirable in a science which is an important branch of applied mathematics. A large number of examples and exercises have been given, together with the solutions. These serve to elucidate the principles, and will at the same time enable the student to effectively test his progress. I have to record my indebtedness to my partner, Mr. W. A. Middleton, for the great care with which he has revised the proofs. GEO. LISLE. NoiiTH St. David Street, Edinburgh. i^ o-±uo CONTENTS PAGE Accounting ^ The Business of an Accountant 3 Book-Keeping ^ Closing Entries -^^ Practical Book-Keeping 22 1. The Casli Book 23 2. The Invoice Book 24 3. The Day Book 25 4. The Journal 25 5. The Ledger 26 Phactical Book-Keeping further developed .... 32 Exercises 39 Single Entry . . . •. 42 Trial Balance of Books kept by Single Entry ... 45 To pass from Single Entry to Double Entry .... 45 Profit 47 Profit and Loss Accounts 49 The Goods Account 51 Stock-Taking 52 Raw Material ......... 53 Partially Manufactured and Completed Goods ... 53 Goods sold on Commission ....... 53 Arrangement of Profit and Loss Accounts .... 55 Trading Account 59 Manufacturing Accounts 61 The Trial Balance 63 The Connection between the Trial Balance, Profit and Loss Account, and Balance Sheet ...... 65 Assets , 67 Liabilities 67 viii ACCOUNTING IN THEORY AND PRACTICE ^ PAGR Capital 68 Balance Sheets 69 On which side of the Balance Sheet the Assets should be placed 70 A full and fair Balance Sheet 74 Arrangement of Balance Sheets ...... 76 The Double Account Form, of Balance Slicct .... 79 Statements of Affairs and Statements of Assets and Liabilities 82 Statement of Affairs of a Bankrupt 83 A Deficiency Account 89 -^ Exercises .......... 93 Accounts of Branches 95 Departments 98 Exercises .......... 99 The Ledger, and Classification of Ledger Accounts . . 104 Ledger Accounts . . . . . . . ■ . . 105 Personal Accounts . . . . . . . . 106 Real or Property Accounts ....... 106 Nominal Accounts . . . . . . . . 106 To balance Ledgers separately ...... 107 To analyse the Accounts in a Ledger ..... 109 Check Ledgers 113 The Card or Loose - Sheet System of keeping Ledger Accounts 114 The Card System applied to a Shareholders' -Ledger . . 115 Cards for Shareholders' Ledger . . . . . . 117 Reserves and Reserve Funds 118 Investment Fund 119 Secret Reserves . . . . . . . . . 119 Redemption Fund 120 Debenture Reserve Fund ....... 120 Sinking Funds 121 Contingent Fund ......... 121 Debenture Bond Sinking Fund 122 Colliery Sinking or Redemption Funds 128 Realisation and Liquidation Accounts 130 Consignment Accounts 131 Joint Accounts 131 Exercises 132 Revenue Account 132 Statement of Receipts and Payments 133 Income and Expenditure Account 133 CONTENTS PACE Suspense Accounts 134 Goodwill 134 Depreciation . . .* 137 Insup.ance 142 Fire Insurance . . . • . . ■ . . . . 143 Marine Insurance . . . . . . . . . 145 Life Assurance ......... 147 Accident and Guarantee Insurance 148 Bills of Exchange 149 Apportionment . . 152 The use of Interest Tables in apportioning Sums for different periods 153 The Apportionment Act of 1870 154 Commercial Apportionments . . . . . . , 157 Rents 160 Fore-hand Rents . . , 163 Heritors' Assessment ........ 164 Casualties .......... 164 Rent Charges 164 Minister's Stipend ...... , • . 164 Wages and Salaries to Servants and Workmen . . . 165 Annuities .......... 165 Interest on Money lent . . . . . . . . 165 Dividends and Interest upon Shares and Debentures in Public Companies ......... 166 Interim Dividends and Bonuses ...... 166 Bonuses returned as Capital ....... 167 Stocks and Shares bought and sold 167 Profit from Private Partnerships 169 Apportionment of Rents under the Land Clauses Act, 1845 . 169 Exceptions to Apportionment . . . . . . 170 Burdens and other Deductions . . . . . . 170 Property not producing Revenue . . . . . . 171 Examples of Apportionment . . . . . . . 172 Table of Particulars necessary for apportionment of Dividends of certain Companies ....... 174 Trust and Executry Accounts 175 Model Set of Trust Transactions 176 Account of Charge and Discharge of the Intromissions of Trustees 180 Trust Ledger Accounts 186 Exercises . . . . . . . . . . 190 Partnership 194 Goodwill in Partnership . . . . . . . 195 Interest on the Capital Accounts of Partners . . . 197 ~1 ACCOUNTING IN THE OR V AND PRACTICE Pahtnership — Continued Division of Profits 205 I. Profits to be divided in proportion to each Partner's Capital 206 II. Profits to be divided in proportion to eacli Partner's Capital and the time such Capital has been in the Business ......... 206 III. Profits to be divided in proportion to certain fixed Ratios 210 Assumption of a Partner ....... 211 Dissolution of Partnership ....... 213 Partnership Transactions worked out ..... 219 Exercises 223 Joint-Stock Companies' Books 233 The Minute Book 233 The Application and Allotment Book ..... 234 Register of Transfers ........ 235 Shareholders' Ledger 235 Preference and Ordinary Shares together ... 240 Debenture Ledger ......... 240 Form of Allotment Letter 241 Form of Letter of Regret 242 Form of Call Letter 243 • Exercises .......... 244 The conversion of a Private Firm into a Joint-Stock Company 248 Exercises .......... 250 Manufactukeks' Accounts 252 First Method — Manufactured Goods and Finished Goods pur- chased kept in one Account ...... 253 Second Method — Showing the Cost of the Goods manufactured 254 Third Method — Showing the Profit on Manufacturing and Profit on Trading separately 255 Exercises .......... 257 Cost Accounts 261 Items of Cost • . 263 Material 264 Labour 264 Direct and Indu-ect Expenses ...... 264 Engineers' Accounts 265 Contracts not completed at date of Balance .... 267 To ASCERTAIN THE PROFIT ON THE GoODS ACCOUNT WITHOUT ACTUALLY TAKING StOCK 267 To FIND THE Cost Value of Goods destroyed by Fire . . 271 Exercise 272 The Accounts of Professional and other Non-manufacturing AND Non-trading Concerns 272 Exercises 273 CONTENTS British Currency Gold . Silver . Bronze . Legal Tender Indian Currency United States Currency French Currency . German Currency Table of Foreign Moneys in Home Accounts Foreign Currencies and their treatment Foreign Branches .... Rules for the conversion of Foreign Currencies The treatment of Rupees in Home Accounts First Method — Cash Transactions only recorded in London Books Second Metliod — All Transactions recorded and converted at rate of Exchange ruling when Transactions took place Third Method — Conversion at average rate of Exchange The Foreign Exchanges Diagram The Par of Exchange Mint Par Telegraphic Transfers The Course of the Exchanges Income Tax . Schedule A Schedule B Schedule C Schedule D Schedule E Exercise Rates of Local Authorities Loans repayable by Instalments Redemption of Leases Hire-Purchase System of acquii Investigations iNG Railway Waggons Percentage Statements First Method — Using four-place Logarithms Second Method — Using Tables of Products Third Method — Reducing the Divisor to a Decimal and multiplying Curves and Diagrams ACCOUNTING IN THEORY AND PRACTICE PAGE Reconciliation Statements 345 The Duties and Responsibilities of an Auditoii 348 First Audits 350 Casli on hand .... 350 Partnersliip Accounts . 350 Companies 351 Partial Audits .... 352 Audits 353 Commercial Audits 353 Office Regulations to Prevent Fraud 353 The AvEiiAGE Due Date 354 Exercises 356 Interest on Cuhuent Accounts 356 I. Using Interest Tables 357 II. By Means oi" Products . 358 Decimals of £1 . 363 Logarithms 365 Table for finding the Days between two given Date 3 . 369 Table showing Days as Decimal Fractions of a Year 373 Table of Logarithms , . . 376 Answers to Exercises 381 Index . 423 ACCOUNTING ACCOUNTING IS THE SCIENCE WHICH TREATS OF THE METHODS OF EECOEDING TRANSACTIONS ENTERED INTO IN CON- NECTION WITH THE PRODUCTION AND EXCHANGE OF WEALTH, AND WHICH SHOWS THEIR EFFECT UPON ITS PRODUCTION, DISTRIBUTION, AND EXCHANGE. In the following pages an attempt has been made to provide a text-book from which may be learned the broad and fundamental principles of Accounting. These principles are general and universal in their application, and, when once grasped, may be applied to any business or financial transaction, no matter how novel or how complicated. Accounting is a branch of applied mathematics, and it is only when it is regarded as such that its principles can be applied with invariable accuracy, and will always, when so applied, bring out the correct results. The accountant is continually coming across businesses with which he is un- familiar, but, as the principles governing all accounts are the same, and are applicable to any accounts, he is never at a loss, but shows by his manipulation of the facts and figures submitted to him that his work is independent of any particular business. There are two main branches of the business of an accountant : — 1 . His work as an accountant. - 2. His^ork as an auditor. I The iPfining for these two branches is almost identical, and is best acquired at the same time; but all the same B ♦ - , ACCOUNTlI^d' IN THEORY AND PRACTICE ', . » , * ; ' 1 t ■ — «^ — <■; — *: ' — \"^ ' ~~" there are very clear lines of demarcation between these two divisions of the work of an accountant. The work of the accountant is largely creative, while the work of the auditor is inspective or critical. The accountant, as such, devises the method by which a set of financial transactions is to be recorded, and either himself carries out, or superintends the carrying out of, the system. It is his province to enable men by the benefit of his advice to make businesses which are already profitable even more remunerative, and to render profitable businesses which are being conducted at a loss. He ascertains the interest of an individual or the interests of many individuals in businesses or funds, and adjusts the interests of parties inter se, seeing that each party really gets what he is entitled to. The function of the auditor is to inspect, examine, and audit accounts which are already completed. Sometimes the two functions run into each other, as when the auditor has to write up or close the accounts of a concern. In fact, in general practice an auditor has very often to balance the books of a concern, and when books of account do not balance it is too frequently the custom to leave them over till the auditor arrives to find the error and himself complete the book- keeper's work. ^^^ The duties of an accountant incli^^^ook-keeping in all its branches and applications, from th^^Rthod of keeping the Postage Book or Petty Cash Book in a retail business to the elaborate and yet charmingly explicit accounts of the National Exchequer. Perhaps no better historical exem- plification of the development of accounting can be found than is displayed in the improvements made within recent years in the annual accounts of the country as published by the Government. All practical accounting being based upon a thorough knowledge of book-keeping, the student, before taking up the principles of accounting, should have gone through a complete course of the study of book-keeping, either in a class under a competent teacher, or by using one of the many satisfactory hand-books which have been published on the elementary principles of book-keeping. ACCOUNTING THE BUSINESS OF AN ACCOUNTANT The work of accounting may be classed under the following heads : — Mercantile and Manufacturing Accounting, which relates to the accounts of traders and manufacturers, and includes shipping. Mining Accounting. Financial Accounting, which includes the accounts of banks, insurance and investment companies, and building societies. Fiduciary Accounting, which includes executry and trust work. Public Accounting and Finance in connection with cities, towns, county councils, parish councils, school boards, and other public bodies. Company Work, embracing investigations into businesses with the view of their being formed into companies ; work as secretary, manager, director, or auditor; investigations into companies in view of their unsatisfactory position, and liquidations. Bankruptcy Work, embracing the preparation of Statements of Affairs and the work of trustee under trust deeds and in sequestrations. Investment and Financial Work, including the invest- ment of money, floating loans for burghs or corporations, and obtaining loans for and financing private individuals. Investigations into business concerns of all descriptions. Estate and Property Work, including the factoring of property and the management of landed estates. Arbitrations, whether as arbiter or oversman, or employed as the accountant in making investigations into accounts. ACCOUNTING IN THEORY AND PRACTICE BOOK-KEEPING BOOK-KEEPING IS THE ART OF RECORDING BUSINESS TRANS- ACTIONS WITH THE VIEW OF HAVING A PERMANENT RECORD OF THEM AND OF SHOWING THEIR EFFECT UPON WEALTH. Each individual business transaction has a two-fold effect, and it may be useful to look on this effect as having a positive and also a negative character. Thus, if a merchant sells goods for £5 of cash, it is evident that the merchant's cash is increased and that his stock of goods is decreased. The effect of the transaction may thus be considered positive as regards the cash, and negative as regards the goods. As book-keeping records this two-fold effect, it is spoken of as " book-keeping by double entry." A Ledger Account is a statement showing on the one hand all the positive or increasing effects on the subject of the account, and on the other hand all the negative or decreasing effects on the subject of the account, in consequence of the transactions which have occurred during a given period. These accounts form in the aggregate the Ledger. The Ledger is thus the book showing the accounts relating to a series of business transactions, wherein these transactions are analysed and recorded so as to show the effect of each transaction in- dividually and the effect of the transactions as a whole. The Ledger is therefore the essential book in book-keeping, and once its functions have been properly grasped the respective places occupied by all other books, and the uses of these books, will be clearly understood and appreciated. In order to illustrate the methods of book-keeping, and to show the principles upon which it is founded, a model set of business transactions are given, and have been treated in three different ways. In the first place, the transactions are treated in a purely. theoretical manner; next, as they might be treated in actual practice ; and lastly, as they might be treated in actual practice, with further improvements and developments. These transactions are supposed to be BOOK-KEEPING spread over a year, and, although they are very simple, any one who thoroughly understands their treatment as now submitted will have acquired a competent knowledge of book-keeping. The Transactions of William Wood, Merchant William Wood took stock on 1st January. The following statement shows his liabilities and his assets: — Statement of Affairs as at 1st January. Liabilities. Assets. Due to Jack & Co. . £300 Due by J. Collins . . £800 Goods in stock . 600 Sum in bank . 150 1 Cash on hand . 50 His transactions throughout the year were as follows :- — Jan. 2.^ Paid cash for goods purchased £40 Purchased goods on credit from Scott & Tait 400 Gave Scott & Tait bill at three months 400 5>J. Collins settles his account for £800 by paying in cash .... 760 And is allowed as discount . 40 Paid into bank . . . 700 7> Paid Jack & Co., in settlement of their account for £300, cheque for . 285 They allowing as discount . 15 9.^ Sold goods for cash .... 20 Sold goods to J. Collins 500 Eeceived from J. Collins bill due in three months .... 500 Discounted J. Collins's bill, and received in cash ...... 495 Discount charged 5 Apr. 5} Gave cheque in payment of bill due to-day ...... 400 June 30. Paid for half-year's rent to this date . 35 Paid wages ..... 100 Dec. 1. Sold goods to W. Simj 3S0n . 650 ACCOUNTING IN THEORY AND PRACTICE Dec. 1. Paid to account of rent for half-year ending 31st inst. .... Purchased from Jack & Co. goods on credit ..... Gave Jack & Co. bill at three months Gave Jack & Co. cheque for They allowing as discount . 6. Sold goods to J. Collins 7. Purchased goods from Scott & Tait on credit .... Received cash from J. Collins Received bill from J. Collins at three months . 8. Paid into bank Purchased goods from Jack & Co. on credit . . . . Gave cheque to Scott & Tait as pay ment to account 31. Paid wages to date . Cash taken during year by "William Wood for his own use Trial Balance to he taken at this stage Dec. 31. Value of goods on hand at this date Amount due for rent to date £15 490 280 200 10 1830 1000 1230 300 900 370 770 100 600 700 20 The Transactions of William Wood, Merchant Recorded using the Ledger only. William Wood is supposed to have taken stock on 1st January. His object in so doing was to prepare a State- ment of his Affairs as at that date. It is evident that if he wishes to keep a proper record of his business transactions, he must begin his books on 1st January by incorporating in them the exact position of his business on that date. From his Statement of Affairs it will be observed that his only liability was £300 due to Jack & Co. This sum being due to Jack & Co., they are creditors of the business for the amount, and accordingly an account is opened in the Ledger headed Jack & Co., and on the right or credit side of this account is placed the £300. William Wood having brought this liability into the business, his account, BOOK-KEEPING called the Capital Account, must be charged or debited with the £300, as he is indebted to the business for the business having, as it were, taken over the liability. To keep a record of these transactions it will be observed that the entry in the Capital Account is debited as follows : " Jan. 1. To Jack & Co., £300," and Jack & Co.'s Account has on the credit side the following entry: "Jan. 1. By Capital, £300," the entry in each account referring back to the other account. The Assets at 1st January are as follows : — Due by J. Conins . , . £800 Goods in stock . . . 600 Sum in bank . . . . 150 Cash on hand . . . 50 These assets having been brought into the business, William Wood credits himself with each item individually, as shown in his account. J. Collins is debited with £800, because he is indebted to that extent to William Wood. Similarly, the Goods Account is debited with £600, the Bank Account with £150, and the Cash Account with £50. The transactions throughout the year will now be taken up in detail. Jan. 2. Faid Cash for Goods Purchased y £40. It is evident that the goods have come in and that cash has gone out, and the Goods Account is therefore debited and the Cash Account is credited with the £40, the entry being made in the Goods Account "To Cash," and in the Cash Account "By Goods," and this rule of each entry in each account referring by name to the Ledger Account, where the opposite entry will be found, is carried on throughout. 'O* Jan. 2. Purchased Goods on credit from Scott & Tait, £400. Here goods having come in, the Goods Account must be debited, and Scott & Tait must be credited, as by the transaction they become creditors for the £400. ACCOUNTING IN THEORY AND PRACTICE Jan. 2. Gave Scott & Tait Bill at three montJis, £400. The meaning of this transaction is that Scott & Tait, who are creditors of William Wood for the goods purchased from them, got William Wood to acknowledge on a piece of stamped paper that he was so indebted to them, and would pay them cash at the end of three months. So far as William Wood is concerned, therefore, he is now no longei due Scott & Tait £400 on an open account, but is due £400 on a bill payable. It is therefore necessary for William Wood to record this alteration of his liability in his Ledger, and accordingly Scott & Tait are debited and Bills Payable Account credited with the £400. Jan. 5. J. Collins settles his Account for £800 hy paying in Cash £760, and is allowed as Discount £40. If J. CoUins's Ledger Account be referred to, it will be seen that it is debited with £800. As he now settles his indebtedness, it is necessary that he should be credited : — By Cash . . . £760 „ Discount . . 40, and the Cash Account will fall to be debited with the £760 of cash which has come in, and the Discount Account to be debited with the £40 allowed J. Collins as discount. Jan. 5. Paid into Bank, £700. The cash having been paid out, the Cash Account must be credited and the Bank Account is debited, because the bank has received the money, and is therefore indebted to the business for it. Jan. 7. Paid Jack & Co., in settlement of their Account of £300, Cheque for £285. They allowing as Discount £15. • If Jack & Co's Account is referred to in the Ledger, it will be seen that there is £300 at their credit. As William BOOK-KEEPING Wood has settled this by cheque, and by being allowed discount, it is necessary to enter on the debit side of their account "To Bank, £285," and "To Discount, £15," and to credit the bank with £285, as the bank will duly meet the cheque, and to credit Discount with £15. Jan. 9. Bold Goods for Cash, £20. As the cash has come in, the Cash Account is debited with £20, and as the goods have gone out, the Goods Account is credited with £20. Jan. 9. Sold Goods to J. Collins, £500. J. Collins having received these goods is indebted for them, and his account should be debited. The goods having gone put, the Goods Account is credited. Jan. 9. Received from J. Collins Bill due in three months, £500. William Wood has received from J. Collins a piece of stamped paper acknowledging that he is due the £500, and agreeing to pay it in three months. J. Collins was debited with £500 in respect of the goods, but the £500 was simply due on his open account. The debt in the form of a bill is of more value, as J. Collins, having once put his name to the bill, cannot dispute the indebtedness. It is therefore necessary to credit J. Collins's Account "By Bills Receivable, £500," and to debit the Bills Eeceivable Account with the £500. Jan. 9. Discounted J. Collins's Bill, and received in Cash £495. Discount charged, £5. This bill is at the debit of Bills Eeceivable, and until it is discounted is an asset of £500. Having been discounted, the nature of the asset has changed, and it is necessary to wipe this bill out by entering on the credit side of the Bills Eeceivable Account "By Cash, £495," and "By lo ACCOUNTING IN THEORY AND PRACTICE Discount, £5." It only remains to enter the £495 on the debit side of the Cash Account and the £5 on the debit side of the Discount Account. A'gr. 5. Gam Cheque in payment of Bill due to-day ^ £400. The bank must get credit for having paid this cheque, and accordingly the Bank Account is credited. The Bills Payable Account is debited, as the bill is no longer a liability. June 30. Paid for Half-years Rent to this date, £35. Cash having gone out, the Cash Account is credited and the Eent Account debited. June 30. Paid Wages, £100. The Cash Account is credited and the Wages Account is debited. Dec. 1. Sold Goods to W. Simpson, £650. W. Simpson is debited because he has received the goods, and is therefore indebted for them, and the Goods Account is credited, as the goods have gone out. Dec. 1. Paid to Account of Eent for Half-year ending ^Ist December, £15. The Cash Account is credited and the Eent Account is debited. Dec. 1. Purchased from Jack & Co. Goods on credit, £490. The Goods Account is debited, because the goods have come in, and Jack & Co. are credited, because they have sent the goods. BOOK-KEEPING Bee, 1. Gave Jack & Co. Bill at three months, £280. Gave Jack & Co. Cheque for £200. They allowing as Biscount £10. Jack & Co.'s Account should be debited as follows :- To Bills payable . . £280 „ Bank . 200 „ Discount . . 10 and Bills Payable, Bank, and Discount should be credited with the respective entries. Bee. 5. Sold Goods to J. CoIHtis, £1830. J. Collins should be debited, as he received the goods, and the Goods Account should be credited, as the goods have crone out. O' Bee. 7. Purchased Goods from Scott & Tait on credit, £1000. The Goods Account should be debited, because the goods have come in, and Scott & Tait should be credited, because they have sent the business the goods. Bee. 7. Received Cash from J. Collins, £1230. Received Bill from J. Collins at three months, £300. It is quite evident that J. Collins should be credited "By Cash, £1230," and "By Bills receivable, £300," and the Cash and Bills Eeceivable Accounts debited. Bee. 8. Paid into Bank, £900. The bank should be debited, as they have received, and are therefore indebted for, the cash, and the Cash Account should be credited, as that amount of cash has been paid. 12 ACCOUNTING IN THEORY AND PRACTICE Dec. 8. Purchased Goods from Jack & Co. on credit, £370. The Goods Account should be debited, as the goods have come in, and Jack & Co. should be credited. Dec. 8. Gave Cheque to Scott & Tait as Payment to Account, £770. Scott & Tait should be debited, as they receive the cash, and the bank should be credited, as they pay it out on behalf of William Wood. Dec. 31. Paid Wages to date, £100. The Cash Account should be credited and Wages Account debited. Dec, 31. Cash taken during Yearly William Wood for his own use, £600. It is quite evident that Cash should be credited, as the cash has gone out, and William Wood having taken the money for his own use, he should be debited with the amount. It will have been observed that in recording all these transactions for every debit there has been a corresponding credit, and, accordingly, if the Ledger is added up at this stage, the total of the debit side will agree with the total of the credit side. This is shown in the Trial Balance. Ledger Accounts before making Closing Entries /. Collins. Jan. 1 . To Capital . £800 Jan. 5. By Cash . £760 9. .. Goods . 500 ,, Discount 40 Dec. 5. ;, do. . . 1830 9. ,, Bills re 3130 ceivable 500 Dec. 7. ,, Cash . 1230 „ Bills re ceivable 300 2S30 BOOK-KEEPING 13 W. Simpson. Dec. 1. To Goods . . £650 | Jack & Co. Jan 7. To Bank . £285 Jan. 1. By Capital . £300 ,, Discount 15 Dec. 1. ,, Goods . 490 Dec. 1. „ Bills pay 8. „ do. . 370 able . 280 1160 „ Bank . 200 ,, Discount 10 790 Scott <& Tail Jan. 2. To Bills pay- Jan. 2. By Goods . £400 able . £400 Dec. 7. „ do. . 1000 Dec. 8. ,, Bank 770 1170 1400 Bills Payable. Apr. 5. To Bank . . £400 Jan. 2. By Scott & Tait £400 i Dec. 1. ,, Jack & Co. . 280 i 680 Bills Receivable. Jan. 9. To J. Collins Dec. 7. ,, do. £500 300 800 Jan. 9. By Cash . ,, Disco ant . £495 5 500 a Goods. Jan. 1. To Capital £600 Jan. 9. By Cash . £20 2. ,, Cash . 40 ,, J. Collins . 500 „ Scott & Tait 400 Dec. 1. „ W. Simp- Dec. 1. „ Jack & Co. 490 son. 650 7. „ Scott & Tait 1000 5. „ J. Collins . 1830 8. ,, Jack k Co. 370 2900 3000 a ACCOUNTING IN THEORY AND PRACTICE Bent .Tune 30. To Cash . Dec. 1. „ do. . . £35 . 15 SO Waaes. June 30. To Cash . . £100 Dec. 31. „ do. . . 100 200 Discount Jan. 5. To J. Collins £40 Jan. 7. By Jack & Co. . £15 9. ,, Bills receiv- Dec. 1. „ do. . 10 able . 5 45 25 Capital. Jan. 1. To Jack & Co. . £300 Jan. 1. By J. Collins . £800 Dec. 31 „ Cash . . 600 „ Goods 600 900 „ Bank. 150 „ Cash . 50 1600 Bank. Jan. 1. To Capital . £150 Jan. 7. By Jack & Co. £285 Q 5. „ Cash . . 700 Apr. 5. „ Bills pay- Dec. 8. „ do. . . 900 able . 400 1750 Dec. 1. ,, Jack & Co. 200 *' 8. „ Scott&Tait 770 1655 Cash. Jan. 1. To Capital „ J. Collins . £50 Jan. 2. By Goods £40 5. 760 5. ,, Bank 700 9. „ Goods 20 'June 30. ,, Rent 35 ,, Bills receiv- „ Wages 100 able 495 Dec. 1. ,, Rent 15 Dec. 7. ,, J. Collins . 1230 8. „ Bank 900 2555 31 „ Wages „ W. Wood 100 600 2490 CLOSING ENTRIES Trial Balance as at 31st December. Br. Cr. J. Collins .... £3,130 £2,830 W. Simpson . Jack &; Co, . 650 790 1,160 Scott & Tait . 1,170 1,400 Bills payable 400 680 Bills receivable 800' 500 Goods . 2,900 3,000 Rent . 50 Wages . 200 Discount 45 25 Capital. 900 1,600 Bank . 1,750 1,655 Cash . 2,555 2,490 £15,340 £15,340 CLOSING ENTEIES The accuracy of the posting of the Ledger having been so far determined by the agreement of the totals of the Trial Balance, the closing entries involving the preparation of the Profit and Loss Account and Balance Sheet may now be proceeded with. Goods Account, The first account requiring adjustment is the Goods Account. The following is an abstract of the Goods Account as it at present stands in the Ledger : — Abstract of Goods Account Jan. 1. To Stock on Dec. 31. By Sales . £3000 hand at this date £600 Dec. 31. ,, Purchases 2300 It is important to note the various items of which this account consists, and these will be readily seen from the above abstract. On the debtor side there is the cost of goods which were in stock at the beginning of the year and the cost of the goods purchased since, and on the credit side there is the total sales which have been made during the year. The debit side therefore shows the i6 ACCOUNTING IN THEORY AND PRACTICE total cost of the goods which have been in the shop or warehouse during the year, and the credit side contains the total price realised for the goods which have been sold. All the goods, however, have not yet been sold, and, to arrive at the profit from the purchase and sale of the goods, it is neces- sary that the goods on hand at the close of the year should be allowed for. The value of the goods on hand at the close of the year would be arrived at by actually going over the goods and preparing a priced inventory of them. Suppose that this has been done, and that the value of the goods, taken at cost price, is £700, it is evident that if this sum is deducted from the debit side of the Goods Account, the total of the debit side will then represent the cost of the goods which have been actually sold, and as on the credit side there is the price realised for these goods that have been sold the difference between the two sides will give the gross profit on the goods. Instead of deducting the goods on hand at the close of the year from the debit side, the effect will be the same if the amount is entered on the credit side, and as the goods on hand at the close of the year may be looked upon as the balance of the Goods Account, the simplest plan is to enter the amount on the credit side as the balance. The credit side will then amount to £3700, and the debit side to £2900, and the difference, £800, will be the gross profit on goods. The gross profit on goods should be trans- ferred to the Profit and Loss Account, where all the profits and all the charges or losses are collected together, and this is done by entering on the debit side of the Goods Account "To Profit and Loss, £800." The abstract of the Goods Account will then appear as follows : — Abstract of Goods Account. Jan. 1. To Stock on hand at Dec. 31. By Sales . £3000 ,, Balance 700 this date £600 Dec. 31. „ Purchases 2300 >) Profit and Loss 800 £3700 £3700 Jan. 1. To Balance £700 CLOSING ENTRIES 17 Eent Account Another account requiring special adjustment is the Eent Account. This account appears as follows : — Eent Account. June 30. To Cash . . £35 I Dec. 1. ,, do. . 15 I The account is at present debited with £50, but the rent of the shop or warehouse is £70 per annum, and it would not therefore do to transfer £50 to the Profit and Loss Account, but £70 must be transferred. If the entry- is made on the credit side of the Eent Account — " By Profit and Loss, £70," the Eent Account will then have a balance of £20, which should be carried down as a liability, that being the balance of rent which is due on the 31st of December. The Eent Account will then appear as follows : — Bent Account. June 30. To Cash Dec. 1. „ do. 31. „ Balance . £35 16 20 Dec. 31. By Profit and Loss Jan. 1. By Balance £70 £70 £70 £20 Wages. The Wages Account has £200 on the debit side, and to transfer this to the Profit and Loss Account the entry is made on the credit side — " By Profit and Loss, £200," and the amount transferred. J)iscount. Similarly, the Discount Account shows an excess of the debit side over the credit side of £20, and this amount is transferred in the same way to the Profit and Loss Account. c ACCOUNTING IN THEORY AND PRACTICE Profit and Loss Account. There has now been transferred into the Profit and Loss Account all the profits of the business for the year, these appearing on the credit side, and on the debit side are placed all the charges incurred in earning this profit, namely rent, wages, and discount. The difference between the two sides is £510, which is the net profit. As the net profit belongs to the owner of the business, it should be transferred to his account, namely, the Capital Account, by entering on the debit side of the Profit and Loss Account "To Capital, £510." Balance Sheet. All that now remains to be done is to balance off each of the accounts, and carry down the balances. All the debit balances represent assets, and the credit balances represent liabilities, including capital. In the Balance Sheet are shown on the one side all the assets, and on the other all the liabilities, including capital. Completed Ledger Accounts /. Collins. Jan. 1. To Capital . £800 Jan. 5. By Cash £760 9. ,, Goods . 500 ,, Discount . 40 Dec. 5. „ do. . 1830 9. „ Bills re- ceivable 500 Dec. 7. „ Cash •„ Bills re- ceivable 1230 300 To Balance 31. ,, Balance . 300 £3130 £3130 Jan. 1. . £300 W. Simpson. Dec. 1. To Goods . £650 Dec. 31. By Balance . £650 £650 £650 Jan. 1. To Balance . £650 BOOK-KEEPING 19 Jade & Co. Jan. 7. To Bank . £285 Jan. 1. By Capital . £300 ,, Discount 15 Dec. 1. ,, Goods 490 Dec. 1. ,, Bills pay able ,, Bank ,, Discount 280 200 10 8. „ do. 370 Dec. 31. ,, Balance . 370 Jan. 1. By Balance £1160 £1160 . £370 Scott & Tait Jan. Dec. Dec. 2. 8. 31. To Bills pay- able . £400 ,, Bank . 770 „ Balance . 230 Jan. 2. Dec. 7. Jan. 1. By Goods ,, do. By Balance . £400 1000 £1400 £1400 _0 . £230 Bills Payable. Apr. 5. To Bank Dec. 31. ,, Balance . £400 . 280 Jan. 2. Dec. 1. Jan. 1. By Scott & Tait . „ Jack & Co. . By Balance . £400 280 £680 £680 jO £280 Bills Receivable. Jan. 9. To J. Collins . £500 Dec. 7. „ do. . 300 Jan. 1. To Balance £800 £300 Jan. 9. By Cash . £495 ,, Discount 5 Dec. 31. ,, Balance . 300 £800 20 ACCOUNTING IN THEORY AND PRACTICE Goods. Jan. 1. To Capital £600 2. „ Cash . ,, Scott & 40 Tait 400 Dec. 1. „ Jack & Co. 490 7. ,, Scott & Tait 1000 8. ,, Jack & Co. 370 31. „ Profit and Loss 800 £3700^ J Jan. 1. To Balance . £700 Jan. 9. By Cash . . £20 „ J. Collins . 500 Dec. 1. „ W. Simpson 650 5. „ J. Collins . 1830 31. „ Balance . 700 £3700 Rent. June 30. To Cash . Dec. 1. ,, do. . 31. ,, Balance £35 Dec. 31. By Profit and 15 20 £70 Loss £70 £70 Jan. 1. By Balance . £20 Wages. June 30. To Cash Dec. 31. „ do. . £100 . 100 Dec. 31. By Profit and Loss £200 £200 £200 Discount Jan. 5. To J. Collins . ^. „ Bills receiv- able . £40 5 Jan. 7. By Jack & Co. £15 Dec. 1. ,, do. . 10 31. „ Profit and Loss . 20 £45 £45 Capital. Jan. 1. To Jack & Co. £300 Dec. 31. „ Cash . 600 „ Balance . 1210 Jan. 1. By J. Collins ,, Goods . „ Bank ,, Cash Dec. 31. ,, Profit and Loss Jan. 1. By Balance . £800 600 150 50 510 £2110 £2110 £1210 BOOK-KEEPING Bank. Jan. 1. To Capital 5. „ Cash . Dec. 8. „ do. . . £1.50 . 700 . 900 Jan. Apr. Dec. 7. 5. 1. 8. 31. By Jack & Co. £285 „ Bills pay. able . 400 „ Jack & Co. 200 ,, Scott &Tait 770 ,, Balance . 95 £1750 £1750 Jan. 1. To Balance . £95 Gash. Jan. 1. To Capital 5. ,, J. Collins 9. ,, Goods ,, Bills receiv able Dec. 7. ,, J. Collins Jan. 1. To Balance £50 760 20 495 1230 £2555 £65 Jan. 2. By Goods 5. ,, Bank June 30. Dec. 1. 31. ,, Rent , , Wages ,, Rent ,, Bank ,, Wages „ W. Wood ,, Balance . £40 700 35 100 15 900 100 600 65 £2555 Profit and Loss. Dec. 31. To Rent . „ Wages ,, Discount „ Capital £70 200 20 510 £800 Dec. 31. By Goods . £800 £800 Balance Sheet as at 31st December. Liabilities. ,/, Assets Due to Jack and Co. Due to Scott & Tait Bills payable Rent outstanding Capital £2110 Due by J, Collins Due by W. Simpson Bills receivable . Goods on hand . Cash in bank Cash on hand £300 650 300 700 95 65 £2110 It has now been shown, by means of Ledger Accounts only, how all the business transactions of WiUiam Wood 22 ACCOUNTING IN THEORY AND PRACTICE may be properly and sufficiently recorded. It is seen exactly how it is that he has made a profit on his business, and what his assets and liabilities consist of. It is thus apparent that the essential book in book-keeping is the Ledger, and that all the results which book-keeping is capable of affording may be obtained by the use of the Ledger alone. In practice, however, it would be found almost impossible to keep accounts in the way that has been illustrated by means of a Ledger only, but it is important to remember that the whole theory of book- keeping is contained in the Ledger, and that any additional books which it may be found advisable to use are simply branches or parts of the Ledger system, and can only be ^ properly understood and correctly used when they are looked upon as such. These same transactions of William Wood will now be treated in a way which is more in harmony with actual practice. PEACTICAL BOOK-KEEPING In devising a set of books for any business concern, there are certain points which the accountant should care- fully keep in mind. It should be such a system of book- keeping as will not involve the keeping of too many clerks nor the procuring of too expensive books. The great secret of achieving economy in the book-keeping of an establish- ment is to utilise the original entries to the fullest extent. No scroll-books should ever be used, but the entries should be at once written into the proper book of record as the transaction takes place, and each book of record should, if possible, be so arranged as to be utilised in preparing the Profit and Loss Account and Balance Sheet. Another criterion of a good system of book-keeping, and one which often effects great saving of time, is to have the books so arranged that it is possible /in the event of any errors getting into the books to trace^^them readily. Where it is possible to localise errors the irksome labour of going over the whole of the books until all the errors are found is BOOK-KEEPING IN PRACTICE 23 obviated. In a good system of book-keeping the books • should be so arranged and sub-divided that the clerks of the establishment can have access to them as they require. No excuse should ever be accepted that one clerk cannot get on with his work because another clerk is using the book he requires. Under a well-arranged system of book- keeping it is very easy to avoid this. To sum up, that system of book-keeping is the best in which the fullest effect is given to the following : — 1. The utilising of the original entries. 2. The localising of errors. 3. The accessibility of the books to the clerks of the establish- ment. The transactions of William Wood as they might he recorded in actual practice. Having treated, the transactions of William Wood in a purely theoretical manner, it now remains to illustrate how these transactions might be treated in a practical way. It is evident that if the business was of any size at all the transactions connected with cash might become so extensive as to necessitate a clerk being employed to devote his sole time to attending to the cash. In such a case it is quite evident that it would be of advantage instead of having the cash account in the Ledger to keep it in a separate book which the cashier could have always in front of him. Similarly, a separate book might be kept for goods received and a separate book for goods sold. The books necessary to record the transactions of William Wood might therefore be the following : — 1. Cash Book, for cash transactions. 2. Invoice Book, for goods purchased. 3. Day Book, for goods sold. 4. Journal. 5. Ledger. 1. The Cash Booh The Cash Book which is given has three money columns on each side, headed Discount, Bank, and Cash, and the 24 ACCOUNTING IN THEORY AND PRACTICE use of these columns is easily understood. The Discount column on the debtor side is for the purpose of inserting opposite the name of the customer the amount of discount allowed to the customer when a settlement takes place. The Discount column on the credit side is for discount allowed by creditors at settlement. The Bank column on the debtor side is for the purpose of containing all sums paid into bank, and the Bank column on the credit side is for the purpose of containing the amounts of all cheques which are issued on the bank. It will be observed that the Bank column on the debtor side starts with the cash in bank at the beginning of the year, and that the cash in bank at the close of the year — £95 — is entered in the credit column. The Bank columns contain all the entries exactly as they appear in the Bank Pass Book, and there is thus no necessity of keeping a Bank Account in the Ledger. The Cash column on the debtor side is for cash actually received, and the Cash column on the credit side of the Cash Book is for cash actually paid away. All the items on the debit side of the Cash Book should be posted to the credit side of some account in the Ledger, and all the items on the credit side of the Cash Book should be posted to the debit side of some account in the Ledger, except the purely cash transactions with the Bank and the Cash and Bank balances. It will be observed that only the balance of the discount, namely £20, is posted to the Ledger. The only transactions in the Cash Book which are not posted are the payments of cash into bank or cash received from bank, which are given effect to through the Cash and Bank columns. 2. The Invoice Book. The Invoice Book is for the purpose of containing the details of aU goods purchased. It thus practically takes the place of the debit side of the Goods Account in the Ledger, and to form the Ledger Account it is only necessary to post the total of the Invoice Book, either weekly or monthly, as may be thought desirable, to the debit of the BOOK-KEEPING IN PRACTICE Goods Account. The details of the Invoice Book are posted to the credit of the various accounts with the exception of the cash items which have already appeared on the credit side of the Cash Book. 3. The Bay Booh. The Day Book is for the purpose of containing the details of the goods sold. It is thus really the credit side of the Goods Account in detail. To the Goods Account in the Ledger the total of the Day Book should be credited, weekly or monthly, as required. The individual items in the Day Book are posted to the debit of the different customers' accounts in the Ledger, with the exception of any purely cash items which have already appeared on the debit side of the Cash Book. 4. The Journal. The Cash Book, the Invoice Book, and the Day Book are called the books of original record, because the trans- actions are recorded in them just as they take place. These books are all posted into the Ledger direct. In most businesses there are some transactions which are not contained in the books of original record which require to appear in the Ledger, and for all such items it is desirable to use the Journal. The Journal is solely for the purpose of keeping a record of the debiting and crediting of items in the Ledger, and is practically used for : — 1. Opening entries. 2. Entries which cannot be conveniently carried through the books of original record. 3. Closing entries. In the Journal submitted it will be observed that the opening entries are all given, although perhaps the bank and the cash items might have been posted direct from the Cash Book. The entries throughout the year refer to bills payable and bills receivable and to the totals of the Invoice Book and Day Book. When bill transactions are numerous 26 ACCOUNTING IN THEORY AND PRACTICE it is desirable to keep a special book for bills payable and bills receivable, which may be used as the Bill Journal. The other entries relate to the closing of the books. 5. The, Ledger, The Ledger is given all in one, although in most businesses it is very desirable to have the Ledger divided into : — 1. The Customers' Ledger or Debtors' Ledger, for Customers' Accounts. 2. The Purchases Ledger or Creditors' Ledger, for accounts with creditors or with those from whom goods are purchased. 3. The General Ledger, for all other accounts. Where, as in most businesses, it is desired that the clerks should not know what profit is being earned or what the amount of the capital is, a Private Ledger should also be kept. The other ledgers may be balanced apart from the Private Ledger by keeping in the General Ledger an account headed " Private Ledger Account " for all trans- actions which require to be entered through the other books, but which really belong to the Private Ledger. If a Private Ledger were kept in the present system, no Goods or Capital Accounts would be required, and the Private Ledger Account in the General Ledger would be as follows : — Private Ledger Account. Jan. 1. To Jack & Co. . £300 Jan. 1. By J. Collins £800 Dec. 31. Cash, W ,, Bank 150 Wood 600 „ Cash 50 „ Rent . 50 Dec. 31. ,, Sales 3000 „ Wages 200 ,, Discount 20 ,, Purchases 2300 ,, Balance 530 £4000 £4000 _0 BOOK-KEEPING IN PRACTICE 27 6 % £ s. d. 40 700 35 lOQ 15, 900 100 99 009 r most wholesale merchants. The student slioukl 1 Discount columns. The Bank columns are very 3 above method they are used as principal columns, eated in the same way as cash received into or I|| £ s. d. 285 400 200 770 If SI £ s. d. 15 10 y Goods , Bank. , Jack & Co. , Bills payable , Rent . , Wages . , Rent . , Jack & Co. , Bank , Scott & Tait , Wages , W. Wood- Capital Accoun , Discount . , Balances . w - " ~ 8 Jan. 2. 5. 7. Apr. 5. June 30. Dec. 1. 8. 31. 6 £ s. d. 50 760 20 495 1230 \a C<1 .0 g^ ^ .-t^ pq ^ £ s. d. 150 700 900 le Cash Book above shown is s lly note the method of using the used merely as analytical columns ash paid out of or paid into b ut of the cash-box. s;3 £ s. d. 40 5 To Capital ,, J. Collins . ,, Cash ,, Goods ,, Bills receivable ,, J. Collins . „ Cash . & j l-H vd oJ t^ 06 1 J 1 T] specia often and c paid 28 ACCOUNTING IN THEORY AND PRACTICE Invoice Book Jan. 2. Dec. 1. 7. 8. To Cash . ,, Scott & Tait ,, Jack & Co. ,, Scott & Tait ,, Jack & Co. Goods . . Br. £40 400 490 1000 370 £2300 _0 Day Book Jan. 9. Dec. 1. 5. By Cash . ,, J. Collins ,, W. Simpson . ,, J. Collins Goods Or. £20 500 650 1830 £3000 Journal Jan. 1. J. Collins . . . . Dr Goods , Bank „ Cash „ To W. Wood, Capital Accoun for assets at this date . £800 600 150 50 b £1600 W. "Wood, Capital Account . To Jack & Co. for liability at this date Dr 300 300 Br £1900 £1900 2. Scott & Tait . To Bills payable 400 400 9. Bills receivable . To J. Collins . Br 500 500 Dec. 1. Jack & Co. . To Bills payable Br 280 280 7. Bills receivable To J. Collins . . Br 300 300 31. Goods . To Sundries . for total of Invoice Bool . Br 2300 2300 Sundries To Goods for total of Day Book Br 3000 3000 Carry forward £6780 £6780 BOOK-KEEPING IN PRACTICE 29 Journal — Continued Dec. 31. Brought forward Goods (New Account) . . Dr. To Goods (Old Account) . for goods on hand at this date Rent (Old Account) . . Dr. To Rent (New Account) for rent accrued to date unpaid Goods .... To Profit and Loss . Profit and Loss To Rent . ,, Wages , , Discount ,, Capital Dr. . Dr. £6780 700 20 800 800 £9100 £6780 700 20 800 70 200 20 510 £9100 Ledger /. Collins. Jan. 1. To Capital . £800 Jan. 5. By Cash . £760 9. ,, Goods . 500 ,, Discount . 40 Dec. 5. „ do. . 1830 9. Dec. 7. ,, Bills receiv- able ,, Cash . ,, Bills receiv- able . 500 1230 300 1. To Balance 31. ,, Balance 300 £3130 . £300 _0 0. £3130 Jan. W. Simpson. Dec. 1. To Goods . . £650 Dec. 31. By Balance . £650 £650 £650 Jan. 1. To Balance . £650 30 ACCOUNTING IN THEORY AND PRACTICE Jack & Co. Jan. 7. To Bank £285 Jan. 1. By Capital . £300 ,, Discount 15 Dec. 1. ,, Goods . 490 Dec. 1. ,, Bills pay- able ,, Bank ,, Discount 280 . 200 10 8. „ do. . 370 31. , , Balance . 370 Jan. 1. By Balance £1160 £1160 . £370 Scott & Tail Jan. 2. To Bills pay- able Dec. 8. ,, Bank 31. ,, Balance . £400 770 230 £1400 Jan. 2. By Goods Dec. 7. ,, do. . £400 1000 £1400 Jan. 1. By Balance . £230 Bills Payable. Apr. 5. To Bank . . £400 | Jan. 2. By Scott & Tait . £400 Dec. 31. Balance 280 1 Dec. 1. „ Jack & Co. £680 280 £680 i Jan. 1. By Balance . £280 Bills PeceivaUe. Jan. 9. To J. Collins Dec. 7 ,, do. . Jan. 1. To Balance £500 300 ^1 0| £800 £300 Jan. 9. By Cash . . £495 ,, Discount . 5 Dec. 31. „ Balance . 300 £800 Goods. Jan. 1. To Capital . £600 Dec. 31. ,, Purchases 2300 „ Profit and Loss . 800 Dec. 31. By Sales ,, Balance . £3000 . 700 £3700 £3700 Jan. 1. To Balance . £700 BOOK-KEEPING IN PRACTICE 31 Pient. June 30. To Cash . Dec. 1. ,, do. . 31. ,, Balance £35 15 20 £70 Dec. 31. By Profit and Loss . £70 £70 Jan. 1. By Balance . £20 Wages. June 30. To Cash . Dec. 31. ,, do. . £100 100 £200 Dec. 31. By Profit and Loss . £200 £200 Discount. Dec. 31. To Cash £20 £20 Dec. 31. By Profit and Loss . £20 £20 Capital. Jan. 1. To Jack & Co. £300 Dec. 31 ,, Cash . 600 „ Balance . 1210 Jan. Dec. Jan. 1. 31. 1. By J. Collins ,, Goods . ,, Bank „ Cash ,, Profit and Loss . By Balance . £800 600 150 50 £1600 510 £2110 £2110 £1210 Profit and Loss Account. Dec. 31. To Rent . £70 ,, Wages . 200 ,, Discount . 20 ,, Capital . 510 £800 Dec. 31. By Goods . £800 £800 32 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet as at 31st December. Liabilities. Assets. Due to Jack & Co. Due to Scott & Tait Bills payable Rent outstanding Capital Due by J. Collins Due by "W. Simpson Bills receivable . Goods on hand . Cash in bank Cash on hand £300 650 300 700 95 65 £2110 PEACTICAL BOOK-KEEPING FUETHER DEVELOPED THE TRANSACTIONS OF WILLIAM WOOD AS THEY MIGHT BE RECORDED IN ACTUAL PRACTICE, WITH FURTHER IM- PROVEMENTS AND DEVELOPMENTS ON THE METHOD ALREADY SHOWN. The method of recording the transactions of William Wood may be still further improved. A method of keeping these transactions is now submitted which has several advantages over those already shown, and it may be well to point out exactly what these advantages are. The books kept under this system are :— 1. Columnar Cash Book 2. Invoice Book. 3. Day Book. 4. Journal. 5. Ledgers : — (a) Customers' Ledger or Debtors' Ledger, for cus- tomers' accounts. Purchases Ledger or Creditors' Ledger, for accounts with creditors or with those from whom goods are purchased. (c) The General Ledger, for all other accounts. The Cash Book. It will be observed that in the form of columnar Cash Book now submitted both debit and credit transactions are (b) BOOK-KEEPING IN PRACTICE 33 entered immediately after the date. There is thus never any break in the page. In the form of Cash Book formerly given if the number of debit transactions was not the same as the number of credit transactions a portion of the page had to be left blank. In the form now submitted no such blank can occur. It will be observed that the Cash and Bank columns, both debit and credit, are the same as in the form of Cash Book already given. The other columns consist of the folio columns and monetary columns for the purpose of analysing the receipts and payments, and of containing the discount. By means of the analytical columns a Cash Abstract may be at any time prepared, and the ledgers may be balanced separately. The posting of this Cash Book, so far as the details of the Customers' and Creditors' Accounts are concerned, is carried out exactly on the lines of the Cash Book already described. Detailed accounts may also be kept for any of the other items in the analytical columns, or the totals of these analytical columns may be posted either weekly or monthly to the General Ledger. In the example given the columns are totalled and posted at the end of the year. Invoice Book, Day Booh, and Journal. These books are used exactly in the manner already described, and, being the same as in the former set, are not repeated. The Ledgers. The Ledger Accounts which should be specially noted, and the working of which should be carefully followed, are the " Abstract of Customers' Ledger " and the " Abstract of Purchases Ledger," contained in the General Ledger. These accounts are prepared in practice from the weekly or monthly totals of the Day Book and Invoice Book, together with the totals of the Sales column, the Purchases column, and the Discount columns in the Cash Book. The great advantage of these accounts is that they verify at any time the amount due by customers or due to creditors as D 34 A ceo UN TING IN THE OR V A ND PRA CTICE WILLIAM wool Gas Dr. Discount. Sales. Fol. Bank. Cash. £ 5. d. £ 5. d. £ s. d. 150 £ s. d. 50 1899 Jan. 1. 2. To Capital By Goods .... 40 760 700 760 5. 7. To J. Collins By Bank, sum paid in ,, Jack & Co. . 20 20 9. To Goods .... 5 495 495 Apr. 5. June 30. Dec. 1. ,, Bills receivable . By Bills payable ,, Rent .... „ Wages . . . ,, Rent . ,, Jack & Co. . 1230 900 1230 7. 8. 31. To J. Collins By Bank, sum paid in „ Scott &Tait. „ Wages . „ William Wood — Ca Account . ,, Balances ipita 45 2505 1750 |2555 BOOK-KEEPING IN PRACTICE ERCHANT IN LONDO]^' » Cr, Cash. Bank. Fol. Purchases. Discount. Wages. Rent.Rates, Gas, and Insurance. Charges. ! other Payments. £ 5. d. £ s. d. £ s. d. £ s. d. £ S. d. £ S. d. £ 5. d. £ s. d. 40 40 00 285 400 2S5 400 15 35 35 00 100 15 200 200 10 15 00 770 770 00 100 00 600 65 95 55 1750 1695 25 200 50 600 i 36 ACCOUNTING IN THEORY AND PRACTICE contained in the Customers' Ledger and Purchases Ledger. The three ledgers may thus be balanced separately at any time, and an error in the books is at once localised into one or other of the three ledgers. It will be observed that the Bills Eeceivable Account is kept in the Customers' Ledger, and the Bills Payable Account in the Purchases Ledger, to which they naturally belong, as otherwise continual adjust- ments between the ledgers would require to be made when bills were received or accepted. Customers' Ledger /. Collins. Jan. 1. To Capital . £800 Jan. 5. By Cash £760 9. „ Goods . 500 ,, Discount. 40 Dec. 5. ,, do. . 1830 9. Dec. 7. „ Bills re- ceivable „ Cash „ Bills re- ceivable 500 1230 300 1. To Balance 31. ,, Balance . 300 £3130 . £300 £3130 Jan. W, Simpson. Dec. 1. To Goods . £650 Dec. 31. By Balance £650 £650 £650 Jan. 1. To Balance . £650 Bills Receivable. Jan. 9. Dec. 7. To J. Collins do. To Balance £500 300 Jan. Dec. 9. By Cash ,, Discount . 31. ,, Balance . £495 5 300 £800 _0_ £800 Jan. 1. £300 BOOK-KEEPING IN PRACTICE 37 Purchases Ledger Jack & Co. Jan. 7. To Bank £285 Jan. 1. By Capital . £300 ,, Discount 15 Dec. 1. ,, Goods . 490 Dec. 1. ,, Bills pay able „ Bank ,, Discount 280 200 10 8. „ do. . 370 31. ,, Balance 370 Jan. 1. By Balance £1160 £1160 . £370 Bcott & Tail. Jan. 2. To Bills pay- able Dec. 8. „ Bank 31. ,, Balance . £400 770 230 £1400 Jan. 2. By Goods Dec. 7. ,, do. Bills Payable, £400 1000 £1400 Jan. 1. By Balance . £230 Q Apr. 5. To Bank Dec. 31. ,, Balance £400 i Jan. 2. By 280 • Dec. 1. „ Scott & Tait £400 Jack & Co. 280 £680 £680 Jan. 1. By Balance . £280 General Ledger Abstract of Customers' Ledger, Jan. Dec. 1. 31. 1. To Balance . „ Day Book To Balance . £800 3000 Dec. 31. By Cash ,, Discount ,, Balance £2505 45 1250 £3800 £3800 Jan. £1250 Abstract of Purchases Ledger. Dec. 31. To Cash ,, Discount ,, Balance . £1695 25 . 880 Jan. Dec. Jan. 1. 31. 1. By Balance ,, Invoice Book By Balance . £300 . 2300 £2600 £2600 . £880 38 ACCOUNTING IN THEORY AND PRACTICE Goods. Jan. 1. To Capital . £600 Dec. 31. „ Purchases 2300 ,, Profit and Loss . 800 Dec. 31. By Sales ,, Balance . £3000 . 700 £3700 £3700 Jan. 1. To Balance . £700 Rent, Dec. 31. To Cash ,, Balance . £50 20 Dec. 31. By Profit and Loss Jan. 1. By Balance . £70 £70 £70 £20 Wages. Dec. 31. To Cash. £200 £200 Dec. 31. By Profit and Loss . £200 £200 Discount. Dec. 31. To Cash . £45 Dec. 31. By Cash ,, Profit and Loss £25 20 £45 £45 ^ J Ccqntal. Jan. 1. To Jack & Co. £300 Jan. 1. By J. Collins . £800 Dec. 31. ,, Cash 600 ,, Goods 600 ,, Balance . 1210 Dec. 31. „ Bank „ Cash ,, Profit and 150 50 Jan. 1. Loss By Balance . 510 £2110 £2110 £1210 Profit and Loss Account. Dec. 31. To Rent ,, Wages ,, Discount . ,, Capital . £70 200 20 510 £800 Dec. 31. By Goods . £800 £800 BOOK-KEEPING IN PRACTICE 39 Balance Sheet as at 31st December. Liabilities. Assets. Due to creditors : — On open accounts On bills payable . £600 . 280 6 Due by customers : — On open accounts On bills receivable Goods on hand . Cash :— In bank £95 On hand 65 . £950 . 300 Rent outstanding Capital . • £880 20 . 1210 £1250 . 700 IfiO £2110 _0 £2110 _0 Exercises. Treat the following particulars and transactions in the same way as those of William Wood have been treated. 1. On 1st January the position of Adam White, Merchant, was as follows : — Liabilities. Assets. Due to George Tait & Son .... £200 Bills payable . . 150 Due by John Harvey . £300 Bills receivable . . 100 Goods on hand . . 800 Bank . . . . 500 His transactions during the year were as follows :- Jan. 3. Eeceived cash for bill due to-day . . £100 4. Paid cash for goods purchased . . 30 Purchased goods on credit from George Tait & Son 500 Paid bill due to-day by cheque . . 150 Gave George Tait & Son bill at three months 700 7. John Harvey settles his account for £300 by paying in cash .... 285 And is allowed as discount . . 15 Paid into bank 300 Purchased goods from Kusk & Co. . 400 Sold goods for cash 105 40 ACCOUNTING IN THEORY AND PRACTICE Jan. 9. Sold goods to John Harvey . Received from John Harvey bill due in three months .... Discounted John Harvey's bill, and re ceived in cash .... Discount charged . Paid into bank .... Paid Rusk & Co. cheque for . Discount allowed by them Apr. 7. Gave cheque in payment of bill due to-day Dec. 2. Sold goods to John Harvey . 3. Purchased from George Tait & Sou goods on credit ..... Gave George Tait & Son bill at three months ..... Gave George Tait & Son cheque for Discount allowed by them 5. Sold goods to John Harvey . Purchased goods from Rusk & Co. 6. Received bill from John Harvey at three months ..... Received cash from John Harvey . Purchased goods from George Tait & Son on credit ..... 31. Paid wages to date in cash . Paid rent to date by cheque . Cash taken during year by Adam White for his own use Trial Balance to he taken here. Value of goods on hand at this date £1000 1000 990 10 1100 388 12 700 800 1500 1000 425 75 2000 700 2000 500 900 350 200 190 3000 2. On 1st January the position of William Inglis, Merchant, was as follows : — Liabilities. Assets. Due to A. Ross & Co. Bills payable . £300 250 Due by John Adamson . £500 Bills receivable . . 200 Goods on hand . . 1000 Bank . . . . 500 His transactions during the year were as follows : — Jan. 2. Received cash for bill due to-day . . £200 4. Paid cash for goods purchased . . 100 Purchased goods on credit from A. Ross & Co 2000 BOOK-KEEPING IN PRACTICE 41 Jan. 4. 7. 9. Paid bill due to-day by cheque Gave A. Ross & Co. bill at two months John Adamson settles his account for £500 by paying in cash . And is allowed as discount Paid into bank .... Sold goods for cash Sold goods to John Adamson Received from John Adamson bill due in three months .... Discounted John Adamson's bill, and re ceived in cash .... Discount charged . Paid into bank .... Mar. 7. Gave cheque in payment of bill due to day Sold goods to John Adamson Purchased from A. Ross & Co. goods on credit ..... Gave A. Ross & Co. cheque for Discount allowed by them Sold goods to John Adamson Purchased goods from A. Ross & Co. Received cash from John Adamson Discount allowed to him Paid wages to date in cash . Paid rent to date in cash Cash taken during year by William Inglis for his own use . . . . Trial Balance to he taken here. Value of goods on hand at this date Dec. 6. 31. £250 2300 475 25 550 60 3000 2970 30 2970 2300 1200 1500 1425 75 900 200 1140 60 600 200 3000 400 1000 3. On 1st January Peter Glen commenced business as a merchant with £100 of cash on hand, and £2400 of cash in bank. His transactions during the year were as follows : — Jan. 3. Gave cheque for office fittings and furniture £200 4. Paid cash for goods purchased . . 70 Purchased goods on credit from James Watt & Co 1500 42 ACCOUNTING IN THEORY AND PRACTICE Jan. 7. Sold goods to John Eeid Sold goods for cash 9. John Reid settles his account for £1200 by paying in cash And is allowed as discount Paid into bank . Paid James Watt & Co. cheque for Discount allowed by them 1 0. Purchased goods from James Watt & Co, Sold goods for cash Sold goods to John Reid Paid James Watt & Co. cheque for Discount allowed by them Dec. 2. Sold goods to John Reid 3. Purchased from James Watt & Co. goods on credit ..... Received cash from John Reid Discount allowed to him 31. Paid wages to date in cash . Paid rent to date in cash Cash taken during year by Peter Glen for his own use .... Paid into bank .... Trial Balance to he taken here. Dec. 31. Value of goods on hand at this date . 2000 . £1200 50 . 1140 60 . 1140 ' . 1425 75 >. 2000 80 . 3000 . 1900 . 100 . 900 . 2100 . 2850 150 400 . 150 500 . 1500 SINGLE ENTRY BOOKS KEPT UPON A PARTIAL OR INCOMPLETE SYSTEM OF BOOK-KEEPING ARE SAID TO BE KEPT BY SINGLE ENTRY. It has been shown that under a complete system of book- keeping, or in book-keeping by double entry, as it is called, the Ledger Accounts are so arranged that one set clearly shows the assets and liabilities of a business concern and the other set the profits and losses, and both sets result in showing and confirming the net profit or loss. Where this is not done the system is incomplete, and the books are said to be kept by single entry. Such books may be in all stages of incompleteness. Thus, very often the only Ledger SINGLE ENTRY 43 Accounts kept are the Customers' Accounts. Sometimes the Creditors' Accounts are also kept. In fact, single-entry book-keeping so called may be said to deal only with personal accounts. In books so kept the charges to customers and the obligations to creditors are recorded in the same manner as in double-entry book-keeping, but the complementary accounts relating to goods and profit and loss, and the important principle of the equality of the debits and credits, are altogether absent. No detailed Profit and Loss Account can as a rule be prepared, and there is no satisfactory check on the accuracy of the results as is provided by the balancing of books which have been kept by double entry. The only check on the accuracy of the posting is to go over it all again and tick off each item as it is ascertained to be correct. The net profit or loss for any period can be ascertained from books imperfectly kept if the Capital Account, or Capital Accounts in the case of a partnership, have been properly kept for the period so as to show the capital at the begin- ning, the transactions not connected with the business, in- cluding sums taken out of or paid into the business, and the capital at the close of the period. Thus, if a Statement of Affairs has been prepared at the beginning of the period, the surplus shown is the capital at that time, and from a similar Statement of Affairs as at the end of the period the capital then in the business may be ascertained. The profit ] Gnust be the increase in the capital during the period plus i ^ any capital withdrawn during the period and less any sums j invested in the business during the period. ' Suppose that the capital in a business was £800 at the beginning of the year, and that during the year £300 was taken by the owner as his personal drawings in cash, and £60 of goods were used by the owner for his private consumption. Then if the capital at the end was £900, it is evident that the profit must have been £460. The following might be the Statement of Affairs at the end of the year of such a business : — 44 ACCOUNTING IN THEORY AND PRACTICE Statement of Affairs of T. J. Smith as at 31st December. Liabilities. Assets. Due to creditors . . £300 Due by customers . £600 Capital . 900 Valuation of goods on Made up thus : — hand . 500 Capital at Cash on hand . 100 1st Jan. £800 Deduct— Cash draw- ings £300 Goods used 60 360 £440 Profit for year, being amount re- quired to make up capital to £900 . . 460 ^ Capital as above . £900 _0 £1200 £1200 The rule for finding the profit from books kept by single entry where complete Capital Accounts have been kept, or where it is possible to prepare them, may be shortly stated as follows : — Prepare a Statement of Affairs as at the close of the period, and so ascertain the capital at the end of the period. Prepare a Capital Account, or Capital Accounts if the business is a partnership, for the period. From the capital brought out by the Statement of Affairs deduct the capital shown by the Capital Account or the Capital Accounts prepared. The difference is the net profit for the period. If the capital shown by the Capital Accounts is greater than the capital shown by the Statement of Affairs, the result of the period's transactions is a loss. SINGLE ENTRY 45 Trial Balance of Books kept hy Single Entry. A partial trial balance of books kept by single entry may be prepared in the form of an Abstract of Customers' Accounts and an Abstract of Creditors' Accounts. To pass from Single Entry to Double Entry. After the profit has been ascertained, and the Capital Accounts have been duly credited with their shares, all that is necessary to convert books kept by single entry into double entry is to see that in the ledger or ledgers each of the assets appears on the debit side, and each of the liabilities, including the capital, appears on the credit side. No new ledger is required, and the additional labour involved in keeping books under a proper system is so trifling and the advantages to be derived so great that no one is justified in not adopting a complete and satisfactory method of keep- ing accounts. Example. H. Cooper and W. Fulton have been in partnership for a year on an equal footing. They have kept their books by single entry. At the end of the year their assets and liabilities were as follows : — Assets. Liabilities. Goods .... . £800 Cash .... 85 Heritable Property 1000 Due by T. Eoss . 900 H. Cooper, Capital Account £385 W. Fulton, Capital Account . 400 Due to J. Watson 1500 It is required to find the profit for the year, and to show the Journal entries necessary to open a new set of books to be kept by the firm. The Statement of Affairs of the firm as at 31st December is as follows : — 46 ACCOUNTING IN THEORY AND PRACTICE Statement of Affairs as at 31st December. Liabilities. Assets. Due to J. Watson Capital . £1500 . 1285 £2785 Due by T. Ross . Goods on hand . Heritable property Cash on hand £900 800 1000 85 £2785 The profit for the year is £500, as follows : — Capital of the firm at the close of the year, as above ...... Deduct — The credit balance shown on the partners' accounts : — H. Cooper . . . £385 W. Fulton . . . 400 £1285 785 Leaving as profit for the year . . . £500 Each partner is entitled to half of this profit, or £250 each. Crediting the partners with £250 each, the capital of £1285 belongs to the partners in the proportions shown below : — H. Cooper: — Credit balance £385 Share of profit 250 W. Fulton :— Credit balance . Share of profit . £400 250' £635 650 £1285 The Journal entries necessary to open the new set of books are therefore as follows : — Journal. Jan. 1. Goods . Cash . Heritable property T. Ross To Balance Balance To H. Cooper, Capital Account ,, \V. Fulton, Capital Account ,, J. Watson . . . . Dr. Dt £800 85 1000 900 2785 £2785 650 1500 PROFIT 47 It will be observed that by this method of making the Journal entries a Balance Account is opened which is debited and credited with the same amount, namely £2785. To debit the whole of the assets to the whole of the liabili- ties, and omit the Balance Account altogether, is quite permissible. PEOFIT The return from capital employed in business or trade is divided by economists into — 1. Interest on the capital itself. 2. A premium of insurance to cover the risk of losing the capital. 3. Wages of management or superintendence for the owner of the capital when he manages the business. The interest on capital invested in a mercantile or manufacturing concern is usually reckoned as 4^ or 5 per cent, that being the rate which a borrower would have to pay for money to be so invested, and as a rule a lender would stipulate for a life policy or some other asset as collateral security. The interest so paid to the lender includes the premium of insurance to cover the risk of losing the capital, A merchant in business for himself therefore expects the business to yield him : — 1. Interest on the capital he has invested in the business, because he could invest this money elsewhere, and he would receive interest upon it. 2. A premium of insurance to cover the risk of losing his capital. The rate of this premium will vary according to the nature of the business. 3. The merchant expects a further sum in respect that he devotes his time to his business, and could earn a salary as manager of another business if he were not in business for himself. What is meant by insurance of the risk of losing capital will be readily understood from an example. British consols at the present time yield an investor 2 per cent, while Brazilian bonds yield as much as 7 per cent. In 48 ACCOUNTING IN THEORY AND PRACTICE the case of consols the whole return may be looked upon as interest, as the security is the best that can be got, but in the case of Brazilian bonds, while £2 of the return on each £100 invested may be regarded as the interest on the capital employed, the balance of £5 should be looked upon as an insurance premium to be set aside to cover the con- tingency of the capital never being received. No wages of management enters into the return, as the bondholder, unfortunately for him, is not allowed to manage the finances of Brazil. Pkofit consists of the surplus kemaining over from the employment of capital after defraying all the necessary expenses and outlay incurred in its em- ployment, and after the capital has been replaced or PROVISION MADE FOR ITS REPLACEMENT. If THERE ARE NOT SUFFICIENT ASSETS LEFT TO REPLACE THE CAPITAL, THE RESULT OF THE VENTURE OR EMPLOYMENT IS A LOSS. It should be observed that this definition of Profit is from an economist's point of view, and while absolutely true in theory cannot always be employed in practice to ascertain what may be profit as defined by an Act of Parliament or some other deed regulating a business. Under an Act of Parliament there is sometimes included under the term " profit " what is not embraced by this definition. Such statutory or legal profit must be distinguished from the profit above defined. The profits of a concern for any given period are immediately ascertainable if there exists a statement of the liabilities and assets of the concern at the beginning and at the end of the period, together with a note of the sums which may have been withdrawn not connected with the business during the period. Thus, if a merchant's State- ment of Affairs shows that at 1st January he had a capital of £500, and at the 31st December of the same year a capital of £600, and it is known that during the year he has drawn from his business for his own personal expenses at the rate of £4 per week, or £208 per annum, it is clear that the profit made during the year has been £308, made up of the increase in the capital, £100, ylus the expenses of living, amounting to £208. Had the £208 not been PROFIT AND LOSS ACCOUNTS 49 drawn out of the business the capital at 31st December would have been £808, and the difference between this sum and the original capital of £500 gives £308 as the profit, as formerly. In books kept by single entry this, as has already been shown, is the method of arriving at the profit. But, while it is satisfactory to know the amount of profit, it is better also to know exactly how the profit has arisen, so that the turnover and the charges of one year may be compared with those of another year, and the business made even more profitable. PEOFIT AND LOSS ACCOUNTS THE PROFIT AND LOSS ACCOUNT AS A LEDGER ACCOUNT IS THE ACCOUNT IN WHICH ARE COLLECTED ON THE CREDIT SIDE ALL THE SOURCES OF PROFIT, AND ON THE DEBIT SIDE ALL THE CHARGES INCURRED IN MAKING THE PROFIT DURING A GIVEN PERIOD. IF THE CREDIT SIDE OF THE PROFIT AND LOSS ACCOUNT is GREATER THAN THE DEBIT SIDE THERE IS A PROFIT, BUT IF LESS THERE IS A LOSS. When a separate division of this account is kept, under the name of the Manufacturing, or Trading, or Goods Account, the balance of these accounts appears on the credit side of the Profit and Loss Account proper as the gross profit. There is also placed upon the credit side of the Profit and Loss Account in such cases the income from other sources. On the debit side appear the expenses of distribution and the charges of management connected with the general conduct of the business, such as rent, taxes, insurance, office expenses, clerks, advertising, etc. Sometimes a third division is made in the Profit and Loss Account, to which are carried any extraordinary profits or losses which are quite apart from the usual transactions of the business. In the final division of the Profit and Loss Account is shown how the profit is apportioned. so ACCOUNTING IN THEORY AND PRACTICE In preparing Profit and Loss Accounts with various branches, and in distributing the different items of which they consist under a proper classification and arrangement so as to make the statements the most serviceable which can be produced for the particular business concerned, there is the fullest scope for the skill and judgment of the ac- countant. However complicated the accounts themselves may be, the Profit and Loss Account and its various branches should be so framed that they almost force one to grasp their salient features. Different businesses require different modifications, so that the accounts of each business may display in the best manner possible the essential elements of the revenue and expenditure of that particular business. The facts to be ascertained and shown in the Profit and Loss Account and its branches are, shortly : — L The turnover of the business, both as a whole and in each department, where the accounts of each department are kept separate. 2. The expenditure, as a whole and in each department, which is directly due to the volume of business done. 3. The gross profit is ascertained, both as regards the whole business and each department, frora the above particulars. 4. Tiie expenditure which is due to the establishment or relates to the conduct and management of the business as a whole, and is not so directly due to the turnover, but depends more upon the premises or constitution of the business, and would practically not change much with any change in the turn- over. 5. The profit or loss which is due to the business, apart from any alteration that the profit or loss may sustain through the capital being insufiicient or excessive. This is arrived at by deducting 4 from 3. 6. The net profit, after making all allowances for interest and discount, which is apportionable to capital. To attain these results it is necessary to divide the Profit and Loss Account into various sections, and this may be done either by balancing off one account as occasion requires or separate accounts may be opened. Sometimes separate accounts show the division in a clearer THE GOODS ACCOUNT 51 manner than the method of having one Profit and Loss Account with rests. The Profit and Loss Account and its branches for a given period should contain all the profits for that period, and all the charges incurred or expended in making the profit during the same period. Thus in preparing a yearly Profit and Loss Account of a farm, the whole crop for that year must be included in some form or other on the credit side, and the whole charges incurred in obtaining the crop, including the rent for one year, must be debited. In preparing Profit and Loss Accounts for broken portions of a year, all such charges as rent, taxes, insurance, and other periodical payments, must be apportioned for the period embraced by the account. THE GOODS ACCOUNT A GOODS ACCOUNT FOR A GIVEN PERIOD IS AN ACCOUNT SHOWING THE TRANSACTIONS CONNECTED WITH GOODS WHICH HAVE TAKEN PLACE DURING THAT PERIOD. In an ordinary merchant's business the first division of the Profit and Loss Account is the Goods Account. The Goods Account is opened at the beginning of each financial period by the value of the stock of goods being entered upon the debit side. The purchases during the period are entered upon the debit side, and the sales upon the credit side. Upon the credit side is also entered the value of the goods on hand at the close of the financial period. The difference between the two sides is the gross profit upon the goods if the credit side is the greater, but the loss upon goods if the debit side is the greater. In the ordinary form of a Goods Account as above explained the stock on hand at the close of the year is entered on the credit side, and has practically the effect of cancelling the cost of these unsold goods which has already been entered on the debit side of the account. This is the most convenient method for book-keeping purposes, but for ly' 52 ACCOUNTING IN THEORY AND PRACTICE purposes of comparison, and to show in the account itself the actual cost of the goods sold, it is necessary to deduct the stock on hand at the end of the year from the debit side of the Goods Account, where is found the value of the stock at the beginning of the year, and the purchases during the year. There is thus shown on the debit side of the Goods Account the actual cost of the goods which have been disposed of during the year. The important factor in a Goods Account is not the cost of the goods which have been purchased during the year, but the cost of the goods which have been used. Thus, suppose at the beginning of the year the goods on hand are valued at £1000, that during the year the price of the goods purchased amounted to £5000, and that at the end of the year the goods were valued at £400, it is evident from the following statement that the actual cost of the goods sold during the year amounted to £5600 : — Value of goods on hand at the beginning of the year £1000 Price of goods purchased during the year . 5000 Cost of goods in warehouse during the year at one time or another . . £6000 Deduct — Value of goods on hand at the end of the year 400 Cost of goods actually used during the year . . . . £5600 STOCK-TAKING STOCK-TAKING IS THE EXAMINING, FINDING THE VALUE, AND PEEPARING A PRICED INVENTORY, OF GOODS OR MER- CHANDISE ON HAND AT A PARTICULAR MOMENT OF TIME. It is done periodically at each financial balancing time of a business, with the view of the value of the goods on STOCK-TAKING 53 hand being incorporated in the accounts of the concern. It is also done at other times, such as when a Statement of Affairs of a debtor is required for the information of his creditors, or for inventory and confirmation purposes when the owner of a business dies. The price put upon the goods will thus vary according to the purposes for which the inventory is prepared. Where the object of stock- taking is for the purpose of being incorporated in the accounts of a going concern, the goods should be priced at cost, on the footing that the business is a going concern. In the case of a bankrupt business the values will be such as the stock may be expected to realise under a forced sale. For confirmation purposes the prices are lower. Haw Material. In the absence of any extraordinary shrinkage in the market value, raw material should be valued at cost price, flus all subsequent direct charges in connection with the goods in stock, such as freight, duty, and the cost of anyl direct labour expended upon the goods. Where the market value is under this figure, the basis should be market prices. Partially Manufactured and Com/pleted Goods. All goods in stock which are partially manufactured or are completed should be valued at the prime cost of the raw material, plus the freight, duty, and other direct charges, together with the cost of any direct labour. Sometimes a percentage is added for general management expenses so far as they have been expended in the manufacture of the goods, but it is safer not to do this, as when it is do ne ther e is a risk of the profit from the selling of the goods being anticipated. Goods sold on Commission, The Goods Account of a merchant who, in addition to his ordinary business, sells goods on commission requires to be carefully adjusted, so that the correct gross profit on 54 ACCOUNTING IN THEORY AND PRACTICE sales, and the ratio of expenses to sales, may be correctly determined. In some concerns commission transactions are kept by themselves, being entered through a Commission Journal, or through special columns in the Purchase Day Book and Sales Day Book. In other concerns, however, the goods sold on commission are entered in the ordinary Purchase Day Book and Sales Day Book, along with the ordinary purchases and sales. Where it is possible to allocate the proportion of expenses due to the commission business it is best to have a separate Profit and Loss Account for goods sold on commission. Where this cannot be done, the assumption must be made that the sales on commission cost the same as the other sales, and the proper method of treating the Goods Account will be seen from the following example. Suppose the ordinary sales amount to £5000, the goods costing £3000, that the goods sold on commission realised £1000, and that the commission amounts to £150. Taking the expenses of the whole business as £1200, the Profit and Loss Account, with the relative percentages, would be as follows : — Profit and Loss Account for Year. {Correct Method.) To Cost of goods ,, Purchases commission Per Cent, on of . 66-67 . 35-83 ^ . 20-00 . 15-83 £3000 1000 Per Cent. By Sales ,, Sales on com- mission Total sales . 100-00 ,, Commission By Gross profit brought down 35*83 £5000 1000 Total cost goods . ,, Gross profit £4000 2150 £6000 150 £6150 £6150 To Expenses . ,, Net profit . £1200 950 £2150 £2150 £2150 If the sales on commission are not included, then the Profit and Loss Account would appear as follows: — STOCK-TAKING - \ rr Peofit and Loss Account for Year. {OhjedionaUe Method.) To Cost of goods ,, Gross profit Percent. . 60-00 . 43-00 . 24-00 . 19-00 £3000 2150 By Sales ,, Commission By Gross profit brought down . Per Cent, 100-00 43-00 £5000 150 £5150 £5150 To Expenses . ,, Net profit . £1200 950 £2150 43-00 £2150 43-00 £2150 In the second Profit and Loss Account the gross profit appears as 43 per cent of the sales, and the expenses as 24 per cent of the sales, whereas the correct percentages should be 35*83 and 20, as shown in the first Profit and Loss Account. For some purposes it might be advisable to include the commission along with the sales, and find the percentage of the total which is gross profit and expenses. Arrangement of Profit and Loss Accounts. A pro forma Profit and Loss Account, which is applicable to most businesses, and works very satisfactorily, is given. This form is of great advantage in preparing percentage statements, and in comparing the accounts of different years. A merchant using such divisions is enabled to determine what must be his minimum turnover in order to meet his fixed charges, and may localise any leakage or extravagance in management. He cai also ascertain in what directions economies may be effected. The account is divided into four sections, as follows : — First Section. — The Tkading Account shows on the credit side the total sales, after deducting purely trade discounts and returns. On the debit side is placed the cost of the goods used, including any outlay for the carriage inwards of such goods, and after deducting purely trade discounts on the price. There is also entered on the debit side all expenditure directly connected with the sales, or which reduces the 56 ACCOUNTING IN THEORY AND PRACTICE price realised for the goods, such as commission and salaries of travellers and travellers' expenses, wages of salesmen, carriage outwards of goods sold, and cash discounts allowed on sales. All these charges depend to a large extent upon the turnover. This first section of the account may be headed "Trade Account," and the balance upon it is gross profit, which is carried down to the second section. Second Section. — The ordinary Business Profit and Loss Account has on the credit side the gross profit, together with any income not directly connected with :2_ > ^^^ales, such as rent of premises, forming part of the heritable property belonging to the concern let to ^ / ^^tenants, and revenue in the form of royalties from patents. On the debit side are all the fixed charges not directly connected with the sales, and which do not vary much with the rise or fall of the turnover, such as rent, rates, taxes, salaries of office staff and management. There is also debited in this section ^:$ - c t business losses, such as loss through bad debts, and any small loss through defalcations. The balance on this sec- tion of the account may be looked upon as the ordinary business profit, and is carried down to the next section. Third Section. — The Net Profit Account has on the credit side the balance brought down from the previous section, being the ordinary business profit for the period. There is also entered on the credit side of this section any income connected with capital, such as revenue from investments belonging to the concern, interest earned, and cash discounts obtained, which depend upon the capital in the concern. This section is debited with charges connected with capital, such as interest on loans. These all depend and vary with the amount of capital in the business. The balance of this section, being the net profit, is carried down to the next section. Fourth Section. — The Profit and Loss Appropriation Account. This section is credited with the amount of the unallocated profit from the previous fiscal PROFIT AND LOSS ACCOUNT 57 period, together with the balance of net profit from the third section. On the debit side is shown how this profit has been allocated, whether 'in the form of interest on partners' capital, share of profit allocated to capital, or profit reserved for any special purpose. If the business is that of a public company, the dividend paid on the shares is debited to this account, together with any sum carried to the reserve fund, and the balance unappropriated is carried forward, and appears in the next Profit and Loss Appropriation Account. The form of the account given should be carefully studied, but its utility can only be appreciated in practice. By the use of such divisions, and by comparing the accounts of one year with another, any looseness in the management" of a business, or anything which might endanger its stability, can as a rule be at once detected, and measures taken to prevent further loss. Profit and Loss Account Method of Division where it is required to compare one Year with another. Expenditure. Income. ^^ To Cost of goods used By Sales (after deduct- (including carriage ing purely trade inwards, and after discounts) . . £ deducting purely- trade discounts) . £ ,, Expenditure directly- connected with sales, or which reduces the price realised for the f goods, such as — Commission and salaries of tra- vellers, and tra- vellers' expenses Wages of sales- men Wages of porters Carriage out- wards of goods sold Cash discount al- lowed on sales Carry forward £ Carry forward £ 58 ACCOUNTING IN THEORY AND PRACTICE Brought forward £ To Balance carried down, being gross profit To Fixed charges not directly connected with sales and not varying much with the turnover, such as — Rent, rates, taxes £ Repairs and up- keep of offices . Salaries of office staff and man- agement . Depreciation ,, Business losses, such Bad debts . Defalcations Balance carried down being profit on or dinary business To Expenses connected with capital, such as — Interest on loans ,, Balance carried down, being net profit To Allocation of profit : — Interest on capital £ Profit allocated to capital Profit allocated to reserve ,, Profit unappropriated, carried forward Brought forward £ By Balance brought down, being gross profit . £ ,, Income not directly connected with sales, such as — Rent of stores or premises belong- ing to the busi- ness let to tenants Revenue from roy- alties By Balance brought down, being profit on ordin- ary business ,, Income connected with capital, such as — Revenue from in- vestments . Interest earned Cash discounts ob- tained, which de- pend upon the amount of capital in the business . By Balance brought down, being net profit . £ TRADING ACCOUNT 59 TEADING ACCOUNT THE TEADING ACCOUNT IS THE SECTION OF THE PROFIT AND LOSS ACCOUNT OF A TRADING CONCERN WHICH SHOWS ON THE CREDIT SIDE THE AMOUNT REALISED FOR THE GOODS SOLD, AND ON THE DEBIT SIDE THE ACTUAL COST OF THE GOODS AND THE EXPENDITURE DIRECTLY CONNECTED WITH SALES. Ihe cost of the goods includes the cost price of material, freight, duty, and all other outlay incurred in acquiring possession, together with the wages spent in rendering the goods marketable. The goods at the beginning of the period and at the end of the period embraced by the account are entered in some form or other in the Trading Account or one of its branches, in order to charge only the goods actually sold. The goods on hand have not been realised, and it is only th^ost of the goods actually realised which should be charged against the price realised. The gross profit shown by the Trading Account is carried to the credit of the next section of the Profit and Loss Account, which is usually called " The Profit and Loss Account," where any income not immediately connected with sales is also shown. On the debit side are the establishment expenses. The profit shown is carried to the next section of the Profit and Loss Account. The Trading Account shows what is usually called the " gross profit " of a concern, or the difference between the price realised for the goods and the cost of the goods. In some businesses the goods are sold almost in the same condition in which they were purchased, but in other con- cerns a considerable amount of labour is spent in rendering the goods marketable. On the following page are shown the Trading Accounts of a business having two separate departments, and practically selling the goods in the same condition as when they were purchased. ACCOUNTING IN THEORY AND PRACTICE Example of Trading and Profit and Loss Accounts HAT AND CAP DEPARTMENT Trading Account. Dec. 31. To Cost of goods :— Stock at begin- ning of year . £1300 Purchases dur- ing year (less returns) . 3000 Dec. 31. By Sales (less returns) . . £5000 £4300 Deduct— Stock at end of year . . 2100 £2200 „ Cliarges . . 200 ,, Profit and Loss Account, for gross profit . 2600 £5000 £5000 HOSIERY DEPARTMENT Trading Account. Dec. 31. To Stock of goods :— Stock at begin- ning of year . £200 Purchases dur- Dec. 31. By Sales (less returns) . . £600 ing year (less returns) . 300 <£ £500 Deduct— Stock at end of year . .150 £350 „ Charges . . 50 ,, Profit and Loss Account, for gross profit . 200 £600 £600 TRADING ACCOUNT 6i Frojii and Loss Account. Dec. 31. To Rent . ,, Salaries ,, Expenses . ,, Carriages . ,, Depreciation £705 Balance carried down . . 2095 £2800 Dec. 31, To Interest on loan and bank over- draft ,, Balance carried down £60 2185 £2245 Dec. 31. To Interest on capi- tal :— W. Watt . R. Ross Balance, being net profit divisible as follows : — W. Watt, |rds £1410 R. Ross, ird . 705 £40 30 £70 2115 £2185 Dec. 31. By Hat and Cap De- partment, gross profit . . £2600 ,, Hosiery Depart- ment, gross profit . . 200 £2800 Dec. 31. By Balance brought down . . £2095 Discount on pur- chases . . 150 £2245 Dec. 31. By Balance brought down . . £2185 £2185 Manufacturing Accounts In preparing Manufacturing Accounts the first section of the Profit and Loss Account usually consists of the Manu- facturing Account. This account may be in several different forms. In the example given it is used merely for the purpose of ascertaining the cost of manufacturing the goods, and is debited with the cost of raw material used, the wages of production, the rent and taxes of factory, depreciation on machinery, sundry stores, and any other direct charges of manufacture. A Manufacturing Account, however, ^ may also be used for the purpose of showing the profit on the manufacturing department as apart from the trading 62 ACCOUNTING IN THEORY AND PRACTICE department. This is done by crediting the Manufacturing Account with the price at which the goods manufactured could be purchased elsewhere. In the example submitted the next section is the Trading Account, and the other sections are prepared on the lines already indicated. Manufacturing Account. Dec. 31. To Cost of raw mate- Dec. 31. By Trading Account, rial : — being cost of Stock at begin- manufacturing . £7710 ning of year . £700 Purchases dur- ing year . 5000 £5700 Deduct— Stock at end of year . . 900 £4800 „ Wages . ., 2500 ,, Rent and taxes of factory . 300 , . Depreciation on machinery . 60 ,, Sundry stores . 50 /- £7710 ^ £7710 Trading Account. Dec. 31. To Manufacturing Ace ou n t, cost of manufactur- ing . £7,710 Dec. 31. By Sales . . £16,280 1) S alesme n's salaries Travellers' salaries and commission 300 200 " Discount on Sales . 300 £8,510 Profit and Loss Ac- count, for gross profit. = 7,770 £16,280 £16,280 THE TRIAL BALANCE 63 Frojit and Loss Account. Dec. 31. To Rent of ware- house . Salaries of clerks Depreciation ^on fixtures . Office expenses . Advertising"- . Reserve for bad debts £200 250 120 200 30 120 Dec. 31. ,, Balance down carried 3n loan carried £920 6850 £7770 To Interest ( ,, Balance down £50 7000 £7050 Feb. Dec. 31. To Dividend Ac- count, for dividend at 6 per cent de- clared to-day £6,000 ,, Reserve fund for amount transferred this day . 1,500 ,, Balance .. . 7,100 £14,600 Dec. 31. By Trading Account, , gross profit . £7770 £7770 Dec. 31. By Balance brought down, being profit on busi- ness for year . £6850 ,, Discount on pur- chases . . 200 £7050 Jan. 1. By Balance brought forward from last year. £7,600 Dec. 31. ,, Balance brought down, being net profit for year 7,000 £14,600 THE TRIAL BALANCE A TEIAL BALANCE IS A STATEMENT OF THE LEDGER ACCOUNTS PREPARED AFTER THE BOOKS OF A CONCERN HAVE BEEN POSTED UP, BUT BEFORE THE CLOSING ENTRIES ARE MADE, SHOWING IN TWO PARALLEL MONEY COLUMNS EITHER THE TOTAL OF THE DEBIT AND THE TOTAL OF THE CREDIT SIDE OF EACH LEDGER ACCOUNT, OR THE DIFFERENCES BETWEEN THE DEBIT SIDE AND THE CREDIT SIDE OF EACH LEDGER ACCOUNT. There are thus two methods of preparing a Trial Balance. 64 ACCOUNTING IN THEORY AND PRACTICE First Method. By abstracting the totals of the debit and credit sides of each Ledger Account. — The Trial Balance may be prepared by abstracting the totals of the postings to the debit side of each Ledger Account and the totals of the post- ings to the credit side of each Ledger Account. By this means the books are not only brought to a balance, but, should the totals of the two sides of the Trial Balance not agree, the error may be localised to the one side or to the other side of the Trial Balance, as by summing the totals of the different books of original entry and taking account of the balances at the beginning of the period it can be ascertained what the totals of the Trial Balance should amount to. Second Method. By abstracting the Ledger Balanx^es. — The second method, by the abstraction of the balances of each Ledger Account, has the additional advantage over the first method that from it, as it gives the differences between the tw^o sides of each of the Ledger Accounts, the preparation of the final Balance Sheet and of the balancing of the books, once the Trial Balance is found to agree, is facilitated. By this second method the risk is greater of the Trial Balance not balancing at first, in consequence of the risk there is of making mistakes in subtracting the two sides of each Ledger Account. By the addition of two money columns to the first method the Trial Balance on the basis of the second method may be at once formed, immediately the Trial Balance by the first method is found to agree. While the agreement of the debits and credits of the Ledger Accounts is not a positive proof of the coia-ectness of the Ledger, certainly without the totals balancing it is positively known that the Ledger Accounts cannot be correct. A Trial Balance should invariably be drawn up before making the closing entries and preparing the Profit and Loss Account of a concern. In most businesses it is desirable that a Trial Balance should be taken at regular intervals. Thus, in businesses where the accounts are only balanced off finally and a Profit and Loss Account prepared once a year, it is often desirable to have a Trial Balance of the books quarterly, or even monthly. In the case of banks there is usually a Trial THE TRIAL BALANCE 65 Balance taken weekly. In the case of merchants where it is desirable that the position of the accounts should be regularly brought before the principals of the business, it is advisable to take a Trial Balance monthly. In the case of traders and manufacturers a quarterly or half-yearly Trial Balance is usually found sufficient. . Where a regular Trial Balance is taken and the accounts do not vary much, it is of advantage to have a Trial Balance Book ruled with two, four, or twelve sets of money columns on each page. By this means the names and folios of each account need not be rewritten at each period of balancing. The coriTiection hetween the Trial Balance, Profit and Loss Account, and Balance Sheet. In order to show the connection between the Trial Balance, Profit and Loss Account, and the Balance Sheet, and to demonstrate the close relation which they bear to one another, there is given a statement showing how in the transactions of William Wood the Profit and Los^ Account and Balance Sheet are derived from the Trial Balance and the particulars taken at stock-taking. The preparation of such statements will be found very useful in enabling the student to acquire a complete mastery of the principles of book-keeping. It will be observed that the Trial Balance is not the same as that already submitted, but that the differences beiween the two sides of each Ledger Account, or the balances, are given instead of the totals of each side. The Trial Balance shows that there is a sum at the credit of Goods of £100 ; to this sum is added the value of the stock in hand at 31st December, amounting to £700, making in all £800 as the gross income from Goods to be entered in the Profit and Loss Account. In the case of rent, which is given as an example of a Charges Account, the Trial Balance shows a debit balance of £50, which is the amount which has been actually paid during the year. At the time of stock-taking there is £20 due for rent, which, being added to the £50 paid, makes £70 as the total charge for the year to be entered in the Profit and Loss Account. It will well repay F 66 ACCOUNTING IN THEORY AND PRACTICE I o H w o Iz; A Q O H 8 o o o o o O «!* o s o o o o o o CO 2 .2 o o o o o o ■§ CO (M (M (N 1 -^ r^ o o o o o o o 8 c cS 1 o o o o o o o o o o »o vo o o O O O O Oi (O s CO CO coi>- § fe o o < $, 1 o o a a o o § CO < '-ri ^ m . o o o o o ^ i 73 ^ o o o o o fl 'O S o o o o o ^ Pi 1^ O (M .-H o 1 W ^ !N lO 00 o • o 1 _^- o o g M W § § i^ i^ M ^ ^ to ' 3 to o o ■1 03 _C bo's _^o o s OQ s o ""1 <^ ^ ^ o o o o o o 1 o o o o o o +a >' f^ o o o o o o § CO t>- r^ oo o o -i^ CO (M (N rH 1^ o "^ ^ oo o ooo oo o !3 73 oo o ooo oo o n ^ oo o ooo lOvO oo O lOOO^ CiO g CO CO CO CM i r2 3 o • fl --^1 ?n to a^^i;S:^l^|i-U|^ "^ .^^4c«SS0tt3^Q6«O o d i «;=: S^ THE TRIAL BALANCE 67 the student if he has worked out a set of business transac- tions in the ordinary way, and has prepared therefrom a Profit and Loss Account and Balance Sheet, to prepare such a statement as that shown, as he will thereby get a proper grasp of the close relationship which exists between the Trial Balance, as modified by the stock-taking, and the Profit and Loss Account and Balance Sheet. ^^ The assets of a business consist of all the property and rights belonging to the business which have a money value. Business assets may be divided into floating assets and fixed assets. Floating ass ets are those which may be sold or realised without interfering with the plant or machinery of a * business or its business operations, as cash, goods, customers' accounts, and bills receivable. So far as floating assets are available as funds out of which current obligations may be met, they form the working capital of a business. Fixed assets are those which represent capital sunk in a business in the form of plant, machinery, or ground, such as buildings, railway lines, and all fixed machinery. Sometimes business assets are divided into three, as follows : — 1. Permanent, as heritable property 2. Wasting, as machinery. 3. Floating, as given above. Liahilitus. The liabilities of a business consist of all the sums due ^ to outside creditors as distinguished from the sums due to the partners or shareholders. Business liabilities may be divided into floating liabilities and fixed liabilities. % Floating liabilities are those claims by creditors which will have to be met within a short period, such as creditors' accounts, bills payable, and bank overdrafts. Fixed liabilities are those permanent obligations of a concern which are not usually paid off till the concern 68 ACCOUNTING IN THEORY AND PRACTICE is wound up, such as debenture debt and mortgages. Liabilities may be classed into : — On open accounts/ On bills payable ; by the debtor accepting a bill the amount of the debt is fixed, and, as a rule, the date of its repayment. A preferable liability or claim is one which has a preference of payment over other debts, as Crown taxes. A secured liability is one in respect of which the creditor is entitled to receive payment out of the security which he holds. A contingent liability is one in respect of a claim which has not yet arisen, but of which there is some probability. Capital, The student of accounting will have done well if he has read Adam Smith's Wealth of Nations. The definition given by Adam Smith of Capital is that it is wealth set aside for productive purposes. Wealth so employed to produce a surplus or profit to the industrial community is distinguished as " social capital." From a commercial point of view capital is wealth employed to yield a profit, includ- ing in the term " profit " interest on money lent, and may be called, in contradistinction to social capital, " individual capital." Thus money lent to a spendthrift to be used for his own personal gratification may be classed under the heading of "individual capital" so far as the lender is concerned, but not being used for the benefit of the community is not " social capital." The capital of a business concern at a particular moment of time may be defined, for purposes of account- ing, as the surplus of the assets of the concern over the liabilities to the creditors of the concern. if this definition is applied to the Balance Sheet of a joint- stock company it would include as capital not only the money subscribed by the shareholders, but also any reserve fund, together with the undivided profit of the company. While from an economic point of view this would be correct, in such cases the word "capital" is usually restricted to the paid-up capital only. BALANCE SHEETS 69 ( ^ or THF " UNIVERSITY BALANCE SHEETS \ ., "^ A BALANCE SHEET IS A CONCISE STATEMENT COMPILED FROM THE BOOKS OF A CONCEKN WHICH HAVE BEEN KEPT BY DOUBLE ENTRY, SHOWING ON THE ONE SIDE ALL THE LIABILITIES AND ON THE OTHER SIDE ALL THE ASSETS OF THE CONCERN AT A PARTICULAR MOMENT OF TIME. It is prepared for the purpose of showing the financial condition of the concern at the particular moment of time, and should be so classified and arranged as to give the clearest and fullest idea of the financial condition of the concern. The balances shown by the Trial Balance having been adjusted by the closing entries giving effect to the valuations of stock, unexpired charges, reserves, and other particulars, the balances remaining are liabilities so far as they are credit balances, and assets so far as they are debit balances. The customers and creditors, and other items involving many items, are not given in the Balance Sheet in detail, but are contained in separate schedules or lists, or in a Balance Book kept for the purpose. If the assets exceed the liabilities the Balance Sheet shows a surplus, which is due to the owner or owners of the business, and forms the capital of the concern. Capital is therefore the • surplus of assets over liabilities, or the measure of the indebtedness of a business to the owners in respect of money invested in the business and accumulated profits. It is the principal sum invested or remaining in a business. Book-keeping is so complete and thorough that even the ^ owner of a business is looked upon as an outsider, and his account, called the Capital Account, is credited with what he puts into the business, because, as he means to get back again what he puts in, he becomes a creditor of the business for it, and he also gets credit for any profit the business earns, as he is entitled to that also. The Capital Account was formerly sometimes called the Stock Account, but this use of the word " stock " is now almost obsolete, 70 ACCOUNTING IN THEORY AND PRACTICE and it is as well, to prevent confusion, to keep the word " stock " for the goods and merchandise. In the case of a company, as for example one registered under the Companies Act of 1862, where the capital is fixed, the surplus of assets over liabilities may consist of the capital, of a reserve created for the benefit of the shareholders and the stability of the company, and of the * unappropriated or undivided profit. If the liabilities exceed the assets the Balance Sheet shows a deficiency, and the amount of the deficiency is the measure of insolvency of the concern, or the indebtedness of the owners to the business for losses incurred. The BALANCE SHEET MAY THUS BE DEFINED AS A STATEMENT OF THE LIABILITIES OF A CONCERN (CREDIT BALANCES AS \J TAKEN FROM THE LEDGER), I^iOAJDING THE CAPITAL, RESERVE, AND UNAPPROPRIATED PROFiTT'ON THE ONE SIDE, AND THE ASSETS OF THE CONCERN (DEBIT BALANCES AS TAKEN FROM THE ledger), including ANY DEFICIENCY, ON THE OTHER. The main distinction between a Profit and Loss Account and a Balance Sheet is that the Profit and Loss Account shows the progress of the business during a period of time, while the Balance Sheet shows the position of the concern at a particular moment of time. The difference is similar to that between a biography and the portrait of an individual. On which Side of the Balance Sheet the Assets should be placed. When a book-keeper has completed those entries known as " closing " entries, including the preparation of the Profit and Loss Account, and has balanced off all the Ledger Accounts, carrying down the balances to begin the accounts for the next year, he usually prepares a Statement of the Ledger Balances, arranging all the debit balances in the left money column, and all the credit balances in the right money column, in some such form as the following, which is the Balance of the books of William Wood : — BALANCE SHEETS 71 Statement of Ledger Balances as at 31st December. Customers' Ledger J. Collins . W. Simpson Creditors' Ledger Jack & Co. Scott & Tait General Ledger : — Bills payable Bills receivable . Goods Rent . Capital Bank of Scotland Cash on Hand It will be observed that in the foregoing statement all the balances of the accounts appear just as they are in the Ledger after the balances have been carried down, that is, the debit balances are entered in the debit column and the credit balances in the credit column. The particulars above given in the Statement of Ledger Balances, if thrown into the form of a Balance Sheet, would appear as follows : — Balance Sheet as at 31st December. {Correct Form.) Dr. Cr. £ s. cL £ s. d. 300 650 950 370 230 600 280 300 700 20 1210 95 65 2110 _o_ 2110 Assets. Liabilities. Due by customers Bills receivable . Goods on hand . In Bank of Scotland Cash on hand £950 300 700 95 65 £2110 Due to wholesale houses £600 Bills payable . . 280 Rent accrued to date . 20 Capital £900 1210 £2110 In the above Balance Sheet it will be observed that the assets appear on the left side and the liabilities on the right /^ 72 ACCOUNTING IN THEORY AND PRACTICE side of the statement, just as they appear in the Ledger. It will be observed further that the contractions Br. and O., for debtor and creditor, are not used as part of the heading. This is because the Balance Sheet is best regarded not as an account but as a Statement of Ledger Balances. In a set of books kept completely by double entry, and in which even the balancing of the accounts is done through the medium of the Journal, an account is used entitled the "Balance Account," into which all the balances are transferred at the close of the year, and in which the Ledger Accounts would appear as they are given in the above Statement of Ledger Balances. For the opening entries a Balance Account would also be used, but the items would necessarily appear on opposite sides from the closing Balance Account. The Balance Sheet, if given in the form above shown, is thus practically a copy of the closing Balance Account. From this point of view the assets should undoubtedly be placed on the left side of the Balance Sheet, which corresponds to the debit side of the closing Balance Account. Further, all balances which represent assets are debit balances, and accountants naturally come to associate assets with the debit or left side of either an account or a statement. So that theoretically the left side is the side upon which the assets should appear in the Balance Sheet. In practice, however, the assets are usually to be found upon the right side, and it may prove interesting' as well as instructive to investigate the matter further. The fundamental idea of a Balance Sheet is that it is a statement showing how the Ledger Accounts of a concern stand at a particular moment of time. It would be unnecessary if we could see and comprehend at one view the contents of a set of ledgers. As we are unable to do this we prepare a Balance Sheet, but why in the process the assets which are on the debit side and the liabilities which are on the credit side, as according to the principles of accounting they ought to be, should change places, it is im- possible to justify. The custom seems to have arisen through the influence of the forms given in Acts of Parliament, chiefly the Companies Act, 1862, which must have been BALANCE SHEETS 73 prepared by those unacquainted with the theory of accounts. The Profit and Loss Account is taken from the Ledger, and the sides are not transposed, and there is no logical reason why the sides in the Balance Sheet should be reversed when the items in it are supposed to be the balances remaining in the Ledger, after certain balances have been taken to the Profit and Loss Account. In the accounts of public undertakings, such as railways, formed under the sanction of Acts of Parliament, when the receipts and expenditure on account of capital must be published, the Capital Account, in the form prescribed, has the items as they appear in the Ledger, but the Balance Sheet, the form of which is also prescribed, has the items reversed. The form of Balance Sheet in which the assets appear upon the left side is both theoretically the correct form and in practice is the most convenient form to use. It is the form adopted on the Continent, in America, and, in fact, through- out the world, with the exception of the United Kingdom. Until recent years it was the form almost univefsally adopted in Scotland. Prior to about the passing of the Companies Act, 1862, it was the form chiefly adopted in England, but is so no longer. It is known by the name of the Continental or Scotch form. The form of Balance Sheet prescribed in Table A of the Companies Act, 1862, has the liabilities on the left side, and this is the form now generally adopted throughout the United Kingdom. The Scotch form, however, is still largely used in Scotland, even for companies under the 1862 Act which applies to Scotland. The practice is so diverse that there are firms of accountants in which one of the partners invariably uses one form and the other partner as invariably the other. It is certainly most desirable that the form of Balance Sheet with the assets on the left side, which is founded on correct principles, should become universal, but this could now, in view of existing statutes where the form which is contrary to the true principles of accounting is prescribed, only be brought about by an Act of Parliament. Such an Act would no doubt cause a little temporary inconvenience, but this would be nothing compared to the advantage of having X 74 ACCOUNTING IN THEORY AND PRACTICE all Balance Sheets uniform and conforming to the best traditions, and the accepted practice of the rest of the world. As, however, it is most desirable that uniformity should be observed, and as the Companies Act, 1862, the Life Assurance Companies Act, 1870, the Building Societies Act, 1894, and other Acts applicable to the United Kingdom, prescribe the form in which the liabilities appear on. the left side, and as, after all, when one gets used to the form there is no risk of confusion, the student should adopt the English form always. It is supported on the ground that, as the Balance Sheet is the account of a concern, that concern should be credited with all the assets and debited with all the liabilities of the concern. The objection to this is, that the statement is not an account at all but a balance or abstract of the ledger balances. Whichever form is used, the contractions " Dr." and " Cr." should never be put upon a Balance Sheet, because, as already stated, it is not an account. A Full and Fair Balance Sheet. The Companies Act of 1862 does not specially state how the Balance Sheet of a company is to be prepared, but the following regulations are given in Table A appended to the Act, and these regulations apply to all companies limited by shares, unless they are excluded or modified by the Articles of Association adopted by the company. The following are the regulations relating to the Balance Sheet : — Regulation No. 81. "A Balance Sheet shall be made out in every year, and laid before the company in general meeting, and such Balance Sheet shall contain a summary of the property and liabilities of the com- pany arranged under the heads appearing in the form annexed to this table, or as near thereto as circum- stances admit." Regulation No. 94. " The auditors shall make a report to the members upon the Balance Sheet and accounts, and in every such report they shall state whether, in their opinion, the Balance Sheet is a full and fair BALANCE SHEETS 75 Balance Sheet, containing the particulars required by these regulations, and properly drawn up so as to exhibit a true and correct view of the state of the company's affairs, and in case they have called for explanations or information from the directors, whether such explanations or information have been given by the directors, and whether thfey have been satisfactory ; and such report shall be read, together with the report of the directors, at the ordinary meeting." The Balance Sheet, whether of a company or of a private concern, should be, as mentioned above, " full and fair." All the assets should be stated at their fair value, and the liabilities should be fully shown. The Balance Sheet should not conceal any weakness in the financial position of the concern, but should give the fullest information to the shareholders and the general public, consistent, of course, with the proper conduct of the business. In some cases it might be advisable not to reveal too much in consequence of the competition of similar concerns, but what is really the failing of Balance Sheets is that they reveal too little and not too much. The Balance Sheet formerly given in the Scotch form is now given in the English form, but it has been varied slightly to show a better method of grouping the assets, and it has further been assumed that the Balance Sheet is that of a company with a paid-up capital of £700. U X Balance LiaUUties. Sheet as at 31st December. (English Form.) Assets. Due to Creditors — On open accounts . On bills payable £600 280 Due by Customers — On open accounts . On bills receivable . Goods on Hand Cash — In bank . £95 On hand . 65 £950 300 Rent accrued to date Due to Shareholders- Capital . . £700 Undivided profit 510 £880 20 1210 £1250 700 160 £2110 _o £2110. 76 ACCOUNTING IN THEORY AND PRACTICE . The following might have been the Profit and Loss Account of this company for the year : — Pkofit and Loss Account for the Year. Expenditure. Income. By Sales . . . £3000 o To Cost of goods £2200 ,, Rent . 70 ,, Wages . 200 „ Discount 20 ,, Profit for year 510 £3000 £3000 If the Balance Sheet in the English form and the Profit and Loss Account of this company were printed in the annual report to the shareholders, as is usually the case, it will be observed that the net profit of £510 would appear on the left side of the Balance Sheet, and also on the left side of the Profit and Loss Account. It is more in keeping with our ideas of book-keeping by double entry that these items should appear on opposite sides, as they would do if the Scotch form of Balance Sheet were adopted. Arrangement of Balanxie Sheets. Much skill may be displayed in grouping the various items of a Balance Sheet so as to give the fullest information in the form in which it will be most readily understood, and most available for the purposes for which the Balance Sheet is to be used. In arranging the assets a very good rule is to place them in the order in which they are easiest of realisation ; that is, to begin with the assets which are most easy to realise, and conclude with those which would be most difficult to realise. Under this method the most available asset, namely cash, whether in hand or in bank, would come first, although it is often placed last on the footing that it is an asset which is already realised and is on hand, available to meet any of the liabilities. As cash, whether in bank or in hand, is equally available, the amount in bank and in hand should, although shown separately, BALANCE SHEETS 77 be added together and appear under one leading heading. Any investments, which could be immediately realised, would follow the cash. The amount due by customers or trade debtors should come next, and, under branch headings, the amount due by customers in respect of bills receivable and on open accounts should be shown separately, as a debt due under a bill receivable is more directly available to liquidate any liability, and is less likely to be success- fully disputed, than a debt due on an open account. The open accounts should be classified into "good" and " doubtful," and any provision or reserve for loss, either through bad debts or discount, should be deducted from the total before carrying out tlie amount into the main column. Goods on hand which are manufactured or ready for sale come next. Then goods which are in process of manu- facture, and to be used in manufacturing and stores. Thereafter the value of fixed plant, machinery, and other similar assets should be given in detail, and any additions on account of expenditure during the period embraced by the accounts, and deductions in respect of depreciation, should be shown. Any heritable property, whether in the shape of land or building, would come next. Thereafter the less real and more speculative assets may be given, if there are any, such as patent rights, copyrights, and goodwill. The liabilities due to outside creditors should be stated before the liabilities to shareholders or owners of the business, although in the form given in the Companies Act of 1862 this is not done. The liabilities to the public should be stated in the order of priority of the claims, or of the powers the creditors have of enforcing them. The amount due to unsecured creditors should be given first, and it is well to show separately the amounts due to creditors under bills payable and on open accounts. The sundry unpaid but accrued charges for rent, taxes, wages, etc., should come next. Mortgages against heritable property sometimes appear among the assets as deductions from the property assigned in security, but it is better as a rule in the accounts of a going concern to show them among the liabilities. Borrowed capital, whether in the form of 78 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet as at Liabilities. Assets Trade Creditors :— Cash— Due under bills payable . £ On hand . £ Due on open accounts . £ In bank • £ Sundry Charges accrued Investments . , TO date :— Due by Customers : — Rent . . £ Bills receiv- Taxes . able . £ Wages, etc. . Open a c- couuts : — Good Loans over Heritable Property :— Doubtful . Amount due over the £ security of Deduct— £ Reserve for Interest due discount and ac- and bad crued debts . Stock on Hand Other Loans (including interest to date) AS VALUED BY Amount due to outside creditors Manufactured goods . £ £ Goods in pro- Due to Shareholders :— cess of manu- Capital . £ facture Reserve . Raw material Profit Stores . Plant, Machi- Were there a debit nery, etc. : — balance on the Profit and Amount in last Loss Account, such debit Balance balance should be deducted Sheet . £ from the amount due to Expended shareholders. since . Deduct— Depreciation . Heritable £ Property : — Land £ Buildings Goodwill and other assets of an indetermin- able or contin- gent value • £ £ DOUBLE ACCOUNT FORM OF BALANCE SHEET 79 ordinary loans on personal security or debentures, should then be detailed. After stating all the liabilities to outside creditors, and showing the total due to such creditors by summing the amounts, the amount due to partners or to shareholders should ^e given separated into capital, reserve and undivided or unallocated profit. The liabilities and capital should never be stated and summed altogether as one, but the amount due to outside creditors and to the shareholders should be shown separately. In the case of a limited company a debit balance on the Profit and Loss Account should not be entered among the assets, but should be deducted from the paid-up capital. THE DOUBLE ACCOUNT FOEM OF BALANCE SHEET The double account form of Balance Sheet, as it is called, which is prescribed for companies formed to undertake public works under sanction of Acts of Parliament, is of some interest. Its distinctive feature is that, since the money authorised to be spent is provided for a specific purpose, such as the construction of a railway, the fixed assets and fixed liabilities are separated from the floating assets and floating liabilities of the concern. The fixed assets and fixed liabilities are kept in an account called the Eeceipts and Expenditure on Capital Account, and the floating assets and floating liabilities form the General Balance Sheet of the concern. The Capital Account is credited with the capital receipts, whether in the form of share capital or loan capital, and is debited with the capitajjr expenditure incurred in acquiring the property or q,q9 structing the works for which the capital receipts were expressly authorised by the special Act of Parliament to be received. The excess of the capital receipts over the amount expended as capital expenditure shows the amount of the capital receipts which have not been applied to their specific purposes and are still available ; while any excess of capital expenditure over capital receipts shows the 8o ACCOUNTING IN THEORY AND PRACTICE expenditure of revenue in fixed assets in addition to the capital receipts authorised to be so spent. The balance of the Capital Account is carried to the General Balance Sheet, and represents either the indebtedness of capital to revenue or revenue to capital. In such cases the ordinary rules for the valuation of assets do not apply. The capital is raised for a certain purpose, and must be expended on that purpose. The Capital Account is for the purpose of seeing that the money contributed for any public work is used for the construction of such works. The idea is that no further sums should be spent on such capital expenditure once the total has been expended, but that the works should be kept in repair and in a state of efficiency out of the revenue receipts. Parliament having made these provisions thought it unnecessary to stipulate for the periodical valuation of the works themselves, and practically said that as these works would be permanently carried on they might be valued at their initial cost, and this Capital Ex- penditure Account will show how much they have cost and what proportion of the sum authorised to be borrowed or received by the company from its shareholders is still on hand. Even, however, in accounts kept upon the double account system, where those having charge of the financing of the concern deem it prudent to allow for the depreciation or wasting of the assets, this can be readily done in the General Balance Sheet, where the floating assets and liabili- ties are shown as distinct from the capital assets and ex- penditure, which is shown in the Capital Account. While the Act under which the Capital Account is kept makes no provision for depreciation, a Depreciation Account may be formed out of available revenue, and the balance of this account will fall to be included as a liability in the General Balance Sheet. An example of a double account form o^ Balance Sheet is submitted. The figures should be read a thousands of pounds instead of pounds. DOUBLE ACCOUNT FORM OF BALANCE SHEET 8i s ^ B 02 W o }Z5 •g ^ ^ < ^ cS ^ i <1 ^ §H w s ^<; h3 ■^ n e P e o 00 fi .§. p=< § o f§ w ^ eiH !^ < X W a i £ 5. f?. 40,000 5,000 3,000 48,000 2,000 o o o" Amount receivea half-year to 31st Dec. £ s. d. 1000 o o l-H h < 40,000 5,000 2,000 o o By Receipts : — Shares and stock Loans Debenture stock ,, Balance carried to General Bal- ance Sheet 1 £ s. d. 40,000 1,000 G,000 1,000 2,000 o o o" o o o § o 1 ill £ s. d. 2000 100 1000 o o § I— 1 CO 13 1° £ 5. d. 38,000 900 5,000 1,000 2,000 46,900 ^ To Expenditure : — On lines open for traffic . On lines in course ' a On working stock Subscriptions to other railways Docks, boats, and other special items 82 ACCOUNTING IN THEORY AND PRACTICE General Balance Liahiliiies. Sheet as at 31st December. Assets. Net Revenue Account . £1000 Capital Account — bal- Unpaid dividends and ance at debit . £2000 interest . 10 Cash at bankers, cur- Guaranteed dividends rent account . 300 and interest pay- Consols and Govern- able . 100 ment securities 3000 Temporary loans . 400 Shares of other com- Debts due to other com- panies not charged panies 1000 as capital expendi- Sundry outstanding ac- ture .... 1000 counts 3300 General stores, stock, Fire insurance fand on and material in station works and hand 1000 buildings . 90 Traffic accounts due to Insurance fund on the Company . Amounts due by other 500 steamboats 100 Depreciation Account . 2000 companies Amounts due by Clear- 20 ing House 30 Amounts due by Post Office 10 Sundry outstanding ac- counts 140 £8000 _0 £8000 STATEMENTS OF AFEAIES AND STATEMENTS OF ASSETS AND LIABILITIES A STATEMENT SHOWING THE ASSETS AND LIABILITIES OF A CON- CERN WHICH IS NOT PREPARED FROM A SET OF BOOKS PROPERLY KEPT ON THE PRINCIPLES OF DOUBLE ENTRY, WHERE ALL THE LEDGER ACCOUNTS ARE BROUGHT TO A PERFECT BALANCE, BUT IS PREPARED, EITHER WHOLLY OR PARTLY, FROM INFORMATION GOT OUTSIDE OF, AND NEVER INCORPORATED COMPLETELY IN, LEDGER ACCOUNTS, IS CALLED A " STATEMENT OF AFFAIRS." A Statement of Affairs and a Balance Sheet are often confused, but, while both statements deal with the same subjects, it is best to keep strictly to the definitions which have been given. A further distinction is also desirable between a Statement of Affairs of a solvent concern and such a state when prepared of a bankrupt concern for the information of creditors. The Statement of Affairs prepared STATEMENTS OF AFFAIRS IN BANKRUPTCY 83 of a solvent concern, where the books are kept by single entry, is best designed as a Statement of Assets and Liabilities. A Statement of Affairs for creditors, being prepared for a special purpose, is further removed in form from the Statement of Assets and Liabilities of a going concern than a Balance Sheet, of which they are both varieties. When it is proposed to place the books of a con- cern on a proper footing, which have not hitherto been kept by double entry, a Statement of Affairs or Statement of Assets and Liabilities is prepared on the same lines and showing the same facts as a Balance Sheet would have done had proper books been kept, and from this statement the new set of books is properly opened. Statement of Affairs of a Banhrwpt. A Statement of Affairs of a bankrupt, when prepared for the information and guidance of the creditors, is best arranged slightly differently from an ordinary Statement of Affairs of a going business. Such a statement should show on the one side, under appropriate heads, all the liabilities of the business at the date of the state, whether actual, provisional, or contingent, distinguishing whether these liabilities are preferable or ordinary, or are secured partly or w^holly by certain of the assets of the concern being held by certain of the creditors, in security of their claims. On the other side all the assets of the concern should be shown, valued either on the footing that the business is a going concern, at break-up prices, or on some other fixed principle of valuation, according to the purpose for which the state- ment is required. Such a statement should show clearly these assets which are free to be divided among the ordinary unsecured creditors and those which are subject to special liabilities or claims, which must be liquidated out of such assets before the balance of the amount realised for these assets is available to meet the claims of the ordinary creditors. Sometimes it is advisable for the accountant to submit a Statement of Affairs prepared on the footing of the business as a going concern, together with a similar statement on a break-up basis. The Statement of Affairs 84 ACCOUNTING IN THEORY AND PRACTICE is specially prepared with the view of revealing the condition of the affairs of a concern and the probability of the different creditors, preferable, secured, partly secured, and ordinary, receiving payment in full or having to accept a dividend on their claims. In preparing such a statement, therefore, an investigation is required which goes beyond ordinary book- keeping, but it is usually most satisfactory if the statement is prepared on the basis of the properly balanced books of the concern, and supplemented from other sources. The statement should contain not only all the liabilities that may appear on the debtor's book, but all others which may be enforcible, and even contingent claims, such as any liability through the bankrupt's name being upon bills of exchange which have been discounted by the bankrupt, or otherwise put into circulation with his name upon them, and which may not be met at maturity, should be included. Preferable claims for taxes, rent, wages and salaries, so far as they are preferable and require to be paid in full out of the assets of the estate, should be deducted from the assets in order to show the net estate available for division among the ordinary creditors, although the details of all such preferable claims should be entered among the liabilities but not included in the total. The claims of fully secured creditors are entered on the Liabilities side, but the amounts are not carried out to the total column, but are deducted from the assets forming the specific security held, the balance only of these assets, being the amount not required to meet the claims, is available for the ordinary creditors, and is entered in the Assets column. Claims partly secured are entered among the liabilities, and the amount to which they are secured is deducted from them, and the balance which is unsecured and which will fall to receive a dividend with the unsecured creditors appears in the Total Liabilities column. The corresponding asset appears in detail among the assets, but its value is not extended in the Total Assets column. The object of these adjustments is to show clearly the net assets which will be available for the ordinary creditors, and the total amount of the claims of the ordinary creditors which will come a^rainst the available assets. STATEMENTS OF AFFAIRS IN BANKRUPTCY 83 A Statement of Affairs should always have appended to it schedules showing the fullest particulars of the different entries which appear in the state in slump. Thus the names and addresses of the creditors should be given, the nature of the debt, whether a trading debt or for borrowed money, and the particulars of any security held. The assets of an insolvent estate are usually more difficult to ascertain and value than the liabilities. Even where the book or nominal valuation can be ascertained, it is usually necessary to write down that value considerably, to show what will be the amount likely to be received. The bankrupt himself is often of great help in such matters, but it is often advisable, in order that the creditors may have before them a statement w^hich they can rely upon as giving a correct view of the estate, for the accountant to call in an expert who, from his personal knowledge and experience, is in a position to fix accurately the value of the assets on the footing of the business as a going concern, or to determine their break-up value. It is always desirable to show the nominal or book value of the assets, together with what they may be expected to produce on realisation, as it enables the amount of the difference which is due to a forced realisation to be determined. The book debts should be classified into good, doubtful, and bad. The doubtful debts are included at the figure they are expected to produce, and the bad are of course merely shown upon the face of the state, but are not included in the addition of the assets. The assets most readily realisable are placed first, and those least realisable last in the state. The dividend shown to the ordinary creditors, exclusive of expenses of realisation, is given in a note. In the case of the insolvency of an individual, his private assets, such as his household furniture, his life policy, and the value of any expectancy he may have to succeed to property, must be included in his Statement of Affairs. From the Statements of Affairs submitted the above explanations will be better understood, but the efficiency of the method of displaying all the assets and liabilities at one glance, and of the various deductions and cross references, can only be appreciated and learned in actual practice. 86 ACCOUNTING IN THEORY AND PRACTICE T. BROWN & CO., Statement of Affairs Showing the Gross Liabilities, the Liabilities expected Ordinary Creditors, the Cost or Book Value of the Assets, Liabilities Ordinary unsecured creditors Trade creditors Loans Creditors on heritable bond fully SECURED Deducted from Assets. Creditors partially SECURED . . . £1300 Deduct — Value ofseciirity per Assets 1000 Contingent liability in respect of bills discounted by Bankrupt, and accom- modation bills, to amount of £8000, of which there will rank on this estate Preferable claims : — Rates and taxes . . . £60 Wages 50 Rent . . . . . 100 Deducted from Assets £210 Gross Liabilities. £ s. d. £ s. d. 8,000 8,000 2,000 2,000 10,000 7,000 1,300 1,500 210 20,010 Expected to rank. 10,000 300 1,500 11,800 STATEMENTS OF AFFAIRS IN BANKRUPTCY 87 MERCHANTS, LONDON as at 31st December. to rank against the Assets available for division among the and the Amount the Assets are estimated to realise. Assets Cost or Book Value. Estimated to realise. Cash : — On hand In bank ....... Goods Customers' accounts : — Good .... £4000 Doubtful (estimated to realise £100) . . 650 Bad .... 1200 £5850 Machinery, fittings, 'fixtures, uten- sils, ETC Heritable property .... Valued at . . . £9000 Deduct — Bond, per Liabilities . 7000 Investments assigned to creditors Valued at . . . £1000 and deducted from Liabilities. Deduct — Preferable claims per Liabilities £ s. d. 30 250 £ s. d. 30 250 280 1,300 280 950 5,850 3,000 12,000 1,500 4,100 1,000 2,000 ,930 5,330 210 Assets available for division among the ordinary creditors Equal to a dividend of 13s. 9d. per £ on claims of £11,800, exclusive of expenses of realisation. Deficiency ,120 3,680 11,800 88 ACCOUNTING IN THEORY AND PRACTICE T. Brown & Co. Deficiency Account. To Loss from shrinkage in value of assets, as shown in the State of Affairs : — Goods . . . £350 Customers' Accounts 1,750 Machinery, etc. . 2,000 Heritable property 3,000 Investments. . 500 £7,600 Loss through lia- bility in respect of bills discounted and accommodation bills 1,500 Cash drawn by part- ners : — First year £2000 Second year 5000 Third year 3500 10,500 £19,600 By Deficiency, as per Statement of Affairs £3 680 ,, Capital — cash put into business at commencement . 5,000 ,, Profit shown by ac- counts : — First year £5000 Second year 3000 Third year 2920 10,920 £19,600 The Statement of Affairs of T. Brown & Co., and the relative Deficiency Account, are worth careful study. The firm is supposed to have been in business for three years. They started with a capital of £5000. Their accounts show that their profit for the three years was £10,920, and their drawings amounted to slightly under that, namely £10,500. At the end of the three years, therefore, as shown by their books, the capital they had in the business was £5420. That this was the capital at the date of the Statement of Affairs is seen from the following statement : — The book value of the assets was . . £23,930 The gross liabilities, after deducting the contingent claim of £1500, was . . 18,510 Leaving as the capital £5,420 STATEMENTS OF AFFAIRS IN BANKRUPTCY 89 In spite, however, of having this capital, the firm had been reckless in incurring liabilities, and were unable to meet their obligations, in consequence of which they had to suspend payment, as otherwise certain of the creditors would have secured payment at the expense of the others. The Deficiency Account shows clearly how from loss on a forced realisation an apparently solvent firm may pay a very small dividend. A Deficiency Account. The Statement of Affairs of a bankrupt, showing the amount of his deficiency, should, where possible, be accom- panied by a Deficiency Account, showing in detail the causes of the bankruptcy. Such an account should be credited with the capital at the commencement of the business or at the last ascertainable date of solvency, and the capital since put into the business, together with any profit earned. The Deficiency Account should be debited with all losses made as shown in the accounts of the debtor, together with the loss and shrinkage on assets as valued in the Statement of Affairs. The account should also be debited with the debtor's drawings. The balance of the account should be the exact amount of the deficiency, as shown by the Statement of Affairs, if the books have been correctly kept and due allowance made for all difference on valuation. A Deficiency Account when carefully prepared is of great value in determining the causes which have led to insolvency. Exanffple. From the following particulars, which have been taken from the books of the insolvent debtors and other sources of information, a Statement of the Affairs as at 30th June 1899 of Eoss & Todd, who are unable to meet their liabilities, and have suspended payment, has been prepared, and is submitted. There is also given a Deficiency Account ex- plaining the deficiency: — 90 ACCOUNTING IN THEORY AND PRACTICE Particulars. Cash on hand £200 Customers* Accounts : — Good ...... 2000 Doubtful, £300, estimated to produce 100 Bad ..... . 500 Goods valued at ... . 1900 Heritable property, cost £3000, estimated to be worth .... 2500 Note. — This property is assigned to creditors for £2300. Shares held ..... 150 Note. — These shares are assigned in security of a debt of £400. Creditors : — Ordinary unsecured — On open accounts 5000 On bills payable .... 1000 Partially secured by shares 400 Fully secured over heritable property 2300 Preferable claims for taxes, wages and salaries .... 100 Partners' drawings : — W. Ross 2000 R. Todd 2850 When the business was commenced on 31st December 1896, W. Ross put into it £2500 and R. Todd £2900. The first year resulted in a profit of £3000, but the next eighteen months showed a loss of £4300. No provision was made in the accounts for bad debts. From the above particulars the student should carefully prepare a Statement of Affairs of the firm as at 30 th June 1899, and should thereafter prepare a Deficiency Account. When he has got the Deficiency Account properly balanced he should compare his results with the Statement of Affairs and Deficiency Account now submitted, which differ in several points from the example already given. STATEMENTS OF AFFAIRS IN BANKRUPTCY 91 t-5 p p O H «3 §^ fa o Eh ^.2 o |2 o o o o o o o o o o' o O .-I CO "7i % '^ en VO OJ iO CO . ^<^^ (N ^ o«+i CO . •=*i * * 03 c3 .2 Shh* o n g O — , o 00 W frt d - § ■< Q 1 92 ACCOUNTING IN THEORY AND PRACTICE P P O H xfi ui O o o o o »o OS ^ PL, O"" o o ^1 pq I c3 C CO _^ Ago « ^ >>co ^ 1-H 02 ^'-''-' .S o o o ,^ o o o o o O VO O 00 (M (N &0 '.SO o .3 I » ^ C CO C<-c m O ■1 m _r^ STATEMENTS OF AFFAIRS IN BANKRUPTCY 93 Exercises. 1. From the following information prepare a Statement of Affairs for the information of creditors : — • The Heritable Land Society Unsecured creditors . . . £200,000 Creditors fully secured on property . . 6,000 Property held by secured creditors £12,000 Creditors for rates, taxes, and wages (preferential) 300 Bill of exchange (good) 22 Book debts 27,000 Good, £1000. Doubtful, £25,000 (produce £2000). Eemainder bad. Property .... 66,000 Loans on mortgage (pro- duce £60,000) 170,000 Office furniture 100 Cash at bankers 900 Cash on hand . 100 2. Wallace & Gibb, Merchants, are unable to meet their obligations. From their books and their own testimony the following particulars of their condition are ascertained : — Cash on hand £50 Customers' Accounts : — Good 1000 Doubtful, £100, but estimated to produce . 60 Bad, £200 Property (estimated to produce £2000), cost . 3000 Bills receivable, good ..... 800 Other securities (£800 pledged with partially secured creditors ; remainder held by the fully secured creditors) ...... 7000 Stock Exchange losses 3000 Trade expenses ...... 2300 Creditors, unsecured . . . . . 6000 . £6300 . 4000 . 150 . 2500 . 3900 . 2000 . 1500 . 1900 94 ACCOUNTING IN THEORY AND PRACTICE Creditors, partially secured Creditors, fully secured .... Preferential claims : wages, salaries, and taxes Wallace, capital Gibb, capital . Wallace, drawings . Gibb, drawings Business losses Prepare a Statement of Affairs, showing the liabilities and the assets with respect to their realisation and liquida- tion ; also a Deficiency Account, showing such of the above stated particulars as would account for the deficiency shown by the Statement of Affairs. 3. William Arnot, a Liverpool merchant, trading to the West Coast of Africa, finding himself on 1st July unable to meet his engagements, asks you to make up his Statement of Affairs for submission to his creditors. You find from his books and other sources of informa- tion the following facts regarding his affairs : — Unsecured creditors £9,00000 Fully secured creditors 2,300 Who hold security of the value of £3000. Partly secured creditors . . . . 35,000 Who hold securities of the value of £^0,000. Preferable claims 800 Bills payable 20,000 Book debts in England (good) . . . 1,000 Book debts (doubtful), £200, estimated to produce ....... 75 Book debts (bad), £300, of no value. Stock in Liverpool, cost £1500, estimated to produce 1,200 Stock and book debts, less sundry liabilities at four stations on the coast . . . . 36,000 Of which it is estimated there will be a loss on realisation of stock of £6000, and of book debts £9000. Four station buildings, plant, steamers, and carrying craft, £40,000, expected to realise 20,000 Office furniture, £300, estimated to reaHse . 200 ACCOUNTS OF BRANCHES 95 Cash in hand ...... £400 Cash at bankers ...... 80 Heritable property held by fully secured creditors 3,000 Shares held by partly secured creditors . . 20,000 Show his position, and make out his Deficiency Account from six years ago, when he had a capital of £42,000. The profits for the first three years appear by the books to have been £3000, £4000, and £5284, and the losses in the three subsequent years £1500, £2500, and £3000 respectively, after allowing £2000 a year for interest upon capital. His withdrawals have been at the rate of £4000 a year. ACCOUNTS OF BEANCHES The book-keeping of a business with one or more branches may be so conducted by getting daily or weekly returns from the branches as to incorporate the whole trans- actions of the branches in the books kept at the head office. This method, however, necessitates practically the keeping of duplicate accounts, as it is usually essential that complete accounts be kept at the branches, and treats the business of the branch more as an agency than as a branch. The more usual plan, and the method by which the full advantage of a branch establishment is secured, is to have what is practically a complete system of book-keeping at each of the branches. An account for each branch is kept in the head office books in which all the transactions between the head office and the branch are recorded, and each branch keeps a corresponding account in the branch books for the head office. These two accounts must necessarily show the same balances, but on opposite sides of the respective ledgers. At the date of the annual balance a Trial Balance is made of the books at the branch, and this, together with the stock sheets, and any other particulars required to complete the Profit and Loss Account and Balance Sheet, is forwarded to the head office. At the head office the Trial Balance and other particulars may be used to prepare a Profit and 96 ACCOUNTING IN THEORY AND PRACTICE O s O CD CO OS o 1 =!3 900 9,000 1,400 500 o o <^ £ s. d. 2,600 800 5,500 500 2,400 o o ^" £ s. d. 100 2000 500 o o o o q £ s. d. 600 200 1500 300 o o O 1 ^ . J fO| Dec. 5. Purchased from Webster & Co. Velvet £2200 7. Sold to T. Henry . . . Silk 1500 Cloth . 1200 Velvet . 1900 Sold for cash . . . Velvet . 400 Received from T. Henry bill at three months ...... 4000 31. John Dent took in cash for his personal use ....... 500 Drew from bank for personal use . 350 Took for his personal use during year .... Silk 45 Paid wages ...... 20 Rent and taxes paid .... 150 The stock on hand at the end of the year was as follows : — Silk 400 Cloth . 300 Velvet . 708 Prepare accounts showing the profit separately on silk, cloth, and velvet. Prepare Profit and Loss Account and Balance Sheet as at end of the year, writing off 10 per cent from furniture and fittings for depreciation. 2. The following is the Balance Sheet as at 30 th June of Tod & Dick, Wholesale Warehousemen, who are interested in the profits of the business in the proportion of two-thirds to Tod and one-third to Dick. The firm took stock on 31st December following, and after making all necessary reserves and adjustments the result was as set forth in the following particulars. Prepare the following : — (a) Trial Balance. (&) Departmental Trading Accounts, showing net profit of each department, (c) Final Accounts and Balance Sheet. 102 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet as at 30th June. Lwhilities. Sundry trade creditors upon open account Sundry trade creditors upon bills payable Sundry cash creditors ..... Interest and discount reserved Sundry creditors for rent, rates, taxes, salaries, and wages ..... Capital — Tod ... . £15,000 Dick .... 6,000 10,000 20,000 40,000 1,000 1,000 21,000 £93,000 Assets. Balance at bankers . .^ ^^ . Cash in hand . £1,000 100 Sundry trade debtors upon open account . . 40,000 Sundry trade debtors upon bills receivable in hand ...... . 2,900 Sundry debtors upon loans . 1,000 Stock in trade ..... . 40,000 Fixtures, fittings, and trade utensils . 1,000 Business premises ..... . 7,000 £93,000 31st December . Sundry trade creditors upon open account Sundry trade debtors upon open account Bills payable .... Bills receivable on hand Balance at bankers Cash on hand .... Sundry cash creditors . Sunday debtors upon loans Fixtures, fittings, and trade utensils Business premises .... Partners' drawings — Tod Dick . £18,000 29,000 10,000 3,000 2,000 100 28,000 1,000 950 6,500 1,000 400 DEPARTMENTS 103 Departmental Account Departments No. 1. No. 2. No. 3. Total. Stock, 30th June . £28,000 £7,000 £5,000 £40,000 Stock, 31st December . 27,000 6,000 5,000 38,000 Purchases .... 51,000 10,000 9,000 70,000 Sales 56,000 15,950 14,000 85,950 Working expenses (including depreciation) 6,700 1,300 1,000 9,000 3. From the following particulars prepare a Cash Book and a columnar Day Book and Invoice Book. Post into Ledger, and prepare Profit and Loss Account, showing separately the profit on cinnamon, nutmegs, and mace. Use the Journal for all entries not originated in the books above given, and prepare final Balance Sheet. Cinnamon on hand, valued at Nutmegs, do. do. Mace do. do. Cash .... B. Adams Bills receivable £1200 750 300 2000 125 200 W. Perkins Liability, Transactions during Year. Sold cinnamon for cash .... Bought nutmegs from W. Perkins Bought mace from T. Scott for . Paid him that sum, less discount, £3. Bill receivable became due, and was duly met Sold parcel of goods to B. Adams — Cinnamon ..... Nutmegs ...... Mace Drew upon B. Adams for full amount now owing Paid W. Perkins And gave him a bill for . . £800 . £200 350 . 120 ." 200 . 700 . . 100 . 200 g 1125 500 . 500 I04 ACCOUNTING IN THEORY AND PRACTICE Sold goods for cash — Nutmegs ....... Mace Paid office expenses ...... The stock on hand at the close of the year was valued as follows — £800 200 100 Cinnamon Nutmegs Mace (all sold) 480 470 4. From the following particulars of the business of E. Hay & Sons, Wine Merchants, prepare Departmental Accounts, showing the gross profit on whisky, brandy, and gin and wines, and Profit and Loss Account for the year. Stock in hand 1st January . Stock in hand 31st December Purchases .... Sales Duty and charges RTiisky. Brandy. Gin and Wines. Total. £700 £400 £6000 £7,100 900 500 5000 6,400 1500 1000 5800 8,300 2120 1900 9500 13,520 300 200 2000 2,500 The following additional payments and allowances have been made during the year : — Carriage . Wages and salaries . Stationery and stamps Eent Rates and taxes Discount allowed to customers Trade discounts received . £50 300 10 50 18 100 150 THE LEDGER, AND CLASSIFICATION OE LEDGER ACCOUNTS THE LEDGER IS THE BOOK OF ACCOUNT IN WHICH BUSINESS TRANSACTIONS ARE ARRANGED, CLASSIFIED, AND RE- CORDED SO AS TO SHOW HOW EACH PERSON STANDS IN RELATION TO THE BUSINESS, AND THE AGGREGATE EFFECT OF THE TRANSACTIONS. The financial statements of which a Ledger is made up are called Ledger Accounts, and are headed with a title THE LEDGER 105 descriptive of their contents. In each Ledger Account the transactions are separated into debits and credits. The money column on the left is reserved for the debit entries, and the money column on the right for the credit entries. The date and particulars are usually also separated, and where they relate to debit transactions are put upon the debit side, and where they relate to credit transactions on the credit side of the account. The main feature is that the Ledger should have separate money columns for debit and credit entries. The application of the terms "debit" and " credit " as applied to accounts is very easily followed in the case of an account headed with the name of a customer who purchases goods from the business. If he receives goods on credit it is clear that his account must be debited with the price of the goods, as he is indebted to the business for them. When the customer pays his goods ^ he must get credit for having done so. The application of the words " debtor " and " creditor " to impersonal accounts is not so easily followed. Ledger Accounts. Ledger Accounts may be divided into : — 1. Personal : those showing the transactions with persons, as Customers' Accounts and Creditors' Accounts. 2. Impersonal : all other accounts. Impersonal Accounts may be divided into : — 1 . Keal or property : those having to do with material matter, such as stores, raw material, and cash. 2. Nominal, or accounts affecting revenue : those recording facts as to profits and losses, such as wages and rent. The Goods Account is only a pure real account when it shows the balance of goods on hand at the close of a fiscal period. At other times it partakes of the nature of a revenue account as well as of a real account. [o6 ACCOUNTING IN THEORY AND PRACTICE Personal Accounts. Personal Accounts are accounts with persons, and show the transactions between the business and the persons with whom there are transactions which require to be recorded as personal transactions. They resolve themselves into two heads, debtors and creditors, or sales and purchases in a manufacturing or trading business. By keeping the Debtors' Accounts in one ledger, and the Creditors' Accounts in another ledger, the accounts can be more easily referred to, and one clerk may be posting purchases while another is posting sales. The Debtors' Ledger is also entitled the Sales Ledger or Sold Ledger, and the Creditors' Ledger the Purchases Ledger or Bought Ledger. These ledgers may be further subdivided where required. Thus the Sales Ledger may be divided into Home Sales Ledger and Foreign Sales Ledger; also Town Sales Ledger and Country Sales Ledger. The customers in the Town Sales Ledger may be arranged alphabetically, and the Country Sales Ledger may be arranged so that the Customers' Accounts in the different towns may come together, and the towns themselves may appear in alphabetical order. Beat or Property Accounts. Real or Property Accounts are those which represent cash and real goods of all kinds, such as land, buildings, plant, machinery, patents, stocks, ships, shares, goods, merchandise, consignments, and assets of all descriptions except Customers' Accounts, which are personal. Nominal Accounts. Nominal Accounts are those which represent income or expenditure, such as wages, salaries, travelling expenses, general expenses, rents, taxes, gas, water, etc. The Eeal and Nominal Accounts should usually have a ledger to themselves. In such a ledger the Eeal Accounts should come first, and the others should follow in the order in which they appear in the Profit and Loss Account. THE LEDGER 107 To halance Ledgers separately. It is usually advisable where a merchant's transactions are numerous to keep his accounts so that his ledgers may- be balanced separately, as by this means any errors in the books may be at once localised, and the difficulties of tracing them, and the time thereby wasted, very much reduced. A merchant also often wishes to know the total amount due by his customers and the amount that he is due to his creditors, and it is a considerable advantage if this can be ascertained without balancing the individual accounts and preparing a Statement of Ledger Balances in the usual way of the Customers' Ledger and the Creditors' Ledger. It is a considerable advantage if the General Ledger, which contains the accounts relating to property, profit and loss, and capital, can be balanced independently of the individual accounts of the customers and creditors. The ledgers kept in a merchant's business are usually three, as follows : — 1. The Customers' Ledger, containing the individual accounts of each customer or trade debtor. 2. The Creditors' Ledger, containing the individual account of each trade creditor. 3. The General Ledger, containing all the other accounts, being those which relate to property, profit and loss, and capital. To enable these three ledgers to be balanced in- dependently of one another, the books of original entry are kept so that all the items which are to be posted to the Customers' and Creditors' Accounts are arranged in money columns so that the totals of these columns can be posted to accounts kept in the General Ledger, headed " Customers' Accounts " and " Creditors' Accounts," or " Customers' Ledger " and " Creditors' Ledger." With only a Customers' Ledger, a Creditors' Ledger, and a General Ledger this would involve columns in the Cash Book for the receipts on behalf of customers and payments to creditors, any occasional payments to customers or receipts from creditors being adjusted by deductions from the respective columns in the Cash Book or by a Journal io8 ACCOUNTING IN THEORY AND PRACTICE entry. The " Customers' Accounts " and " Creditors' Accounts " in the General Ledger are practically abstracts of the Customers' and Creditors' Ledgers, and may with advantage be headed " Abstract of Customers' Ledger " and " Abstract of Creditors' Ledger." Sometimes the two accounts in the General Ledger are headed " Abstract of Customers' Accounts " and " Abstract of Creditors' Accounts." The " Customers' Account " is opened by having placed on the debit side in one slump sum the total balances due by customers at the date of opening the account. There would also be on the debit side the goods sold to customers as shown by the weekly or monthly totals of the Day Book, and on the credit side would appear the cash received from customers, goods returned, and discount allowed to customers. The General Ledger can thus be balanced independently of the Customers' and Creditors' Ledgers, and when the balances of these ledgers are ready, the statements of ledger balances would show the same balances as are shown by the Customers' and Creditors' Accounts in the General Ledger. Sometimes a customer has also an account as a creditor, and all transfers between his two accounts must be entered in the Customers' and Creditors' Accounts in the General Ledger, as well as in his individual accounts. By this method the General Ledger contains all the particu- lars necessary to balance .the books, and immediately the books of original entry are written up, summed, and their totals posted, and the General Ledger Accounts completed, the Profit and Loss Account and Balance Sheet of the concern may be prepared. The Customers' and Creditors' Ledgers may be posted up, and the individual accounts balanced off, and statements of the balances prepared as found convenient. One of the great advantages of the method is, that by it any mistakes in the books are at once localised, as it can be ascertained whether the mistake is in the Customers' Ledger, the Creditors' Ledger, or the General Ledger. Thus, if the Trial Balance of the General Ledger "is out," by preparing the Statement of the Customers* Ledger Balances, and comparing the total amount thereby shown to be due by customers with the balance shown by the Customers' Account, THE LEDGER 109 and by comparing the total amount due to creditors as shown by the List of Creditors' Ledger Balances with the balance shown in the Creditors' Account in the General Ledger, the error may be localised into one or other of the ledgers. If the total of the Self-Balancing Ledger does not agree with the balance shown in the abstract account in the General Ledger, of which the Trial Balance agrees, then since the error must be in the Self-Balancing Ledger, by taking a Trial Balance of the Self-Balancing Ledger, showing the totals of the two sides of each account, the sum of these totals should agree with the totals of the abstract account in the General Ledger, and so the error may be still further localised to one side of the Self - Balancing Ledger. Again, the Customers' Ledger and the Creditors* Ledger may be further subdivided. Thus the Customers' Ledger may be divided into a ledger for Town Accounts and another for Country Accounts. In this case it would be necessary for the Sales Day Book to have two money columns, one for town items and the other for country items. Or a method which works even better in practice is to have one Sales Day Book for town customers and another Sales Day Book for country customers. To make a ledger belonging to such a system of accounts as has been indicated absolutely self-balancing, it is only necessary to have in it an abstract similar to the one in the General Ledger, but with all the items which appear on the debit side in the General Ledger on the credit side in the abstract account in the other ledger, and the items which appear on the credit side in the General Ledger on the debit side. The method of keeping such accounts is shown in the third method of recording the transactions of William Wood given on pages 32 to 39. To analyse the Accounts in a Ledger. It is sometimes necessary where a set of books is being checked or investigated to prepare a complete analysis of the Ledger Accounts so as to show the sources e* ./^ no A ceo UN TING IN THE OR V AND PRA CTICE Analysis of the Ledger of William Woor Fol. Name of Account. J. Collins W. Simpson Jack & Co. Scott & Tait . Bills payable . Bills receivable Goods Rent Wages Discount . Capital . Add— Cash Sales Cash Purchases Balances : — Bank . Cash . Dr. Balances at beginning. Cash. £ s. d. 800 600 £ s. d. 285 200 770 400 300 150 50 35 15 100 100 600 40 95 65 Discount. Day Book. JoumaL £ s. d. 15 10 20 £ s. d. 500 1830 650 £ s. d. 280 400 1900 i 2705 45 20 500 300 2300 3000 3780 3000 6780 1 « UNIVtK&l I T H \ ^^ J THE LEDGER '^^^^.^^-.^^^ ^ TAKEN BEFORE MAKING THE Trial Balance Cr. Balances at end. Cr. Balances at beginning. Cash. Discount. Invoice Book. Dr. Journal. Balances at end. £ s. d. £ S. d. 300 £ s. d. 760 1230 £ s. d. 40 £ s. d. 490 £ S. d. 500 300 £ s. d, 300 650 370 0, 370 230 400 1000 280 495 5 400 280 300 100 3000 50 200 20 700 1600 20 150 50 40 • 95 65 1680 1900 2705 45 2300 4480 2300 1680 6780 112 ACCOUNTING IN THEORY AND PRACTICE from which the various items in these Ledger Accounts are derived. The analysis is carried out on a large sheet of paper ruled with perpendicular money columns, with a column for the folio of the book of original entry between each money column. Each account is taken, and each item of the account is entered in the analysis sheet in its appro- priate column. Where the folio in the book of original entry is given this also is entered on the analysis sheet. Thus the debit columns in the analysis sheet would begin with a column for the debit balances, and the other columns would be for the items in the books of original entry, such as the Sales Day Book, the Cash Book, and the Journal, together with a column for any credit balance entered on the debit side before closing off the account. As already pointed out, the folio of the book of original entry is entered against each item. The items on the credit side of each account are treated in the same way, item by item, there being columns for the credit balances at the beginning of the account, for the different books of original entry, such as the Invoice Book, Cash Book, and Journal, and any debit balance entered on the credit side before closing off the account. Each account thus stretches across the analysis sheet, and occupies as many of the horizontal lines as there are items in the column containing the greatest number of items. The next account is entered on the first clear line on the analysis sheet. Each page of the analysis sheet is thus independent, and in fact each account can be balanced by itself, but it is usually sufficient to balance each sheet. When the totals of the columns in the analysis sheets are completed they should be reconciled with the corresponding totals of the books of original entry, and where there is any difference it can be readily traced by checking the items from the analysis sheet into the book of original entry, if the folios have been entered on the analysis sheet. On the two preceding pages is an analysis of the Ledger of William Wood given on pages 29 to 31, and the agree- ment of the totals of the columns with the books of original record is at once seen. The balances at the close of the year are those given on page 66. CHECK LEDGERS CHECK LEDGEES In checking the posting of a set of books where there are numerous entries, and which have not been kept so that each ledger may be balanced separately, it is possible with very little additional trouble to prepare Check Ledgers, which enable any errors to be at once localised. In checking the posting of a set of books when that is done in the order in which the items are posted, namely from the books of original record into the ledgers, it usually falls to a junior clerk to call out the original entries, and a senior clerk checks them into the ledgers. While the senior clerk is searching for the folio upon which the entry is to be found, the junior clerk writes up the Check Ledgers, which are represented upon sheets of paper ruled with money columns. The method can be best followed by an illustration, and on the next page is given the Cash Book Check Ledger Slips of the set of books of William Wood, of which the Cash Book is given on page 34. The Customers' Ledger is checked as follows : — Balance due by customers at beginning of year . £800 Total of Day Book . . . £3000 Deduct — Cash sales . . . . 20 2980 £3780 Deduct — Credits throuirh Cash Book .... 2530 Balance due by customers at close of year . £1250 .0 This is the balance shown by the Customers' Ledger as due by customers at the close of the year. No adjustment for cash sales and cash purchases is necessary if these are treated as belonging to the Customers' and Purchases Ledgers respectively. 114 ACCOUNTING IN THEORY AND PRACTICE Cash Book Check Ledger Figures Cash Debtor. Customers' Ledfijer. General Ledger. £760 40 495 5 1230 £150 50 20 0' £2530 £220 2530 £2750 Cash Creditor. Purchases Ledger. General Ledger. £40 £285 15 400 35 100 15 200 10 770 100 600 £1680 £890 1680 £2570 Discount £45 25 20 65 Balances 95 £2750 00 THE CARD OR LOOSE-SHEET SYSTEM OF KEEPING LEDGER ACCOUNTS The Card or Loose-Sheet system of keeping Ledger Accounts, which has found considerable favour in America, works very satisfactorily in some businesses. By this method, instead of the Ledger Accounts being in bound volumes, they are kept upon loose sheets or cards in a box or case. When it is proposed to open a new account, a card or loose sheet, ruled like a Ledger Account, is taken and headed with the name of the account. When a sheet is completely filled, the account is continued on another loose sheet, and Ledger Accounts which are finished and which will not be again required are at once removed. The ledger thus consists only of accounts which are in use, THE CARD LEDGER 115 and, in preparing a Trial Balance, the trouble of going over accounts which have no balance upon them is saved. The accounts may further be arranged in any order, either alphabetically, according to the names of the accounts ; or geographically, according to the towns, or according to the streets where the persons reside, or in any other way that may be found desirable. The advantages of the method are : — 1. The account of one person, or the account relating to the same kind of transaction may be extended as required to any extent by merely adding more sheets as found necessary. 2. Accounts when closed may be removed at once. 3. The accounts may be arranged in any order, and this order may be altered at any time. 4. The trouble of opening a new ledger is done away with. 5. An account or any number of accounts may be taken out and given to separate clerks to be copied without dis- turbing the others. In connection with this system of keeping ledgers an efficient index to each ledger must be provided. If the sheets are arranged alphabetically, however, the index may be dispensed with. The sheets may be paged in the same way as the pages of an ordinary ledger. The Card System applied to a Shareholders' Ledger. The card system may be applied with advantage to the keeping of a Shareholders' Ledger or of a Debentureholders' Ledger. The work in connection with the transfer of shares once the transfers have been resfistered in the Transfer Eegister, consists mainly in the irksome routine of debiting the account of each transferor, and crediting the account of each transferee with the shares. The labour of this is much reduced by the card system, and the work practically results into simply lifting one card with the shares noted upon it from its place beside the transferor's name, to its place beside the name of the transferee. In the application of the method to a Shareholders' Ledger no change is required in the other books of the system, such as the ii6 ACCOUNTING IN THEORY AND PRACTICE Allotment Book or Eegister of Transfers. The cards are kept in a cabinet specially prepared for their reception such as is used in libraries catalogued on the card system. The name of each shareholder is written at the top of a card, a specimen of which is shown, and the particulars of the shares are entered upon a shorter card, a specimen of which is also shown. Upon each name-card the name, designation, address, and the distinctive number of the shareholder is given. Upon each share-card are contained the particulars of each block of shares held, showing their distinctive number and their total amount. In the specimens given particulars have been filled in. The share-cards, upon which are contained particulars of the shares held by any individual shareholder, are placed in front of his name-card. The share-card contains a space for the date and number of each transfer. Both cards are perforated near their lower edge so that when the cards are arranged in their drawer a rod may be passed through to fix them in their places. The name-cards are arranged in alphabetical order. In posting a transfer from the Eegister of Transfers all that requires to be done is to take the share-card containing the particulars of the shares trans- ferred from in front of the transferor's name-card, place the date and number of the transfer upon it, and deposit it in front of the transferee's name-card. When blocks of shares are split, or a share-card is completely filled up, new share- cards are used, and the old ones are cancelled. To prepare a list of shareholders at any time all that requires to be done is to copy out the names and holdings from the cards. No index is required, as the names are arranged alphabetically. When circulars are being addressed to the shareholders any number of clerks may be employed, and the vv'ork com- pleted in as short a time as desired. The system is so simple that with ordinary care no error need ever be made, but should a mistake occur it can be readily traced by means of the references on the share-cards. The following are specimens of the cards referred to : — THE CARD LEDGER Cards for Shareholders' Ledger No Name Designation Address 117 From 56421 \ Shares \ To 56520 Amount 100 Date. Transfer No. Date. Transfer No. Date. Transfer No. 1 ) 1 1 8 A ceo UNTING IN THE OR Y AND PR A CTICE EESERVES AND EESERVE FUNDS A RESERVE IS AN AMOUNT SET ASIDE OUT OF PROFITS, OR OTHER CREDIT BALANCE NOT REPRESENTING A LIABILITY TO OUTSIDE CREDITORS, BY DEBITING THE PROFIT AND LOSS OR OTHER ACCOUNT AND CREDITING THE RESERVE OR RESERVE FUND ACCOUNT. A reserve is formed out of profit where it is thought for any reason to be undesirable to pay away the full amount of the profit shown in the Profit and Loss Account. The profits must have been such as might have been dis- tributed in the form of dividends, but are retained with the view of the capital being strengthened and augmented. /The reserve should therefore be formed by debiting the Profit and Loss Appropriation Account and crediting the sum to the Reserve Fund Account. A reserve may be available for equalising dividends or for meeting extra- ordinary losses. When a reserve is provided for any distinct object or contingency it should be specially desig- nated so as to ear- mark the fund. As, for example. Reserve for Equalising Dividends, Reserve for Bad Debts, Reserve for Depreciation, Reserve for loss on Investments, etc. With reference to such reserves, it must be noted that a reserve for bad debts or for depreciation is not a reserve so far as bad debts have been incurred or deprecia- tion has actually taken place, but are only reserves so far as the amount reserved is in excess of current require- ments. Reserves for Bad Debts and Depreciation are better termed Allowances for Bad Debts and Depreciation when they refer to present requirements. Similarly with Reserve against loss on Investments. A reserve to be such must form part of the surplus of assets correctly valued over all liabilities to outside creditors, capital, and unappropriated profits. In a new company, for example, there can be no Reserve Fund until all such assets as Preliminary Expenses have been wiped out. Again, there can be no Reserve RESER VES A ND RESER VE FUNDS 1 1 9 Fund until any debit balance on the Profit and Loss Account is wiped out. Sometimes when shares or debentures are issued at a premium the total premiums received, after deducting the expenses of the issue, are credited to a Eeserve Fund, which ^ is used generally to strengthen the financial position of the company. Various terms are applied to a reserve, such as Eeserve Fund, Eeserve Account, Surplus, Margin, and Eest. Investment Fund. When a Eeserve Fund in place of being merely such as we have defined it has a corresponding amount of cash used to purchase securities which are held as available for the purposes of the reserve, the Eeserve Fund is sometimes designated as an Investment Fund. It is perhaps, however, preferable to still call the fund the Eeserve Fund, and to place the investment connected with it under the head " Eeserve Fund Investments " on the assets side of the Balance Sheet. A reserve is as truly a reserve whether a corresponding sum is invested outside the business or remains in the business. In fact, the sum so invested may remain intact, but the reserve may disappear through the depreciation of the assets of a concern or through direct losses. Secret Reserves. Certain large financial concerns, such as banks and insurance offices, have sometimes very large secret reserves. These are formed by writing down, for example, the figure at which the buildings stand in the accounts to a nominal sum, by maintaining investments at cost which have permanently appreciated in value, and by the omission altogether of assets from the Balance Sheet which might fairly be included. The practice is not to be commended, as it is quite as incorrect, although less harmful in its results, to understate a company's position as to overstate it. Some companies thus practically defraud one race of shareholders for the benefit of their posterity. I20 ACCOUNTING IN THEORY AND PRACTICE Redemption Fund. A REDEMPTION FUND IS SIMILAR TO A RESERVE FUND IN THAT IT IS SET ASIDE OUT OF PROFITS, USUALLY BY EQUAL YEARLY INSTALMENTS, SO THAT WHEN A FUNDED DEBT OR OTHER OBLIGATION MATURES THE REDEMPTION FUND WILL EQUAL THE AMOUNT OF THE OBLIGATION, AND THERE WILL BE AN ACCUMULATED SURPLUS OF ASSETS OUT OF WHICH TO REDEEM IT. Had the profits been divided there would have been no cash or other available assets out of which to meet the obligation. By means of such a fund, it is evident that the obligation is paid out of revenue. When the obligation is paid off, the Eedemption Fund still remains, and must then either be treated as an ordinary Eeserve Fund or carried back to the Profit and Loss Account. Debenture Reserve Fund. It is sometimes provided in the Articles of Association of a company that an annual sum is to be set aside out of profits to pay off its debentures at the end of a certain time. The result of such a provision is to form a Eedemp- tion Fund, which may be called the " Debenture Eeserve Fund," which at the date when the debentures mature should have at its credit a sum equal to the amount of the debentures. The directors should, of course, have watched to see that they had sufficient cash to meet the debentures, and when these are paid the Debenture Account would be debited with the amount, and the directors thus find themselves with a credit balance equal to the amount of the debentures paid off on the Debenture Eeserve Account. The balance of the Debenture Eeserve Fund Account may, therefore, after the debentures have been paid off, either be re-transferred to the Profit and Loss Account, where it will be available for dividends, or may be used as an ordinary Eeserve Fund. SINKING FUNDS SINKING FUNDS A SINKING FUND IS A FUND SET ASIDE OUT OF ASSETS AND ACCUMULATED AT INTEKES.T FOR THE PURPOSE OF MEETING A DEBT. Thus the fund set aside annually by a government, and invested, along with the interest on the annual instalments, with the view of redeeming at some future date the liabilities of the government to its stockholders, is a Sinking Fund properly so called. The main dis- tinction between a Sinking Fund and a Eeserve Fund or Depreciation Fund is that a Sinking Fund is formed of specific assets set aside and ear-marked to be used in the payment of some liability, whereas a Eeserve Fund is set aside out of profits to be used should occasion require to write down some asset. The Sinking Fund is a debit balance in the ledger, or an asset. The Eeserve Fund is a credit balance, or liability. A Sinking Fund is sometimes formed by companies to redeem such liabilities as debentures and mortgages. Contingent Fund, A CONTINGENT FUI^D, LIKE A SINKING FUND, IS SET ASIDE OUT OF CASH OR OTHER ASSETS, USUALLY OF THE NATURE OF OCCASIONAL OR EXTRAORDINARY RECEIPTS NOT RECEIVED FOR ANY PARTICULAR PURPOSE. The fund is USCd for payments for which there are no other available funds. The expression " Contingent Fund " should never be used for a Eeserve Fund, but the name should be kept strictly for such an asset as has been defined. The Contingent Fund is an asset, whereas the Eeserve Fun.d appears among the liabilities. In a friendly society fines paid by the members in respect of non-attendance at meetings or non- acceptance of office are sometimes accumulated in such a fund apart from the regular accounts of the society alto- 122 ACCOUNTING IN THEORY AND PRACTICE gether, and the fund is useful when any contingency arises requiring the disbursement of money which cannot be paid out of any of the other funds. Debenture Bond Sinking Fund. An everyday instance of a Sinking Fund is found in the case of a debenture bond purchased at a premium, and redeemable at par at the end of a fixed number of years. Under such circumstances the interest received cannot all be treated as income ; part of it must be applied year by year to wipe off the premium so that immediately before maturity the Investment Account may stand debited with the par value only of the bond. The annual income is termed the nominal interest ; the balance after provision has been made for writing off the premium is the true interest, or, as it is technically termed, the yield of the in- vestment. Thus, suppose £104 is paid for a £100 deben- ture bond, redeemable at the end of 10 years, and bearing interest meanwhile at 5 per cent per annum. Here 5 per cent is the nominal interest, or the interest on the par value of the bond, but the interest on the actual capital invested, in other words, the yield of the investment, is only 4|- per cent, the difference representing capital repaid which should be re-invested. In the case of curatories and judicial fac- tories under the Court it is usually necessary to set aside each year a portion of the income from all bonds and stocks purchased at a premium and redeemable within a given number of years. Thus Colonial Government stocks when redeemable and purchased at a premium must be reduced from what they cost to their redeemable value by having so much written off the figure at which they are valued each year, so that when they are redeemed the cash re- ceived will be the same as the value put upon them in the accounts. The Ledger Account for such an investment as that given above would be as follows : — SINKING FUNDS 123 £100 FIVE PER CENT DEBENTURE BOND Redeemable 1st January 1910 at par. — Yield of Investment, 4 J per cent. Dr. ' Cr. 1900. Jan. 1. To Cash . . £104 Dec. 31. ,, Interest (4^ per cent on £104) . 4 13 7 1900. Dec. 31. By Cash (nominal interest re- ceived) . .£500 ,, Balance . 103 13 7 £108 13 7 1901. Dec. 31. By Cash ,, Balance . 1902. Dec. 31. By Cash ,, Balance . £108 13 7 1901. Jan. 1. Dec. 31. To Balance . . £103 13 7 ,, Interest (4J per cent on £103 :13s. 7d.) 4 13 4 £108 6 11 .£500 . 103 6 11 £108 6 11 1902. Jan. 1. Dec. 31. To Balance . . £103 6 11 ,, Interest (4^ per cent on £103 : 6s. lid.) 4 13 £107 19 11 .£500 . 102 19 11 £107 19 11 and so on each year. Here it will be seen that in the first year 6 s. 5cl. of the premium is wiped off; in the second year 6 s. 8d. ; in the third year 7s., and if the account be continued to its close it will be found that the sum of all these " repayments of capital" is £4, and that the debit will be reduced to £100 by the time the bond will have reached maturity and be paid off at its par value. The student will ask how he is to ascertain that such an investment yields him 4|- per cent, or, conversely, such a debenture bond being offered him, how he is to ascertain the price that will yield him 4|- per cent, or any other desired return, on his investment. These questions form a chapter in the Theory of Annuities-Certain, which hardly falls within the scope of this work. The problem is, how- 124 ACCOUNTING IN THEORY AND PRACTICE ever, capable of a simple solution by means of interest and annuity tables. Thus, suppose I am offered a bond such as has been described, and I wish to ascertain what annual return the investment will yield. I have to pay £104, and for this I am to receive (1) an annuity of £5 for 10 years," and (2) repayment at par, namely £100, at the end of 10 years. Now the rate of interest I wish to ascertain is that rate at which the present values of the interest and the capital added together will amount to £104. I take my tables and first try, say, 4^ per cent. Present value at 4f per cent of an annuity of £5 for 10 years . £5 x 7-816 = £39'080 Present value at 4f per cent of £100receivableatendoflOyears £100 x -62872= 62-872 £101-952 The value of the annuity (7-816 per unit) and the capital (-62872 per unit) have been taken too low, that is, at too Mgh a rate of interest; in other words, the price asked, 104, would not enable me to realise 4|- per cent. Try Al\ per cent. Present value at ^\ per cent of an annuity of £5 for 10 years . £5 x 8-011 =£40-055 Present value at 4J per cent of £100 receivable atendof 10 years £100 x -65954= 65-954 £106-009 Here, on the other hand, the rate of interest tried is evidently too low. If I wanted to realise only A:\ per cent I could afford to pay £106. Try now an intermediate rate, say 4 J- per cent. Present value at 4J per cent of an annuity of £5 for 10 years . £5 x 7-913 = £39-565 Present value at 4 J per cent of £100receivableatendof lOyears £100 x -64393= 64-393 £103-958 SINKING FUNDS 125 I have thus, as near as possible, hit upon the correct rate, and have found that if I pay £104 (more accurately £103 : 19s. 2d.), for the bond in question, the return on my investment will be 4|- per cent. The converse problem of finding what price I should pay in order to realise a stipulated return on my outlay is, of course, solved in the same manner, but without the necessity of successive trials. I simply value the £5 per annum and the £100 payable 10 years hence at the stipulated rate of interest, and the sum of their values is the price I should pay. Thus if I want to realise 4-|- per cent I shall pay £106-009 ; if 4i per cent, £103-958 ; if 4f per cent, £101-952. The bond dealt with above bears interest at a nominal rate per annum. In practice, interest is usually payable half-yearly. But all that has been said applies if we substitute in the above example the words "20 periods " for "10 years," treat the bond as bearing 2 J- per cent per 'period for 20 periods, and select the annuity and present values accordingly. The resulting yield will be the yield per 'period. The bond may be purchasea, not at a premium, but at a discount. But the same principles hold good. The true yield in such a case will be higher than the nominal rate of interest, and will be ascertained as above; the debit entries in the Loan Account will exceed the credits, and thus the loan will be gradually written up to the par value of the bond. Tliese brief explanations will, it is hoped, enable any one to calculate for himself the yield on a simple debenture bond. But those who deal frequently with such invest- ments have no need to be their own computers. Various sets of tables, such as those of Nash, have been published^ from which the information required can be obtained at a glance. In what has preceded it is assumed (1) that the pay- ments of nominal interest will be regular and uniform, and (2) that the first payment of interest falls due a full year (or period) after the date of purchase, in other words, that 126 ACCOUNTING IN THEORY AND PRACTICE the bond is acquired immediately after a payment of interest has been made. This latter condition does not usually hold in practice. Bonds are bought and sold daily, and the purchaser usually acquires with them the next due interest coupons, no matter how soon they may be payable. In such cases the actual price paid must be discounted for the fractional period elapsed before it is made the basis for calculat- ing the yield. The discounting is usually effected by simply knocking off the amount of nominal interest already accrued. Thus, suppose I buy on 1st July, at £10 6|-, a bond for £100, 5 per cent interest, the first interest coupon of which is payable on the 1st January following. £2 :10s. of in- terest has thus accrued, and is presumably included in the price. Deducting it, we have £104, the price as at 1st January 'preceding, and this will form the basis for ascertain- ing the yield. The Ledger Account will of course be debited with £106 J actually paid on 1st July. Then, on the 1st January following, the first instalment of interest, £5, will fall to be credited. The corresponding debit, however, is only for half a year in respect of the price paid, and should be arrived at as follows. The yield will be 4|- per cent, as shown above, if the bond be a 1 years one. The discounted 'price on which the yield was estimated is £104. A full year's interest on this at 4 J per cent is £4 : 13s. 7d. ; deduct £2 : 1 Os. included in the actual price, debit the balance, £2 : 3s. 7d., and the account will then be in the same position as if the purchase had been made a full year previously at £104, as shown in the example already given. In the case of a bond payable in a foreign currency, the element of exchange may enter and complicate matters a little. As an example take an American railway bond for, say, $500, with coupons attached for $25 each, i.e. 5 per cent. On the London Stock Exchange the value of the dollar is usually taken at 4s. Thus, if the price were 104, a purchaser would have to pay £500 x 1*04 divided by 5, or £104. But in all probability he will receive more than 4s. per dollar, both on his interest coupons and on the bond at its maturity ; in fact, 4s. Id. per dollar may safely be anticipated as a minimum. At this rate £104 is SINKING FUNDS .27 equal to $509'4, being a premium of only 1'88 per cent on the $500 bond. Thus, by paying at the rate of 4s. per dollar, and receiving interest and capital at the rate of 4s. Id., the nominal premium is reduced by 2*12 per cent, and the yield will be increased accordingly. One other point may be referred to. It is not necessary to burden the Ledger Account with both debit and credit entries in respect of interest. From the example already given in detail of the £100 five per cent debenture bond, it will be seen that the capital is written down by 6s. 5d. the first year ; 6s. 8 d. the second year ; 7s. the third year, and so on. These instalments of Sinking Fund are all that need appear in the Ledger Account. The whole interest as re- ceived would go to the credit of the Interest Account, and the instalments of Sinking Fund would be journalised as follows : — 1900. Dec. 31. Interest. . . .Dr. To £100 five per cent £0 6 5 debenture bond £0 6 5 1901 Doc. 31. Interest . . . Dr. To £100 five per cent 6 8 debenture bond 6 8 1902. Dec. 31. Interest. . . .Dr. To £100 five per cent 7 debenture bond 7 and so on each year. This method has one advantage in the case of loans affected by a foreign exchange — any profit or loss arising from incidental variations of exchange is at once carried to the Interest Account, and is not suffered to affect the Loan Account. The first instalment of Sinking Fund having been ascertained, the succeeding instalments are easily calculated, TC for they form a geometrical series with the ratio 1 + j^, where K is the yield per cent. Thus, in the above example 6s. 8d. = 6s. 5d. ;plus 4-|- per cent ; 7s. = 6s. 8d. plies 4-| per cent, and so on. 128 ACCOUNTING IN THEORY AND PRACTICE COLLIERY SINKING OR REDEMPTION FUNDS Provision is, as a rule, made in the Articles of Associa- tion of a colliery company for the time when the coal will become exhausted, or for the expiry of the lease, when the fixed plant and workings which have been put down and opened up at considerable cost will be of very little value. The precise value of the fixed plant and other capital outlay of a colliery at any particular time is a question more for a mining expert than for an accountant, and very often in such questions it is of great advantage for an accountant and a mining expert to have a conference, so that they may advise the colliery company what is the best course to pursue in the special circumstances of each case. The mining expert can tell how long the coal will last, and the accountant can tell what sum it will be necessary to set aside each year in order to replace the Capital of the company. It is very desirable to have some scientific basis upon which to calculate the Redemption Fund, so that when the colliery is completely worked out or the lease has expired the capital of the shareholders may be used for the purpose of leasing another coal-field, or may be returned to the share- holders. When the specific gravity of the coal is known, together with the average thickness of the various seams, and the total area included in the lease, the quantity of coal in the coal-field may be calculated with considerable accuracy. The total quantity of coal and the probable annual output being known, the date of exhaustion when the Sinking Fund will be required to replace the capital may be ascertained. There are various ways in which the Sinking Fund to provide for the capital to be repaid to the shareholders, or to be used in the leasing of another field, may be formed. Thus, the same sum may be set aside each year and invested outside the business of the colliery in some security so that these instalments, with the interest that has accumulated, will amount to the sum required. Again, sums of the same amount may be debited to the COLLIERY SINKING FUNDS 129 Profit and Loss Account and credited to a Eeserve Account in the books of the colliery, and interest at the required rate may also be credited each year, but no separate invest- ment may be made. Again, an equal annual sum may be set aside each year of such an amount as without interest will amount to the sum required. The annual output of a colliery varies very much one year with another, and an equal annual sum is of course felt most in poor years. A preferable method is to make the payments to the Sinking Fund depend on the profits for the year, and this is done by setting aside a fixed rate per ton of coal raised or sold. This method works very satisfactorily on the whole, and by it each ton of coal bears its equal share of the expenses of pit sinking and making the colliery. Thus, if £50,000 is expended upon sinking shafts and general colliery formation expenses, and the total quantity of coal in the field is estimated at twenty-four millions of tons, a rate of -^-d. per ton will provide the necessary Sinking Fund by the time the coal is worked up. This method, although it errs on the safe side, leaves out of account the question of interest, and assumes that the money will simply remain in the colliery. If the Sinking Fund is invested outside the business, or if the fund, although left in the business, is credited with interest each year, the amount per ton required to be set aside will only be about one-half. Assuming that in the above case the coal would be exhausted in fifty years, and that the annual output would be 480,000 tons per annum, the annual sum required to be set aside and invested at 3 per cent to provide £50,000 in fifty years is £443 : 5s. 6d. This sum, divided by the annual output, gives less than ^d. per ton as the amount required to be set aside in respect of each ton of coal raised. Of course it is evident that if more coal is raised each year so that the coal becomes exhausted in less than fifty years the Sinking Fund will not be sufficient ; on the other hand, if less coal is raised, and the colliery lasts beyond the fifty years, the Sinking Fund will be more than sufficient in consequence of the operation of interest. Almost all colliery Sinking Funds require to be carefully revised and adjusted every few years. The K I30 ACCOUNTING IN THEORY AND PRACTICE simplest method of all, and one which requires no adjusting, is to set aside the same sum each year. Thus, suppose a pit cost £19,000 to sink, and that the lease is for thirty years, at the end of which time the break-up value of the machinery will be £1000. It is evident that £18,000 must be written off during the thirty years. The simplest way to accomplish this is to charge £600 per annum. This method has the advantage of simplicity, and when the amount of depreciation is fixed there is no temptation to adjust it each year so as to enable a dividend to be paid. EEALISATION AND LIQUIDATION ACCOUNTS A REALISATION AND LIQUIDATION ACCOUNT IS AN ACCOUNT SHOWING THE RESULT OF THE LIQUIDATION OF A BUSINESS OR ESTATE. It is debited with the total assets as shown in the Balance Sheet or Statement of Affairs of the concern as at the date of the commencement of the liquidation, and is credited with the liabilities to outside creditors. It is there- after credited with the assets as realised and charged with the liabilities as they are liquidated, together with the expenses of realisation and the cost of liquidation. Realisation and Liquidation Accounts are sometimes prepared in the form of Accounts Charge and Discharge. The liquidator charges himself with the whole estate as at the date of liquidation. The Charge also contains in an inner column the estate actually realised. Any surplus on realisa- tion is added, and any deficiency or loss on realisation is deducted from the Charge. On the Discharge side of the account appear the payments made to creditors, the expenses of realisation, and the cost of the liquidation. \ JOINT A ceo UNTS 131 CONSIGNMENT ACCOUNTS A CONSIGNMENT ACCOUNT IS AN ACCOUNT KEPT BY A MERCHANT, CALLED THE CONSIGNEE, WHO KECEIVES GOODS CONSIGNED TO HIM . FOR SALE, AND SHOWS ON THE DEBIT SIDE THE EXPENSES AND COMMISSION CHARGED IN CONNECTION WITH GOODS RECEIVED FROM ANOTHER MERCHANT, CALLED THE CONSIGNER, AND ON THE CREDIT SIDE THE AMOUNT REALISED FOR THE GOODS. The goods are sent at the risk of the consigner, and remain his property till sold. The corresponding account in the books of the consigner is headed merely " Consignment Account " or " Consignment Outwards Account." The state- ment which the consignee renders to the consigner when the transaction is completed is called an " Account Sales," and enables the consigner to write up his Ledger Account. The balance is remitted by the consignee either by cash or bill, or transferred to the current account of the consigner. JOINT ACCOUNTS A JOINT ACCOUNT, OR JOINT ADVENTURE ACCOUNT, AS IT IS SOMETIMES CALLED, RECORDS THE COMMERCIAL TRANS- ACTIONS OF A PARTICULAE KIND, USUALLY OF A TEMPORARY NATURE, ENTERED INTO JOINTLY BY SEVERAL PARTIES WHO COMBINE TOGETHER FOR THE PURPOSE, AND CONTRIBUTE THE CAPITAL AND THE SERVICES, AS MAY BE ARRANGED, AND AGREE TO SHARE THE LOSSES OR PROFITS IN CERTAIN PROPORTIONS. One of the parties may act as manager, although they may all have a share in the management, and when the speculation or venture is completed the manager combines all the transactions in the Joint Account, ascertains the balance due to or by each of the parties, and settles with 132 ACCOUNTING IN THEORY AND PRACTICE his CO -venturers. The debit side of the Joint Account contains all the outlay, and the credit side all the receipts or income. Exercises. 1. Brown imports goods on joint account with Smith ; the goods cost £1000, which was paid by Brown; the freight and insurance cost £65, which Smith paid. The goods realise £11 70, which is received by Smith, Draw up an account, showing the profit on the venture and the amount payable by Smith to Brown. 2. E. Allan and T. Dick agreed to import into this country from Australia a quantity of timber. On 1st March they opened a banking account in their joint names, to the credit of which E. Allan paid £700 and T. Dick £500. They agreed to divide profits or losses in pro- portion to these amounts. From this account £900 was remitted to Australia for cost of timber, £50 for agent's charges, and £200 was paid for freight and other charges. On 1st December they had realised by various sales £1200, which had been paid to the Joint Account, and each partner had been paid thereout the amount he had advanced. They agreed to close the adventure, Allan taking over the unsold timber at the price of £200. Make out the accounts, and show how the transaction would be closed. Bevenibe Account. The Profit and Loss Account is often called the Eevenue Account, but it is perhaps better to keep the expression " Eevenue Account " as the generic term embracing all accounts dealing with income, earnings, or profit, against which appear the cost, expenses, and losses connected therewith. In a concern not conducted for profit the revenue transactions are embraced in an account called the Eevenue Account or the Income and Expenditure Account. INCOME AND EXPENDITURE ACCOUNT 133 STATEMENT OF EECEIPTS AND PAYMENTS A Statement of Keceipts and Payments is a summarised Cash Account, showing on the debit or receipts side, properly- analysed under appropriate headings, the total money received during the period embraced by the account. The credit or payment side shows the cash disbursed during the period to which the account relates. These receipts and payments may be earnings and expenses relating to other periods than that covered by the account, the only requisite being that the cash was actually received or actually paid during the period embraced by the account. The state- ment shows the balance of cash on hand at the beginning of the period and the balance of cash on hand at the close of the period. Income and Ex'penditure Account. An Income and Expenditure Account, or Eevenue Account, as it is sometimes called, should have on the credit side the whole income of the society or concern to which the account relates for the period embraced in the account. Part of this income may have been received and part may still be due, but whether received or due, so long as it is the income relating to the period, and it is considered that it will be received, it must be brought into the account. Similarly, the whole expenses properly chargeable during the period or against the income, whether these expenses have been paid or are still due, must be included on the debit or expenditure side. The income outstanding at the close of the account forms an asset and the expenditure still due a liability of the concern, and should appear in the Balance Sheet of the concern at the close of the period. The Income and Expenditure Account is prepared from, and must reconcile with, the cash received and paid during the period, together with the assets and liabilities of the concern at the beginning and end of the period. The balance of the Income and Expenditure Account is the surplus, or excess of income over expenditure, if the income side is the 134 ACCOUNTING IN THEORY AND PRACTICE greater, or the deficiency of the concern, or the excess of expenditure over the income, if the expenditure side is the greater. This surplus or deficiency will be that for the period embraced in the accounts, unless there is a balance carried over from the previous year. It is always advisable, however, to indicate the exact surplus or deficiency attribut- able to the period embraced in the account. SUSPENSE ACCOUNTS A SUSPENSE ACCOUNT IS AN ACCOUNT OPENED FOR THE PURPOSE OF HAVING POSTED TO IT ITEMS WHICH THE BOOK-KEEPER IS UNABLE FOR THE TIME TO DETERMINE THE PROPER ACCOUNT TO WHICH THEY SHOULD BE POSTED. This may arise through a dispute as to the intention of parties, and upon settlement the item is transferred to its proper account. Sometimes cash is received in the form of a bank order or post office order, and through the omission of the sender the cashier has no clue to the object of the payment. In such a case the Suspense Account is the correct place to post the receipt to pending inquiries. A Suspense Account should never be used for any other purpose. GOODWILL GOODWILL IS THE MONETARY VALUE PLACED UPON THE CONNECTION AND REPUTATION OF A MERCANTILE OR MANUFACTURING CONCERN, AND DISCOUNTS THE VALUE OF THE TURNOVER OF A BUSINESS IN CONSEQUENCE OF THE PROBABILITIES OF THE OLD CUSTOMERS CON- TINUING. It is the value of the connection and reputation which a business has acquired during its existence, and these warrant the expectation that the turnover will continue so long as the business is conducted by the same parties, under the same GOODWILL 135 name, upon the same principles, or in the same premises. Lord Eldon's definition was : " The goodwill of a trade is nothing more than the probability that old customers will resort to the old place." Goodwill is seldom met with in the accounts of private concerns, but it is almost always to be found in the Balance Sheets of limited liability companies which have been formed out of existing busi- nesses sold at a price in excess of the value of the tangible assets. How Valued. The value of the goodwill of a business depends upon : — 1. The place. 2. The name. * 3. On the chance of no one stepping in connected with the old firm to compete. A purchaser of the goodwill of a business requires to carefully consider and weigh all these points. He should further consider liow far the business is really personal to the seller, and so not transferable. The business of a contractor, for example, is largely personal, and cannot as a rule be transferred. The question of the value of the goodwill of a business may arise : — 1. Upon the dissolution of a firm, which may arise from : — (1) The death of a partner. (2) The voluntary retirement of one of the partners. (3) The bankruptcy of one of the partners. 2. Upon the sale of a concern : — (1) To a new proprietor. (2) On the conversion of the old concern into a limited liability company. (3) Upon a new partner being assumed. It is evident that when a partner dies his co-partners naturally take possession of the whole of the goodwill, including the deceased's share. They should pay heavier for it than if the deceased partner were still living and had voluntarily retired, because he might have competed with them in business after receiving his share of the goodwill. 136 ACCOUNTING IN THEORY AND PRACTICE The bankruptcy of one of the partners of a business has, as a rule, an adverse influence upon the goodwill, but may- still leave the goodwill as an asset of considerable amount. All depends upon the special circumstances of the business. It is the custom to base the value of the goodwill of a business on a certain number of years' or months' purchase of the average net profits for, say, the three or five years immediately previous to the date of valuation. In the liquor trade the value of goodwill is sometimes based upon the quantity of liquor consumed in the year. The turnover of spirits can always be determined accurately from the Government Permit Book, and in such a business the ratio of profit to turnover should not vary much. Sometimes the interest on the capital employed and an allowance for personal management is deducted from the profit before arriving at the net profit upon which a certain number of years' purchase is to be taken as the goodwill. If a business requiring a capital of £3000, upon which the interest at 5 per cent would be £150, and yielding a profit of £1000 per annum, was worth (£1000 - £150) X 3, or £850x3,= £2550 ; another similar business yielding the same profit, and requiring only £2000 of capital, would be worth, it is evident, (£1000 - £100) x 3, or £900 x 3, = £2700. Simi- larly, a business requiring a man's undivided attention is not worth so much as another business yielding the same profit and employing the same capital, but requiring only half the attention of one man. For purposes of comparison, therefore, at all events a value must be placed not only upon the capital to be employed, but upon the services requiring to be rendered. It is evident, however, that if we deduct from the profits the interest on capital and an allowance for management, we must adopt a greater number of years as our factor to multiply such net profit by to arrive at the goodwill than we would adopt if we had not made these deductions. The amount given in practice for goodwill is as foUows : — Wholesale or retail trading businesses, 1 to 4 years' pur- chase of the profits. DEPRECIATION 137 Manufacturing concerns, 1 to 3 years' purchase of the profits. Professional concerns, 1 to 2 years' purchase of the profits. In the case of a compulsory purchase, say by a railway company or corporation, under powers of an Act of Parlia- ment, 10 to 25 per cent would require to be added to the sum arrived at on the above basis to come to a reasonable sum for such disturbance. It was formerly the practice to give the seller of a business a certain proportion of the profits made during succeeding years in respect of goodwill. From a buyer's point of view this was a very satisfactory method, as it made the amount payable depend upon results ; but from the seller's point of view the method proved unsatisfactory, as the buyer did not exert himself so much as he would have done had all the profits belonged to himself. DEPRECIATION Depreciation is the diminution in the value of an asset, and may be due to various causes. Thus in the case of machinery, it may be due to wear and tear or to the machinery becoming obsolete. In the case of heritable property, it may be due to objectionable works being started in the locality, or to economic causes. The subject is a very wide one, because different classes of assets depreciate at different rates. When capital is spent in the purchase of machinery, plant, land, or buildings with the view of a profit being earned, provision must be made for the replace- ment of the capital before the return from the expenditure can be regarded as income. Depreciation is thus a charge upon revenue. The object of writing off depreciation from the sums at which assets appear in one Balance Sheet is to make allowance for any diminished value, so that these assets may appear in each Balance Sheet at their true value. In determining the rate of depreciation the main facts to be kept in view in reference to any particular subject are : — 138 ACCOUNTING IN THEORY AND PRACTICE 1. The original cost. 2. The annual repairs required. 3. The probable life. 4. The market value. 5. The break-up or residual value. In allowing depreciation the rate may be calculated upon the original value or upon the diminished value from which the depreciation of pi-evious years has already been written off. Where the depreciation is on the original cost a much lighter rate is sufficient than where the depreciation is calculated on the diminished value. The more usual way is to calculate depreciation on the diminishing values. The effect of so calculating depreciation is that in later years the allowance for depreciation is lighter, but this is counter- balanced by the repairs being as a rule heavier in these years. Thus, if the life of a machine be taken as twelve years, and it is considered that the residual value of the machine at the end of twelve years will be 10 per cent of the original cost, then depreciation at the rate of 7-|- per cent on the original cost will require to be written off each year. To arrive at the same result if the percentage is written off the decreasing value each year, it will be necessary ta write off depreciation at the rate of 17 '4 6 per cent per annum from the decreasing value. To FIND THE RATE OE DEPRECIATION TO BE WRITTEN OFF THE DECREASING VALUE OF AN ASSET EACH YEAR SO THAT WHEN THE ASSET HAS TO BE REALISED THE VALUE OF THE ASSET AS APPEARING IN THE BOOKS MAY BE THE SAME AS THE RESIDUAL VALUE WHICH THE ASSET WILL REALISE. Let V represent the present value of the asset ; E the residual value after n years ; n the number of years at the end of which the asset will be required to be sold, when it will only be worth E, ; d the depreciation per unit per annum. It is evident if d is the depreciation per unit per annum that the value of the asset at the end of the first year will be Y — V6^ = V (1 —d). This value of the asset at the end of the first year will depreciate during the DEPRECIA TION 1 35 second year at the same rate as the value of the asset dur- ing the first year. Hence the value of the asset at the end of the second year will be V (1 - fZ) (1 -^) = y (1 -fZ)2, and so on at the end of each year. Hence at the end of n years the value of the asset will be V (1 — dY, but this sum is E, hence we have the equation : — V(l-c^)« = E; ■■.0-.i)-(5); -■..- = (5)i, •—-(f)' The rate of depreciation per cent is 100 x d, or Take the following example : — Suppose that £1000 is the value at the beginning of a certain period of an asset, and that five years afterwards the value will be £400. It is required to find the per- centage of depreciation to be written off each year from the decreasing value to leave £400 five years hence. To find Here V=1000. E= 400. 71= 5. Hence we have I02 (l)'=■•»(IS)*=^«»»«-* = 1-9204120.'- E\i ''^= -83255; ... 1- (|)'=cZ--16745; and 100 c^= 16-745. I40 ACCOUNTING IN THEORY AND PRACTICE After finding the rate of depreciation, which in this case is '16745 per unit, or 16*745 per cent, we have only to write the depreciation off the decreasing value each year as follows : — Value of asset at beginning of period . Depreciation on £1000 at 16'745 per cent Value at end of first year .... Depreciation on £832*55 at 16*745 per cent Value at end of second year .... Depreciation on £693*14 at 16*745 per cent Value at end of third year .... Depreciation on £577*08 at 16*745 per cent Value at end of fourth year .... Depreciation on £480*45 at 16*745 per cent Value at end of fifth year as given . . . • The above statement, when converted into pounds, shillings, and pence, may be put into the following form : — £1000 167*45 £832-55 139-41 £693*14 116*06 £577-08 96*63 £480*45 80-45 £400 SCHEDULE Showing the amount of depreciation at 16*745 per cent written off each year from the decreasing value of an asset costing £1000 for five years so that at the end of the five years the value of the ASSET STANDS AT £400. Year. 1 Decreasing Value of Asset. Depreciation each Year. Remainder at end of Year. 1 i 1 2 3 4 5 £ s. d. 1000 832 11 693 2 10 577 1 8 480 9 £ S. d. 167 9 139 8 2 116 1 2 96 12 8 80 9 £ S. d. 832 11 693 2 10 577 1 8 480 9 400 600 DEPRECIATION 141 The formula used above, V (1 — d)^ — E, may be used to find any one of the values involved when the other three are given. Thus, if it is required to find the number of years in which the value of a ship will be reduced one-half, if depreciation is written off the value of the ship at the rate d per unit on the annually decreasing value, we have to substitute in the equation V = 1 and E = |-, and we get at once (1 —dy' — \. Or, working the question out from first principles, we may take 1 as the original value of the ship. At the end of the first year, after writing off deprecia- tion, the value will be (1— fQ; at the end of the second year, since {\—d) will decrease at the same ratio as 1 did the first year, the value will be (1— ^) (1— ^) = (1— d)^. And so on, so that at the end of the n\h year the value will be (1— (^)"'; but the value is also \, hence we have {X—dy — ^. To solve this equation take logarithms of both sides, and we have n log (1 — c^) = log 1 — log 2. Hence n iog(i-dy If we take the value of the ship as £1000, and d 16745, as in the former example, we get _ l^g ^ _ _ log 2 , ^~ "log (1- -16745')" "log -83255' •3010 _ -3010 ""1-9204" '--0796' = 3-78 years. On referring to the schedule on the opposite page, it will be seen that at the end of four years the value of the asset is £480 : 9 s., and as in the present case we wish to find when the value of the ship costing £1000 will be reduced to one-half, namely £500, we see that the formula giving 3-78 years is correct. 142 ACCOUNTING IN THEORY AND PRACTICE INSUEANCE INSURANCE IS A CONTRACT BY WHICH A PERSON, CALLED THE INSURER OR UNDERWRITER, IN CONSIDERATION OF A CERTAIN SUM OF MONEY, CALLED THE PREMIUM, BECOMES BOUND TO INDEMNIFY ANOTHER PERSON, CALLED THE INSURED OR ASSURED, TO A SPECIFIED EXTENT IN THE EVENT OF A CERTAD^ CONTINGENCY OCCURRING DURING THE TIME THE CONTRACT IS IN FORCE. The contiugency may be certain risks to which the insured or his property is exposed, or certain liabilities which he may incur. He may insure himself against the risk of accidents happening to him, his property against the risk of fire, and his business from loss through any of his employees meeting with an accident and claiming against him under the Employers' Liability Acts. A written statement or deed, on duly stamped paper, called a policy of insurance, is by statute requisite to the constitution of the contract. The policy specifies the name of the insured, the risk covered, the premium paid, the duration of the policy, and the general conditions upon which the insurance is effected. The policy is signed by the insurer. A policy of insurance being a contract of indemnity, the subject insured must be one in which the insured has an interest, otherwise such policies might be used for waging or gaming. The words assurance, assurer, and assured are sometimes limited to life subjects, and the words insurance, insurer, and insured to other subjects, such as property. The different forms of insurance may be shortly grouped as follows — 1. Fire insurance. 2. Marine or maritime insurance. 3. Life assurance. 4. Accident and guarantee insurance. 5. There are many other minor forms of insurance, such as against loss of licences, death from natural causes of animals, etc. FIRE INSURANCE 143 riEE INSUKANCE FIRE INSURANCE IS A CONTRACT BY WHICH THE INSURER UNDERTAKES, IN CONSIDERATION OF THE PREMIUM, TO INDEMNIFY THE INSURED AGAINST LOSS THROUGH FIRE TO A SPECIFIED EXTENT TO THE PROPERTY WHICH IS THE SUBJECT-MATTER OF THE INSURANCE. The deed embodying the contract is called a fire insurance policy, and is for a specified time, usually a year, but is renewable on payment of a further premium. The contract being one of indemnity, the insured must have an interest in the subjects covered by the policy at the time of the damage. Immediately property insured changes hands the policy should be endorsed by the company to the new owner, otherwise it is of no use. Thus, when any one buys a house he should insure it or get an assignation to an existing policy immediately his offer is accepted, and he should not wait until he has paid the price. If a policy contains, as is usually the dase, what is called an " average clause," the insurer is only liable to pay such a proportion of the loss as the sum insured bears to the whole value of the property, part of which only is insured. Thus, if a warehouse worth £1500 is insured for £1000, and £600 of damage is done to the warehouse by fire, the amount payable under a policy with an average clause would only be ^§§§ths, or |-rds, of £600, which is equal to £400, the idea being that the policy covers the whole property and each separate article of it to an average extent of two-thirds of its value, otherwise the insured would enjoy the benefit of an insurance extending over the whole of his property, £1500, although he paid a premium for only £1000 of it. This practice is perhaps not widely enough known, and many people imagine when they are under-insured that, as the whole property will not likely be lost, the whole damage will be recovered from the insurance company in the event of partial loss, but this is not the case. 144 ACCOUNTING IN THEORY AND PRACTICE The rate of premium is quoted at so much per cent, and varies according to the risk. The following are some of the premiums for first-class risks, that is, those where the buildings are of brick or stone, and slated or tiled, without stove or external hazard : — Private dwelling-houses Is. 6d. Household furniture therein 2s. Stables and contents . 2s. 6d. Shops, non-hazardous, from 2s. Bakers' shops, with oven . . 2s. 6d. Do. without oven 2s. Boat builders 5s. to 21s. Bootmakers 2s. 6d. Grocers . . . . . 2s. 6d. Butchers .... . 2s. Hotels 2s. 6d. Confectioner, dressmaker, draper , milhner, ] losier furniture dealer, tobacconist, upholsterer 3s. 6d. These are specimens of the rates of the best fire insurance companies in the country, which are associated together by an agreement under which they do not compete for business by under-cutting each other, but charge the same premium under the same conditions for the same risk. These companies are called tariff companies. No policy is issued for a less premium than 2s. A policy may be obtained for one day, as in the case of a bazaar. Policies for seven years may usually be effected for six years' premiums paid down. In annual policies fifteen days' grace is allowed for the payment of the renewal premium. The rent of a property may be insured, so that in the event of the total destruction of the property the revenue derivable from the property is paid by the insurance company during the period in which the property is un- tenantable or is being rebuilt. As a rule, where buildings are in blocks the rate of premium for each separate portion of the block is the highest rate chargeable for any particular portion of the block. Thus, the rate for dwelling-houses in the same block as shops is 2s. or upwards, in place of Is. 6d., the rate for houses in blocks where there are no shops. MARINE INSURANCE 145 The stamp on a fire insurance policy is for Id., no matter what the amount. A fire insurance policy may be vitiated : — 1. If the fire is caused through the wilful act or with the connivance of the insured. 2. Through wilful misstatement or false description of the risk at the time of eff'ecting the insurance, or if the claim for loss or damage is fraudulent. 3. Through the erection of any stove or heating apparatus or other alteration in the building so as to materially alter the nature of the risk without the sanction of the insurance company. Loss of business profits through fire are not covered by a policy, nor are deeds, bonds, script, bills of exchange, money, or books of account, except at their value as paper. A fire insurance company has usually the right under its policies to re-instate the property which may be damaged or destroyed instead of paying the amount of the loss in cash. The commission allowed to agents for the collection of fire premiums by the tariff companies is at the rate of 1 5 per cent on the premiums collected. MAEINE INSUEANCE MARINE INSURANCE IS A CONTRACT WHEREBY A PERSON HAVING AN INTEREST DEPENDING UPON THE SAFETY OF PROPERTY EXPOSED TO RISK AT SEA MAY BE INDEMNIFIED BY PAYING A SUM, CALLED A PREMIUM, TO THE INSURER OR UNDERWRITER. The subjects insured must be lawfully insurable. Thus an insurance of contraband articles is not enforcible. The contract of insurance being one of indemnity, the insured must have an insurable interest in the subjects insured at the time of the loss, because unless he is to sustain damage from the loss he does not require to be indemnified. AH L 146 ACCOUNTING IN THEORY AND PRACTICE the risks incident to a sea voyage may be insured against. These consist of : — 1. The goods or cargo carried, including their cost, the expenses of shipment, and the cost of their insur- ance. 2. The ship itself, including the value of the ship at the outset of the voyage, the cost of the outfit stores, provisions for the crew, wages paid or due, and also the cost of insuring the ship. This insurance is spoken of as insurance on hull and outlay, or on the whole ship and the expenditure connected with its outfit. 3. The freight, which is lost through the goods not being delivered, and the cost of insuring the freight. The insured is thus guaranteed against loss through freight not being received in consequence of the vessel being lost. Insurances are made either under time policies, that is, policies for a certain period, usually a year, or under voyage policies, that is, policies covering a specific voyage. Valued policies are those in which the property or goods insured are valued, and the values stated at the time of effecting the insurance. In open policies no values are stated, and when a loss occurs the values must be proved. The ordinary form of Lloyd's policy contains three chief stipulations : — First. The insurers take upon themselves certain specific risks through which loss may happen to the owners of the vessel or cargo during a certain term or duration of the insurance which is clearly set forth. Second. There is what is called the "sue and labour clause," under which the insured must exert every effort to save the property insured when in peril, and the insurers agree to contribute towards any expenses which may be incurred. Third. Petty claims are avoided by excluding, except in events specified, claims below a certain percentage of the total sums at risk, or from claims for damage to certain goods of a specially hazardous description. When the master of a ship cuts away masts or cables and throws goods overboard to lighten the ship (jettison) LIFE ASSURANCE 147 with the view of saving the remainder of the ship and cargo, the loss so occasioned is brought into a " general average," in which the ship, cargo, and freight bear a proportionate share of the sacrifice made for the common good, and this is borne by the underwriters in proportion to the insurances. " Particular average " is where certain goods are damaged, as by wet, which is borne by the general goods. When the insurer has to pay for total loss, he is entitled to the goods abandoned and all the rights and claims of the insured connected with the abandonment. LIFE ASSUEANCE LIFE ASSURANCE IS A MUTUAL CONTRACT BY WHICH AN INSURANCE COMPANY UNDERTAKES TO PAY A CERTAIN SUM UPON THE DEATH OF THE ASSURED, OR UPON HIS ATTAINING A CERTAIN AGE, AND THE ASSURED BECOMES BOUND TO PAY CERTAIN SUMS IN NAME OF PREMIUM. The holders of a life assurance policy must have an interest in the life of the assured at the time of effecting the policy. A man, it has been held, has an unlimited interest in his own life, and may legally assure it for any amount. Life assurance, however, is not necessarily a contract of indemnity, and the whole sum is payable on the death of the assured, or on the maturing otherwise of the policy. The contract, in fact, is one of mutual risk. In the case where a creditor assures the life of his debtor, or has a life policy assigned to him in security, the policy does become, however, an indemnity one. There is great variety in life assurance business, and in the nature of the risks assured. The great majority of the policies, however, are for the whole term of life, and are payable only on the death of the assured. Such an assurance can either be effected by a uniform annual 148 ACCOUNTING IN THEORY AND PRACTICE premium payable till death, by increasing or decreasing premiums, by a limited number of premiums, or by one single premium paid at the time of effecting the policy. Endowment assurances are assurances for securing the payment of a sum on attaining a specified age, or at death, if that occur before attaining such age. Policies for a limited number of years are frequently effected in connection with loan transactions, but such short-term assurances do not form satisfactory securities for loans, because in the event of the period covered by the policy being survived, if the borrower's life is then uninsurable in consequence of ill- health a new policy cannot be taken out. Joint life assurances are those effected on the lives of two or more persons, where a sum of money is to be payable as soon as one of them dies, or on the death of the survivor. Survivorship assurances are those which effect the assurance of a sum to be paid at the death of one life, should that event occur during the existence of another life. Written notice of the assignation of a life policy must be sent to the head office or one of the head offices of an insurance company before it is effectual. On receiving such notice, together with a fee of not more than 5 s., the company is bound to make an acknowledgment of the assignation. To facilitate the office making such an acknowledgment, it is usual to send notices of assignation in duplicate, when the office returns one copy bearing a memorandum that the other has been received. The stamp duty on a life insurance policy amounts, roughly, to Is. per cent on the sum insured. ACCIDENT AND GUAEANTEE INSUEANCE ACCIDENT INSURANCE IS A CONTRACT SIMILAR TO THAT OF LIFE INSURANCE, UNDER WHICH THE INSURER CON- TRACTS TO PAY A CERTAIN SUM IN THE EVENT OF INJURY OR DEATH FROM ACCIDENT. It is to a limited extent a contract of indemnity. The existence of such a policy, and any payment received under BILLS OF EXCHANGE 149 it, does not prevent the assured from recovering damages in respect of his injury, or his representatives recovering damages in the event of his death, from those responsible for the accident. Guarantee insurance is a contract under which the insurer becomes bound to implement a liability or debt upon failure of the person primarily responsible for its fulfilment. The insurer is also called the guarantor or surety, and the insured is usually the creditor or the employer BILLS OF EXCHANGE A BILL OF EXCHANGE IS A WRITTEN REQUEST ADDRESSED BY ONE PERSON, CALLED THE DRAWER, TO ANOTHER PERSON, CALLED THE DRAWEE, DESIRING HIM TO PAY A SUM OF MONEY EITHER TO THE DRAWER HIMSELF OR TO A THIRD PARTY, CALLED THE PAYEE, ON A FIXED DATE OR WITHIN A CERTAIN TIME AFTER THE BILL HAS BEEN PRESENTED FOR PAYMENT, OR ON DEMAND. A bill is called an acceptance after the drawee has signed it in token of his agreeing to the request. The drawee is then called the acceptor. An inland bill is a -bill which, on the face of it, purports to be drawn and payable within the British Islands. A foreign bill is a bill in connection with foreign trade, or one which does not come under the above definition. A bill may be drawn in the form of a promise to pay, when it is called a promissory note. Every bill and promissory note, except a bill payable on demand, must be written upon a piece of paper having an ad valorem stamp previously impressed upon it. It cannot be afterwards stamped, except in the case of it having been impressed with a stamp of sufficient amount but of 50 ACCOUNTING IN THEORY AND PRACTICE improper denomination. Bills or notes drawn or made out of the United Kingdom before being presented for payment or endorsement, or being negotiated in an}^ way, require to have affixed to them and cancelled an adhesive stamp of the proper amount. The ad valorem duty chargeable is at the rate of Is. per cent. On a bill payable on demand the duty is Id., and may be denoted by an adhesive stamp. The following is an example of an ordinary inland bill : — Edinburgh, 2Uh May. Two months after date, pay to me or my order the sum of One hundred pounds Sterling for value received. (Signed) David Brown. To Charles Dods & Company, Merchants, London. The following is the form of the above bill as a promissory note : — London, 2^th May. Two months after date, we promise to pay to / \ you or your order the sum of One hundred pounds / is. \ Sterling for value received. ( Stamp, j (Signed) Charles Dods & Company. V J To Mr. David Brown, Edinburgh. Charles Dods & Co. accept the bill when it is in the first form by signing their name either across the face of the bill or underneath the signature of David Brown. David Brown may then endorse the bill and hand it over to a third party, who in his turn may pass the document on to another party ; the endorsation having the effect of assign- ing the debt. Bills of exchange are usually negotiated finally by bankers. BILLS OF EXCHANGE Foreign bills of exchange are sometimes drawn in sets of two or three, each bill being sent by a different route, so that the risk of one bill of the set not turning up is very little. Only one of the set requires to be stamped. The following is an example of a foreign bill : — Paris, 2^th May. At one month after sight of this our first of exchange (second and third of same tenor and date being unpaid) pay to our order the sum of One hundred pounds Sterling for value received. (Signed) A. F. Eoget et Fils. To Charles Dods & Co., Merchants, London. Bills are regarded by a merchant as bills receivable or bills payable, according as the cash which they represent is payable or receivable by him. If a debt of £100 is due to a merchant by one of his customers, he might have some difficulty in recovering the asset, because he would have to prove his debt. If the customer, however, accepts a bill payable to the merchant, the nature of the asset is changed, because what was formerly due on an open account is now due in the form of a bill receivable. When a merchant receives the cash for a bill the form of his asset is aofain changed from a debt due on a bill receivable to actual cash on hand. Similarly, if a merchant is due to one of his creditors £100, that creditor would require to properly constitute his claim before he could enforce payment, but once the merchant has accepted a bill for the amount it changes his liability from a liability on an open account to a liability under a bill payable. The peculiar privilege of bills is that payment of the amount may be enforced summarily, without the necessity of an action for constituting the claim. The Bills of Exchange Act of 1882 codifies the law in regard to bills of exchange, cheques, and promissory notes. 152 ACCOUNTING IN THEORY AND PRACTICE APPORTIONMENT APPORTIONMENT IS THE DIVISION OF A SUM INTO PRO- PORTIONATE PARTS ACCORDING TO THE RIGHTS AND INTERESTS OF DIFFERENT PARTIES, OR THE DIVISION OF A WHOLE INTO PARTS PROPORTIONED TO THE RIGHTS OF CLAIMANTS. Thus, if an annuity of £400 per annum is payable to A at the terms of Whitsunday and Martinmas, so long as he is alive, with the provision that A's heirs are to get a pro- portionate part for the period up to the date of his death should he die between terms, then in the event of A dying on the 26th of November his heirs will be entitled to receive the proportionate part for the fifteen days from 11th November, when he received his last payment, to the 26 th November, when he died, that is, his heirs will be entitled to receive -^g^g^ths of £400. This sum, amounting to £16 : 8s. 9d., might be payable on the 26th November, the date of A's death, if a provision to that effect were con- tained in the deed under which the annuity was payable, but in the absence of such a provision it would be payable at the next term following A's death, namely Whitsunday. It is important to observe that in making this allocation we have looked upon the annual sum and have taken the proportion upon that for the number of days during which A was entitled to receive the annuity. Had we considered merely the £200 which fell due at Whitsunday, and taken into account the number of days between 11th November and 15th May, namely 185 days, the sum we would have brought out as payable to A's heirs would have been xW^^^ of £200, which is equal to £16 :4s. 4d., so that by this method A's heirs would get 4s. 5d. less than by the correct method. Although this latter method is sometimes adopted^ it is not the correct one, because the £200 really represents a half-year's payment, and is therefore in respect of 182|- days. If we take x^i^^s of £200 we get £16 : 8 s. 9d., as before. APPORTIONMENT 153 An apportionment may be (1) in respect of time, where, as in the above example, the claimants' interests are successive ; and (2) in respect of estate, as where a house and lands, let on lease at one entire rent, are left by the owner in his will to different parties, that is, the house to one party and the lands to another, in which case the entire rent would be apportioned according to the respective values of the house and of the lands. In the case of a furnished house, let at an entire rent, it would not be fair to apportion in the ratios of the value of the house and furniture, as the furniture is so much more perishable. A fairer proportion might be got by taking the ratio of 4 per cent on the value of the house to 1 per cent on the value of the furniture, the house by this method being considered as worth 25 years' purchase, and the furniture as worth 10 years' purchase. The use of Interest Tables in ap'portioning Sums for different periods. Where a number of sums have to be apportioned over different periods of time, it is very serviceable to have an easy method of making the apportionment. Interest tables, showing the interest on different sums for any number of days at 5 per cent, such as the well-known tables of the late Mr. James Laurie, published by Messrs. George Routledge & Sons, are very useful for this purpose. The rule to use is, shortly, as follows : — To find the pro- portionate SUM FOR A CERTAIN NUMBER OF DAYS, HAVING GIVEN THE SUM PER ANNUM, MULTIPLY THE SUM PER ANNUM BY 20 (i.e. reduce pounds to shillings), and find from the TABLE THE INTEREST AT 5 PER CENT ON THIS NUMBER OF POUNDS FOR THE GIVEN PERIOD. Thus in the foregoing example the amount per annum is £400, which multiplied by 20 gives £8000, and the interest on £8000 for 15 days at 5 per cent is £16 : 8s. 9d., as already found. The reason why interest tables at 5 per cent may be used for such questions is seen if we consider that if S be the sum with which we enter or look up the tables of interest at 5 \ 154 ACCOUNTING IN THEORY AND PRACTICE per cent for 15 days, the result given in the table is 15 5 15 1 S X X = S X -— - X — If we enter the table with 365 100 365 20- 15 1 S X 20, we get as our result S x 20 x - - x --, which is 365 20 15 equal to S x — — , what we wish. In apportioning any sum under £18 :5s. (365 shillings) over different numbers of days, the same tables may be used in a slightly different way. Since the interest on a sum for a certain number of days is equal to the interest on the number of days looked upon as pounds for the number of days there are pounds in the sum, we have only to look upon the number of days as the sum, and the sum as the number of days. Thus, to allocate £13 over 40, 93, and 500 days, we have merely to find from the tables the interest on £40, £93, and £500, for 13x20 = 260 days at 5 per cent, and we get £1 : 8s. 6d., £3 : 6s. 3d., and £17 :16s. 2d. The Apportionment Act of 1870. At common law sums payable at regular periods of time are not apportionable, apart from some special provision in the deed under which the sum is payable. Thus, at common law if the liferenter of a property died the day before the term upon which his liferent was payable, his heirs or executors were formerly entitled to nothing more than if he had died the moment after receiving the previous term's payment. The objections to such a state of matters are easily seen. The person in receipt of an annuity, believing that he will receive a payment on the term day, may live fully up to his income, and may incur obligations in view of what he expects to receive ; but if he dies the day before the term the annuity would not be payable, and unless he left other funds the obligations he had undertaken would never be implemented. The hardships created by regular payments such as rents and annuities not being apportionable, where no such provision was made in the APPOR TIONMENT 155 deed regulating the payment of the rent or annuity, resulted in the passing of an Act for the more effectually securing the payment of rents, in the eleventh year of the reign of George II. (the Distress for Eent Act, 1737), which did not apply to Scotland. A further and wider Act, known as the "Apportionment Act of 1834," which was held to apply to Scotland, was also passed, and in 1870 a most important and still wider Act was passed which extends the principle of apportionment to all cases where apportionment is possible, except to the case of annual sums made payable in policies of assurance. The main provisions of " The Apportionment Act, 1870," which was passed on 1st August 1870, and which is the most recent statute dealing with the matter, are as follows : — " 11. Rents and periodical payments shall accrue from day to day, and be apportionable in respect of time. — From and after the passing of this Act all rents, annuities, dividends, and other periodical payments in the nature of income (whether reserved or made payable under an instrument in writing or otherwise), shall, like interest on money lent, be con- sidered as accruing from day to day, and shall be apportionable in respect of time accordingly." "III. Apportioned part of rent, etc., shall be payable WHEN the next ENTIRE PORTION SHALL HAVE BECOME DUE. — The apportioned part of any such rent, annuity, dividend, or other payment shall be payable or recoverable in the case of a continuing rent, annuity, or other such payment, when the entire portion of which such apportioned part shall form part shall become due and payable, and not before ; and in the case of a rent, annuity, or other such payment determined by re-entry, death, or otherwise, when the next entire portion of the same would have been payable if the same had not been so determined, and not before." Section IV. of the Act contains provisions making the entire portion of the rent or other periodical payment payable to the heir, from whom the apportioned part is recoverable by the executors or other parties entitled to the same, less "all just allowances." "V. Interpretation of terms. — In the construction of this Act — "The word 'rents' includes rent - service, rent -charge, and rent-seek, and also tithes and all periodical 156 ACCOUNTING IN THEORY AND PRACTICE payments or renderings in lieu of or in the nature of rent or tithes." "The word 'annuities' includes salaries and pensions." " The word ' dividends ' includes (besides dividends strictly so called) all payments made by the name of dividend*, bonus, or otherwise out of the revenue of trading or other public companies, divisible between all or any of the members of such respective companies, whether such payments shall be usually made or declared at any fixed times or otherwise; and all such divisible revenue shall, for the purposes of this Act, be deemed to have accrued by equal daily increment during and within the period for or in respect of which the payment of the same revenue shall be declared or expressed to be made, but the said word ' dividend ' does not include payments in the nature of a return or reimbursement of capital." "VI. Act not to apply to policies of assurance. — Nothing in this Act contained shall render apportionable any annual sums made payable in policies of assurance of any de- scription." " VII. Nor where stipulation made to the contrary. — • The provisions of this Act shall not extend to any case in which it is or shall be expressly stipulated that no apportionments shall take place." Questions of apportionment occur chiefly in connection with testamentary deeds where the liferent of an estate is left to one party, and the capital, or fee of the estate, to another. It is most important, therefore, in such cases to determine the exact amount of the capital of the estate which is liferented, and the various provisions of the Act, so far as not modified by the testamentary writings or trust deed, must be exactly given effect to. It is important to observe that, according to Section Y. of the 1870 Act, all revenue from trading or other public companies must be deemed to have accrued by equal daily increments during the period in respect of which the pay- ment of the revenue " shall be declared or expressed to be made." The date of the actual payment of the revenue is of no moment, but the important factor is the period for which the revenue is " declared or expressed to be made." APPORTIONMENT 157 Some companies are very particular in stating on the counterfoils of their dividend warrants the period during which a dividend paid has been earned, but others give no indication whatever, and it is often difficult to determine the period even from the Balance Sheet and Annual Eeport. The result of giving effect to the provisions of the Act of 1870, where the estate to be liferented consists largely of shares, the dividends upon which are payable a considerable time after the period during which they have been " made," is that the liferenter may not receive any income for a year or more after the testator's death. This loss, however, is made up to the liferenter or his heirs when the shares are sold or when he dies. Testators, to obviate this hardship, frequently provide for the payment of a slump sum at the first term occurring after death. Under the Act of 1870, therefore, rents, annuities, dividends, and other periodical payments of the nature of income, are to be considered, like interest on money, as accru- ing from day to day, and apportionable in respect of time accordingly, and the apportioned part is payable when the next entire portion is payable. The Act vests in a life- renter or proprietor and transmits to his executors the rent due for the period he survives of a broken term, the rent so vested being the proportion for the period he lived into the term. Commercial Apportionments. In balancing the books of a commercial or manufactur- ing concern at any particular date, there are usually certain charges, such as rent, taxes, fire insurance, interest, feu-duty, etc., which have only been partially paid during the period covered by the Profit and Loss Account, and which so far as accrued have to be allowed for and charged against the profit. These charges appear in the Balance Sheet as a liability under the general heading of " Charges accrued," or ^ under specific headings, such as " Kent accrued to date." Similarly, if rents or taxes are paid in advance, an apportion- ment has to be made, and the amount reserved goes to increase the profit, and appears in the Balance Sheet as an asset under ;<^ 158 ACCOUNTING IN THEORY AND PRACTICE the heading of " Charges paid and unexpired," or under specific headings, such as " Eent paid in advance." The purpose of a Profit and Loss Account being to show the profit for a specific period, the whole income for that period must be taken into account, whether it has been received or is still due, and any income so outstanding appears as an asset in the Balance Sheet. Care, however, should be taken that all accruing income from rents, interest, etc., which appears as an asset is a good asset and likely to be received, as under no other heading are assets so often overestimated in Balance Sheets. In balancing the accounts of a concern yearly or half- yearly, apportionments almost always have to be made if any degree of accuracy is desired, and where a concern changes hands, as in the case of the conversion of a business into a limited liability company, or on the assumption of a new partner, or where it is required to find the amount due to a retiring partner, or to the representatives of a deceased or bankrupt partner, apportionments require to be very carefully made so as to be absolutely fair to all parties. Most items that occur annually are easily apportioned and present no difficulty, but in the case of rents or dividends payable half-yearly, quarterly, or monthly, considerable care must be exercised to arrive at correct results. Thus, to take a practical example : Suppose the business books of a concern are balanced at 30th June, what is the proportion of the rent which should be taken as a liability, supposing the last half-yearly payment of rent was duly paid on 15 th May ? If the half-yearly rent is taken as £100, the follow- ing solutions may be given to the question : — 46 1. ^rz- of £200 (the annual rent) 000 or 46 182i of £100 = £25 :4s. Id. 2,^ of £100 or 1^ = £25 :11s. Id. £100 te ^~X of £100 APPORTIONMENT Since the 28tli of May is the removal term, and the rent paid on the 15 th May is for occupation up to the 28 th, the following additional solutions may be given of the question if the period of occupation be held to govern the apportionment, and not the date of payment of the rent : — 3. ^ of £200 or 33 182J of £100 I = £18 :1s. 8d. 4. -^ of £100 184 or v = £17 :18s. 8d. £100 less~\ of £100 lo4: Of the four solutions the first and third are correct on the assumptions made, as they treat the payment as a yearly one. The second and fourth solutions are not correct, as they treat a payment for half a year, or 182|- days, as a payment for 180 or 184 days. In arriving at the above solutions the days have been counted as from the 15th or 28 th of May, these dates being thus adopted as the dates of entry. Suppose, however, that the business was begun on the 11th or 28th of November, then the result of counting the days from the 15th or 28th of May is to charge the Profit and Loss Account with rent for half a year plus 46 or 33 days, that is, for 228|- days or 215|- days, whereas the number of days between the 11th and 28 th November and the 30th June is 231 days and 214 days. In such a case, therefore, it would be more correct if the 11th and 28th November be taken as the dates to count from, and the following additional solutions may be given : — 231 5. =^ of £200 less £100: 365 91 4. 6. ^X of £200 less £100 365 £26 :11s. 6d. £17 :5s. 2d. i6o ACCOUNTING IN THEORY AND PRACTICE From the above it will be seen that the correct method to employ depends upon the special circumstances of each case. The principle, however, always remains the same — that the rent should be charged according to the amount accrued during the period embraced by the Profit and Loss Account. Ments. In Scotland the rents of houses and shops are, with few exceptions, payable at Whitsunday (15th May) and Martinmas (llth November), and the year runs as a rule from the Whitsunday term. Although the rents are payable on these dates, possession of the subjects is not given to the tenant as a rule until 28 th May, and he is entitled to occupy them for a full year from that date. Similarly, a tenant who gets entry at Martinmas obtains possession on 28 th November, and does not remove until 28 th November in the following year. In view of the fact that the rents are due for the actual possession of the subjects, one would have assumed that the apportionment would fall to be made as from the date on which the possession com- menced, and in commercial apportionments the removal terms should as a rule be taken. Thus, in balancing the accounts of a hotel which closes its books on the 30th June, where the rent payable is £1200 per annum, the correct sum to appear as a liability in the Balance Sheet, and to be charged in the Profit and Loss Account as accrued to 30 th June would, on the assumption of a Whitsunday entry, and that the rent due at 15 th May has been paid, be the proportion of £1200 for the thirty- three days between 28 th May and 30 th June, because the last instalment of rent, namely £600, paid on 15th May was for possession up to 28th May, and to apportion from 15th May would be to charge in the Profit and Loss Account the rent for the period from 15 th May to 28 th May twice. Similarly, if the proprietor of a house die on 20 th May, one would have supposed that his executor could have no right whatever to share in any apportion- ment of the rent payable by a tenant who did not get APPORTIONMENT i6i possession of the house until eight days after the death, viz. 28th May. But that is not the interpretation which has been given to the Act by the Court. In the leading case of Campbell v. Campbell, 18th July 1849, 11 Dunlop, 1426, it was in effect settled that the apportionment should take place from 15th May, the term when the rents were legally payable, and ' not from the term when possession was actually obtained. The circumstances in the case of Campbell were as follows : — Campbell of Lochnell, heir of entail in possession of the estates, died on 18th May 1846, that is, three days after the legal term of Whitsunday. The farms upon the estate were grass farms. The entry was at Whitsunday, but the first half-year's rent was, under the lease, payable at Martinmas thereafter, and the second at Whitsunday following, and so on. The executor of the deceased Lochnell claimed at common law the rents legally due at Whitsunday, but conventionally payable at Martin- mas 1846, and under the Act a proportion of the second half-year's rents of crop 1846, payable at Whitsunday 1847, effeiring to the three days between the term and Lochnell's death. The Court sustained that claim. The view taken was that the half-year's rents payable at Martinmas 1846 had wholly vested in the late Lochnell, being rents for the crop of a half-year during the whole of which the tenants derived their rights from him as proprietor, and which were legally payable at Whitsunday, when he was still in life. As to the rents payable at Whitsunday 1847, these were also rents legally due for a half-year, during part of which Lochnell had been proprietor. This case was decided with special reference to the Apportionment Act of 1834, and before the existing Act of 1870 was passed. But in the decisions that have been given under the Act of 1870, Campbell's case has been recognised as a binding authority. Thus in 1892 Lord Low decided in a case where the late Mr. H. M. Horsbrugh was judicial factor, and where there was a large amount of house property in Edinburgh /^^' OF THE ^ A ( UNIVERSITY ] i62 ACCOUNTING IN THEORY AND PRACTICE belonging to the estate, that the terms at which the rents were payable, namely 15 th May and 11th November, were the correct periods to count from. The Accountant of Court had wished to take the removal terms. The latest case on the subject is Graham (Tennent's executor) u Lawson, decided by Lord Low on 2nd November 1897, and reported in the Scottish Law Reporter, vol. XXXV. p. 72. In that case a liferentrix let a house for five years, with entry at Whitsunday, at a rent payable half-yearly at Whitsunday and Martinmas, the first half- year's rent being payable at Martinmas for the half-year preceding. She died on 14th June 1896, and her executor sued the tenant for the half-year's rent due at Martinmas 1896. He maintained that the whole of the half-year's rent vested in the liferentrix by her survivance of the term of Whitsunday 1896, but Lord Low held that the executor was only entitled to the portion of the rent efifeiring to the period between Whitsunday and the date of death. His lordship's opinion is very clear and instructive, and should be read by all who wish to understand this abstruse subject. In view of these decisions of the Court, an accountant should meantime apportion rents between the heir and executor as from the 15th May or 11th November to the date of death. The rent of land is payable in respect of its productive quality, and hence each year's crop should have allocated to it its respective year's rent. The possession of land for agricultural purposes is thus from year to year, although the rent is as a rule payable in two equal portions half-yearly. To the majority of farms in Scotland entry is given at Martinmas, because at that term the crop of that summer has been reaped, and the land requires to be prepared for the next crop. The first half-year's rent naturally falls to be paid at the Whitsunday following, for possession up to that date, and the balance at Martinmas. These are called the legal terms of payment. In the case of a pastoral farm where the entry is at Whitsunday, the first payment of a half-year's rent is legally due at the date of entry APPORTIONMENT 163 and the second payment at Martinmas, the two together being for the crop of grass of that year. There would be no difference in the legal terms of payment had entry been given at the Martinmas preceding. Where rent is not paid at the legal terms, but the parties agree to accelerate or postpone the payment of rent, we have fore or fore-hand rent when it is accelerated, and' back or back-hand rent when it is postponed. These fore-hand and back-hand terms of payment are called the conventional or contractual terms of payment, as distinguished from the legal terms. In questions of apportionment the rule is that the legal terms govern the apportionment except where the rent is fore-hand, so that to accelerate the terms of payment of rent may have an effect on the interests of heirs, but postponing it has none. When the ow^ner of an estate dies, the rents effeiring to his executor are all arrears of rents payable but not paid at the date of death, and the apportioned parts of rents legally due accrued to the date of death. That is, the executor is entitled to all the rents the proprietor would have received had he drawn the rents daily for each day's occupation up to the day of his death. Fore-hand Rents. In the case of fore-hand rents, the rent is held as accruing according to the terms when the rent is payable. Thus, if the proprietor of a property where the entry is at Whitsunday, and a half-year's rent is then paid for the half-year in advance, dies between Whitsunday and Martin- mas, his executors are entitled to a proportion of the rent due at Martinmas, although that rent is really for the period of the year in which the proprietor was dead. The liferenter has no claim against the executor of the pro- prietor in respect of the rent paid the proprietor at Whit- sunday, but gets his share of the rent due at Martinmas for the portion of the year between the proprietor's death and that term. i64 ACCOUNTING IN THEORY AND PRACTICE Heritor^ Assessment. Heritors' assessment is chargeable against the heir if it was imposed by the heritors after the truster's death, even although it was levied for the purpose of defraying accounts incurred prior to the truster's death. Heritors' assessment being levied on the heritors does not fall upon the liferenter, but is chargeable to capital. Casualties. All casualties on entry and nineteenth -year's com- positions should be treated as capital, and should not be allocated either so as to increase the revenue of the life- renter when they are received, or to diminish the income of the liferenter by being charged against him when they have to be paid. Bent Charges. Eent charges should be allocated between capital and revenue, although each instalment consists of interest and capital repaid. The whole is chargeable against the life- renter for the period during which he liferents the estate. Minister's Stipend. When minister's stipend is a " just allowance " under Section IV. of the Act of 1870, and forms a deduction from rents, it is apportionable. This burden is payable on 11th November for the year closing at that date if payable in money, but if in kind it is held as payable for the year closing on the 29 th September, and should be apportioned accordingly. So far as the minister and his representatives are concerned, however, the Apportionment Act does not apply. The matter is regulated by the Statute 1672 c. 13. If the minister die after Whitsunday, his executors, whoever they are, take the first half of the stipend as executry, and his widow and nearest of kin, according to their rights, the other half of that year's stipend. This latter half is APPORTIONMENT 165 technically called ann or annat. If the minister survive Michaelmas (29th September) the whole year's stipend is executry, and the next half forms the ann, and goes to the next of kin. Wages and Salaries to Servants and Workmen. In the case of a heritable estate the wages and salaries of servants and workmen are apportionable to the extent that the heir has received the benefit of their services since the death of the predecessor. Annuities, Annuities payable during the life of an annuitant, and which terminate on his death, are apportionable under the Act; so that an annuity created by a will, unless other stipulation is made under the will, is apportionable for the period between the date of death and the first term's payment; also, when the annuitant dies his executors are entitled to receive a proportion of the annuity in respect of the period from the last term's payment to the date of death. Thus in the case of an annuity of £5 payable on the last day of each month, left by a truster who died on the 5 th August, the first instalment would be the apportionable part, namely £4 : 5s. 6d., for the twenty-six days between the 5th and 31st August, and would be payable on 31st August. Interest on Money lent. As interest on money lent accrues from day to day, it can very easily be divided between those claiming succes- sively. As pointed out under the heading of Commercial Apportionments, care must be taken where interest is payable at particular terms that in calculating the alloca- tions the original, term of the investment of the money is taken as the date to count from, and in the case of a liferent interest, the apportionments at the beginning and at the end of the liferent should be so calculated as to give the liferenter the interest for the exact number of days to which he was entitled to it. 7 f i66 ACCOUNTING IN THEORY AND PRACTICE Dividends and Interest upon Shares atid Dehentures in Puhlic Companies. All dividends and interest upon shares and debentures in public companies should be apportioned according to the period for which the interest or dividend is " declared or expressed to be made," regardless of the actual date of payment. Suppose a truster died on the 26 th November who held shares upon which a dividend was paid on the 15th May of the following year in respect of profit earned during the year ending 31st December of the year of death, then of that dividend |-|g^ths would fall to capital, and the balance, -^^^^^ths, being the proportion for the period from 26th November to 31st December, would fall to income. Interim Dividends and Bonuses. Some companies pay an interim dividend ; that is, for the convenience of its shareholders the company, although balancing its books once a year, does not wait until the end of the year before declaring a dividend, but pays a sum to account, usually slightly under what the rate of the annual dividend is expected to be. After the close of the year, when the profit is ascertained, the balance of the dividend is paid. In all such cases where questions of apportion- ment arise it is necessary to consider the dividend for the whole year. Thus, suppose a company pays an interim dividend at the rate of 6 per cent per annum in July to account of the dividend for the year then current, and pays in January, after the profit for the year closed on 31st December has been ascertained, a dividend at the rate of 8 per cent for the half-year to 31st December, making altogether a dividend at the rate of 7 per cent for the whole year : then it is on the basis of a 7 per cent dividend for the whole year that any apportionment should be made. Thus if a truster died on 31st May, the correct apportionment of the dividends on the shares which fell to capital would be found by assuming that the dividend was APPORTIONMENT i6; one at the rate of 7 per cent per annum, and allocating for the period from 1st January to 31st May. In actual practice this is worked out as follows : On the receipt of the interim dividend at the rate of 6 per cent in July, the proportion effeiring to capital, being the amount for the period from 1st January to 31st May, would be ascertained and placed to the credit of capital. On the receipt of the dividend for the next half-year, which would be received in January, the proportion thereof which would be required to bring the dividend from 1st January to 31st May already allocated at 6 per cent up to 7 would then be placed to capital. Further, suppose a truster die on 26th November, after having received the interim dividend at the rate of 6 per cent payable in July, the portion of the dividend paid in January following which would have to be placed to capital would be -ff-gths of the dividend at the rate of 7 per cent per annum, less the amount of the interim dividend actually received. The portion effeiring to revenue would be -^^^^^^ths, being for the period from 26th November to 31st December at the rate of 7 per cent per annum. Bonuses returned as Capital. Bonuses not paid as dividends in the ordinary way, but as capital refunded, should be treated as capital. Stocks and Shares hought and sold. If the provisions of the Apportionment Act of 1870 are given effect to at the beginning and end of a liferent, then the same methods of apportionment must be applied when the stock is bought or sold. Thus if stock is bought on behalf of a trust where the estate is liferented, then the purchase price must be considered as including in it the dividend accrued to which, had the stock been held from the beginning of the trust, the liferenter's executor would be entitled if the liferenter had died on the day of the purchase, and this proportion of the dividend or dividends as received must be treated as capital. Similarly, when i68 ACCOUNTING IN THEORY AND PRACTICE stock is sold by such a trust the price received must be considered as including in it the dividend accrued to which the liferenter's executor would have been entitled if the liferenter had died on the day of the sale, and the pro- portion of the dividend or dividends so arrived at must be treated as income. There are certainly a number of decisions which are against this view, but there can be no doubt that this is the only logical method to adopt. It is mathematically true, and always results in the liferenter getting the revenue for the exact number of days he has been alive and entitled to it. Any other method of apportionment results in absurdities and in hardships to either the liferenter or fiar. Suppose a beneficiary entitled to the liferent of a trust estate dies on 15th April 1899, and that on the previous day, namely 14th April 1899, £2300 had been expended by the trust in the purchase of 100 Clydesdale Bank shares, costing £23 per share; then, if the purchase price is to be apportioned, the amount falling to the liferenter's executor would be 5s. 6d., as follows : — Dividend of £50, being half of year's dividend at the rate of 1 per cent, payable in August 1899, for the half-year to 31st December 1898 £50 Proportion of dividend at 10 per cent accrued from 31st December 1898 to 15th April 1899 (date of death of liferenter), 105 days 28 15 4 £78 15 4 Deduct — Amount of purchase price effeiring to capital, being the above £50, and £28 : 9s. lOd., pro- portion of dividend from 31st December 1898 to 14th April 1899, paid for out of capital in purchase price of £2300 . . 78 9 10 £0 5 6 This is exactly equivalent to one day's revenue of the stock, which is the precise amount which should be received APPORTIONMENT 169 by the liferenter's executor, seeing the liferenter only lived one day after the purchase of the stock. If it is held that the cost of the stock purchased is not apportionable, but that the Act applies at the termination of the liferent, the amount effeiring to the liferenter's executor would be £78 : 15s. 4d., as follows : — Dividend of £50, being half of year's dividend at the rate of 1 per cent, payable in August 1899, for the half-year to 31st December 1898 £50 Proportion of dividend at 10 per cent accrued from 31st December 1898 to 15th April 1899 (date of death of liferenter) . . 28 15 4 £78 15 4 The liferenter's executor would thus receive £78 : los. 4d. in place of 5s. 6d., the correct amount. This clearly shows the absurdity which results from applying the Apportion- ment Act of 1870 at the termination of a liferent and not also when stock is bought. The same reasoning applies to the case of the sale of stock. Profit from Private Partnerships, Profits from private partnerships, even where they are paid at regular periods, are not apportionable under the Act. Apportionment of Bents under the Land Clauses Act, 1845. Under this Act, when part of land held under a lease is acquired for any purpose under the Act apportionment takes place. In terms of Section 119 of the Act, "the rent payable in respect of the lands comprised in such lease shall be apportioned between the lands so required and the residue of such lands, and such apportionment may be settled by agreement between the lessor and lessee of such land on the one part and the promoters of the under- taking on the other part; and if such apportionment be not so settled by agreement between the parties, such • I70 ACCOUNTING IN THEORY AND PRACTICE apportionment shall be settled by two justices, and after such apportionment the lessee shall, as to all future accruing rent, be liable only as to so much of the rent as shall be so apportioned in respect of the lands not required for the purposes of the special Acts." Excejptions to Apportionment. The Apportionment Act of 1870 does not apply in the following cases : — Where specially excluded by the terms of the deed. The profits of a private partnership. Annual sums made payable in policies of assurance. Dividends or bonuses declared not as ordinary dividends but as capital payments. Fore-hand rents. Minister's stipend, so far as the receiver of the stipend is concerned. Burdens and other Deductions. Under Section IV. of the Act of 1870, " all just allow- ances " are deductible from the rents and other sums to be apportioned. In the case of trust estates it is often convenient to show the periods and the corresponding deductions in a separate statement at the end of the account, as follows : — State showing Apportionment of Burdens Date of Payment. Period for which Burden applicable. Number of days from beginning of period to date of death (26th November). Chargeable against Nature of Burden. paid. Executor. Heir. Feu duty . Poor and School Rates County Rates Property tax, Soli. (A) . . . Nov. 30 Feb. 1 ,, 10 „ 12 Year to Mart. Year to Whit. do. Year to 5th April 15 195 195 235 £ 9 6 4 7 s. 10 d. £ 3 2 4 s. 7 4 2 10 d. 10 1 9 2 £ j s. 9 2 2 15 l!l7 1 2| 9 d. 2 11 3 10 26_ 10 10 4 10 16 1 5 2 APPORTIONMENT 171 Property not 'producing Revenue. Where property is left not producing revenue, but under instructions to have it realised, and the proceeds of the investment liferented, it is only fair where the realisation is delayed for some years, for the ultimate benefit of the estate, that the liferenter should receive an equivalent for acceding to the delay. If there are no funds out of which the liferenter can be paid, then at all events when the property is realised the liferenter is entitled to receive a share of the proceeds. The amount which the liferenter is entitled to on the realisation is the difference between the sum realised and its value when the liferenter became entitled to receive the revenue, discounted at the rate of interest represented by the annual income which might have been received had the property been realised at once. Thus, supposing a certain property has not yielded any revenue, in the meantime is liferented as from 1st January 1899, and is realised on 1st January 1904 for £1000; then on 1st January 1904 the share falling to the liferenter of the £1000 v/ould be £137: 7s. lOd. (that being the difference between £1000 and the value of that sum five years before, discounted at 3 per cent, £862 : 12s. 2d.) If 3 per cent is the rate of return on investments before deducting income tax, then the rate taken above should be 3 per cent, less the rate of income tax. Supposing part of the estate left to B, the widow of A, in liferent consisted of a fully-paid insurance policy of £1000 on the life of C. On C's death, ten years after B became a widow, the £1000 would be payable, and on receipt £744 : Is. lid. would go to capital, and £255 : 18s. Id. to the widow, as shown by the following statement : — Total amount received from insurance company £1000 Deduct — Value of £1000 ten years ago, discount at 3 per cent ...... 744 1 11 £255 18 1 Giving the widow the £255 : 18s. Id. is equivalent to giving her the interest at 3 per cent on the £744 : Is. lid. 172 ACCOUNTING IN THEORY AND PRACTICE annually from the date when she entered upon the liferent of the estate. Care must be taken to distinguish such cases from those securities which should have produced income, but are bad and there is delay or loss in realising them. Thus, if the interest on a bond falls into arrear, and the security has to be realised : when it is realised the full interest duly compounded is due to the liferenter, if there is a sufficient amount realised to pay the interest so compounded, and the original amount of the bond ; but if there has been loss on the realisation of the security, then the rules of equity appear to warrant that the total sum realised should be divided between the fiar and the liferenter in the ratio of the original bond to the annual interest in arrear accumulated at compound interest. Examples of Apportionment. £500 capital stock of the 'National Bank of Scotland, Limited, was sold for £1595 by the trustees of J. Smith, who died on 15th August 1890, and the net proceeds were received on 1st July 1891. Two dividends at the rate of 15 per cent were received on 1st January and 1st July 1891 for the bank's financial year ending 1st November 1890, the amount of dividend on each occasion being £37 : 10s. To find what proportion of the dividends received and of the net proceeds of £1595 is applicable to revenue. The liferenter is entitled to the proportion of the dividend on £500 at 15 per cent from 15th August 1890 to 1st November 1890. He also is entitled to the dividend at the rate of 15 per cent on £500 from 1st November 1890 to 1st July 1891, as the £500 stock would be earning that dividend during the period. These two amounts are as follows : — Proportion of dividend on £500 at 15 per cent from 15th August to 1st November 1890, 78 days (£75 X 78-^365) . . £16 7 Proportion of dividend on £500 at 15 per cent from 1st November 1890 to 1st July 1891 at 15 per cent, 242 days (£75 X 242-1-365) . . . . 49 14 6 Total applicable to revenue . £65 15 1 APPORTIONMENT 173 £65 : 15s. Id. is the interest at 15 per cent on £500 from 15th August 1890 to 1st July 1891 (78 + 242 = 320 days), as it should be. A testator died on 30th June 1897, leaving £2000 of National Bank of Scotland stock to be liferented, and the fee given to the Eoyal Infirmary. The National Bank of Scotland close their books on the 1st November in each year, and the dividend made during the year is payable in January and July following in equal portions. The dividends received would be as follows : — On 12th July 1897, balance of dividend at 15 per cent for year ending 1st November 1896 . . . , £150 On 11th January 1898, first half of dividend at 16 per cent for year ending 1st November 1897 . , £160 On 12th July 1898, second half of dividend at 16 per cent for year ending 1 st November 1897 . 160 320 The whole dividend of £150 received on 12th July 1897 would go to capital, being for the period while the testator was alive. The dividend received on 11th January 1898 being to account of the dividend for year to 1st November 1897, the liferenter is entitled to receive his share for the 124 days from 30th June to 1st November 1897, and similarly with the second portion of the dividend when received. The life- renter would therefore get : — On 11th January 1898, -Jfiths of £160 . £54 7 U On 12th July 1898, do. do. . 54 7 IJ £108 14 a This is the interest on £2000 for 124 days at 16 per cent, as it should be. The following table shows the particulars necessary for apportionment of dividends of certain companies : — 174 ACCOUNTING IN THEORY AND PRACTICE LE SHOWING Capital, Date of Dividends payable of Banks, Companies in Scotland. Closing Accounts, and Date when Insurance Companies, and Eailway Name. Banks. ik of Scotland . ;ish Linen Com- any Bank ?donian Banking ompany, Ltd. iesdale Bank, Ltd. . imercial Bank of 3otland, Ltd. ional Bank of Scot- md, Ltd. th of Scotland Bank, td. al Bank of Scotland ^n and County Bank, td. on Bank of Scotland, td. Insurance Cos. idonian Insurance ompany T of Glasgow Life ssurance Company Qburgh Life Assur- ace Company Association of 30tland ional Guarantee and uretyship Associa- on, Ltd. th British and Mer- mtile Insurance Co. thern Assurance ompany ;tish Union and ational Insur ice Company idard Life Ass'ur- ice Company Railways. idonian Railway Co. aburgh and Bathgate lilway Company hland Railway Co land Railway Co. •} Share. Lh British Railway jmpany 150 Stock 12i 50 100 500 20 Stock 35 50 25 25 100 40 20 25 100 50 Paid up. 100 100 2i 10 20 100 4 100 7 10 5 2i 20 8| 2 6i 10 1 3| 12 Paid up Capital. £ 1,250,000 1,250,000 150,000 1,000,000 1,000,000 1,000,000 400,000 2,000,000 252,000 1,000,000 107,500 60,000 100,000 87,500 50,000 687,500 300,000 239,145 60,855 120,000 Tlie particulars of capi- tal of tliese Com- panies are constantly changing. The ac- counts are closod half-yearly, and the dividend then paid is in respect of the half- year, and should be apportioned accord- ingly. Accounts close. 28th February 15th April 30th June 31st December 1st November 1st November 30th September 8th October 31st January 2nd April 31st December 20th January 31st December 5th April 31st May 31st December 31st December Dividends payable. J-31st December 15th November 31st Jan. and 31st July 31st Jan. and 31st July 28th Feb. and 31st Aug. 30th June and 31st Dec. 31st Jan. and 31st July October previous and April following. December previous and June following. Febr. previous and Aug. fol- lowing. February and August follow- ing in equal portions. July previous and January following. January and July following in equal portions. May previous and Nov. following. June previous and December following. September previous and March following. May and November follow- ing in equal portions. May and November follow- ing in equal portions. April and October following in equal portions. April and October following in equal portions. Interim dividend in May and balance in November. Interim dividend in Dec. previous, balance in July. May and November following in equal portions. Interim dividend in Dec, balance in June following, June and December following in equal portions. May and Nov. following. April and Oct. respectively. February and August respec- tively. May and November respec- tively. August and February respec- tively. Slarch and September respec- tively. TRUST ACCOUNTS 175 TEUST AND EXECUTRY ACCOUNTS The preparation of Trust and Executry Accounts affords considerable scope for the ability of an accountant, as in connection with such accounts there are usually intricate questions relating to the interpretation of the deed con- stituting the trust, and to the apportionment of sums between capital and revenue. The usual form in which these accounts are prepared is that of an Account of Charge and Discharge, although sometimes the ordinary form of Ledger Accounts is used. For the sake of comparison a model set of trust transactions is given, and the accounts are shown as they might be submitted by the trustees : — I. In the form of an Account Charge and Discharge. 11. In the form of Ledger Accounts. When Trust Accounts are kept in the Ledger form the fullest information may be at once obtained as to the position of the trust at any particular time, and from these Ledger Accounts the Account of Charge and Discharge may be prepared at the close of each period. The agent or factor in the trust usually keeps an account in his Ledger for the trust, and this Ledger Account practically forms the Account Current of the Trustees' Intromissions. In preparing the Account of Charge and Discharge the Account Current is sometimes submitted as an appendix, as it shows the transactions of the trustees in the order in which they took place, and from it may be ascertained the daily balance due to or by the factor. The will or trust settlement constituting the trust or executry should be carefully perused, and short notes upon it prepared. The object of preparing these notes is to obviate continual reference to the trust deed itself, and they should show at a glance the provisions of the trust. Upon the terms of the settlement will depend to a large extent the form in which the accounts should be kept. Thus, if the estate has merely to be realised and, after all 176 ACCOUNTING IN THEORY AND PRACTICE the debts and expenses have been paid, the money is to be divided among certain beneficiaries, the accounts will be very simple. If, on the other hand, the estate is to be life- rented, capital and revenue will require to be very carefully distinguished, and the principles of the Apportionment Act, so far as not modified by the trust deed, will require to be given effect to. In preparing the Account of Charge, and Discharge, where capital and revenue have to be dis- tinguished, it is sometimes advisable to have an account for the capital and another for the revenue. With only one account the revenue and capital transactions appear under leading headings, and then in the report which usually precedes the account, or in a separate abstract, the capital and revenue are carefully distinguished, and the respective balances shown. In ordinary Executry or Trust Accounts it is usually best to begin with the inventory of the estate as at the date of death, and to have, this as the first item of the charge against the trustees. By this means there is no chance of any of the estate being omitted. Model Set of Trust Transactions. The method of keeping Trust Accounts will be best seen from the following example : — William Slater, Merchant, died on 31st March 1899, leaving a trust disposition and settlement for the follow- ing purposes : — 1. Payments of debts and expenses. 2. Payment of a legacy of £1000 to his daughter Jane. 3. His heritable estate to go to his son John. 4. His moveable estate to be liferented by his wife. 5. On his wife's death the moveable estate to go to his daughter Jane. The following is a copy of the inventory of the estate as prepared shortly after the date of death : — TRUST ACCOUNTS 177 Inventory of Estate. 1. Moveable estate : — 1. Cash in house £50 2. Household furniture . , . . 400 3. Value of 400 shares of £50 each, £10 paid, of the Clydesdale Bank, Limited, at 22| 9,050 4. Life policy, No. 79,810, with the Lanca- shire Insurance Company . . 3,000 5. Deposit receipt with the Bank of Scot- land, dated 14 th October 1898, for . . . £400 Interest to date 3 17 2 403 17 2 6. Rents accrued to date as follows : — Smith Crescent — Proportion of £600 rental to date . . . . 226 6 £13,129 17 8 11. Hekitable estate : — The heritable property consisted of four villas at Smith Crescent, the rental of which amounted to £600 ; feu- duty, £60. These villas were valued at £9000, which is arrived at to satisfy the requirements of the Inland Eevenue, as follows : — The rental as given in the Valuation EoU was £600 Deduct — Feu-duty . . £60 Landlord's taxes . 45 Repairs at 7 J per cent on rental . 45 150 Net annual value . . £450 Taken at 20 years' purchase the estimated saleable value is £9000. N 178 ACCOUNTING IN THEORY AND PRACTICE The following may be taken as the account in the Factor and Law Agent's Ledger, showing his intromissions with the funds of the estate from 31st March 1899, when the testator died, to 10th June 1900, the date of the death of the liferentrix : — The Trustees of the late William Slater 1899. Apr. 1. 17. 18. 19. 20. May 13. By Cash found in deceased's re- positories To Funeral expenses paid . ,, Dr. Robertson, for attend- ance on deceased on death- bed By Amount in life policy, No. 79,810, with the Lanca- shire Insurance Company To Paid the following accounts — Servants' wages James Thomson, Stationer Thomas Paterson, sum in I.O.U. by deceased, dated 1st January 1898 James Davie, Wine Mer- chant .... David Bennet, Ironmonger John Boyd, Solicitor, busi- ness account William Monteith, Tailor and Clothier Alexander Elliot, Grocer . Collector of Inland Revenue, for estate duty at 4 per cent on net value of estate, £12,300, £492 Interest to date (19 days at 3 per cent) . 15 4 ,, Legacy paid to Jane Slater, daughter of deceased By Proceeds of sale of 400 shares of £50 each, £10 paid, of tnc Clydesdale Bank, Ltd., at 23, less expenses, £45 Carry forward . Cash paid. £30 10 10 30 15 531 5 54 10 6 12 2 6 17 2 6 21 30 492 15 4 1.000 Cash received. £2,244 15 4 £50 3,000 9,155 £12,205 TRUST ACCOUNTS 179 The Trustees of the late William Slater — Gontd. Cash paid. Cash received. 1899. May 14. 15. Nov. 11. 12. 1900. May 15. 16. June 10. Brought forward . By Uplifted deposit receipt for £400, dated 14th October 1898, with interest to date .... ,, Received the following half- year's rents of villas at Smith Crescent : — David Watson William Riddell . Adam Munro James Jenkinson . To John Slater, son of deceased, proportion of rents due to him as heir to heritable property for period from 31st March to 15th May 1899 . . £73 19 6 Less — Propor- tion of taxes, etc., paid by deceased for period to 15th May 1899 . 10 „ Cash, paid loan of £10,300 over Allan Street property at 4 per cent . By Interest for half-year to date on bond for £10,300 at 4 per cent over Allan Street property, less tax, £6 : 17s. 4d. . To Liferentrix, paid her to account . . . . By Interest for half-year to date on bond for £10,300 at 4 per cent over Allan Street property, less tax, £6:17s. 4d. . To Liferentrix, paid her to account . . . . ,, Commission to factor . ,, Business account and out lays by law agent, as taxed . . . . ,, Miscellaneous expenses ,, Balance in hands of factor . £2,244 15 4 £12,205 405 1 8 75 100 75 50 63 19 6 10,300 150 200 50 75 3 6 10 214 8 8 £13,308 7 199 2 8 199 2 £13,308 7 ;8o ACCOUNTING IN THEORY AND PRACTICE ACCOUNT £400 3 17 Rents of villas at Smith Crescent, proportion yearly rental of £600 to date of death of £9000 Amount in Inventory. £50 3,000 9,050 403 17 2 226 6 £12,729 17 8 Heritable estate : — Four villas at Smith Crescent, valued for estate duty purposes at Note. — In terms of the trust disposition this pro- perty has been conveyed by the trustees to John Slater, Esq. , son of the truster. Funds and estate realised : — 1899. Apr. 1. Cash found in deceased's repositories 18. Amount in life policy, No. 79,810, with the Lanca- shire Insurance Company May 13. Proceedsof sale of 400 shares of Clydesdale Bank, Ltd., at 23, less expenses, £45 . 14. Uplifted deposit receipt for £400, dated 14th October 1898, with interest to date 15. Proportion of half - year's rents of £300 to 31st March 1899 . OF CHAEGE AND DISCHAEGE of the INTEOMIS- From 31st March 1899 (date of death of testator) Charge I. On account of Capital. 1. Estate as given up in inventory : — (1) Cash in house ....... (2) Household furniture (3) Value of 400 shares of £50 each, of which £10 is paid, of the Clydesdale Bank, Ltd., at 22f . (4) Life policy, No. 79,810, with the Lancashire Insur- ance Company ....... (5) Deposit receipt with the Bank of Scotland, dated 14th October 1898, for. Interest to date of death (6) Rents accrued — £50 400 ),050 3,000 403 17 2 Deduct applicable to Revenue — Proportion of dividend on Clydes- dale Bank shares, held from 31st March to 13th May 1899, in- cluded in sellingprice Interest on deposit receipt for £400 from 31st March to 14th May 1899 . . 14 £47 2 Deduct — Amount in inventory . Gain on realisation . £50 3,000 ,155 405 1 8 226 6 £12,836 2 2 48 7 £12,787 15 2 12,729 17 8 Carry forward 226 6 £13,129 17 8 57 17 6 £13,187 15 2 TRUST ACCOUNTS i8i SIGNS OF THE TRUSTEES of the late WILLIAM SLATER, Esq. to 10th June 1900 (date of death of liferentrix). Discharge I. Payments affecting Capital. Deathbed and funeral expenses:— 1899. Apr. 17. Paid funeral expenses . . . . • • • ,, Dr. Robertson, for attendance on deceased on deathbed ....•••• 2. Debts due by deceased paid :— £30 15 6 531 5 54 10 6 12 2 6 17 2 6 21 6 30 8 6 1899. Apr. 19. Paid servants' wages . ,, James Thomson, Stationer . ,, ThomasPaterson,suminLO.U.by deceased, dated 1st January 1898 ,, James Davie, Wine Merchant ,, David Bennet, Ironmonger . John Boyd, Solicitor, business account . . . • „ William Monteith, Tailor and Clothier .... ,, Alexander Elliot, Grocer 3. Duty paid to the Crown : — 1899 Apr. 19. Paid collector of Inland Revenue estate duty at 4 per cent on net value of estate, £12,300 . . . • 4. Legacy paid : — 1899 Apr. 2*0. Paid legacy to Jane Slater, daughter of deceased . 6. Expenses of realisation and administration chargeable to Capital : — 1899. June 10. Commission to factor . Business account and outlays by law agents, as taxed Miscellaneous expenses De^wc^— Proportion of above charge- able to Revenue II. Investments made. 1899. May 15. Paid sum in loan by trustees over Allan Street property at 4 per cent, entered in Discharge, "Branch IV. £50 75 10 3 6 £135 15 3 3 6 6 £10,300 Carry forward £30 10 10 £40 10 711 10 492 1,000 120 £2,364 £2,364 i82 ACCOUNTING IN THEORY AND PRACTICE Charge — continued. I On account of Capital — continued. 4. Brought forward Rents received and taxes kecovered from heir :— 1899. May 15. Received the following half-year's rents of villas at Smith Crescent : — David Watson William Riddle . Adam Munro James Jenkinson . Deduct — Proportion of above applicable toCapital, carried to Branch I. (3) of Charge Paid to John Slater, son of deceased and heir to property, the above proportion falling to him as heir . . . Less — Proportion of landlord's taxes paid by deceased for the period from 31st March to 15th May 1899 £73 19 6 10 £75 100 75 50 II. On account of Revenue. 1899. Nov. 11. Received half-year's interest on bond for £10,300 at 4 per cent, less tax, £6 : 17s. 4d. 1900. May 15. Received do. do. Add — Proportion of dividend on Clydesdale Bank shares, held from 31st March to 13th May 1899, effeiring to revenue as per (3) of Charge . Interest on de- posit receipt from 3 1st March to 14th May 1899 per Branch I. (3) of Charge Branch Sum of the Charge £300 226 6 £73 19 6 63 19 6 £199 2 199 2 £398 5 4 48 7 £13,187 15 2 10 £13,197 15 2 446 12 4 £13,644 TRUST ACCOUNTS 183 Discharge — continued. Brought forward III. Payments affecting Revenue. 1. Payments to liferentrix : — 1899. Nov. 12. Paid to account 1900. May 16. do, 2. Expenses of management and miscellaneous CHARGES : — 1899. Apr. 19. Paid collector of Inland Revenue interest on estate duty, 19 days at 3 per cent . . . Proportion of expenses of administration charge- able against Revenue, per Branch I. (5) of Discharge ly. Estate as at lOth June 1900. Bond for £10,300 over Allan Street property at 4 per cent Household furniture Cash balance in hands of factor . £150 200 £350 15 18 10 £10,300 400 214 8 8 Sum of the Discharge Equal to that of Charge. £2,364 365 18 10 10,914 8 8 £13,644 7 i84 ACCOUNTING IN THEORY AND PRACTICE ABSTEACT of ACCOUNT CHARGE AND DISCHARGE OF THE INTROMISSIONS of the TRUSTEES of the LATE WILLIAM SLATER, Esq. From 31st March 1899 (date of death of testator) to 10th June 1900 (date of death of liferentrix). Charge I. On account of Capital : — 1. Estate as given tjp in inven- tory 2. Heritable estate . . . £9000 Conveyed to John Slater, Esq. 3. Gain on realisation of funds and estate 4. Taxes recovered from heir . II. On account of Revenue .... Sum of the Charge £13,129 17 8 57 17 6 10 £13,197 15 2 446 12 4 £13,644 7 6 Discharge I. On account of Capital : — 1. Deathbed and funeral ex- penses . . . . . 2. Debts due by deceased . 3. Duty paid 4. Legacy paid . . . . 5. Expenses II. Investments made III. Payments affecting Revenue : — 1. Payments to liferentrix 2. Expenses .... IV. Estate as at 10th June 1900 . £10,300 £350 15 18 10 Sum of the Discharge Equal to that of Charge. £40 10 711 10 492 1,000 120 £2,364 365 18 10 10,914 8 8 £13,644 7 6 The position of affairs at 10th June 1900 was therefore as follows : — TRUST ACCOUNTS 185 I. As Eegards Capital Receipts on account of Capital Payments on account of Capital Capital of the trust estate II. As Eegards Eevenue Receipts on account of Revenue Payments affecting Revenue . Balance of Revenue due to representa- tives of liferentrix . . . . £446 12 4 365 18 10 Total estate at IQth June 1900 £13,197 15 2 2,364 £10,833 15 2 80 13 6 £10,914 8 The liferentrix having died on 10th June 1900, the capital of the trust estate now belongs to the testator's daughter Jane, and accordingly, after settlement of any Government duties payable and the expenses of winding up the estate, the whole capital funds could be handed over to her. The balance of Eevenue, amounting to £80 :13s. 6d., belongs to the representatives of the life- rentrix, and should be handed over to them, together with the interest on the bond of £10,300 from 15th May to 10th June 1900, which would be received on 11th November 1900, less any expenses chargeable against Eevenue. In the event of the liferentrix leaving a will in favour of her daughter Jane, it would be unnecessary, of course, to make any apportionment, and the whole funds could be handed over to her at once. The trustees' intromissions, recorded in the form of Ledger Accounts, are now submitted, together with Balance Sheet as at 10th June 1900. The Cash Account is not shown, as that has already been given in the Account Current so far as the entries are concerned. To complete the following Ledger Accounts, a Cash Account, or a Cash Book with the money columns on opposite sides to those shown on page 178, would be necessary. i86 ACCOUNTING IN THEORY AND PRACTICE WILLIAM SLATER'S TRUST Ledger Accounts Capital Account. 1899. Mar. 31. To Debts due at de- cease, per account „ Deathbed and funeral ex- ,, Balance carried down . £711 10 40 10 £752 12,377 17 8 £13,129 17 8 1899. Apr. 19. To Cash, estate duty 1900. June 10. ,, Legacy to Jane Slater . „ Expenses . ,, Balance of capi- tal at this date 10,833 15 2 £492 1,000 120 £12,445 15 2 1899. Mar. 31. By Cash in house . ,, Household fur- niture . ,, Clydesdale Bank shares . ,, Amount in life policy . ,, Deposit receipt and interest . ,, Rents £50 400 9,050 3,000 403 17 223 6 £13,129 17 8 1899. Apr. 1. By Balance brought down . . £12,377 17 8 1900. June 10.,, Rents and taxes recovered . 10 ,, Clydesdale Bank shares, gain on realisation . 57 17 6 1900. June 10. By Balance £12,445 15 2 . £10,833 15 2 Cash in House. 1899. Mar. 31. To Capital, for amount of cash found in deceased's re- positories £50 £50 1899. Apr. 1. By Cash Account . Household Furniture. £50 £50 1899. Mar. 31. To Capital 1900. June 10. To Balance I 1900. £400 I June 10. By Balance I £400 1 £400 TRUST ACCOUNTS 187 Clydesdale Bank Shares. 1899. Mar. 31. To Capital, for 400 shares £50 each, of which £10 is paid, at 221 . May 13. ,, Liferentrix, for proportion of dividend from 31st March to 13th May 1899 included in selling price . June 10. ,, Capital, gain on realisation £9050 47 2 6 57 17 6 £9155 1899. May 13. By Proceeds of sale of 400 shares of £50 each, of which £10 is paid, at 23, less expenses, £45 £9155 £9156 Life Policy, 1899. Mar. 31. To Capital, amount in policy No. 79,810 . £3000 1899. Apr. 18. By Cash, from Lan- cashire Insur- ance Company £3000 Deposit Receipt. 1899. 1899. Mar. 31. To Capital, amount May 14. By Cash, being in deposit amount in receipt, dated deposit re- 14th October ceipt uplifted. 1898, with in- with interest terest to date. to date . • £405 1 8 £3 :17s. 2d. . £403 17 2 May 14. „ Liferentrix, for interest on deposit re- ceipt from 3 1st March to date 1 4 6 £405 1 8 £405 1 8 ACCOUNTING IN THEORY AND PRACTICE Rents and Taxes recovered. 1899. 1899. ar. 31. To Capital, propor- May 15. By Cash, for the tion of yearly following half. rental of £600 year's rents : — to date . £226 6 David Watson . £75 [ay 15. ,, Cash, John William Riddell 100 Slater, propor- Adam Munro . 75 tion of half- James Jenkinson 50 year's rents due to him £300 as heir for , , Cash, John Slater, period from for proportion 31st March of taxes paid to 15th May by deceased to 1899 . 73 19 6 15th May 1899 10 ,, Capital . 10 £310 £310 Debts due by Deceased. 1899. 1899. pr. 19. To Cash, for the following Mar. 31. By Capital, for the following accounts : — accounts : — Servants' wages £30 Servants' wages £30 James Thomson, James Thomson, Stationer 15 6 Stationer 15 6 Thomas Pater- Thomas Pater- son, sum m son, sum in I.O.U. byde- ceased, dated I.O.U. bv de- ceased, dated 1st Jan. 1898 531 5 1st Jan. 1898 531 5 James Davie, James Davie, Wine Merchant 54 10 6 Wine Merchant 54 10 6 David Bennet, David Bennet, Ironmonger . 12 2 6 Ironmonger . 12 2 6 John Boyd, John Boyd, Solicitor 17 2 6 Solicitor 17 2 6 William Mon- William Mon- teith, Tailor teith, Tailor and Clothier . 21 6 and Clothier . 21 6 Alexander Elliot, Alexander Elliot, Grocer . 30 8 6 Grocer . 30 8 6 £711 10 £711 10 TRUST ACCOUNTS 89 Deathbed and Funeral Expenses. 1899. 1899. Apr. 17. To Cash, funeral ex- Mar. 31. By Capital, funeral ex- penses £30 penses £30 „ Cash, Dr. Robert- „ Capital, Dr. Robert- son, for attend- son, for attend- ance on deceased ance on deceased on deathbed 10 10 on deathbed 10 10 £40 10 £40 10 Legacy. 1899. Apr. 20. To Cash, legacy to Jane Slater . £1000 1900. June 10. By Capital £1000 Bond over Allan Street Property. 1899. May 15. To Cash, amount in loan by trus- tees over Allan Street property at 4 per cent. £10,300 1900. =^== June. 10. To Balance . . £10,300 1900. June 10. By Balance £10,300 Expenses of Realisation and Administration. 1900. June 10. To )9 Commission to factor . Business account and outlays by law agent, as taxed Miscellaneous expenses . £50 75 10 3 6 1900. June 10. By Capital, for share of total ex- penses . „ Liferentrix, share of expenses £120 15 3 6 £135 3 6 £135 3 6 I90 ACCOUNTING IN THEORY AND PRACTICE Liferentrix. 1899. 1 1899. Apr. 19. To Cash, interest on May 13. By Clydesdale Bank shares, for pro- estate duty . £0 15 4 Nov. 11. Cash to account . 150 portion of divi- dend from 31st 1900. May 16. do. 200 March to 13th June 10. >> Expenses of reali- sation and May 1899, in- cluded in sell- administration 15 3 6 ing price It Balance due life- rentrix at 14. „ Deposit Receipt Account, in- this date 80 13 £446 12 6 4 Nov. 11. „ 1900. May 15. „ 1900. terest from 3 1st March to 14th May 1899 Cash, half-year's interest on bond over Al- lan Street pro- perty at 4 per cent, less tax, £6 : 17s. 4d. . do. do. June 10. By Balance . £47 2 6 14 6 199 2 8 199 2 8 £446 12 4 £80 13 6 WILLIAM SLATER'S TRUST Balance Sheet of the Trust as at 10th June 1900. Liabilities. Capital of the trust Due to liferentrix . £10,833 15 2 80 13 6 £10,914 Bond over Allan Street property at 4 per cent £10,300 Household furniture . 400 Cash in hands of factor. 214 8 £10,914 8 8 Exercises. 1. Prepare Executorship Accounts from the folio wing particulars : — W. Smith died on 28th November 1899, leaving a trust disposition and settlement, which directed that after payment TR UST A ceo UNTS 191 of all his just and lawful debts, the following legacies should be made, appointing his executor residuary legatee. To his widow, that part of the heritable property consisting of his residence and the household effects therein, and the income from £5000 to be invested. To Us son and daughter, £4000 each, and half share each of the above £5000 at the widow's death. The inventory made up for estate duty purposes was as follows : — I. Moveable estate: — Cash in house . , £50 Cash in Private Bank Account , 240 Household effects as valued . 700 Business assets — Stock £6000 Book debts 4000 Cash in hand . 400 Balance at bank 2000 Fixtures, fittings, and trade utensils 1000 13,400 yj £14,390 ERITABLE ESTATE :— - The heritable estate consisted of- — The residence of deceased, valued at £3000 Five houses, valued at . . 3000 (To be sold ace lording to will.) £6000 The cash transactions from 28th ISTovember 1899 (date of death of testator) to 30th June 1900 (date of closing of accounts) were as follows : — - [92 ACCOUNTING IN THEORY AND PRACTICE 1899. Nov. 30. By Cash found in deceased's re positories ,, Cash uplifted from Private Bank Account .... Dec. 20. To Funeral expenses ,, Private debts of deceased : — James Anderson, Clothier George Boak, Grocer David Ramsay, Ironmonger John Lees, Merchant 1900. May ' By Sum received for business assets taken over by Mr. John Elder To Business debts of deceased paid :— Messrs. Mitchell & Welsh Messrs. Munro & Fraeer . Messrs. Robertson & Da\ie 15. ,, Legacies to son and daughter, £4000 each .... By Price of heritable property, con- sisting of five houses, sold per directions of will . ,, Rents of five houses for half-year to date, less taxes . To Amount invested for liferent of widow in bond over heritable property at 4 per cent . June 30. ,, Collector of Inland Revenue for estate duty at 4 per * cent on net value of estate, £12,500 . . £500 Interest on £500 from 28th Nov. 1899 to 30th June 1900 (214 days at 3 per cent) . . 8 15 11 Law expenses .... Balance remaining in hands of executor after payment of all debts and legacies . Cash paid. 30 50 10 15 5 ,000 100 500 8,000 5,000 508 15 11 71 4 1 1,700 Cash received. 50 240 13,500 16,990 16,990 3,000 200 2. John Eoberts dies on 10th January, bequeathing his entire property, after payment of all debts and funeral expenses, to the following beneficiaries, viz. one -fifth to John Eoberts, jr., one-fifth to George Eoberts, one-fifth to William Eoberts, three-tenths to Mary Eoberts, and one- tenth to Frank Smith. TRUST ACCOUNTS 193 The inventory lodged by his executors was as follows :- Stocks and shares . . . £4000 Mortgages . . . . 6000 Furniture and wearing apparel . 100 Cash in bank .... 40 There are two executors, and their transactions { ire as ows .-■ ■ Cash receipts : — Stocks and shares sold . . £3,341 Mortgages realised . 4,656 Furniture and wearing apparel sold 50 Dividends collected on stocks and s" lares . 1,800 Interest collected on mortgages . 2,400 Interest received on deposits in ban k . 100 Heritable estate sold . 1,000 Rents collected 720 Cash in bank at decease, uplifted . 40 £14,107 ~0 Cash disbursements : — Funeral expenses . £30 Expenses of obtaining confirmation 200 General legal expenses . 400 Repairs to heritable property . 220 Stationery, postage, etc. 10 A^ccountant's fee . 80 Debts of deceased . . . 500 Taxes ... 800 Insurance .... 10 John Roberts, Jr., to account of leg acy . 2,200 George Roberts, to account of legac; jr . 2,500 William Roberts, to account of lega cy . 2,220 Mary Roberts, to account of legacy . 3,100 Frank Smith, to account of legacy 960 £13,230 ~0 The inventory at the date on which they wish to account is as follows : — Stocks and shares . . . £1000 Mortgages . . . • . 1280 Cash in bank .... 877 Make up summary statement of the Executors' Accounts showing the balance due each legatee. 194 ACCOUNTING IN THEORY AND PRACTICE PAETNERSHIP PAKTNERSHIP IS A CONTRACT BY WHICH THE PARTIES TO THE CONTRACT AGREE TO CONDUCT A BUSINESS FOR THEIR MUTUAL BENEFIT. By the Companies Act, 1862, no partnership consisting of more than twenty persons may be formed for the purpose of carrying on any business without being registered as a company under that Act, unless it is incorporated under some other Act. In the case of a banking company the partnership may not consist of more than ten persons without being so registered. A partnership limited to a particular adventure or speculation is distinguished as a joint adventure. A partnership may be formed without any deed, but it is better to have it constituted by a formal contract of co- partnery, setting forth the agreement of the parties as to the business to be conducted, the duration of the partner- ship, the contribution of the capital, the division of the profits and losses, the general management, and the dissolu- tion of the partnership. Under the Partnership Act of 1890 the advance of money in the form of a loan to a person engaged in business under a contract in writing with such person that the lender is to receive a rate of interest varying with the profits, or is to receive a share of the profits arising from carrying on the business, does not of itself constitute the lender a partner, but in the event of the bankruptcy of the trader the lender of the money is not entitled to recover the money lent or the interest or profits due to him until the claims of the other onerous creditors have been satisfied. A deed of co-partnery, after stating the name of the firm and the business which it is proposed to conduct, should give the date of the commencement and the duration of the partnership. The capital which is to be originally PARTNERSHIP 195 contributed by each partner or to be afterwards put into the business should also be stated. Sometimes it is desirable that either partner in respect of devoting his whole time to the business should receive a salary before the divisible profits are ascertained, so that in the event of there being no profits such partner still draws his salary. Interest on the capital employed should also be charged before arriving at the divisible ' profits. Even when the capital of a partnership at starting is the same, during the progress of the partnership, in consequence of circumstances arising, the proportions of the partners' capital change, and to make a fair allowance for this it is very desirable that there should be a stipulation in the deed of co-partnery that interest is to be allowed at the rate of say 4 or 5 per cent upon all sums at the credit of the partners, and changed on all sums at their debit. The effect of this is that the partners receive interest in respect of the money they have in the business. The proportion in which the profits and losses of the business are to be allocated should be strictly defined. To prevent a partner drawing out too much capital, and thereby endangering the stability of the business, some limitation is usually placed upon the rights of partners to withdraw capital. Provision should be made in all contracts of co-partnery for a periodical Balance Sheet of the firm being prepared and docquetted by the partners as approved of within a specified time. Provision should be made for the dissolution of the firm, and for any disputes which may arise in the course of the co-partnery or at its termination being referred to arbiters, who must be named in the deed. Goodwill in Partnership. Sometimes when a new partner is assumed in an established firm it is agreed that he shall, in respect of being taken into the business, pay a certain sum in respect of goodwill. This sum may be treated in various ways. The cash he pays may be paid direct to the original owner or owners of the business, or the sum may be paid in cash 196 ACCOUNTING IN THEORY AND PRACTICE into the business, and credited to the Capital Account of the original owner or owners. By this treatment the partners of the original firm get the full benefit of the payment made in respect of goodwill. On the other hand, the new partner may pay the sum into the business, and such sum may be placed to the credit of the Goodwill Account. There it may either be treated as a sum written off goodwill or as a reserve fund . In this case the original partners merely benefit in the proportion in which they are in future to share the profits, and the incoming partner benefits to the extent that he is to share the profits, as the amount will eventually be divided up in some form or other. Thus, if £600 is paid by B for the goodwill of a business, and that sum is handed in cash to A, or on being paid into the business is placed to A's credit in the partner- ship accounts, then A benefits to the extent of £600 ; but if the sum is placed to the credit of Goodwill Account, and A is entitled to two-thirds of the profits, then he only benefits to the extent of £400, so that it would be quite the same thing if B gave A £400 in cash, except, of course, that the business would not have the benefit of the additional capital. When a partner is taken into a business it is of the greatest importance that a correct Balance Sheet is prepared as the basis on which he is assumed. Sometimes a Balance Sheet as at the date of the commencement of the partner- ship is appended to the deed of co-partnery. Sometimes also the old partners guarantee the assets, and in the event of them not realising their book value the loss is borne by the original partners. Not only at the beginning, but also at the end of a partnership, it is important that the basis should be a correct Balance Sheet of the concern. When there is a provision that after a certain date the division of profits is to be altered, one partner receiving a larger ratio and the other a correspondingly smaller ratio,, it is essential that great care should be taken to see that the Balance Sheet of the firm as at the date when the alteration takes place is an exact one. Thus in a partner- INTEREST ON PARTNERS' CAPITAL 197 ship where the junior partner is entitled to receive one- third of the profits for the first three years, but is after- wards entitled to receive one-half, at the end of the third year if any of the assets of the firm are omitted and are in- cluded in the fourth year's account, the result would be that the junior partner would receive one-half of these omitted assets, whereas he is only entitled to receive one -third. On the other hand, if any liability were omitted the junior partner would suffer, because he would be charged with one -half of such omitted liability, whereas his proper proportion is only one-third. INTEREST ON THE CAPITAL ACCOUNTS OF PARTNERS Where partners contribute the capital and take their drawings exactly in the same proportion as they share the profits, there is no necessity for making any provision for calculating interest upon their Capital Accounts. But such a state of matters very seldom exists, and as a rule it is most desirable that with the view of taking into account the capital of each partner which contributes to the profits of the business, interest should be allowed upon each partner's capital and charged upon his drawings. Each partner thus obtains, irrespective of his share of the profits and prior to the divisible profits being ascertained, interest upon the money he has invested in the business, as if it were invested in a savings bank. The rate of interest usually taken is 5 per cent, and in most contracts of co-partnery it is most desirable that there should be a stipulation that interest at this rate is to be allowed upon all the capital invested in the business, and charged upon the capital withdrawn. Where the interest actually earned upon the capital of the business is at the rate of 5 per cent, the result of this arrangement is abso- lutely fair under all circumstances, but it is interesting to investigate the effect of charging interest where the rate 198 ACCOUNTING IN THEORY AND PRACTICE actually earned is higher or lower. The following is given as an illustration. Assume that in a business £700 of profit is earned, and that interest is charged and allowed at the rate of 5 per cent on the partners' capital, and that the capital at the beginning of the year was as follows : — W. Clay T. Watt . £1000 600, and that these amounts are not altered during the year. The provision in regard to profit is that W. Clay gets two- thirds and T. Watt one-third. The Profit and Loss Appro- priation Account and the Capital Accounts would be as follows : — Profit and Loss Appropriation Account. Deo. 31. To Partners, for interest on their capital : — W. Clay . . . £50 T. Watt . . . 30 £80 ,, Partners, for share of protit : — W. Clay £413 6 8 T. Watt 206 *3 4 • 620 £700 Dec. 31. By Profit for year £700 £700 W. Clay, Capital Account. Dec. 31. To Balance . £1463 6 8 £1463 6 8 Jan. 1. By Balance . . . £1000 Dec. 31. ,, Profit and Loss (in- terest) . . 50 ,, Profit and Loss . 413 6 8 £1463 6 T. Watt, Capital Account. Dec. 31. To Balance £836 13 4 £836 13 4 Jan. 1. By Balance . Dec. 31. ,, Profit and Loss (in- terest) ,, Profit and Loss £600 30 206 13 4 £836 13 4 INTEREST ON PARTNERS' CAPITAL 199 If any additional money invested in the business would have resulted in an additional gain equivalent to 5 per cent on the amount so invested, it is evident that the partner who provided this sum would get the whole additional profit, and this is as it sliould be. Suppose, however, that any additional capital paid into the business would have resulted in an additional profit equivalent to 10 per cent on the capital so put in. If W. Clay pay £1000 additional into the business at 1st January, the additional profit would be £100, and the Profit and Loss Appropriation Account and partners' Capital Accounts would be as follows : — Profit aiid Loss Appropriation Account. Dec. 31. To Partners, for interest on their capital : — W. Clay . . . £100 T. Watt . . . 30 £130 I, Partners, for share of profit : — W. Clay £446 13 4 T. Watt 223 6 8 670 £800 Dec. 31. By Profit for year £800 £800 TF. Clay, Capital Account. Dec. 31. To Balance £2546 13 4 1 Jan. 1. By Balance . . . £2000 Dec. 31. ,, Profit and Loss (in- terest) . . 100 „ Profit and Loss . 446 |3 4 £2546 13 4 £2546 T. Watt, Capital Account, Dec. 31. To Balance £853 6 8 £853 6 8 Jan. 1. By Balance . . . £600 Dec. 31. ,, Profit and Loss (in- terest) . . 30 „ Profit and Loss . 223 6 8 £853 6 8 200 ACCOUNTING IN THEORY AND PRACTICE Of the additional profit of £100 due to the extra capital put into the business by W. Clay, he gets ^83 : 6s. 8 d., equivalent to 8 -J- per cent on the additional capital; and the balance, £16 : 13s. 4d., goes to T. Watt. It therefore pays W. Clay to put the £1000 into the business, unless he can earn a larger rate than 8^ per cent elsewhere. On the other hand, if it is assumed that only 1 per cent is made by the firm on the additional capital of £1000 paid in by W. Clay, then the Profit and Loss Appropriation Account and partners' accounts would be as follows : — Frojit and Loss Approp'iation Account. Dec. 31. To Partners, for interest on their capital : — W. Clay . . £100 T. Watt . . . 30 £130 Partners, for share of profit : — W. Clay £386 13 4 T. Watt 193 6 8 580 £710 Dec. 31. By Profit for year £710 £710 W. Clay, Capital Account Dec. 31. To Balamce £2486 13 4 £2486 13 4 Jan. 1. By Balance . . . £2000 Dec. 31. ,, Profit and Loss (in- terest) . . 100 ,, Profit and Loss . 386 13 4 £2486 13 T. Watt, Capital Amiunt., Dec. 31. To Balance , £823 6 8 £823 6 8 Jan. 1. By Balance . . . £600 Dec. 31. ,, Profit and Loss (in- terest) . . . 30 ,, Profit and Loss . 193 6 8 £823 6 8 INTEREST ON PARTNERS' CAPITAL 201 W. Clay gets £23 : 6s. 8d. of additional profit, which is equivalent to 1\ per cent on the additional capital he has put into the business. T. Watt, however, gets £13 : 6s. 8d. less profit, so that he loses by the additional capital being put in. It pays W. Clay to invest his money in the business so long as he is unable to get a greater rate than 2 J per cent elsewhere. Interest to he allowed on the Excess and charged on the Deficiency of the Capital of each Partner heyond or under a certain fixed Sum. Deeds of co-partnery very often contain provisions which it is exceedingly difficult to interpret, and it is fre- quently desirable that the partners should sign an additional agreement explaining what the intention of the stipulations in the deed of co-partnery exactly mean. When there is a provision such as the above in a deed of co-partnery, the simplest way of giving effect to the provision is to calculate interest on each partner's account as it stands, including his drawings, and when the total interest for the period is thus ascertained to deduct from it the interest on the stipulated sum for the period. Thus, suppose W. Hay and E. White are in partnership under the firm of Hay & White, and that the deed of co-partnery stipulates that interest at 5 per cent is to be allowed on the excess and charged on the deficiency of the capital beyond or under £1000 in the case of W. Hay and £800 in the case of E. White, and that the profits thereafter have to be divided in the propor- tion of two-thirds to W. Hay and one-third to E. White. The working-out of the partners' accounts and the Profit and Loss Account, giving effect to these stipulations, would be as follows : — 202 ACCOUNTING IN THEORY AND PRACTICE W. Hay, Capital Account. Interest to 31st Dec. June 30. To Cash .£500 Dec. 31. ,, Balance . £200 1915 16 8 £2115 16 J Interest to 31st Dec. Jan. 1. By Balance £75 £1500 Dec. 31. ,, Interest. . . 20 „ ProUt . . . 595 16 8 £2115 16 8 E. JFhite, Capital Account, June 30. To Cash Dec. 31. ,, Interest ,, Balance Interest to 31st Dec. £3 15 £150 13 15 734 3 4 £397 18 4 Interest to 81st Dec. Jan. 1, By Balance £30 Dec. 31. ,, Profit . £600 297 18 4 £897 18 4 Profit and Loss Appropriation Account. Dec. 31. To W. Hay, Capital Ac- count, for interest : — Interest on account for year . . . £70 Deduct— „ Interest on £1000 . 50 Dec. 31. By It Profit earned for year £900 R. White, Capital Ac- count, for interest :— Interest on £800 . £40 Deduct— Interest on his account 26 5 1 q -IK £20 „ Partners' accounts, for 15 share of net profit : — W. Hay, two-thirds £595 16 8 R. White, one-third . 297 18 4 893 £913 15 £913 15 Interest to he allowed on the Excess and charged on the Deficiency of the Capital of each Partner beyond or under a certain fixed Ratio. When there is such a stipulation in a deed of co- partnery, interest should be calculated on the partners' individual accounts, and the sum of this interest is the INTEREST ON PARTNERS' CAPITAL 203 total interest on the capital, and the proportion of each partner may thus be ascertained. If the actual interest on any partner's account exceed the amount brought out by this proportion, he should be credited with the difference, but if the actual interest on any partner's account is less than that brought out by the proportion his account should be debited with the difference. Thus, suppose that in the previous illustration the stipulation in the deed of co- partnery was that the capital was to be provided in the proportion of two-thirds by W. Hay and one-third by R. White, and that interest was to be allowed on the excess and charged on the deficiency of the capital of each partner beyond or under this ratio. The total interest on W. Hay's account is £70 and on R White's £26 : os., so that the total interest on the capital of the firm is £96 : 5s. The portion of this effeiring to W. Hay is two-thirds, or £64 : 3s. 4d. As his account shows £70, he must be credited with £5 : 16s. 8d. The portion effeiring to R White is £32 : Is. 8d., and as the interest on his account is only £26 : 5s., he must be debited with £5: 16s. 8d. Giving effect to these entries, the Capital and Profit and Loss Accounts would be as follows : — W, Hay^ Capital Account. June 30. To Cash . Dec. 31. ,, Balance Interest to 31st Dec. £5 £200 1905 16 8 £2105 16 8 Interest to 3lst Dec. Jan. 1. By Balance £75 £1500 Dec. 31. ,, Interest . . 5 16 8 ,, Profit . . . 600 £2105 16 8 R. White, Capital Account. Interest to 81st Dec, June 30. To Cash . £3 15 Dec. 31. ,, Interest ,, Balance £150 5 16 744 3 8 4 Interest to Slst Dec. Jan. 1. By Balance £30 £600 Dec. 31. ,, Profit . . .300 £900 _0 £900 _0 204 ACCOUNTING IN THEORY AND PRACTICE Profit %nd Loss Appropriation Account. Dec. 31. To W. Hay, Capital Dec. 31. By Profit earned Account, for for year £900 interest : — R. White, Interest on ac- Capital Ac- count for year £70 count, for Deduct— interest : — Proportion of Propor- £96 :5s., being tion of two-thirds of £96 :5s.. total interest . 64 3 4 being one- third of £5 16 8 total in- ,, Partners' Ac- terest £32 1 8 counts, for share Deduct — of net profit: — Interest W. Hay, on ac- t W - count thirds £600 for year 26 5 R. White, 5 16 8 n e - third 300 900 £905 16 8 £905 ir> 8 This method of allowing interest on the excess and charging it on the deficiency of the capital of each partner beyond or under a certain ratio gives the same results as allowing and charging interest in the usual way, always provided that the proportion of capital held by each partner is the same as his proportion of the profit. The following are the accounts as drawn up in the usual way, and it will be seen that the partners' balances of capital are the same as given above, as the capital held by the partners was two-thirds and one-third, and the profits were allocated also in the proportions of two-thirds and one-third. W. Hay, Capital Account. June 30. To Cash Dec. 31. ,, Balance . £200 1905 16 8 £2105 16 8 Jan. 1. By Balance . . . £1500 Dec. 31. ,, Interest C?\ £75 Dr. 6 70 ,, Profit . . . 535 16 8 £2105 16 8 PARTNERSHIP— DIVISION OF PROFITS 205 R, JVhitey Capital Account. June 30. To Cash Dec. 31. „ Balance . . £150 744 3 4 Jan. 1. By Balance . . . £600 ,, Interest Cr. £30 Dr. 3 15 26 5 ,, Profit. ... 267 18 4 £894 3 4 £894 3 4 Profit and Loss Appropriation Account. Dec. 31. To Interest on partners' capital : — W. Hay . R. White . ,, Partners' accounts, for share of net profit : — W. Hay, t w o- thirds £535 16 8 K White, one-third 267 18 4 £70 26 5 £96 5 803 15 £900 Dec. 31. By Profit earned for year £900 £900 DIVISION OF PEOFITS The division of the profits of partnerships is governed by the contract of co-partnery, and by the provisions of the Partnership Act of 1890. The contract of co-partnery must be carefully read by the accountant, and all its stipulations given effect to. Sometimes contracts through being drafted by those not skilled in accounting contain provisions which if given effect to would have exactly the opposite effect of the intention of the parties, and in such cases great common sense and tact are requisite in framing the accounts. Where the provisions of a contract have not been exactly given effect to, the partners should be requested to put a docquet upon the deed of co-partnery making the necessary alteration upon it. Very often an accountant is asked to revise the draft of a deed of co-partnery, and in such cases he has an opportunity of seeing that all the provisions relating to his department will express the intentions of the parties. 2o6 ACCOUNTING IN THEORY AND PRACTICE I. Profits to he divided in proportion to each Partners Capital. Sometimes the division of the profits of a co-partnery is made according to the capital which each partner puts into the business. In such cases each partner is credited with the said amount in an account headed with the name of the partner, and the words " Capital as fixed in Deed of Co-partnery" are added. These accounts are always kept at the same figure, and other accounts are opened for the drawings of the partners and such other items as would ordinarily appear in the Capital Accounts. EuU. To allocate the profit made by partners in proportion to each partner's capital as fixed in the deed of co-partnery, divide the profit to be allocated by the total capital as fixed in the deed of co-partnery. This will give the profit which effeirsto each £1 of capital, and by multiplying this sum by the capital of each partner the share falling to each is ascertained. Thus, suppose the profit to be divided is £900, and that Black's capital is £3200 and Brown's capital £2100. Then the total capital is £5300, and each £1 of capital is £900 therefore entitled to - , equal to 3s. 4*7 5 5 d. This sum multiplied by 3200 gives £543 : 8s. Od. as Black's share of profit, and multiplied by 2100 gives £356 : 12s. Od. as Brown's share. II. Profits to he divided in Proportion to each Partners Capital and the time such Capital has heen in the Business. Dividing the profits according to the amount of each partner's capital and the time it was of service to the co-partnery is practically the same as dividing the profits in the form of interest on the partners' accounts. Pule. To divide the profits of a co-partnery according to the amount of each partner's capital and the time it has been PARTNERSHIP— DIVISION OF PROFITS 207 in the business, multiply the sums on the credit side of each partner's account by the portion of time from the date of payment to the close of the account, and deduct from the sum of these products the sum of the products of the debit side formed in the same way. This will give the net products for each partner, and the profit to be allocated should be divided according to these products. Thus, suppose the profit to be divided is £700, and the Capital Accounts for the year were as follows : — W. Boss, Capital Account. Dr. Cr. Aug. 1. To Cash . . £500 Jan. 1. By Balance . £1000 Oct. 1. „ do. . 200 May 1. ,, Cash 300 Nov. 1. ,, do. 200 A. Scott, Capital Account. Dr. Or. Jan. 1. By Balance . £600 June 1. ,, Cash. 500 Dec. 1. „ do. . 50 On the basis that the time is taken in months the question is worked out as follows : — fF. Eoss-'-^ Deduci- A Scott- 1000 X 12 12,000 300 X 8 2,400 200 X 2 400 14,800 600) <5 2500 200 X 3 600 3,100 11,700 600 X 12 7200 500 X 7 3500 60 X 1 50 10,750 22,450 2o8 ACCOUNTING IN THEORY AND PRACTICE W. Eoss is entitled to ^„' ^^ ths of £700, equal to 22,450 ^ £364: 16s. 3d., and A. Scott to J^^ths of £700, equal 22,450 to £335: 23. 9d. The average capital of each partner is found by divid- ing their net products by 12. Thus W. Eoss, ^ii^, equals £975. A. Scott, ^^^-, equals £895 : 16s. 8d., and the question practically resolves itself into dividing the profits according to the average capital of the partners. On the more correct basis that the time is taken in days, the profit of £700 would be divided as follows : — 1000 X 365 365,000 300 X 244 73,200 200 X 60 12,000 Deduct— 500 X 152 200 X 91 600x365 500x213 50 X 30 76,000 18,200 450,200 94,200 219,000 106,500 1500 Scott— 356,000 S97.ono 683,000 W. Eoss is entitled to ggg^ths of £700, equal to 39*7 AQQ £364 : 17s. 3d., and A. Scott to g^g^ths of £700, equal to £335 :2s. 9d. The difference by this more correct method is one shilling in favour of W. Eoss. Suppose again that A and B enter into a series of trans- actions as partners, on the footing that the profits at the end PARTNERSHIP— DIVISION OF PROFITS 209 of the year are to be divided according to the amount of the capital each has subscribed, and the time it has been in- vested. Suppose, further, that the profit is £1000, and the capital transactions as follows : — Dec. 31. A pays in cash . B do. Feb. 28. A do. May 31. B do. £2000 1500 600 500 If a month is taken as the unit of time the profit is divided as follows : — Capital. Months to 31st Dec. Product. A. Dec. 31. Feb. 28. £ S. 2000 600 d. 12 10 £ s. d. 24,000 6000 1500 500 12 7 30,000 B. Dec. 31. May 31. 18,000 3500 21,500 A's capital is thus equal to £30,000 for one month, and B's capital is equivalent to £21,500 for one month. The profit of £1000 thus falls to be divided: — A=£1000x B = £1000x 30,000 30,000 + 21,500 21,500 30,000 + 21,500 = £582 10 6 = 417 9 6 £1000 2IO ACCOUNTING IN THEORY AND PRACTICE If a day is taken as the unit of time we have : — • A. Dec. 31. Feb. 28. B. Dec. 31. May 31. Capital. Days to 31st Dec. Product. £ s. d. 2000 600 365 306 £ s. d. 730,000 183,600 1500 500 365 214 913,600 547,500 107,000 654,500 A's capital is thus equal to £913,600 for one day, and B's capital to £654,500 for one day. The profit of £1000 falls to be divided thus : — 913,600 A = £1000x B = £1000x 913,600 + 654,500 654,500 913,600 + 654,500 = £582 12 4 = 417 7 8 £1000 III. Profits to he divided in proportion to certain fixed ratios. The most usual way to divide the profits of a co- partnery is in proportion to certain ratios which are fixed by the deed of co-partnery. Before these ratios are applied to the net profit, allowance must be made for any salary to the partners and interest on the partners' Capital Accounts. Rule. To allocate the net profit made by partners in proportion to certain fixed ratios, add the ratios together, divide the profit to be a.llocated by this figure, and multiply the result by the numerator of each partner. Thus, to divide £900 of net profit among A, B, and C in the proportion of 2, 3, and 4, we have as the addition of the ratios 9. Dividing the £900 by 9 we get £100, which PARTNERSHIP— DIVISION OF PROFITS 2 1 1 multiplied by 2, 3, and 4 gives £200, £300, and £400 as the shares of A, B, and C respectively. Similarly, to divide £1200 among A, B, and C in the proportion of ^, |-, and -^. Eeducing the ratios to one common denominator, we obtain 2, 3, and 1 as the ratios, after reducing to the common denominator, 6. Dividing £1200 by 6 we obtain £200, and £200 multiplied by 2, 3, and 1 gives £400, £600, and £200 as the share of A, B, and C respectively. ' Assumption of a Partner. The following is the Balance Sheet of the firm of Cowan & Company at 31st December. It has been arranged by the two partners that a third partner, R Wilson, is to be taken into partnership, and he pays on 31st December £36,000 into the old firm's Bank Account. Of this sum £28,000 is to be placed to the credit of E. Wilson, and the balance of his payment to the old partners as considera- tion for being taken into partnership. The old partners are to share the £8000 in proportion to their capital, but are to leave it in the business. For the new partnership 4 per cent is to be written off the book debts in respect of bad debts and discount, the value of the stock on hand is to be reduced to the extent of 5 per cent, and the copy- rights, printing plant, and office fixtures and furniture were valued mutually, as follows : — Copyrights £24,000 Printing plant and office . . . 25,000 Fixtures and furniture . . . 1,700 The other assets and liabilities were to be taken as they appear in the Balance Sheet. The following are the accounts of the old partners, and the Balance Sheet of the new firm as at 1st January, giving effect to the cash payment by E. Wilson and the above values i--— 212 ACCOUNTING IN THEORY AND PRACTICE COWAN & CO., PRINTERS AND PUBLISHERS Balance Sheet as at 31st December. Liabilities. Assets. Due to trade creditors . £15,000 Loans .' , . . 7,000 Capital : — J. Cowan . £30,000 W. Bell . 20,000 50,000 £72,000 Book debts . . . £8,000 Stock :— Books . £4,000 Paper, ink, etc. 3,000 7,000 Copyrights . . . 25,000 Printing plant and office 30,000 Fixtures and furniture . 1,500 Bank of Scotland . . 500 £72,000 _0 J. Cowan, Capital Account. Dec. 31. To Share of depreciation, being Dec. 31. By Balance £30,000 ■^ths of the decrease in the Share of £8000 values of assets taken over by paid by R. Wilson in re- new firm, as follows : — Book debts . £192 spect of part- Stock . . 210 nership (fths Copyrights . 600 of £8000) . 4,800 Plant and office . 3,000 £4,002 Deduct— Share of in- crease m value of fixtures and furniture . 120 £3,882 „ Balance . . 30,918 _0 £34,800 £84,800 PARTNERSHIP— DIVISION OF PROFITS 213 W. Bellj Capital Account. I)t;c. 31. To Share of deprecia- Dec. 31. By Balance . . £20,000 tion, being f ths of ,, Share of £8000 the decrease in the paid by R.Wilson values of assets in respect of taken over by new partnership (f ths firm, as follows : — of £8000) . . 3,200 . Book debts £128 Stock 140 Copyrights 400 Plant and office 2,000 £2,668 Deduct — Share of increase in value of fixtures and furniture 80 £2,588 ., Balance 20,612 £23,200 £23,200 COWAN & CO., PEINTERS AND PUBLISHERS Balance Sheet of new firm as at 1st January. Liabilities. Assets. Due to trade creditors , Loans Capital : — J. Cowan . £30,918 W. Bell . . 20,612 R. WHson . 28,000 £15,000 7,000 79,530 £101,530 Book debts .... Stock :— Books . . £3,800 Paper, ink, etc. 2,850 I Copyrights .... Printing plant and office Fixtures and furniture Bank of Scotland £7,680 6,650 24,000 25,000 1,700 36,500 £101,530 Dissolution of Partnership, Under the deed of co-partnery of the firm of Millar, Nimmo, & Orr the three partners were interested in the profits of the business in the ratio of 2, 3, and 4 respec- tively, and 5 per cent was to be allowed on their capital before dividing the profits. In the event of the death of any of the partners, it was provided that the amount due 214 ACCOUNTING IN THEORY AND PRACTICE to his representatives should be the sum at his credit in the books of the concern at the date of the last annual balance, together with any sums since paid into the business by the deceased, interest on his capital, and a sum in respect of profit since the last balance to the date of death, based on the average yearly profits for the three years preceding the date of last balance, less any drawings from the business since that date. The balance so ascertained was to be paid to the representatives of the deceased partner in three equal instalments, for which bills were to be granted by the remaining partners, payable in three, six, and nine months from the date of death, and these bills were to include interest at the rate of 5 per cent. It was further provided that in the event of the decease of a partner the goodwill of the business was to be valued at one year's purchase of the average profits for the three years immedi- ately preceding, and the share of the deceased partner was to be credited to his account. W. Orr died on 30 th June. The average annual profits during the three years ending 31st December immediately preceding the death of W. Orr amounted to £18,000. From the following Trial Balance as at 30 th June it is required to prepare a Trading Account, Profit and Loss Account for the six months, Partners' Accounts, and the Balance Sheet of the firm as at that date, after giving effect to the transactions consequent on the death of W. Orr. The amount to be credited to the partners in respect of interest on capital for the six months was £900, as follows: — A. Millar £200 J. Nimmo 250 W. Orr 450 £900 Charge 6 per cent on the value of the factory to the Trading Account in respect of rent of factory, and write off 10 per cent from the plant for depreciation for the six months. The stock on hand at 30th June amounted to £5300. PARTNERSHIP— DIVISION OF PROFITS 215 Teial Balance as at 30 th June. Stock at 1st January . Purchases .... Factory wages and salaries Discount received, less discount allowed Sales Bills receivable Bills payable OIKce salaries . Office expenses . Customers' Accounts Bad debts . Cash Travelling expenses Factory rates and taxes Office rent, rates, taxes, and in surance Factory Plant and machinery Office fixtures and fittings Trade creditors Interest . A. Miliar, Capital Account J. Nimmo, do. W. Orr, do. £10,000 160,000 25,000 2,000 400 £2,000 200,000 5,000 200 50,000 1,500 3,000 800 100 200 6,000 2,000 250 800 15,000 9,000 11,750 19,500 £262,250 _0 £262,250 _0 Trading Account For Six Months ending 30th June. Jan. 1. To Stock June 30. ,, Purchases ,, Factory, wages, and salaries . ,, Factory rates and taxes , , Rent of factory ,, Depreciation at 10 per cent on plant and ma- chinery . Profit and Loss Account £10,000 160,000 £170,000 25,000 100 300 200 £195,600 9,700 £205,300 _q June By Sales ,, Stock . £200,000 5,300 £205,300 2i6 ACCOUNTING IN THEORY AND PRACTICE Profit and Loss Account For Six Months ending 30th June. June 30. To Office expenses : — June 30. By Trading Account £9,700 Salaries £400 „ Trading Account, Rent . 200 for rent of factory 300 General expenses 200 £800 „ Discount . . 2,000 „ Travelling ex- penses 800 „ Bad debts . 1,500 „ Interest 800 ,, Interest on capital : — A. Millar £200 J. Nimmo 250 W. Orr 450 900 £4,800 „ W. Orr, sum credited to his account in terms of deed of co- partnery (|ths of £9000) 4,000 ,, Balance of net profit, allocated thus :— A. Millar, |ths . £1280 J. Nimmo, |ths . 1920 3,200 £12,000 _0 £12,000 _0 The partners' accounts are as follows : — A. Millar's Capital Account. June 30. To Balance £10.480 £10,480 June 30. By Balance . . £9,000 ,, Interest on capital . 200 ,, Share of profit (^thsof£3200) 1,280 £10,480 PARTNERSHIP— DIVISION OF PROFITS 217 /. Nimmds Capital Account. June 30. To Balance . £13,920 £13,920 £11,750 June 30. By Balance . ,, Interest on capital ,, Share of profit (fths of £3200) 1,920 250 £13,920 W. Orr's Capital Account. June 30. To Balance carried June 30. By Balance . £19,500 to W.Orr's Re- ,, Interest on presentatives' capital 450 Account . £31,950 „ Profit and Loss, for share of profit per deed of co-partnery (|ths of £9000) 4,000 ,, Share of good- will (|ths of £18,000) c 8,000 £31,950 e31,950 The above balance of £31,950 is to be paid to W. Orr's representatives in three equal portions, for which bills were to be granted at three, six, and nine months, with interest at 5 per cent added. Three months' interest on £10,650 at 5 per cent is £133 : 2s. 6d., so that the amounts of the bills would be as follows : — First bill at 3 months . . £10,783 2 6 Second bill at 6 months 10,916 5 Third bill at 9 months . 11,049 7 6 The Journal entries for the transactions consequent on the death of W. Orr would be as follows ; — 2i8 ACCOUNTING IN THEORY AND PRACTICE Journal, 30fch June. Profit and Loss Account, for interest on capital Dr To A. Millar . „ J. Nimmo . „ W. On Goodwill .... To W. Orr, Capital Account Br Profit and Loss Account, for net profit Z)r, To A. Millar, Capital Account . ,, J. Nimmo, do. ,, W. Orr, do. W. Orr's Capital Account . . Br. To W. Orr's Representatives' Account Interest Br, To W. Orr's representatives, lor in- terest on — Bill at 3 months £133 2 6 Bill at 6 months 266 5 Bill at 9 months 399 7 6 W. Orr's representatives . . Br. To Bills payable, for the following bills : — Bill at 3 months £10,783 2 6 Bill at 6 months 10,916 5 Bill at 9 months 11,049 7 6 £900 8,000 7,200 31,950 798 15 32,748 15 £200 250 450 8,000 1,280 1,920 4,000 31,950 798 15 32,748 15 W. Orr's Eepresentatives' Account, after carrying the balance from W. Orr's Capital Account and after giving effect to the bill transactions, would be as follows : — W. Orr's Representatives. June 30. To Bills payable . £32,748 15 £32,748 15 June 30. By Balance, carried from W. Orr's Capital Ac- count . . £31,950 ,, Interestonbills granted for balance due — 1st bill £133 2 6 2nd bill 266 5 3rd bill 399 7 6 798 15 £32,748 15 PARTNERSHIP TRANSACTIONS WORKED OUT 219 From the Journal entries it will be observed that an account is opened for goodwill, and the £8000 is debited to it, as that is the cost of goodwill to the new firm. The Interest Account is also debited with £798 : 15s., which will be carried to the Profit and Loss Account for the next period, and appears as an asset in the Balance Sheet prepared after the death of W. Qrr. The Balance Sheet prepared immediately after W. Orrjs death, and giving effect to all the transactions consequent thereon, is as follows : — Balance Sheet as at 30th June (after giving effect to the transactions consequent on W. Orr's death). Liabilities. Assets. Due to creditors : — Due by customers :— On open account . £15,000 On open account £50,000 On bills payable . 5,000 On bills receivable 2,000 £20,000 £52,000 Due to W. Orr's repre- Value of factory 6,000 sentatives ON BILLS Plant and machinery 1,800 PAYABLE . . . . 32,748 15 Office fixtures and fit- Capital :— tings . . . . 250 A. Millar £10,480 Interest on bills pay- J. Nimmo 13,920 able EFFEIRING TO NEXT 24,400 PERIOD . . . . 798 15 Goodwill . . . . 8,000 Stock . . . . 5,300 Cash 3,000 £77,148 15 _0 £77,148 15 PAKTNEESHIP TEANSACTIONS WOEKED OUT A Trading Account, a Profit and Loss Account, Partners' Capital Accounts, and a Balance Sheet have been prepared from the following particulars, and are shown here. T. Hall and W. Blyth enter into partnership on 1st January, when they purchase a going business. T. Hall contributes £2500 and W. Blyth £1500, and the profit or loss is to be divided in the same proportion. T. Hall is to be entitled to a salary of £250 and W. Blyth to a salary of £f300 before dividing the profit. Interest is to be allowed on the capital at the beginning of the year at the rate of 5 per cent. 220 ACCOUNTING IN THEORY AND PRACTICE At 31st December the Trial Balance of the business was as follows : — T. Hall, Capital Account W. Blyth, Capital Account Stock at beginning of year Purchases ...... Sales Consignments Book debts receivable, including consign- ments Creditors Borrowed capital Plant and fixtures Wages Salaries Rent and taxes Trade charges ...... Interest and discount .... Commission Cash in bank £300 700 2,000 10,000 3,000 400 2,270 200 250 300 200 300 £19,920 £2,500 1,500 8,000 4,000 2,500 1,000 420 £19,920 At 31st December the stock on hand was valued at £3957. The proportion of insurance premiums paid but unexpired amounted to £15. On 31st December a quarter's rent in advance was paid, amounting to £48, and is included in the item of £250. Eeserve 2 per cent on the total sales and consignments for loss through bad debts. Provide for interest on borrowed capital for three months ending 31st December at 4 per cent. Trading Account. Jan. 1. To stock at beginning of year . . . £2,000 Dec. 31. „ Purchases . . 10,000 £12,000 Deduct — Stock on hand at 31st December . 3,957 Cost of Goods . £8,043 Wages . . . 2,270 £10,313 ,, Profit and Loss Ac- count, being gross profit . . . 2,107 £12,420 Dec. 31. By Sales . . . £8,000 ,, Sales on consignment 4,000 ,, Commission . . 420 £12,420 PARTNERSHIP TRANSACTIONS WORKED OUT 221 Profit and Loss Account for the Year ending Slst December. Dec. 31. To Rent and taxes : — Cash paid Deduct — Rent paid in ad- Trade charges : — Cash paid £300 Deduct — Insurance un- expired 15 Interest and discount Amount dur- ing year £200 Interest due on borrowed capital 10 Bad debts reserve: — 2 per cent on turn- over of £12,000 . Salaries . , £250 48 ,, Balance carried down Dec. 31. To Interest on partners' capital : — T. Hall W. Blyth , „ Partners' salaries : — T. Hall . £250 W. Blyth . 600 £202 285 210 240 200 £1137 970 £2107 £125 75 £200 850 £1050 Dec. 31. By Trading Account, for gross profit . . £2107 Dec. 31. By Balance down brought Partners' Capital Ac- counts, for share of net loss, after charg- ing interest on capi- tal and salaries to partners : — T. Hall (|ths of £80) £50 W. Blyth (f ths of £80) 30 £2107 £970 80 £1050 222 ACCOUNTING IN THEORY AND PRACTICE Partners* Accounts T. Hall, Capital Account. Dec. 31. To Cash, drawings ,, Profit and Loss Ac- count (fths of £80) ,, Balance . £300 50 2525 Jan. Dec. 1. 31. By Cash ,, Interest on above for one year at 5 per cent ,, Profit and Loss Ac- count, for salary . £2500 125 250 £2875 _0 £2875 _0_ J W. Blyth, Capital Account. Dec. 31. To Cash, drawings £700 Jan. 1. By Cash £1500 ,, Profit and Loss Ac- Dec. 31. ,, Interest on above count (fths of £80) 30 for one year at 5 „ Balance . 1445 per cent ,, Profit and Loss Ac- count, for salary . 600 £2175 _0_ _0 £2175 HALL AND BLYTH Balance Sheet as at 31st December. Liabilities. Assets. Trade creditors .... Borrowed capital : — Amount of loan . £1000 Interest to date (for quarter at 4 per cent) 10 Partners' Capital : — T. Hall . . £2525 W. Blyth . . 1445 £2500 1010 3970 £7480 Due by customers : — Amount due . . . £3000 Deduct — Reserve for bad debts at the rate of 2 per cent on total sales and consignments . 240 Stock on hand . Plant and fixtures Charges paid in advance :- Insurance premiums Rent . Cash in bank £15 48 £2760 3957 400 63 300 PARTNERSHIP 223 Exercises, 1. X and Y agree to enter into partnership on 1st January. Each brings £3000 in cash into the business. They agree to take over heritable property worth £5000 belonging to X. Y brings into the business goods worth £2000 and book debts valued at £2800. Prepare a Balance Sheet of the new firm as at 1st January. 2. X and Y are in partnership together on equal terms. X's capital at the beginning of the year was £2000 and Y's £1000. X has drawn £200 at the end of each quarter, and Y has drawn £300 at the end of each half-year. The profit for the year has amounted to £1500. Show the partners' Capital Accounts at the close of the year, allow- ing interest at the rate of 5 per cent on the capital, and charging interest at the same rate on the partners' drawings. 3. A and B, partners in a mercantile business, share profits and losses equally. At the end of five years the partnership terminated, and the Balance Sheet showed the following : — Liabilities. Assets. Creditors . . . £3000 Bills payable . .1000 Capital :— A . £3000 B . 1000 1000 Accounts receivable . Goods Plant and machinery Cash in bank . £3000 4000 400 600 £8000 £8000 _0_ _0 Subsequently the business as it stands (except cash in bank) was sold for £5500, the purchaser taking over the liabilities. Make final adjustments and closing entries, and show the amount each partner receives. 4. Messrs. Smith and Brown embarked in business, agreeing to share profits equally, and to receive 5 per cent interest on their capital from time to time. The partners were to receive salaries of £300 and £200 per annum, to be charged to Salaries Account. At the end of a year the capital paid in was as follows : — 224 ACCOUNTING IN THEORY AND PRACTICE Smith. Brown. Jan. 1. Cash Mar. 31. ,, July 15. „ . £500 . 400 . 600 Jan. 1. Cash Mar. 15. ,, July 1. „ £500 300 600 On 31st December the books were closed, and it was found that there was a profit of £1500 before charging partners' salaries. Prepare Capital Accounts, showing amount due to each partner. 5. Messrs. Thin and Black are partners in business, sharing profits and losses equally. From the following Trial Balance of their Ledger at the close of the year prepare a Profit and Loss Account, Capital Accounts of the two partners, and a Balance Sheet as at the close of the year. John Thin, Capital Account . Richard Black, Capital Account Bank . Goods . Bills receivable Bills payable Trade expenses Interest "Wages . Sundry book accounts receivable Do. do. £2000 1800 £3000 800 3200 2100 100 30 350 800 2380 £8280 £8280 _0_ Total of inventory of goods on hand at close of year, £2500. 6. The capital of three partners. A, B, and C, in a manufacturing business on 1st January was £25,000, of which A owned one-fifth, B two-fifths, and C two-fifths. On 31st December, one year thereafter, the condition of the business was found to be as follows : — Assets. Liabilities. Land and buildings . £16,000 Plant and machinery 7000 Stock on hand . . 2000 Book debts . . 6000 Cash in bank . , 3000 £34,000 Creditors £8000 Partners' withdrawals :— A, £1500 ; B, £1000 ; C, £2000. PARTNERSHIP 225 After crediting interest on capital at the credit of each partner at the beginning of the year at the rate of 5 per cent, show the net result for the year, an,,^ distribute the same, in the proportions of the partners' capital, to the partners' accounts. Prepare partners' Capital Accounts, showing the condition of each at the end of the year. 7. Messrs. Smith & Black are partners on equal terms, and they agree to dissolve partnership on 30th June. The followinc^ is the balance of their books at that date : — Customers' Accounts Creditors' Accounts Machinery and plant Stock in trade Bank . Profit and Loss Account Smith, Capital Account Black, Capital Account Black is to take over the business on the footing of the above balance, subject to 10 per cent being written off Customers' Accounts for bad debts, and 5 per cent being written off machinery and plant for depreciation. Show how this arrangement will be carried out, and how much Black will have to pay Smith. 8. A and B have been in partnership for some years, sharing the profits equally, and on 31st December their Balance Sheet was as follows : — £7,000 £8,000 3,000 4,000 1,000 1,500 • 2,000 1,500 £14,000 £14,000 _0_ _0 Balance Sheet as at 31st December. Liabilities. Assets. Creditors . Capital Accounts A . £9,800 B . 10,000 £2,000 19,800 £21,800 ' ' Customers . . £10,000 Goods . . . 7,000 Plant and machinery 4,000 Bank . . . 800 £21,800 They resolve to assume C as a partner as at 1st January. The members of the new firm are to share 226 ACCOUNTING IN THEORY AND PRACTICE profits equally. In respect of being assumed as a partner C agrees to pay A and B each a sum equivalent to one year's profits based on the average for the last three years, and is to place £10,000 in the business as his capital. It is agreed that from the assets appearing in the above Balance Sheet 5 per cent is to be reserved off Customers' Accounts for discount and bad debts, and 10 per cent is to be written off machinery and plant for depreciation. The annual average profit for the past three years is £1500. In settlement of the transaction C pays £13,000 into the firm's Bank Account on 1st January. Prepare Balance Sheet of the new firm immediately thereafter. 9. John Kay and William Mackay start in business as wholesale warehousemen on 1st January. £12,000 was brought in by John Kay, and £8000 by William Mackay. The profits are to be divided in proportion to the capital brought in. On 31st December stock was taken, and amounted to £12,600, and the Trial Balance of the books at that date was as follows : — Purchases .... Sales Freight and carriage Salaries and wages Rent, rates, taxes, and insurance Travelling expenses Discount and commission Gas and fuel .... Office and petty expenses Trade debtors Bank Trade creditors John Kay, Capital Account . W. Mackay, Capital Account . John Kay, Drawing Account . W. Mackay, Drawing Account £28,750 £20, 400 120 570 220 190 70 40 120 4,320 6,750 2,750 12,000 8,000 1,200 800 £43,150 _0 £43,150 _0 Prepare from the above data the necessary closing entries, and make out the Profit and Loss Account and Balance Sheet, showing the exact position of the firm at 31st December.. PARTNERSHIP 227 10. The following is the Trial Balance of Brown & Smith, who are equally interested in the business, as at 31st December: — Stock on hand at beginning of year Purchases during year Sales during year . Stock on hand at end of year, £7000 Discount . Kent, rates, and taxes Wages Salaries . Expenses Stationery and postages Bills payable . Bills receivable Creditors' open accounts Customers' open accounts Bank Brown, Capital Account Smith, Capital Account ^t;8,ooo 40,000 £50,000 300 1,500 2,000 500 250 100 3,000 2,000 4,000 5,000 1,000 1,500 1,550 £60,350 £60,350 The partners agree to dissolve on the footing that Smith retires from the business and is to get one-half of the good- will of the business, which is to be taken as worth three years' profits of the average for the last three years, in- cluding the year of which the above is the Trial Balance. The profits for the two previous years have been £3500 and £3000. In ascertaining the profit for the last year reserve 5 per cent on Customers' Accounts and Bills Eeceivable for bad debts. Show the partners' Capital Accounts and the Balance Sheet of the business after Smith has been paid by cheque the balance due to him. 11. William Johnston and Edward Brown entered into partnership on 1st January, under the style of Johnston & Brown, as wholesale and general ironmongers. On 1st January Johnston paid in as his capital £3000, and Brown £2000. The profits are to be divided in propor- tion to the capital brought in. Interest at 5 per cent is to be charged on their respective drawings. On 31st December stock was taken, and amounted to £1000. The Trial Balance of the books as at that date was as follows : — 228 ACCOUNTING IN THEORY AND PRACTICE Plant and machinery .... Office furniture and fittings Horses, carts, and harness . Purchases Sales Rent, rates, taxes, and insurance Office and general expenses Freight and carriage .... Horse keep Discounts and allowances . Interest, commission, and bank charges Printing, stationery, and advertising . Travelling expenses .... Salaries and wages .... William Johnston, Capital Account . Edward Brown, Capital Account William Johnston, drawings on 30th June Edward Brown, drawings on 30th June Trade debtors Trade creditors £1,800 100 200 6,000 150 £8,500 130 120 80 40 30 20 130 1,000 700 3,000 2,000 500 3,000 500 £14,000 £14,000 Prepare Profit and Loss Account, having first dealt with the interest referred to in the preliminary paragraph, pass the profit or loss, as the case may be, to the partners' accounts, and prepare a Balance Sheet as at 31st December. 12. A, B, and C enter into partnership on 1st January. A contributes £1800, B £1200, and C £600. The profits and losses are to be divided in the same proportion. The partners agree that before dividing the profits there shall be charged as an expense of the business, and placed to their individual credit, salaries as follows: A £100, B £100, and C £50. At 31st December the Trial Balance of their books showed the following : — Capital, A £1,800 „ B 1,200 ,, C 600 Cash on hand and in bank . . . £400 Stock at 1st January . . . . 2,100 Purchases 10,300 Sales 5,500 Plant and fixtures 400 Book debts receivable, including consign- ments 4,100 Consignments outwards, price realised . 6,700 Trade creditors 2,890 Loan Account 1,200 Interest 50 Salaries . . . . . . . 650 Wages 400 Carryforward . . £18,350 £19,940 PARTNERSHIP 229 Brought forward . £18,350 £19,940 Rent, rates, and insurance, etc. 200 Interest and discount 250 Losses on Exchange 400 Commissions 610 Drawings, A (including salary of £100) 550 B (including salary of £100) 450 (including salary of £50) 350 £20,550 £20,550 Their inventory of stock on hand at 31st December amounted to £2300. Unexpired insurance premium, £5. Eent paid in advance, £10. Prepare a Trading Account (cost as against proceeds), a Profit and Loss Account, and a Balance Sheet ; also partners* Capital Accounts as at 31st December, allowing 5 per cent interest on capital at the beginning of the year, and reserving 3 per cent for losses on book debts. 13. From the following particulars of the business of Smith & Brown prepare a Manufacturing Account, a Profit and Loss Account, and Capital Accounts for the year, toofether with a Balance Sheet as at 31st December. John Smith, Capital Account . £4,000 Do. Drawings Account £900 William Brown, Capital Account . 3,000 Do. Drawings Account 600 Bills payable 500 Bills receivable 885 Stock at beginning of year 3,000 Purchases 6,000 Sales .... 16,000 Customers' Accounts 2,000 Creditors 600 Machinery Account 3,500 Buildings 1,000 Wages .... 4,000 Office furniture 280 Rent .... 300 Cash on hand and in bank 250 Power, etc. 300 Travelling expenses 150 Commission . 200 Discount oif purchases 100 Discounts to customers . 160 Freight outwards . 110 Fire insurance 80 Interest and bank charges 60 Horse keep 70 Advertising . 85 Bad debts written off 100 Sundry Expenses . 170 £24 200 £24,200 230 ACCOUNTING IN THEORY AND PRACTICE The stock on hand at end of year was valued at £4000. Provide 5 per cent on book debts for bad debts and discount. Write 7 per cent off machinery and office furniture for depreciation. Carry forward unexpired fire insurance, £20. Provide for three days' wages, £40. Partners to get 5 per cent interest on capital at beginning of year (namely £4000 and £3000). Smith to get £700 a year and Brown £400 in respect of salary. Profits thereafter to be divided equally. 14. John Eichards, Mechanical Engineer, agreed to take his manager, Eobert Low, into partnership as at 1st January, the latter arranging to bring in as his capital the sum of £5000, the profits to be divided in proportion to the capital of each partner. On 1st January the balance of John Eichards' books which was accepted by Low was as foUows: — Stock in trade Plant and machinery- Land and buildings Patent rights — 2 years unexpired Book debts .... Trade creditors Bank John Richards, Capital Account AFsets. £4,500 2,000 3,000 400 2,500 Liabilities. £2,900 1,500 8,000 £12,400 £12,400 On 31st December the Trial Balance of the books stood as follows, but nothing had been written off in respect of plant and machinery and patent rights. Stock was taken by the partners, and amounted to £5000. Trial Balance as at 31st December. Stock at 1st January Purchases Plant and machinery Land and buildings Patent rights . Book debts Wages . Rent, rates, taxes, etc. Carry forward £4,500 7,000 2,250 3,000 400 3,200 1,500 100 £21,950 PARTNERSHIP 231 Brought forward Coal and lighting . Carriage Trade expenses John Richards, Capital Account Robert Low, Capital Account John Richards, Drawing Account Robert Low, Drawing Account Bank Sales ..... Creditors .... £21,950 150 100 150 600 £8,000 6,000 400 1,400 10,000 1,750 £24,750 £24,750 Prepare Profit and Loss Account and Balance Sheet, after writing off 5 per cent from plant and machinery and £200 from patent rights, and show the exact position of the two partners as at 31st December. 15. Eobert Gow and William Erskine, trading as Robert Gow & Co., had been in business as general traders for some years, and their books were made up on the 31st December with a view to taking in their foreman, Peter Scott, as from the 1st January. The position of the business at that date was as follows : — Land and buildings £2,000 Fixtures and fittings 400 Stock on hand 3,000 Debtors . 1,800 Bank 2,000 Creditors £1,200 Robert Gow, capital 6,000 William Erskine, capital 2,000 £9,200 £9,200 Peter Scott brought in as his capital the sum of £1000, and the profits were to be divided in the proportion of six-ninths to Gow, two-ninths to Erskine, and one-ninth to Scott. The partners were to draw as against profits, on the 1st of each month, the respective sums of £100, £33 : 6s. 8d., and £16 : 13s. 4d. On the 31st December the books were made up, and the book-keeper presented to the partners the following as the Trial Balance : — 232 ACCOUNTING IN THEORY AND PRACTICE Land and buildings £2,300 Fixtures and fittings 400 Stock .... 3,000 Debtors 3,600 Creditors £1,100 Bank .... 800 Purchases 5,000 Rent, rates, taxes, and insurance 400 Freight and carriage . 70 Salaries and wages Coals, gas, and lighting 430 . 40 Printing, stationery, and advertising 5 60 General office expenses . 50 Discount and commission 150 Robert Gow, drawings . 1,200 William Erskine, drawings 400 Peter Scott, drawings 200 Sales .... 8,000 Robert Gow, capital 6,000 William Erskine, capital 2,000 Peter Scott, capital 1,000 £18,100 £18,100 The stock was taken by the foreman and partners jointly, and amounted to the sum of £2100. Prepare a Profit and Loss Account, apportion the profit or loss, as the case may be, to the respective partners, and make out a Balance Sheet as at 31st December. 16. On 31st December 1896, Fraser, one of the partners of the firm of Eoss & Eraser, purchased for £3000 Euby Diamond Co. shares. The expenses of the purchase, amount- ing to £9, were charged to the Profit and Loss Account of the firm. The arbiter, under the contract of co-partnery, decided, on 31st December 1898, that the purchase was ultra vires of the contract of co-partnery. Ross is entitled to two-thirds of the profit and Eraser to one-third, and in- terest is allowed on their accounts at the rate of 5 per cent. At 31st December 1898 the Ruby Diamond Shares Account in the Ledger of the firm had £3000 on the debit side, and no dividends had been received. What entries will be re- quired in the books of the firm as at 31st December 1898 to put matters right ? Show the entries which will require to be made in the partners' accounts. JOINT-STOCK COMPANIES' BOOKS 233 JOINT-STOCK COMPANIES' BOOKS The books of account peculiar to joint-stock companies are those relating to the shares and debentures. The Com- panies Act, 1862, prescribes the following statistical books which must be kept : — Eegister of Members; Annual List of Members and Summary ; Eegister of Mortgages ; Minute Book ; and in the case of companies limited by guarantee — Register of Directors and Managers. The Minute Booh, A Company Minute Book is for the purpose of contain- ing the minutes of the meetings of the shareholders and of the directors. Sometimes one book is kept for the minutes of the shareholders' meetings and another for the minutes of meetings of the directors and committees of the directors. The secretary of the company writes up the minutes. A Scroll Minute Book is of considerable convenience. Minutes may be kept on the principle of giving a short account of everything of importance said or done at a meeting, or they may simply contain a record of the actual resolutions passed or of the iindings of the meetings. In the case of directors* minutes it is usual to give the names of directors present, but in the case of shareholders this cannot always be done, although it is advisable to do it as far as possible. The minutes are read and confirmed by the next meeting as to their being records of facts, but in the case of companies they are not formally approved of as decisions. The minutes should be authenticated by the signature of the chairman of the meeting at which they are approved, or of the chairman who presided at the meeting of which the minute is a record. Sometimes the secretary also signs each minute. In 234 ACCOUNTING IN THEORY AND PRACTICE engrossing the minutes in the Minute Book no space should be left between each minute except what is sufficient for the signatures. The Application and Allotment Book, When a company is being floated, or when it is pro- posed to issue further capital, a prospectus is usually issued containing the necessary particulars to induce investors or speculators to put their money into the concern. A form of application for shares usually accompanies each prospectus. The chief point to be careful about in preparing a form of application for shares is, that it must contain an application for a definite number of shares or debentures and a definite undertaking to accept the shares or debentures allotted. The application must be signed by the person or persons applying. Applications for shares may be withdrawn up to the time of allotment. The application has, as a rule, to be made through the bankers of the company, and it is lodged with them, together with a deposit of so much per share and a certain percentage of the debentures applied for. The banker gives a receipt on the form appended to the form of application, and retains the applications themselves on behalf of the company. These applications may be received from the bankers when the period within which applications may be lodged has expired, and the applications having been alphabetically arranged, the Application and Allotment Book, a specimen of which is submitted, may then be filled up. Sometimes, however, the applications are so numerous that if it is desired, as is often the case, that the allotment should be made within a very short period of the closing of the lists, the applications should be obtained from the bank as soon as they are lodged, and the accountant should have sheets ready ruled similar to the Application and Allotment Book, and a sufficient staff of clerks to write up these sheets. Each sheet should have a letter of the alphabet at the head. These separate sheets, having been written up, are arranged alphabetically and summed, and their totals entered on abstract sheets. The secretary, manager, or promoters of JOINT-STOCK COMPANIES' BOOKS 235 the company should, in the event of the shares being over- applied for, go over the lists and insert in the "proposed allotment " column how they consider the shares should be allotted, being careful to prefer those who are likely to influence favourably the business of the concern. When the directors meet the shares will be actually allotted, and the " shares allotted " column filled in. When there are two classes of shares, or shares and debentures, sometimes separate application letters are issued for each class, and when this is so, different coloured papers should be used for the application letters, and a separate set of application and allotment sheets should be used. Immediately after the directors have allotted the shares the allotment letters and letters of regret should be sent out. The great advantage of loose sheets is that any number of clerks may be employed upon the work at one time. When it is no longer necessary to have the sheets separate, they may be bound up into one or more volumes, and form the Application and Allotment Book. Register of Transfers. After the shares have been once allotted all subsequent alterations on the holdings are entered through the Eegister of Transfers. A form of Eegister of Transfers is submitted. It is practically a Share Journal, and the headings sufficiently explain its use. Shareholders' Ledger. A form of Shareholders' Ledger is submitted. The left side of the page is for the purpose of showing the shares acquired and the shares disposed of, and the right side of the page is the Cash Account of the shareholder, so far as the shares he holds are concerned. Both accounts are kept on the usual principles of debit and credit, and the headings fully show the method of using it. This ledger also forms the Eegister of Members prescribed by the Act. 236 ACCOUNTING IN THEORY AND PRACTICE Application and Date of Application. No. Name. Designation. Address. Shares applied Fol. Deposit paid. Proposed Allotment. Eegister Date of lodging Transfer. No. of Transfer. Transferor's Name. No. of Certificate. Ledger folio. Shares transferred. Numbered From To Number of Shares. Amount paid up. JOINT-STOCK COMPANIES' BOOKS 237 Allotment Book Shares allotted. No. of Allotment Letter. Numbers of Shares allotted. Amount due on Cash returned. Remarks. From To Allotment. Date Fol. Amount. OF Transfers Date Transferee's Consideration. Transfer passed by Directors. Name. Designation. Address. No. of Certificate. Ledger folio. 1 238 ACCOUNTING IN THEORY AND PRACTICE Name. Shareholders' Designation Share Account. Shares disposed of. Shares acquired. Balances. Date. Fol. Numbered Shares disposed of. Date. Fol. Numbered Shares acquired. No. of Certificate. Date. Shares hold. From To From To Name. Shareholders' Ledger — Preference Designation Shares disposed or. Date. Fol. Preference. Ordinary. Numbered Shares disposed of. Paid up. Numbered Shares disposed of. Paid up. From To From To JOINT-STOCK COMPANIES' BOOKS 239 Ledger Address Shareholders' Cash Account. Dr. ^ or THF UNIVERSITY OF Cr. Date. Entry. Amount payable. Date. Entry. Cash paid. AND Ordinary Shares together Address. Shares acquired. Date. Fol. Preference. Ordinary. Numbered Shares acquired. Paid up. No. of Certificate. Numbered Shares acquirsJ. Paid up. No. of Certificate. From To From To 240 ACCOUNTING IN THEORY AND PRACTICE Shareholders Ledger — Preference and Ordinary Shares together. A form of Shareholders' Ledger is also given for use where it is desired to keep a record of the preference and ordinary shares held by each individual together. As a rule separate books are kept, but it is sometimes desirable to have the holdings of each individual together. It will be observed that no separate Cash Account is given. Debenture Ledger. simple form of Debenture Ledger is This form is suitable for a Shareholders' Ledger where the shares are in the form of stock. Debenture Ledger Name Designation. stock disposed of. Stock acquired. Date. Folio. Amount. Date. Folio. Amount. No. of Certificate. JOINT-STOCK COMPANIES' BOOKS 241 ^ a 00 "^3 © o o -a rl3 2 i^orm 0/ Allotment Letter. 1 THE NATIONAL REALISATION COMPANY, LIMITED TO g, No ^ Allotment Letter o 5 North St. David Street, q5 Edinburgh. 2 Sir, >» We beg to inform you that, in pursuance of your ^ application, the directors have allotted to you shares of fl M each in this company, in terms of the prospectus § ^ dated 1 i We shall be glad, therefore, if you will kindly pay the sum © ^ of £ , being per share, the amount due on allotment, on or before the instant, to the company's bankers, as under. Your obedient Servants, Lisle and Middleton, ^ ^ Secretaries. g ^ To John Smith, Esq., ^ -^ 16 Ross Terrace, Glasgow. "g^ i, (This portion to be retained by the bankers.) 1 1 2 i THE NATIONAL REALISATION COMPANY, LIMITED Banker's Receipt for Allotment Money o o "^ -^ (being per share called up). '-e 2 Edinburgh. fQ "^ Received of John Smith, Esq., the sum of ■g -^ being per share due on allotment of % ordinary shares of each in the above company. a. For the Bank of Scotland, Cashier. (This portion, when receipted by the bankers, must be preserved by the shareholder, to be exchanged for the share certificate in due course.) R 242 ACCOUNTING IN THEORY AND PRACTICE Form of Letter of Regret. THE NATIONAL EEALISATION COMPANY, LIMITED No 5 North St. David Street, Edinburgh. Sir, We regret to inform you that the directors are unable to allot you any ordinary shares of this company, in compliance with your application for shares of the company. We enclose cheque for £ , being the amount paid by you on the above-mentioned application, and shall be glad if you will sign the form of receipt attached to the cheque sent herewith, and present the same for payment through your bankers. We are. Sir, Your obedient Servants, Lisle and Middleton, Secretaries. To William Robertson, Esq., 3 High Street, Leith. THE NATIONAL REALISATION COMPANY, LIMITED No To The Bank of Scotland, Pay to William Robertson, Esq., or order, the receipt below being signed, the sum of For The National Realisation Co., Limited. Director, Lisle and Middleton, Secretaries. Receipt, Received from The National Realisation Co., Limited, the sum of , being the amount deposited by me on application for shares in the same. JOINT-STOCK COMPANIES' BOOKS 243 Form of Call Letter. THE NATIONAL REALISATION COMPANY, LIMITED Notice of First Call of per Share, Ordinary ^ Shares (making per share called up). J No g 5 North St. David Street, c/2 Edinburgh. ^ Sir, M We beg to give you notice that the first call of g per share has this day been made by the board, in accordance with the terms of the prospectus. 5 On the ordinary shares held by you in this m company, the call amounts to % This amount should be remitted to the company's bankers, % the Bank of Scotland, on or before the ^ 6^ We are, Sir, >i-g Your obedient Servants, Lisle and Middleton, W g ^ Secretaries, 3 a To John Smith, Esq., g 16 Ross Terrac I (This portion to be retained by the bankers.) (^ g 16 Ross Terrace, Glasgow o =^ THE NATIONAL KEALISATION COMPANY, LIMITED 03 'g No 2 Banker's Keceipt for First Call of per Share on o Ordinary Shares, payable ?^ (making per share ^ called up). ^ Received the day of from J. Smith, g Esq., the sum of , being first call of per ^ share, due , on shares in the above company. ^ For the Bank of Scotland, H Cashier. (This portion when receipted by the bankers must be pre- served by the shareholder, to be exchanged in due course for the share certificate.) 244 ACCOUNTING IN THEORY AND PRACTICE Exercises, 1. A private manufacturing corporation, with the view of being floated, desires a certificate of its average annual profits for three years ; after charging up all costs, expenses, and depreciation, and an allowance for bad debts, it is found that the profits for the first year were £5000, for the second year £6000, plus £2000 profit on sale of investments, and for the third year £7000, plus £3000 profit on the sale of real estate. Give the annual average profit to be certified. 2. From the following particulars prepare the Balance Sheet of the Scottish Union Bank as at 31st December, and the Profit and Loss Account for the year ended at that date. Capital .... Reserves .... Kotes issued Customers' credit balances . Unpaid dividends Gross profits Bad debts .... Expenses .... Interim dividend paid Balance of profit brought forward Cash in hand Cash at call Investments Stamps in hand . Premises Customers' debit balances £114,430 145,210 39,700 897,530 240 32,490 £3,000 11,500 5,720 1,560 38,135 44,230 328,465 505 37,250 762,355 £1,231,160 £1,231,160 3. The Balance Sheet of a limited company was as under ; — COMPANIES 245 Liabilities, Assets, Capital issued, 15,000 shares of £10 each Less calls in arrear . Creditors Expenditure on Capital Account . . £74,800 Book debts . 32,100 Stock .... 19,900 Cash .... 5,700 Profit and Loss Account 27,800 £160,300 £150,000 7,500 £142,500 17,800 £160,300 The company obtained the consent of the court to a reduction of its capital by making each £10 share into a £5 share in order that the debit on its Profit and Loss Account might be written off, and the Expenditure on Capital Account reduced. Prepare revised Balance Sheet, giving effect to the reduction. 4. The Balance Sheet of a joint-stock company as at 1st January was as follows : — Liabilities. Assets. Creditors, open accounts . . £3,200 Land and buildings . £10,00C Bills payable . 6,000 Plant and machinery . 17,000 Capital .... . 40,000 Horses and waggons 3,000 Profit and Loss Account . . 6,100 Patents and goodwill 4,100 Goods on hand 9,800 Accounts receivable 7,000 Cash in bank 4,400 £55,300 £55,300 A year later, on 31st December, after an audit of the books and accounts, the Balance Sheet was as follows : — Liabilities. Assets. Creditors, open accounts . . £3,400 \ Land and buildings . £10,400 Mortgage 5,000 ! Plant and machinery :— Capital 40,000 1 Balance, 1st Jan. £17,000 Profit and Loss Account : — Less depreciation 1,700 Balance last year . £6,100 15,300 Profit this year . . 4,680 Horses and waggons : — 10,780 Balance, 1st Jan. £3,000 Less depreciation 450 2,550 Patents and goodwill 4,100 Goods on hand . 13,000 Accounts receivable . 6,600 Agency investments . 3,000 Cash in bank . 4,230 £59,180 £59,180 246 ACCOUNTING IN THEORY AND PRACTICE From the foregoing it will be seen that for the year a net profit of £4680 has been earned, while the accounts receivable are smaller, and the cash balance on hand is less than at the beginning of the year, though no dividend has in the meantime been paid. Prepare statement showing what has become of the profits earned. 5. The directors of a manufacturing company, before the closing and auditing of the books for the half-year ending 31st December, declare out of the net earnings of the company a dividend for the half-year of 4 per cent on the preferred stock of £40,000, and of 3 per cent on the ordinary stock of £40,000. There has been brought forward from the last half-year an undivided balance of profit of £1600, and after the audit of the books the Trial Balance is found to be as follows : — Teial Balance as at 31st December. Preferred stock £40,000 Ordinary stock 40,000 Sales .... 87,670 Bills payable 10,400 Accounts payable . 4,000 Profit and Loss Account 1,600 Property and buildings . £13,000 Plant and machinery 16,000 Patents and goodwill 32,000 Stock on hand, 1st July 11,600 Purchases 33,000 Wages .... 35,200 Coal .... 2,400 Salaries, general . 4,400 Do. management . 2,000 Insurance 350 Repairs 400 Discount and allowances 2,500 Freight .... 600 Discount and interest . 300 Cash in bank 3.200 Investments . 6,200 Miscellaneous expenses . 1,720 Book debts . 18,800 £183,670 £183,670 The stock on hand at 31st December is £10,600. Prepare Profit and Loss Account and Balance Sheet from the above, giving effect in the accounts to depreciation at COMPANIES 247 the rate of 6 per cent per annum on plant and machinery, and an allowance of 5 per cent on book debts to provide for bad accounts ; also create a liability in the Balance Sheet for the dividends declared as above stated. 6. From the following particulars prepare Trading and Profit and Loss Accounts for the year, and Balance Sheet as at 31st December, of Hugh Eose and Co., Limited. Tkial Balakge . Capital. .... Sundry creditors . Bills payable Profit and Loss, balance from previous year ..... Interim dividend paid . Cash on deposit . Cash at bank . Cash in hand ... Land and buildings Fixtures and furniture . Sundry debtors Fire insurances Goodwill .... Stock at beginning of year . Purchases .... Sales Discounts obtained Rent . . ' . Rates and taxes . Gas, electric light, and water Wages ..... Commissions Advertising .... Price lists, printing and postages Carriage, and packing material General trade expenses Interest .... Discounts allowed Annual painting of premises Bad debts .... Preliminary expenses . Salaries .... £1,500 5,000 200 100 12,000 700 3,250 . 200 3,000 10,000 60,000 900 1,600 1,500 400 500 200 1,000 80 70 700 3,000 500 600 4,500 £111,500 £10,000 15,000 2,000 1,000 80,000 2,000 1,500 £111,500 The stock on hand at the close of the year was valued at £9000. Write off £500 from preliminary expenses, and reserve £50 of fire insurance premiums paid in advance. 248 ACCOUNTING IN THEORY AND PRACTICE The conversion of a Private Firm into a Joint-Stock Company. When a private firm is converted into a joint-stock com- pany it is usual to introduce a new set of books altogether, but it is sometimes more convenient for the new company to continue to use the books of the old firm. The method of treating the accounts of a private firm when it is con- verted into a joint-stock company, and where it is desired to continue the use of the books of the old firm will be seen from the following example : — The firm of Eoss & Carr, Iron Merchants, of which W. Eoss and A. Carr are the sole partners, is registered as a limited liability company. The new company take over the whole assets and liabilities of the old firm as at 1st January. The following is the Balance Sheet of the old firm: — EOSS & CAEE Balance Sheet as at 31st December. Liab ilities. Assets. Creditors' Accounts . £7,000 Customers' Accounts . £8,000 Bills payable . . 2,000 Goods Warehouse . 14,000 3,000 £9,000 Bank of Scotland . . 1,000 Partners' capital : — W. Ross . . £11,000 A. Carr . 6,000 17,000 £26,000 £26,000 The new firm is to have a capital of £50,000, divided into 50,000 shares of £1 each. It is proposed to issue at present only £30,000. The amount payable to the vendors is £20,000, of which £15,000 is payable in cash and £5000 in 5000 shares of £1 each, to be held as fully paid. The remainder of the capital issued, £25,000, is fully subscribed. COMPANIES 249 It is required to show the entries which it is necessary to make in the books of the old firm on the footing that the company is to use these books. It is evident that since £20,000 is the purchase price, and as the partners' capital is only £17,000, that £3000 is the amount paid for goodwill, and accordingly an account for goodwill must be raised. If the partners share the profits of the old firm in the proportion of two-thirds to W. Eoss and one- third to A. Carr, then £2000 of the goodwill must be credited to W. Eoss, and £1000 of the goodwill to A. Carr. On the further assumption that the shares are to be allotted to the old partners in equal proportions, the necessary Journal entries in the old books of the firm would be as follows : — Journal Goodwill . . . .Br. £3,000 To W. Ross .... £2,000 ,, A. Carr .... 1,000 W. Ross . . . .Br. 2,500 A. Carr ,, 2,500 Sundry shareholders . . ,, 25,000 To Capital .... 30,000 If the cash paid by the shareholders on their shares is paid through the Bank of Scotland, the following entry would require to be made :— Bank of Scotland . . .Br. 25,000 To sundry shareholders . 25,000 If the partners of the old firm are settled with by cheque on the Bank of Scotland, the entry would be : — W. Ross Br. 10,500 A. Carr „ 4,500 To Bank of Scotland 15,000 The partners' accounts, after these transactions had been carried out, would appear as follows : — W. Ross J Capital Account Dec. 31. To Capital (new company) . £2,500 ,, Bank of Scot- land . . 10,500 £13,000 Dec. 31. By Balance ,, Goodwill £11,000 2,000 £13,000 250 ACCOUNTING IN l^HEORY AND PRACTICE A. Carr, Capital Account. Dec. 31. To Capital (new company) . ,, Bank of Scot- land . £2500 4500 £7000 Dec. 31. By Balance „ Goodwill £6000 1000 £7000 If the books of the old firm were not continued by the new company the closing entries to be made in the old books would be as follows : — Ross, Carr, & Co., Limited . . Dr. To Customers Goods Warehouse Bank of Scotland W. Ross (share of goodwill) A. Carr (share of goodwill) Creditors Dr, Bills payable "W. Ross (shares) "W. Ross (cash) A. Carr (shares) A. Carr (cash) To Ross, Carr, & Co., Limited £29,000 7,000 2,000 2,500 10,500 2,500 4,500 £8,000 14,000 3,000 1,000 2,000 1,000 /, 29,000 The opening entries in the books of Eoss, Carr, and Co., Limited, would be as follows : — Customers .... . Dr. £8,000 Goods n 14,000 Warahouse .... BanK of Scotland • > ) 3,000 1,000 Goodwill . . . 3,000 To Ross & Carr . . £29,000 Ross & Carr . Dr. 29,000 To Creditors . 7,000 ,, Bills payable . 2,000 „ Capital . 5,000 „ Bank of Scotland . 15,000 Exercises, 1. Tod and Co. dispose of their business to a company for £50,000 upon the following terms, viz. — £10,000 in cash. £40,000 in fully paid shares of £1 each. COMPANIES 251 The assets taken over by the company consist of: — Stock-in-trade . . . . £30,000 Book debts .... 8,000 Fixtures, fittings, and utensils . 1,000 Plant 1,500 Show the entries to be made in the books of the com- pany to record these transactions. 2. A private firm having assets consisting of land and buildings, £10,000 ; plant and machinery, £15,000 ; book debts, £7000 ; stock on hand, £8000 ; and lia- bilities consisting of bills payable, £3000 ; transfers its entire business on 1st January to a joint -stock company for £15,000 in debentures, £15,000 in preference shares, and £15,000 in ordinary shares. Show the closing entries and Ledger Accounts in the books of the old firm, and the opening entries in the books of the joint-stock company. 3. A company is incorporated to purchase the three concerns, A, B, and C, doing the same class of business. The assets, the liabilities, and the average annual net profits of each concern for the past five years are as follows : — A B c Assets as valued Liabilities .... Annual net profits, average, five years . £20,000 6,000 2,000 £30,000 10,000 3,000 £40,000 15,000 1,000 It is required to know what amount of stock of the new company should be allotted to each concern as equit- able compensation for net assets and goodwill, and the matter is referred to you for report. What should be the amount of the capital of the new company, and how should it be apportioned to A, B, and C? 4. The Eiverside Gas Company, Limited, is formed to take over as a going concern the assets and liabilities of a private firm of gas manufacturers. The capital of the company is £21,000 in 21,000 shares of £1 each. A, B, 252 ACCOUNTING IN THEORY AND PRACTICE C, D, E, F, and G take 3000 shares each, and pay them fully up. The company pays £13,000 to the old firm in cash, and takes over a heritable bond for £3000, which is the only liability of the old firm. On making an inventory of the property for the purpose of distribution to proper accounts, the following values, exclusive of goodwill, are put upon the assets : — Land and buildings . . . . . £5,000 Coal-gas plant, machinery, and fittings 2,200 Water-gas plant, machinery, and fittings 1,800 Mains ...... 6,000 Meters ...... 300 Supplies ...... 700 Office furniture and fixtures 150 £16,150 Frame the necessary entries to open the company's books, and prepare a Balance Sheet, showing how the com- pany stands after giving effect to the above transactions. MANUFACTURERS' ACCOUNTS The accounts of manufacturers may be treated in various ways, according to their special requirements. The following transactions are supposed to be the transactions of a manufacturer and trader who not only manufactures goods with the view of selling them, but also purchases finished goods, which he ^ells along with the goods of his own manufacture. There are three different methods shown in which the transactions may be treated, and the method to be adopted in any particular case will depend upon the nature of the business and the requirements of the manufacturer. The distinction between the three methods will be best appreciated after they have been worked out in detail MANUFACTURERS' ACCOUNTS 253 Manufacturer's Accounts Transactions for the Year. Jan. 1 . Value of stock on hand at beginning of year :- Raw material .... £800 Goods in process of manufacture 200 Finished goods 1,000 Dec. 31. Purchases during year: — Raw material . . ' , 4,500 Finished goods 1,500 Wages ..*.... 5,000 Sales 15,300 Trading price of goods manufactured during the year .... 11,600 Value of stock on hand at end of year :— - Raw material 700 Goods in process of manufacture 100 Finished goods 900 Dr. First Method. — Manufactured Goods and Finished Goods purchased kept in one Account By the. first method the Trading Account is shown for the year, and the result of the transactions is seen to be a profit of £4000, but no attempt is made to distinguish the amount . of profit made from manufacture and from the purchase and sale of finished goods. Only one account is kept, namely the Trading Account, as under : Trading Account for Year. Cr, Jan. 1. To Stock on hand at be- ginning of year : — Raw material Goods in process of manufacture Finished goods . Dec. 31. ,, Purchases during year : — Raw material Finished goods „ Wages . ,, Gross profit, carried to Profit and Loss Account . £800 200 1,000 £2,000 4,500 1,500 5,000 4,000 £17,000 Dec. 31. By Sales . . . £15,300 , , Stock on hand at end of year : — Raw material £700 Goods in pro- cess of manu- facture . 100 Finished goods 900 1,700 £17,000 254 ACCOUNTING IN THEORY AND PRACTICE SecoTid Method. — Showing the Cost of the Goods Mandfactueed By the second method a Manufacturing Cost Account is kept, by means of which the cost of the goods actually manufactured during the year is ascertamed, and this is debited to a separate Trading Account, which shows the profit upon the goods manufactured and purchased. This method is preferable to the first, because by it the cost of manufacturing the goods is ascertained, and it is useful to compare the cost of goods manufactured in any one year with that of other years. Dr. Manufacturing Cost Account. Dec, 31. Purchases — Raw material "Wages . 4,500 . 5,000^0 £10,500 Trading Account, for cost oT goods manu- factured during year Ci\ Jan. 1. To Stock on hand at beginning of year : — Dec. 31. By Stock on hand at end of year : — Raw material . . £800 Raw material £700 Goods in process Goods in process of manuc ture . 200 of manufacture . 100 £1,000 £800 9,700 £10,500 Trading Account. Jan. 1. To Stock of finished goods at beginning of year £1,000 Dec. 31. ,, Manufacturing Cost Account, for cost of goods manu- factured during year . . . 9,700 ,, Purchases, finished goods . . . 1,500 ,, Gross profit, carried to Profit and Loss Account . . . 4,000 a £16,200 Dec. 31. By Sales . . . £15,300 ,, Stock of finished goods on hand at end of year . . 900 £16,200 MANUFACTURERS' ACCOUNTS 255 Third Method. — Showing the Profit on Manufacturing AND Profit on Trading separately I The third method is the most satisfactory, as by it the profit from the manufacture of the goods is ascertained. This is accomplished by crediting' the goods manufactured during the year at the ordinary trading prices at which they could be purchased from other manufacturers to the Manufacturing Account, and debiting this sum to the Trad- ingj Account. The Manufacturing Account thus shows the profit on the manufacturing department, and the Trading Account the profit on trading. The manufactured goods are charged at the same price as the finished goods could be purchased. On the assumption that the trade price of the goods manufactured during the year is £11,600, it will be seen from the Manufacturing Account that the profit on manufacturing is £1900, and that the profit from trade is £2100, making, as before, a total gross profit of £4000. Manufacturing Accownt. Dr. ( 7r. an. 1. To Stock on hand at Dec. 31. By Trading Account, for beginningof year : — trade price of goods Raw material . . £800 manufactured dur- Goods in process of ing the year. . £11,600 manufacture . . 200 ,, Stock on hand at — end of year : — £1,000 Raw material £700 )ec. 31. „ Purchases — Raw Goods in pro- material . . 4,500 cess of manu- Wages . . . 5,000 facture . . 100 800 £10,500 )> Profit and Loss Ac- count, for profit on manufacturing de- partment . . 1,900 £12,400 £12,400 _o 2^6 ACCOUNTING IN THEORY AND PRACTICE Abstract of Cost Number of Contract. Balance expended as at beginning of Year of unsettled Contracts. Wages. Stores. Material. Plant. Special outlay. Expenses. 34 35 36 37 General £ S. d. 50 10 140 £ 5. d. 120 350 180 70 4280 £ 5. d. £ s. d. 100 320 150 GO 3970 £ 5. d. £ 5. d. £ 5. d. 1 1 200 5000 4600 1 1 1 1 Trading Account. Jan. 1. To Stock of finished goods at beginning of year £1,000 Dec. 31. ,, Manufacturing Ac- count, for trade price of goods manu- factured during year 11,600 ,, Purchases of finished floods during year . 1,500 ,, Profit and Loss Ac- count, for profit on trade during year . 2,100 £16,200 Dec. 31. By Sales . . .£15 300 C: ,, Stock of finished goods on hand at end of year . . 900 C £16,200 ( Abstract of Cost Accounts for Year. There is submitted an Abstract of Cost Accounts for year with the above transactions filled in, although the form is general and of wider application, so that all the columns are not used up by these somewhat restricted illustrations. The uses, however, of these other columns will be readily understood from their headin £33,100 £33,100 The stock on hand at 31st December amounted to £5000 ; each partner is to be credited with 5 per cent on his capital for one year before profits are ascertained ; 3 per cent to be written off book debts for discount ; 1 per cent to be written off machinery and plant for depre- ciation; unexpired insurance to the extent of £40 to be taken into account ; net profit to be divided two-thirds to A and one-third to B. Draft Journal entries for closing the books, and prepare Trading Account and Profit and Loss Account, together with final Balance Sheet. 5. From the following particulars of the business of Jamieson & Eobb, Timber Merchants and Wood Turners, prepare Trading and Profit and Loss Accounts, and Balance Sheet as at the close of the year. 26o ACCOUNTING IN THEORY AND PRACTICE Trial Balance as at 31st December. J. Jamieson, Capital Account R. Robb, Capital Account Sales Stock at 1st January- Purchases (timber) Bills payable Debtors Creditors Carriage, cartage, and horse expenses Repairs and maintenance Coal Gas and water .... Oil, grease, and waste . Feu-duty ..... Rates, taxes, and insurance . Bank interest .... Discounts and allowances Bad debts Buildings, fixed machinery, and plant Horses, carts, harness, etc. . Loose tools, utensils, and furniture Wages . Salaries Incidental expenses Partners' salaries . Cash at bank Cash in hand Bills receivable Stock at 31st December, £3000. Make provision for the following : — Depreciation on buildings, etc., £200. Accruing incidental expenses, £50. Discount 5 per cent on debtors' balances. Loss on debtors' balances, £40. The net profit is divisible between the partners in pro- portion to their capital at 1st January. 6. Prepare Profit and Loss Account and Balance Sheet from the following Trial Balance, as at the 31st of December, of the business of J. Purves, Tobacco Manufacturer : — £5,000 4,000 10,000 £2,500 8,000 3,000 4,200 2,000 500 100 70 20 40 50 70 20 200 60 4,000 400 150 1,000 400 100 300 800 20 1,000 £24,000 £24,000 J. Purves, ca Sales Tobacco purchased . Loan on mortgage . Machinery and plant Land and buildings Carry forward £800 £4,500 10,000 2,000 1,000 1,500 2,000 £6,300 £15,500 COST ACCOUNTS 26] £6,300 £15,500 1,500 5,000 1,000 500 40 500 10 150 100 2,000 1,400 £17,000 £17,000 Brought forward Creditors Wages .... Customers Boxes, labels, etc., for year Rates and taxes Bills receivable Insurance Carriage .... Petty cash and postages . Stock at beginning of year Cash at bank and in hand Charge depreciation on land and buildings at 3 per cent, and on machinery and plant at 5 per cent. Provide for interest on loan (one year) at 5 per cent, and as a provision for bad debts and discounts reserve 6 per cent on the balance due by customers — £1000. The value of stock at the end of year was £2040, and there was £5 of stamps on hand. COST ACCOUNTS A COST ACCOUNT IS A STATEMENT SHOWING ON THE DEBIT SIDE THE ACTUAL COST OF PKODUCING A CERTAIN ARTICLE OR SET OF ARTICLES, AND ON THE CREDIT SIDE THE ACTUAL PRICE RECEIVED FOR THE ARTICLE OR ARTICLES. The ideal Cost Account is one which is kept as a part of the double-entry book-keeping. Under such a perfect system the Manufacturing or Trading Account is done away with, and its place is taken by as many departmental or separate cost accounts as there are departments or different articles manufactured. An ESTIMATED COST ACCOUNT IS A STATEMENT SHOWING ON THE DEBIT SIDE THE ESTIMATED COST OF PRODUCING A CERTAIN ARTICLE OR SET OF ARTICLES OF THE SAME KIND, AND ON THE CREDIT SIDE THE ESTIMATED PRICE TO BE RECEIVED FOR THE ARTICLE OR ARTICLES WHEN COMPLETED. An Estimated Cost Account is not of course a Ledger Account, and never forms part of the book-keeping of a 262 ACCOUNTING IN THEORY AND PRACTICE concern, but is prepared with the view of an estimate being given or a price quoted for the production of certain articles or the doing of certain work. A Cost Account is prepared from the items which ordinarily appear or which may be entered in the Trading and Profit and Loss Accounts. It enables a manufacturer to see what is the cost of the material and labour expended and the profit he is earning upon each article or contract. Such Cost Accounts enable the manufacturer to see what is the average cost of labour and material, and are invaluable in preparing estimates. Without their aid a manufacturer is groping in the dark when he tries to estimate, but with their assistance he knows exactly what price he can quote for any work so as to make a certain profit. With the assistance of such Cost Accounts estimates may be prepared with absolute certainty. With the valuable knowledge ob- tained of the expenses of similar work the contractor can with confidence venture to quote for new contracts. All that is necessary is for the contractor to turn up his old Cost Accounts, and, having made the necessary alterations in consequence of the change in the cost of material or in the rates of wages, he can offer for the work, knowing exactly what profit it will yield him. Each business requires to be specially considered in devising a set of Cost Accounts, and no set of forms of Cost Accounts is suitable for every business. Thus a colliery Cost Account is based on the cost of a ton of coal either brought to the surface or sold. A brickwork and slate quarry Cost Account may be based on the number of bricks and slates produced, if these are all of the same size, or by the ton. In such a business as a printing office, where each job is, as a rule, separately " costed " with the view of the Day Book being written up, by having a Day Book with columns for the items of cost, such as paper, ink, other material, wages, other expenses, and selling price, the cost may be incorporated in the system of book-keeping by totalling these items of cost at the end of each month and crediting the accounts representing these items, and debiting Cost Account with the total cost. Thus the Wages Account COS T A ceo UNTS 263 would be credited with the total wages for each month, and the Cost Account debited. There might at the end of the year be a deficiency in the Wages Account, which would represent wages not chargeable to any particular job ; but taking this into account, the amount of the difference would show the degree of accuracy with which the allocations had been made. If the departments in the printing office were kept separate, it would be better to have a separate Cost Day Book for each of the separate departments. In considering the best form of Cost Accounts to adopt it is necessary to consider what the cost consists of. Prime cost, as its name implies, is the first cost, and may be defined as the sum expended in purchasing a com- plete article which is sold as purchased, or the amount expended upon raw material, together with the wages expended in producing the article. The cost is the prime cost, together with all other direct expenses of production or indirect expenses of distribution. The net profit is the difference between the selling price and the cost. Direct expenses other than material and wages are those expenses which may be charged directly to a particular job or department of a business, such as wages of foreman, outlay for fuel, light and heat, rent and taxes of factory, insurance, and depreciation where it can be separately charged. These direct expenses are, it will be observed, largely the expenses of production. Indirect expenses are those which cannot be directly charged to a particular piece of work or department. They are, as a rule, expenses of distribution, of financing the business, and of general control and management. They include office salaries and expenses, provision for bad debts, interest on loans and capital. The various items of cost may be grouped shortly as follows : — Items of Cost. 1. Material (including carriage inwards). 2. Labour. 3. Direct and departmental expenses of production : — -^ 264 ACCOUNTING IN THEORY AND PRACTICE Wages of superintendence. Buildings and plant : — Light. Heat. Eent, taxes, and insurance. Depreciation and upkeep. 4. Indirect expenses of distribution and general manage- ment : — Salaries. Office expenses. Interest and finance. Bad debts. Material, Goods purchased specially for any particular job are charged at once through the Invoice Book to that job. Other purchases of raw material are charged to the Stores Account or to the various expenses accounts. Goods given out of the stores are credited to the Stores Account, and debited to the particular job. Labour. As often as the wages sheets are prepared an analysis is made of the total amount paid in wages, classified accord- ing to the work upon which each workman has been engaged. The Wages Account is debited wdth the wages paid, and credited with the wages incurred for each different job ; the Cost Account of each job being debited. Direct and Indirect Expenses. These, so far as not directly chargeable to each job, are charged as a percentage on the wages charged to the job, or as a percentage on the wages and material, whichever may be most suitable for the special circumstances of the business. The percentage is debited to the job, and credited to the Direct and Indirect Expenses Account. In a purely distributing business the expenses are best reckoned as a percentage of the purchase price. In a manufacturing COST ACCOUNTS 265 concern usually the percentage should be upon the wages. In colliery companies, for example, the expenses are best treated by reckoning so much per ton of coal raised or sold. When the account of each completed job is balanced off, the balance is carried to the Profit and Loss Account, and is the profit or loss upon that job. Engineers' Accounts, In a large engineering factory, where the raw material is manufactured into various kinds of engines or parts of engines, it is evident that a thorough system of Cost Accounts is essential for the proper management of the business. Only by knowing the exact cost which has been expended in making an engine of a certain pattern can an estimate with safety be prepared for manufacturing another engine of the same pattern. To understand the system of keeping the accounts of a large engineering factory it is necessary first to consider briefly the work to be done. Suppose the factory is an extensive engineering factory, where the raw material is received and made into locomotives, marine and other engines, boilers, cranes, steam - hammers, and such like. To arrive at the proper method of treating the accounts of such an establishment, it is necessary to thoroughly understand the various classes of expenditure. For the purposes of accounting such engineering expenditure may be divided into the following three classes : — I. Direct charges of production, called prime cost. This consists of all expenditure for raw material, wages, and other expenses directly chargeable to ^ the manufacture of the article. This expenditure is in direct proportion to the amount of the busi- ness done or to the turnover. II. Expenditure incurred in the different depart- ments OR shops, called shop establishment CHARGES. The expenditure under this head con- sists of the wages of the foremen, general labourers, tool -makers, watchmen, etc., and expenditure on 266 ACCOUNTING IN THEORY AND PRACTICE power and general stores. This expenditure is less dependent upon the volume of work done than that included under prime cost. III. General establishment expenses, including office expenses for clerks, salaries, stationery, etc. The salaries of the managers and chief officials, rents, rates, taxes, insurance, lighting and heating, wages of store-keeper, gate-keeper, time-keeper, messengers, upkeep and repairs of buildings and plant, trade expenses, travellers' salaries and commissions, and advertising. The expenditure under the third head is more general and less direct than under either of the other heads, and does not depend so directly upon the volume of the work done. The turnover of the business might be doubled without any material increase in the expenditure in this department. The expenditure under the third head could not be charged to any one of the departments, but embraces them all. The ratio of the expenditure in the three branches is constantly changing, and this necessitates the keeping of the three branches separate in making up estimates. The most important head in estimating is, of course, the prime cost. The prime cost having been calculated, the shop and general establishment charges forming the indirect expenses of production are added, to arrive at the total cost. In fixing the ratio of the indirect expenses of pro- duction which must be added to the prime cost, it is neces- sary to go carefully into the various ratios of indirect expenditure in the various shops or departments, and use these ratios which belong to the shops or departments con- cerned in the production. To take the general ratio of the indirect expenses would not in most cases be sufficiently accurate. Provision is sometimes made for the shop establishment charges by finding the ratio which the expenditure in- curred in each of the different shops bears to the wages of each shop, and provision may be made for the general establishment charges by finding the ratio which the general establishment charges bear to the wliole wages paid. COST ACCOUNTS 267 ContrcKts not completed at date of Balance. Care must be taken in ascertaining the profit to the date of balance on contracts not completed that future profit is not anticipated. Thus suppose a contract is for £5000, and it is estimated that the total cost of completing the work will be £4000, thus leaving a profit of £1000, or 25 per cent on the cost; then if at the date of balance £3600 has been expended on the work, the correct profit to assume up to the date of balance is £900, being 25 per cent on the outlay to date, as follows : — Contract No. Dec. 31. To Material, labour, etc. . ,, Profit and Loss . £3600 900 £4500 £2000 400 100 £2500 Dec. 1. By Cash to account 31. ,, Balance . June 20. By Cash £2500 2000 £4500 Jan. 1. To Balance June 3. ,, Material, labour, etc. . Dec. 31. „ Profit and Loss . £2500 £2500 By this means each year has its fair share of profit allocated to it. To ascertai7i the Profit on the Goods Account without actually taking Stock. It is sometimes advisable that the books of a concern should be framed so that the profit from the purchase and sale of goods may be ascertained weekly or monthly, and in businesses where a large stock is held it is desirable that the method adopted should be one which does not involve the taking of stock at each of the periods. The most satisfactory method by means of which the gross profit from the sale of goods may be ascertained is to have an 268 ACCOUNTING IN THEORY AND PRACTICE extra column in the Sales Day Book, headed " Cost." As the sales take place, and are entered in the Sales Day Book, the cost is ascertained, and is also entered. Some busi- nesses are more suitable for the application of this method than others. A retail jeweller's business, where each article as received into stock is inventoried, numbered, and has the cost price and selling price noted upon it, is very well adapted for this method, and gives very satisfactory results. It will be observed that the balance of stock is arrived at from the Goods Sold Cost Account by debiting the purchases, and crediting the goods sold at cost price each month, and it is advisable that, at all events once a year, the stock on hand should be carefully checked to see that it corresponds with the balance shown by the Goods Sold Cost Account. To illustrate the method the following particulars may be taken : — Goods on hand at 1st January £3600 January. February. March. January. February. March. PurcJiases Day Book, do. do. do. do. chased during month . do. do. £2000 1600 1400 £5000 Sales Day Book Cost of Goods. 1 during month . £1760 'do. . 1680 do. . 1360 Sales. £2200 2100 1700 £4800 £6000 The goods on hand at 31st March are valued at £3800. From the above particulars the Goods Account, if pre- pared in the ordinary way, for the quarter ending 31st March would be as follows, showing a profit of £1200 : — COST ACCOUNTS 269 Goods. Jan. 1. To Balance, stock on hand . £3600 Mar. 31. ,, Purchases . 5000 ,, Profit and Loss 1200 £9800 Mar. 31. By Sales . , £6000 ,, Balance, stock on hand . 3800 £9800 rrom the above Goods Account the cost of goods sold during the quarter can be ascertained by adding to the stock on hand at the beginning of the quarter (£3600) the purchases for the quarter (£5000), and deducting the stock on hand at the end of the quarter (£3800). This gives £4800 as the cost of the goods sold during the quarter. This result is very clearly shown when, instead of keeping one Goods Account, two Goods Accounts are kept, namely, a Goods Sold Cost Account and a Goods Sold Eealisation Account. These accounts for the quarter would appear in the following form : — Goods Sold Cost Account. Jan. 1. To Balance 'hldT. 31. ,, Purchases . £3600 5000 £8600 Mar. 31. By Balance, stock on hand . . £3800 ,, Goods Sold Reali- sation Account, being cost of goods sold . 4800 £8600 Goods Sold Realisation Account. Mar. 31. To Goods Sold Cost Account, for cost of goods sold . £4800 ., Profit and Loss . 1200 £6000 Mar. 31. By Sales . £6000 a £6000 0- The accounts if kept monthly, would be as follows : — 270 ACCOUNTING IN THEORY AND PRACTICE Goods Sold Cost Account. Jan. 1. To Balance 31. ,, Purchases Feb. 1. To Balance 28. ,, Purchases Mar. 1. To Balance 31. ,, Purchases £3600 2000 £3840 1600 £5600 £5440 . £3760 . 1400 £5160 Jan. 31. By Goods Sold Reali- sation Account, being cost of goods sold this month . . £1760 „ Balance . . 3840 £5600 Feb. 28. By Goods Sold Reali- sation Account, being cost of goods sold this 'month . . £1680 ,, Balance . . 3760 £5440 Mar. 31. By Goods Sold Reali- sation Account, being cost of goods sold this month . . £1360 ,, Balance . . 3800 £5160 Goods Sold Realisation Account, Jan 81. To Goods Sold Cost Account, for cost of goods sold this month £1760 ,, Profit and Loss, for gross profit for month . 440 Mar. 31. To Goods Sold Cost Account, for cost of goods sold this month £1360 ., Profit and Loss, for gross profit for month . 340 £2200 Feb. 28. To Goods Sold Cost Account, for cost of goods sold this month £1680 ,, Profit and Loss, for gross profit for month . 420 £2100 £1700 Jan 31. By Sales for month . £2200 £2200 Feb. 28. By Sales for month . £2100 £2100 Mar. 31. By Sales for month . £1700 £1700 COST ACCOUNTS 271 In the foregoing example the cost of the goods sold is got from the Sales Day Book, where, as each article is sold, its cost price is entered along with the selling price. This is the most satisfactory method of achieving the result desired, but where this course is not practicable the result may be attained by knowing the percentage of the sales which has been cost in the previous year, and assuming that the same percentage will obtain in the future. Thus, referring to the example above given, the total sales for the period under consideration amount to £6000, and the profit to £1200. The ratio of the sales which is profit is therefore 20 per cent. Assummg therefore that this ratio of profit is constant, the profit for a month or a week can be at once ascertained by taking 20 per cent of the sales. If the profit for the previous year had been at the rate of 20 per cent on the sales, it would be assumed that the same ratio would continue in the future, and the Goods Account for each month or week would be prepared on that assump- tion. When stock was again actually taken it would likely be found that the ratio was not actually 20 per cent of the sales, but was either more or less, and accord- ingly the stock shown in the books would be less or more than the stock as actually taken, and a correcting entry, crediting or debiting Profit and Loss with the difference, would require to be made. To find the Cost Value of Goods destroyed hy Fire, Where a merchant's goods are wholly or partially destroyed by fire it is often necessary to ascertain the value of the goods destroyed from the Goods Account in the Ledger, where the books have been preserved. Thus suppose the Goods Account shows that the cost of the goods on hand at the beginning of the year and the pur- chases for the period up to the date of the fire was £8600, and that the cost of the goods saved, after allowing for any damaiie to them, was £800, and that the sales or the credit side of the Goods Account amounted to £6000. If the average percentage of the sales which was profit for the 272 ACCOUNTING IN THEORY AND PRACTICE past three years was 20 per cent, then the cost of the goods sold was 80 per cent of the sales, and the claim against the fire insurance company would be as follows : — Cost of goods shown by debit side of Goods Account Deduct — Cost of goods sold, being 80 per cent of £6000 of sales . . £4800 Goods salved .... 800 . £8600 Claim against fire insurance company . £3000 Where the gross profit earned in previous years is not available as a basis, the general experience of the business, or the cost and selling price of a sufficient number of the articles, might be taken as the basis to arrive at the per- centage of the sales which represents costs. Exercise. In a business where stock-taking is a laborious operation it is necessary to prepare a Goods Account at the end of January without actually taking stock. On 1st January the stock was £3000. During the month the purchases amounted to £4000, and the sales to £6000. Prepare a Goods Account on the basis that the gross profit on goods is at the rate of 25*25 per cent on the sales. What is the estimated value of stock at the close of the month ? The Accounts of Professional and other non-manufacturing and non-trading Concerns. The Profit and Loss Account for a professional and other non-manufacturing and non-trading concern does not as a rule require to be subdivided in the manner which we have found so advantageous in manufacturing and trading concerns, and one account is usually sufficient. Upon the credit side appears the gross income, and upon the debit all the expenditure, charges, or loss incurred. The net profit shown should be dealt with in the portion of the account dealing with profit and loss appropriation. COST ACCOUNTS 273 Exercises. 1. The following is the Trial Balance of an accountant's business : — Trial Balance as at 31st December. Due by clients Due to clients . . . . . . Fees and commissions outstanding at beginning of the year .... Fees and commissions received during year Fees and commissions outstanding not included above, £700. Salaries .... Rent, rates, and taxes Ofiice expenses . Stationery Office furniture and fittings Capital Account Bank £3000 £1500 500 2000 600 90 250 60 200 1500 3400 700 £6900 £6900 . £50 . 500 . 11,250 . 1,720 . 600 . 3,000 . 1,000 . 1,500 Prepare Profit and Loss Account and Balance Sheet. 2. John Eoberts commenced business on 1st January with the following assets and liabilities : — Cash in hand ...... Cash at bankers ..... £10,000 consols at market price of 112 J . £1000 Great Western ordinary stock at''£l72 Sundry debtors ..... Sundry habiUties to creditors . Loan from bankers ..... Bills payable ...... During the year John Eoberts purchased a warehouse which cost £3000, and fitted the same with plant and machinery costing £2500, both of which items were paid for in cash; he purchased raw materials costing £12,000, and paid for the same, less discount at 5 per cent ; he paid wages, £15,000 ; clerks' salaries, £2000 ; sundry business expenses, £900; taxes and insurance, £175; repairs to building, £100; repairs to plant and machinery, £200. He sold goods to the amount of £32,500, and received in cash on account of same £30,000. T 274 ACCOUNTING IN THEORY AND PRACTICE One of his debtors failed, owing him £2000, on account of which he received a composition of 6s. 8d. in the £ (which is included in the £30,000 cash received, as above stated). He drew out of the bank £1000 for his personal expenses. He sold out his consols at £114, and his Great Western stock at £175. He discharged liabilities owing on 1st January, £3000, and paid off the loan from his bankers on 30 th June, with interest at 5 per cent per annum, and he met at maturity and paid his acceptances for £1500, which were current on 1st January. On 31st December he had on hand unsold goods which cost £2000, but which for his Balance Sheet he valued as worth 90 per cent of cost. Prepare a Profit and Loss Account for the year, and Balance Sheet, showing the position of affairs on 31st December. 3. From the following Trial Balance of the accounts of Messrs. Hardie & Allan prepare a Profit and Loss Account for the year, and Balance Sheet, after making the following provisions: bad debts, £150; discounts, on debtors' balances only, 5 per cent ; and trade expenses outstanding, £50. The net profit is to be divided between the partners in proportion to the capital of each. Trial Balance as at 30 th June. Creditors £7,500 Bankers, overdraft 3,000 Debt on heritable property . . . 5,000 W. Hardie, capital 13,000 T. Allan do 7,000 Credit sales 30,500 Cash sales 4,000 Debtors £11,500 Cash in hand 50 Heritable property 10,000 Machinery and plant .... 2,500 Loose tools, horses, etc 1,550 Stock, 1st July 15,000 Purchases 18,500 Carriage and freight .... 1,500 Wages — labour 3,100 Salaries and wages — office, etc. , . 800 Carry forward . . £64,500 £70,000 COST ACCOUNTS 275 Brought fcrward Rates and insurance Repairs .... Trade expenses Discounts and allowances Bad debts Bank interest and charges Interest on bond on property Partners' salaries The stock at 30th vard £64,500 £70,000 1,550 300 1,200 900 200 250 200 900 rune amc £70,000 £70,000 mnted to £13,000. 4. Prepare a Profit and Loss Account and Balance Sheet from the following Trial Balance of Smart & Currie's books, extracted at 31st December, covering six months' operations : — Casli at bankers Petty cash in hand . Sales .... Goods on hand, 1st July . Returns (customers' returns for half-year) Discount allowed customers Bills receivable on hand . Sundry debtors . Purchases .... Discount allowed on purchases Wages ..... Reserve for bad and doubtful debts Reserve for discounts on book debts Sundry creditors Buildings .... Patent rights . Rent, rates, and taxes Advertising Traveller's salary Carriage .... Bad debts written off Plant and machinery Repairs .... Smart — Capital Account . Do. Drawing Account Currie — Capital Account . Do. Drawing Account Interest on loans Patent royalties received in advance Royalties on patents attributable to half-year Trade and general expenses £600 3 2,741 £16,000 330 938 200 7,365 8,400 390 1,404 540 197 4,000 1,970 50 100 4,500 460 430 390 100 3,000 84 6,000 1,200 720 3,000 120 500 40 502 £33,137 £33,137 The soods on hand at Slst December are valued at 276 ACCOUNTING IN THEORY AND PRACTICE Write off 5 per cent from plant and machinery for depreciation for the half-year. !N"o interest on capital or withdrawals is to be provided for. The profits are to be apportioned as follows : — Smart .... two-thirds. Carrie .... one-third. 5. From the following Trial Balance and particulars, prepare Profit and Loss Account and Balance Sheet of Messrs. Young, Scott, & Allan, Engineers, for the year ended 31st December. Trial Balance ■- Goodwill £200 Patents 100 Patterns and drawings 110 Plant and machinery 1,500 Stock and work in progress at 1st January 1,400 Cash at bank 600 Cash in hand 40 Sundry debtors .... 800 Capital — Young .... £1,600 Scott 900 Allan .... 900 Sundry creditors .... "Withdrawals Account — Young . 230 100 Scott . 70 Allan . 60 Discount 16 Salaries and commissions 400 Postages and stationery . 60 Carriage and cartage 70 Rent, rates, and taxes 150 Insurances 17 Advertising 25 Repairs and renewals 70 Gas for lighting and power 85 Trade expenses .... 30 Purchases, materials 2,500 Do. goods .... 4,000 Wages 3,800 Sales 12,541 £16,187_ £16,187 _0_ The plant and machinery (re-valued) amounted to £1400, and the stock to £1300, on 31st December. Make provision for discounts, £70, and write off £25 from goodwill. Credit interest on capital at 5 per cent, and debit interest on withdrawals — Young, £3 ; Scott, £2 ; and Allan, £1. BRITISH CURRENCY 277 Young is entitled to half the profit, and Scott and Allan to one-fourth each. BEITISH CUEEENCY Gold. The unit of the coinage of the United Kingdom is the gold sovereign. By the Act 56, Geo. III., cap. 68 (22nd June 1816), one pound weight troy of gold is fixed in value at £46 : 14s. 6d., and must be in fineness 22 carats of fine gold and 2 carats of alloy. Until 1816 a guinea was the standard gold coin, £46 : 14s. 6d. being equal to 44|- guineas. Twenty pounds troy of standard gold are coined into 934|- sovereigns. An ounce troy of standard gold is therefore coined into £3^^, or £3:1 7s. 10|-d., which is called the price of an ounce of standard gold. One ounce of pure gold on the same basis is therefore worth £4 : 4s. 1 l|-d. The metric weight of all the British coins is given in the Coinage Act, 1870. The weight of the sovereign is 7-98805 grammes (123-27447 grains). The sovereign thus contains 7-3224 grammes (113-001 grains) of fine gold. Bilmr. The silver coins of this country are really token money, and are not intrinsically worth their face value. Thus the silver in one shilling is not worth one-twentieth of a sovereign. The Mint regulations prescribe that sixty-six shillings shall be coined out of a pound troy of standard silver, of the fineness of eleven ounces two penny-weights of fine silver and eighteen penny-weights of alloy in every pound weight troy ; that is, sixty-six shillings are to contain 5760 grains of silver, thirty-seven fortieths fine, or 5328 grains fine. An ounce of silver coined is thus worth 5s. 6d., and a shilling weighs 87-2727 grains (5-6552 grammes). A shilling thus contains 80-727 grains, or 5*231 grammes, of fine silver. An ounce of silver uncoined is worth about 2s. 3jd. The Government thus make a large profit out of 278 ACCOUNTING IN THEORY AND PRACTICE the silver coinage. Leaving the Mint expenses out of account, they practically buy silver at 2s. 3|-d. per ounce, and sell it for 5s. 6d. ; in fact, this difference, which is termed " seigniorage," is reckoned as a fruitful source of revenue to the nation. Bronze. It is useful to remember that three pennies, five half- pennies, and ten farthings each weigh an ounce avoirdupois approximately. The halfpenny is one inch in diameter. Bronze coins consist of a mixture of copper, tin, and zinc. The penny weighs 145'83 grains, or 9'45 grammes. These bronze coins are also token coins, and their value as metal bears a very small ratio to their value as coins. Legal Tender. A tender of payment is legal if made in coins issued by the Mint, and not called in by proclamation, nor under the minimum statutory weight. Gold coins are legal tender to any amount ; silver coins to forty shillings, and bronze coins to one shilling. The tender of Bank of England notes is legal in England and Wales, except by the Bank of England itself. The Bank must pay in gold if required. INDIAN CUKRENCY According to the Indian Mint Law, the rupee must contain 165 grains of fine silver and 15 grains of alloy. Since sixty-six shillings contain 5328 grains of fine silver, a rupee, expressed in English shillings, is equivalent to ~^^~ = 2s. OJd. (nearly). 165 This would be the value of a rupee were silver selling at 5 s. 6d. per ounce. With silver at 2s. 8d. or 2s. 4d. per ounce, as at present, and the rupee at Is. 4d., it is evident that rupees are valued at more than 50 per cent over the value of the silver which they contain. INDIAN CURRENCY 279 The report on the trade of British India with foreign countries is prepared by the Indian Statistical Bureau. The official year closes on 31st March in each year, and the statistics compiled are published as a Blue-book about the end of January in the year following. The value of the imports of India for the year 1897-98, stated in tens of rupees (Ex.) was 89,896,406, and the value of the exports Ex. 104,671,442. During the three years ending 31st March 1898, the imports and exports have been as follows : — Imports and Exports of British India In Tens of Rupees. Imports. Merchandise Gold . Silver Total imports Exports. Foreign merchandise re-exported . Indian Merchandise . Gold .... Silver . ... Total exports 1895-96. 1896-97. 1897-98. Rx. 69,316,395 5,029,269 8,329,716 Rx. 71,914,697 4,491,179 8,584,174 Rx. 69,420,120 7,281,222 13,195,064 Rx. 82,675,380 Rx. 84,990,050 Rx. 89,896,406 Rx. 4,717,516 109,545,624 2,503,317 1,728,984 Rx. 4,033,637 99,880,660 2,200,141 2,725,750 Rx. 3,751,172 93,786,101 2,372,733 4,761,436 Rx. 118,495,441 Rx. 108.840,188 Rx. 104,671,442 The net import of gold during the year ending 31st March 1898, got by deducting the export from the import, amounted to 732,035 ounces, and the value to Ex. 4,908,489; and of silver to 44,284,617 ounces, and the value to Ex. 8,473,480. The receipts of both were abnormally large, more especially looking to the fact of the contraction of the export trade and the impoverishment of the country by the famine. The purchases of gold and silver were largely speculative, the rise in the rate of exch^ange and in the value of the price of silver, which is 28o ACCOUNTING IN THEORY AND PRACTICE shown in the table which follows, making the trade profit- able. The following table gives the fluctuations in the exchange value of the rupee during the four years ending 31st March 1898, as shown by the rate in Calcutta for bank bills on demand. Exchange Value of Eupee in Pence Year. Highest. Lowest. Difterence per cent. 1894-95 .... 1895-96. 1896-97. 1897-98. 13, 13-16d. 14, 13-16d. 15, 21-32d. 16, l-16d. 12, 13-32d. 13, 3-32d. 13, 25-32d. 14, 9-32d. 10-18 ]l-60 11-97 11-09 The last column shows that the fluctuations have been very large, but comparatively regular in extent, the average difference between the highest and lowest values in each year being slightly over 11 per cent. Simultaneously with the rise in the gold value of the rupee there was a great fall in the gold price of silver, as shown below : — Bombay London 1896-97. 1S97-9S. Highest. Lowest. Highest. Lowest. R. 96i 31id. R. 82 28, 5-16d. R. 82J 28^d. R. 66i 23gd. UNITED STATES CUEEENCY The United States standard coin is an eagle, or ten- dollar piece, consisting of 258 grains, or 16*71818 grammes of gold, nine-tenths fine. A golden eagle thus contains 232-2 grains, or 15 '04 6 4 grammes, of fine gold. Since £1 = 123-27447 grains of standard gold, twenty-two twenty- fourths fine, the pure gold in £1 is equal to, expressed in dollars, 4-86656, as follows : — FRENCH CURRENCY— GERMAN CURRENCY 281 22 123:27447 x ^ £1 = "258 9—^ = S4-86656. To" "" To Equal to 49-32 pence for one dollar. The silver dollar weighs 412-5 grains, or 26'729 grammes, of nine-tenths fine, and therefore contains 371*25 grains, or 24*0561 grammes, of fine silver. FEENCH CUERENCY By the French Mint Law 155 twenty-franc pieces are coined from one kilogramme of gold, nine-tenths fine. Since £1 contains 7*988 grammes of gold twenty -two / 22\ twenty-fourths fine, the pure gold in £1 is = (7*988 X — j grammes = 7*322 grammes. A franc contains in pure gold /I 9 \ X r-r) 1000 grammes = *2 9 032 grammes. Divid- \155 x20 10. ing the pure gold in a sovereign by the pure gold in a franc, we find that £1 = 25*225 francs. Equal to 9Jd. for one franc. The Monetary Union between France, Belgium, Switzer- land, and Italy was formed in 1865, and was joined by Greece in 1868. These countries have their gold and silver coins of the same weight and fineness. The same system is followed in Finland, Eoumania, Servia, and Spain, and partially in several of the South American Eepublics. GEEMAN CUEEENCY The mark is the unit of the German monetary standard established by the law of 4th December 1871. There are gold pieces of twenty, ten, and five marks each, called respectively doppel- krone, krone, and halbe- krone. In a ten -mark piece the fine gold weighs 3*5842 grammes. 282 ACCOUNTING IN THEORY AND PRACTICE The Mint par between this country and Germany is there- fore — £1 = M. 20-42945, or M. 20 = 19s. 6-95d. M. 1 = llfd. The thaler is equal to three marks. The Arithmetic of the Exchanges. The questions relating to exchange are best solved by the elementary rules of arithmetic. The following are given as examples : — Find the sterHng equivalent for Fr. 1674-25 at 2 5 -221. We require to divide 1674-25 by 25-225. The simplest way is to multiply the divisor and dividend by 4 to simj)lify the division, and divide out by contracted division, as follows : — 25-225 1674-25 4 4 100-900 6697-00 100,900)6697000-(66-3726 605400 643000 605400 37600 30270 7330 7063 267 202 65 60 Answer, £66 : 7s. 5|d. If the gold premium in Buenos Ayres is at 119-50, what discount does the paper dollar stand at % FOREIGN MONEYS If gold is at par, 100 % paper = 100 $ gold. If at 119-50 premium, then 219*5 S paper = 100 S gold. 1 $ paper = ^^^^ = 1 % gold, and the discount = -t^-^t-^ = '544, 219-5 which is equal to 54*4 per cent. FOEEIGN MONEYS I. Gold Coins. Country. Gold Coins, Weight in Grains. Value in Sterling, Belgium ' 10 Francs France Greece Italy _ The Latin Union 10 Francs 10 Drachma! 10 Lire Switzerland 10 Francs . 49-78 £0 7 11^ Finland , 10-Marka piece Roumania 10 Leys Servia 10 Dinars Bulgaria 10 Leva J Spain . Doubloon of 10 escudos . 129-43 1 11 ,, 25-Peseta piece 124-46 19 10 Russia Imperial of 15 roubles . 199-10 1 11 9 Argentine Republic . Argentino, or 5-peso piece 124-44 19 10 Austria-Hungary Ducat .... 5.3-85 9 4 11 8 Florins, or gulden 99-57 15 10^ 11 10-Krone piece 52-28 8 4 Brazil 10 Milreis . 138-35 1 2 5^ Chili, Columbia, Uruguay Doubloon, or 5-peso piece 117-70 18 9 China Denmark . 10-Krone piece 69-14 11 Oi Egypt 100-Piastre piece (E£) . 131-18 1 3i German Empire . Krone of 10 reichsmarks 61-40 9 9^ Great Britain Sovereign of 20 shillings 123-27 1 Holland and Java Ducat .... 53-92 9 4| 11 10-Florin piece 103-71 16 6i India .... Mohur of 15 rupees 180-00 1 9 2h Japan 20-Yen piece 257-21 2 llf Mexico 10-Peso piece 261-12 2 5i Netherlands— s«e Holland. Norway and Sweden — set Denmark. Persia . . . . Toman of 200 shahis 57-90 9 5 Peru and Venezuela . 10-Sol piece . 248-91 1 19 7| Portugal . . . . Coroa of 10 milreis 273-70 2 4 4| Tunis . . . . 10-Piastre piece . 3009 4 9i Turkey (Ottoman Empire) . Turkish pound of 100 piastres 111-36 18 of United States . Eagle of 10 dollars 258-00 2 1 IJ Uruguay — i ee Chili. 284 ACCOUNTING IN THEORY AND PRACTICE II. Silver Coins. Country. Belgium . France . Greece . Italy . Switzerland Roumania Servia Bulgaria . Spain Russia Argentine Republic Austria-Hungary Brazil Chili, Columbia, Uruguay China Denmark Egypt . Finland . German Empire Great Britain . Holland and Java . India Japan Mexico . Netherlands — seeHolland Norway and Sweden — see Denmark. Persia Peru and Venezuela Portugal . Tunis . Turkey (Ottoman Empire) United States , Uruguay— »g« Chili. Silver Coins. 1 Franc of ] 00 centimes 1 Franc of 100 centimes 1 Drachma of 100 lepta 1 Lira of 100 centesimi 1 Franc of 100 centimes 1 Ley of 100 banis 1 Dinar of 100 paras 1 Leva of 100 stotinkis ) rS-Peseta piece \ Peseta of 100 centimes . /Rouble of 100 kopecks . (Tchetvertak, or ^-rouble Peso of 100 centesimos . {Florin, or gulden of 100 kreutzer Krone of 100 hellers 1 Milreis of 1000 reis . 1 Peso of 100 centavos . Tael of 10 mace, or 100 candarin, or 1000 cash 1 Krone of 100 ore 1 Piastre 1 Marka of 100 penni . 1 Reichsmark, or mark of 100 pfennige f Crown of 5 shillings \ Shilling of 12 pence JRixdaler of 2i florins . iFlorinof 100 cents Rupee of 16 annas, 64 pice, or 192 pies 1 Yen of 100 sen . 1 Peso of 100 centavos . Khran of 20 shahis Sol of 10 dineros of 100 cents Teston of 100 reis . Piastre . 1 Piastre of 40 paras f Trade dollar . \ Dollar of 100 cents [^-Dollar of 50 cents Weight in Grains. r7-2 385-8 77-2 308-6 77-1 385-8 190-5 77-2 196-8 385-8 583-3 115-7 21-6 80-0 85-7 436-4 87-3 385-8 154-3 180-0 416-0 417-8 71-0 385-8 31-6 46-7 18-6 420-0 412-5 192-9 Equivalent Weight of Standard Silver in Troy Ounces. 0-145 0-782 0-145 0-626 0-156 0-782 0-386 0-144 0-406 0-782 1-288 0-209 0-041 0-156 0-174 0-909 0-182 0-821 0-328 0-372 0-843 0-849 0-142 0-782 0-080 0-098 0-035 0-851 0-836 0-391 FOREIGN CURRENCIES rOEEIGN CUERENCIES AND THEIR TREATMENT IN HOME ACCOUNTS It is of very great importance that concerns having their head office in this country, but which practically do all their business in foreign countries, or which have branches in foreign countries, should convert the transactions which take place in the various local currencies into pounds sterling on a correct basis, with the view of these transac- tions being recorded in the Home Book and being submitted in the annual Abstract of Accounts to the proprietors of the business. The low rate of interest obtainable in this country has induced many large corporations, such as insur- ance companies, to invest their money abroad, and it is of the utmost importance that sound principles should be adopted in incorporating these transactions in the Home Books. Many companies are suffering to-day from the effect of erroneous principles having been adopted as the basis of converting their transactions in foreign currencies into pounds sterling, and some concerns are still pursuing these erroneous principles and putting off the evil day, which is sure to come, when they will have to write down investments in foreign countries to such a large amount as will shake public confidence in them. Had sound principles of account- ing been adopted, these investments would have appeared each year in the Balance Sheet at their true market value, and no drastic readjustment of values would have been required. A method often adopted is to embody periodically in the Home Accounts in pounds sterling the abstract statements received from foreign countries at the par rate of exchange, but this par rate is not a fixed factor. Different nations have different bases upon which their currency is founded. Some, like our own country, have gold, others silver, some both of these metals, and others unfortunately have a paper currency. A gold basis has given the best results in the 286 ACCOUNTING IN THEORY AND PRACTICE past. A gold currency does not fluctuate so much as one based upon silver. Between two countries both using a gold standard the variations in the rate of exchange are comparatively slight, and are caused by the demand for money varying. Between such countries the par basis of conversion is usually sufficiently correct to be adopted in the connection we are considering. Thus the par rate between this country and the United States is that £1 is equivalent to $4-86656 — or, expressed simply, the gold in 100,000 sovereigns could be made into 486,656 dollars. That this theoretical value is sufficiently correct to use for most prac- tical purposes is shown by the fact that a bill for £1000 payable on demand in New York realises about S4867, more or less, according to the demand for money in America. Even if the coinage of the whole world was on a gold basis, there would be a difference in the rate of ex- change due to the laws of demand and supply. If America had the same currency as we have, and in consequence of the balance of trade and other transactions requiring America to remit money here, then £1000 payable in this country would be worth more to an American than £1000 payable in America would be worth to us, simply on account of the demand for money payable here being keener. As an example of transactions between this country and a country having a silver currency, suppose an insurance company has investments in India. The interest on these investments will be paid in rupees, and instead of being remitted home may be re-invested in India. If these Indian investments are valued at the nominal par rate of exchange, namely 2s. for each rupee, the Balance Sheet of the com- pany is altogether misleading, and the Profit and Loss Account shows a profit which has not been earned. Thus, if the Balance Sheet was prepared at a time when the rupee was at Is. 3d., and the Indian investments amounted to 3,200,000 rupees, then the value of these investments at 2s. for each rupee would be £320,000, whereas according to the market value these investments are worth, taking the rupee at Is. 3d., £200,000, so that the Balance Sheet would show the assets too much by £120,000, and the FOREIGN CURRENCIES 287 balance of profit shown by the Profit and Loss Account would be overstated to the same extent. A convenient way to accomplish the same end, instead of writing down the Indian investments, is to have an " Exchange Fund to reduce Indian investments to their actual value as measured by the ruling market rate of exchange on date of balance." This exchange fund would appear as a liability, and would be formed by debiting the Profit and Loss Account with the loss due to currency depreciation. A company in this country, therefore, having either their assets or liabilities in a silver country must reduce these assets or liabilities to pounds sterling at the rate of exchange ruling in the market at the date of the balance. So far as this country is concerned, the currency of a silver country is simply merchandise, and must be valued on the same principles as those upon which we would take stock. Consider next the case of a paper currency. In this country £1000 in notes is supposed to be of the same value as £1000 in gold, but most of us would set more value upon the paper, and if we got our choice would prefer the £1000 to be in notes, as it would be so much more easily counted, handled, or transmitted. But in a country with a paper currency — that is, where the Government have de- clared that the paper notes issued by them shall be taken as legal tender — gold always commands a premium, or, as it might be better expressed, the paper currency is almost always at a discount, and fluctuations are always occurring according as the credit of the Government goes up and down. These fluctuations in such countries as the Argentine Ee- public are very great, and practically reduce trade and business to a speculation on the rise and fall of the paper currency. Any one in such a country who incurs monetary obligations may find that within a month he has to pay double or three times what he had intended, in consequence of an alteration in the currency. Suppose a company having investments in the Argentine Piepublic were to convert these investments at the par basis of exchange, which is $5*04, equal to £1. Such a Balance Sheet would be altogether misleading. The correct method 288 ACCOUNTING IN THEORY AND PRACTICE is to take the actual rate of exchange ruling at the date of the Balance Sheet. Suppose, for example, that at the date of the Balance Sheet the ruling rate of exchange was 250 — that is, gold was at a premium of 150 — then £1, far from being equal to $5*04, would be worth very much more expressed in dollars, namely, $5-04 x 2-50 = $12'6. $5*04, instead of being equivalent to £1, would be equal to 8s. Foreign Branches. Where there are branches of a business in foreign coun- tries, and the books of these branches are kept in the currency of the country where the branch is, the Trial Balance sent home will be in the currency of that country, and the first thing which must be d,one with each item is to convert it into sterling. The rate of exchange between this country and other countries is continually changing, and it is often difficult to determine the rate of exchange at which the con- version should be made. The best plan seems to be to adopt various rates of exchange, according to the nature of the entry in the Trial Balance. Bnles for the Conversion of Foi'eign Currencies. 1. The items which make up the Head Office Account in the Branch Ledger should be taken at the actual figures which were current at the time the transactions took place — that is, the conversion will be made by substi- tuting the balance shown in the Head Office Ledger, which is in sterling, for the balance shown in the Branch Trial Balance in the foreign currency. 2. Profit and loss items representing transactions which have taken place during the period covered by the accounts should be taken at the average rate of exchange ruling during the period covered by the transactions. 3. Floating currency assets and liabilities at the rate of ex- change current at the date of balancing the books, as that is their actual value. 4. Fixed assets and liabilities should be taken in the first instance at the rate of exchange ruling when they were incurred, but care should be taken that full allowance is made for any depreciation in value. FOREIGN CURRENCIES 289 It is quite evident that if different rates of exchange are used in converting the items in a foreign Branch Trial Balance into sterling the totals of the two sides when so converted will not agree. The difference should be entered as either loss on exchange or profit on exchange, as the case may be. The following may be taken as the Trial Balance of a branch sent home from India : — Trial Balance or Indian Branch as at 31st March. stock on hand at Ist January- Purchases for period . Sales for period . Customers' Accounts . Creditors' Accounts . Bills receivable . Bills payable Wages and salaries General charges . Rent, rates, and insurance London office Cash in bank Cash on hand Rs Rs. 8,000 20,000 60,000 5,000 1,000 800 2,000 1,000 500 98,800 40,000 35,000 11,800 11,500 98,800 The stock on hand at 31st March is valued at Es. 4000. The above Trial Balance is forwarded to the head office in London, and in order to include it in the firm's State of Accounts at 31st March it must be converted into English money. The rate of exchange at 31st March is 14, which means that the rupee is worth Is. 2d. The average rate of exchange for the three months is 15, and the rate of exchange at 1st January was 16. Using these rates, and following out the rules given for converting the various items money, the Trial Balance will be as follows :— into English 290 ACCOUNTING IN THEORY AND PRACTICE Trial Balance of Indian Branch as at 31st March (converted into English money). Rate of Exchange taken. 16 Stock on hand at 1st January . £533 6 8 15 Purchases for period . 1250 15 Sales for period . £2500 14 Customers' Accounts 3500 14 Creditors' Accounts 2041 13 4 14 Bills receivable . 291 13 4 14 Bills payable . 688 6 8 15 Wages and salaries 62 10 15 General charges 50 15 Rent, rates, and insurance London office (balance as appear- ing in London books) 125 718 4 6 14 Cash in bank .... 58 6 8 14 Cash on hand .... 29 3 4 £5900 £5948 4 6 Loss on exchange 48 4 6 £5948 4 6 £5948 4 n From the above it will be seen that after converting the rupees into English money the credit side is greater to the extent of £48 : 4s. 6d. This balance is carried to the debit of the Profit and Loss Account as " Loss on exchange." The balance of Ks. 11,500 due to the London office as appearing in the Trial Balance of the Indian branch is taken as £718 :4s. 6d. when converting the rupees into English money, as that is the figure appearing in the books at London, where each cash transaction with the Indian branch is recorded as it takes place. The various Methods of treating Transactions in Rupees in the Home Accounts illustrated. To illustrate the treatment of rupees the following transactions of Thomas Eoss, an Indian merchant having a warehouse in London, may be taken : — FOREIGN CURRENCIES 291 Transactions of Indian Merchant Ruling Rate Date. of Exchange. Jan. 1. 16tV Cash belonging to Tliomas Koss, Merchant, of London and Calcutta £5,000 2. 16 Remitted to representative in Calcutta 1,000 Purchased for cash and sent to India, goods for 1,000 14. \h\ Do. do. 1,000 28. 15iV Do. do. 1,000 Mar. 1. 15 Sold goods for cash in India . Rs. 20,000 14. 14i Do. do. Rs. 20,000 28. 14,^ Sold goods to Blake & Co. in India on credit Rs. 20,000 Remitted to London Rs. 40,000 31 ^ 14 Goods on hand in India at cost Expenses of Indian oflace paid during £900 quarter Rs. 10,000 Paid expenses of London office for quarter £200 The average rate of exchange may be taken as 15. It is required to show the profit on the consignment, the Profit and Loss and other Accounts, and the Balance Sheet at 31st March, as they should appear in the London books. First Method Cask Transactions only recorded in London Boohs. If the rise and fall in the price of the rupee be ignored altogether, except in connection with actual cash transac- tions and the balance at 31st March, the transactions might be recorded in the London books as follows : — Notes. Es. 20,000 at 14 = £1166 13 4 Ks. 40,000 at 14yV = ^343 15 Es. 10,000 at 15 = 625 Es. 5,000 at 14 = 291 13 4 To find the rupees due by the Calcutta repi-esentative, it is necessary to have an account for him in rupees as follows : — 292 ACCOUNTING IN THEORY AND PRACTICE Calcutta Bepresentative. Jan. 2. To London office Mar. 1. ,, Sales 14. .. do. Rs. 15,000 20,000 20,000 Rs. 55,000 Mar. 28. By London office 31. ,, Expenses . ,, Balance . The Ledger Accounts in the books in London would be as follows : — Ledger Cash Account. Jan. 1. To Capital Account Mar. 28. „ Calcutta house . £5000 2343 15 Jan. 2. By Calcutta house do. 14. „ do. 28. „ do. Mar. 31. ,, Profit and Loss expenses „ Balance . £1000 1000 1000 1000 200 3143 15 £7343 15 £7343 15 Calcutta House. Jan. 2. Mar. 28. To Cash . £1000 By Cash £2343 15 „ do. ... . 1000 Mar. 31. Jan. 14. Profit and Loss, for expenses . 625 „ Cash . . 1000 Balances : — Jan. 28. Cash due by agent in India „ Cash . . ■ . 1000 (Rs. 5000 at Jan. 31 14) . . £291 13 4 „ Profit and Loss . . . 1327 1 8 Due by Blake & Co. (Rs. 20,000 at 14) . . 1166 13 4 Goods unsold at cost . . 900 2358 6 8 £5327 1 8 £5327 1 8 Profit and Loss Account. Mar. 31. To Calcutta house, ex- penses in India . ,, Cash, expenses in London £625 200 Mar. 31. By Calcutta house . £1327 1 8 „ Capital (net profit) . £825 502 1 8 £1327 1 8 £1327 1 8 FOREIGN CURRENCIES 293 Capital Account. Mar. 31. To Balance . . £5502 1 8 Jan. 1. By Cash Mar. 31. „ Profit and Loss . £5000 502 1 8 £5502 1 8 £5502 1 8 Capital Liabilities. Balance Sheet as at 31st March. Assets. . £5502 1 8 Cash in London . Cash due by representative India .... Blake & Co., India Goods in India . , . in £3143 15 291 13 1166 13 900 4 4 C £5502 1 8 £5502 1 8 By the above method of treatment it will be observed that only the actual cash transactions are entered in the London books and at tlie period of balancing, the assets so far as in India have been converted into sterling at the rate of exchange ruling on the day of balance, with the exception of the goods, which have been taken at their cost price in sterling. Second Method All Transactions recorded and converted at rate of Exchange riding when Transactions took place. If each transaction is recorded as it takes place, and the conversion is made at the rate of exchange ruling on the day when the transaction took place, the effect of changes in the rate of exchange is seen. The assumption is thus made that when a merchant purchases goods for export to India he expects that the rate of exchange will remain the same, and by this method the merchant tells at once what portion of his loss or profit is due merely to the rate of exchange rising or falling. 294 ACCOUNTING IN THEORY AND PRACTICE Ledger Cash. Jan. 1. To Capital Account Mar. 28. ,, Calcutta house . £5000 2343 15 Jan. 2. By Calcutta house ,, Consignment . 14. ,, do. 28. ,, do. Mar. 31. „ Expenses (London) ,, Balance , , , £1000 1000 1000 1000 200 3143 15 £7343 15 £7343 15 Calcutta House. Jan. 2. Rs. Exchange. £ s. d. Mar. 28. Rs. Exchange. £ s. d. To Cash 15,000 16 1000 By Cash . 40,000 14iV 2343 15 Mar. 1. ,, Expenses for ,, Consignment . 20,000 15 1250 quarter 10,000 15 625 Mar. 14. Mar. 31. „ Consignment . 20,000 14i 1208 6 8 ,, Balance 5,800 14 291 13 4 ,, Exchange, loss 197 18 4 55,000 3458 6 8 55,000 3458 6 8 Consignment. Account. Jan. 2. To Cash 14 „ do. 28 „ do. Mar. 31. „ Profit and Loss Mar 1. By Calcutta house 14. ,, do. 28. ,, Blake & Co., Calcutta 31. ,, Balance (cost price of goods unsold) . Rs. 20,000 20,000 20,000 Exchange. 15 14i 14t^ £ s. d. 1250 1208 6 8 1171 17 6 900 4530 4 2 Blake & Co., Calcutta, Rs. Exchange. Mar. 31. By Balance . ,, Exchange, loss Rs. Exchange. Mar. 28. To Consignment 20,000 Hi^ £ 5. d. 1171 17 6 20,000 14 £ s. d. 1166 13 4 5 4 2 1171 17 6 1171 17 6 FOREIGN CURRENCIES ^95 Exchange Accomd. Mar. 31. To Calcutta house . £197 18 4 , Blake & Co. . 5 4 2 Mar. 31. By Profit and Loss . £203 2 6 £203 2 6 £203 2 6 Thomas Boss^ Capital Account. Mar. 31. To Balance . £5502 1 8 Jan. 1. By Cash . £5000 Mar. 31. „ Profit and Loss . 502 1 8 £5502 1 8 £5502_ J J Expenses. Mar. 31. To Calcutta house ,, Cash (London) Rs. Exchange. 10,000 15 £ s. d. 625 200 825 Mar. 31. By Profit and Loss . £825 £•825 Profit and Loss Account. Mar. 31. To Ejrpenses . £825 ,, Exchange, loss . 203 2 6 Mar. 31. By Consign- ment . . £1530 4 2 £1028 2 6 „ Capital (net profit) . 502 1 8 £1530 4 2 £1530 4 2 The Balance Sheet is the same as by the first method. From the Profit and Loss Account the merchant learns that the adverse fluctuations in the value of the rupee have cost him £203 :2s. 6d. TiiiKD Method Conversion at Average rate of Exchange. If all the transactions, except cash transactions, between the two countries are converted into sterling at the average 296 ACCOUNTING IN THEORY AND PRACTICE rate of exchange during the period such transactions took place, and the balances at the close of the period are con- verted at the rate of exchange ruling on that date, the loss on exchange is greater although the net profit is brought out the same. Cask Account Jan. 1. To Capital . Mar. 28. „ Calcutta house . £5000 . 2343 15 Jan. 2. By Calcutta house . £1000 ,, Consignment . 1000 14. „ do. . 1000 28. „ do. . 1000 Mar. 31. „ Profit and Loss expenses (London) . 200 „ Balance . . 3143 15 £7343 15 £7343 15 _0 Calcutta House. I Rs. Exchange. Mar. 28. Rs. Exchange. Jan. 2. £ s. d. £ s. d. To Cash 15,000 16 1000 By Cash . 40,000 14i^^ 2343 15 Mar. 1. „ Consignment . 20,000 15 1250 ,, Profit and Loss Mar. 14. expenses ,, Consignment . 20,000 15 1250 (India) Mar. 31. 10,000 15 625 ,, Balance 5,000 14 291 13 4 ,, Exchange, loss . 239 11 8 55,000 3500 55,000 3500 Consignment Account £ s. d. Rs. Exchange. £ s. d. Jan. 2. To Cash . 1000 Mar. 1. By Calcutta house 20,000 15 1250 14. „ do. . 1000 do. . 20,000 15 1250 18. „ do. . 1000 28. ,, Blake & Co. . 20,000 15 1250 Mar. 31. „ Profit and Loss . 1650 31. ,, Balance (cost price of goods unsold) 900 4650 4650 1 TNE FOREIGN EXCHANGES 297 Blake & Co., Calcutta. Mar. 28. To Consignment . Rs. Exchange £ s. d. 1250 Mar. 31. By Balance . ,, Exchange, loss Rs. Exchange. 20,000 i 15 20,000 14 £ 5. d. 1166 13 4 83 6 8 1250 1250 Exchange Account. Mar. 31. To Calcutta house . „ Blake & Co. £239 11 8 83 6 8 Mar. 31. By Profit and Loss . £322 18 -4 £322 18_4 £322 18 4 Profit and Loss Account. Mar. 31. To Calcutta house, expenses ,, Cash, expenses in Lon-lon . ,, Exchange, loss Rs. Exchange. £ s. d. 625 200 10,000 i 15 Mar. 31. By Consignment .... £1650 825 322 18 4 „ Capital fnet profit) . 1147 18 4 502 1 8 i 1 1 ■ 1650 :i650 THE FOEEIGN EXCHANGES The foreign exchanges are the means by which the indebtedness of commercial nations is discharged. The theory of the foreign exchanges deals with the principles upon which foreign bills are drawn, dealt in, and settled. The foreign exchanGfes are founded on the trade of 298 ACCOUNTING IN THEORY AND PRACTICE this country with other countries. The imports of this country amount to about £450,000,000, and the exports to £300,000,000. Besides the trade of the country there are other causes of indebtedness which require to be settled. Thus loans may be granted to the governments or individuals of foreign countries, and the settlement of these loans with interest upon them will be eftected by means of the exchange between the two countries. The theory of the foreign exchanges may be very simply illustrated, and is not difficult to understand. Thus, suppose that X is an importer and Y an exporter in New York, and that A is an importer and B an exporter in London, and that Y sends goods to A, and B sends goods to X, to the value of £1000. The result of these transac- tions, which is shown on the diagram, is that X is due B £1000, and A is due Y £1000, and to settle their in- debtedness X would require to ship £1000 in gold from New York to London, and A would require to ship £1000 in gold from London to New York. To save the expense of this shipment of gold, all that is necessary is for X to hand his neighbour Y in New York £1000 in gold, and for A to hand his neighbour B in London the £1000 in gold. This may be effected in various ways. The usual way is for Y to draw a bill on A. A accepts this bill, and sends it back to Y. Y takes it to X, gets cash for it from X, and X sends the bill to B in payment of his debt. B collects the cash from A, and the parties are all satisfied. The following diagram, in which the principle of Ledger Accounts is utilised, shows the whole transaction very clearly : — THE FOREIGN EXCHANGES 299 Foreign Exchanges Diagram NEW YORK. LONDON. X, importer. Y, exporter. A, importer. exporter. Br. Cr. Br. Cr. Br. Cr. ^- Cr. Receives go ods from B. Sends goc )ds to A. Receives go Dds from Y. Sends goods to X. ToB. Draws upon cepts and r By A. A, who ac- eturns bill. ToY. ByX. Pays cash t and sends D Y for bill, bill to B. Receives ea to whom bill. sh from X, le gives the Receives bill from X, and gets the cash from A. 1 • Pays B ca 3h for bill. By Y. To X. ByB. To A. The result would have been the same if, instead of Y drawing upon A, B had drawn upon X. In this case the settlement would have been effected as follows : — B draws upon X, who accepts and returns bill to B. B receives cash from A, to whom he gives the bill. A sends the bill to Y. Y receives the bill, and gets cash from X. It has been supposed in this illustration that the in- debtedness is of the same amount. If it is different, gold must be exported by the country having most to pay. In consequence of the stability of our currency, and the fact that London is the centre of exchange, and from other causes, it is more usual for foreign bills to be drawn on London than for the exporter here to draw bills on his 300 ACCOUNTING IN THEORY AND PRACTICE foreign customers. The exchange therefore is practically done by means of bills drawn abroad, and accepted and paid in London. The negotiations are conducted through bankers and bill brokers, and not directly as supposed in the illustration. The Far of Exchange, When the rate of exchange between two countries is such that the same amount of gold on either side purchases exactly the same amount of bills of exchange, the exchange is said to be "at par." Thus if £1002 in this country and in Australia exactly purchases a £1000 bill on the other country, the exchange is said to be at par. Mint Far. The Mint par of exchange, sometimes called the par of exchange, is the intrinsic value of the currency unit of one country expressed in terms of the currency unit of another country, using the same metal as the standard of exchange. There is thus no fixed Mint par of exchange between two countries having different metals as their standards where these metals vary in value. Telegra/phie Transfers, International business transactions were formerly almost entirely settled by means of foreign bills at two, three, or even six months. Now, by means of 'the telegraph, the matter is settled on the arrival of the goods. The Course of the Exchanges. The course of the exchanges between two countries is continually changing in consequence of the varying demand for money and the changes in the rate of interest. Each day the Times, the Scotsman, and other papers publish a statement of the rates of exchanoje which were current the day preceding. The following is such a statement, the words in italics having been added to explain the figures. THE FOREIGN EXCHANGES 301 THE EXCHANGES London, Tuesday Evening, 29th August 1899. The following are the rates of exchange on London, cabled from the chief commercial centres : — To-day. Previous Paris, cheques . . 25-24 25-24 francs and centimes per £. Brussels, cheques 25-29* 25-30 do. Geneva, sight . 25-361 25 -36* do. Berlin, cheques . 20-47i 20-47| reichsmarks and pfennigs per £. Vienna, sight 12-06i 12-06 florins and kreuzers per £. Amsterdam, sight . 12-loi 12-lOj guilders and stivers per £. Italy, sight 27-13 27-14 lire and centesimi per £. Athens, sight . 38-40 38-40 drachmai and lepta per £. Madrid, sight . Nom. Nom. {usually quoted in pence per peseta). Lisbon, sight 36,^d. 36Ad. pence per milreis St. Petersburg, 3 months 93-80 93-90 roubles per £10. Rio, ninety days 8d. 8d. pence per milreis. Valparaiso, ninety days 15id. 15 19-32d. pence per peso. Argentine gold preraii im 126-00 126-80 seepage 282. The rates telegraphed from the East were : — Bombay teleg. trans. . Calcutta do. H.-Kong, 4 mos.' bills Do., teleg. transfers Shanghai, 4 mos ' bills Do., teleg. transfers Yokohama, 4 mos.' bills Do., teleg. transfers Singapore, 4 mos.' bills Manila, 4 mos.' bank bills To-day. Previous. . Is. 3 31-32d. Is. 3 31-32d. per rupee. . Is. 3 31-32d. Is. 4d. do. . Is. 11 ll-16d. Is. 11 ll-16d. per dollar. . Is. lUd. Is. lUd. do. 2s. 8id. 2s. Cid. per tael. 2s. 8|d. 2s. 8|d. do. . 2s. ll-16d. 2s. ll-16d. per dollar. . 2s. Oid. 2s. Oid. do. . Is. 11 15-16d. 2s. Od. do. . 2s. Oid. 2s. 04 do. The rates for merchants' bills on the East were :- India, 30 days . Hong-Kong, 60 days Shanghai, 60 days Straits, 60 days ". Japan, do. . To-day. Is. 3 13-16d. Is. lid. 2s. 7M. Is. ll|d. 2s. Oid. Previous, Is. 3 13-16d. Is. lid. 2s. 7id. Is. iHd- 2s. Did. per rupee per dollar, per tael. 2)er dollar, do. 302 ACCOUNTING IN THEORY AND PRACTICE INCOME TAX Under the Income Tax Acts persons with incomes beyond £160 per annum have to pay tax on their net income. The tax is to a certain extent graduated, and the following table shows the abatements allowed : — Income Tax Table of Exemption and Abatement I Income Abatement. Exceeding. Not Exceeding. £160 400 500 600 £160 400 500 600 700 Exempt. £160 150 120 70 The Government year closes on 5th April, and the income tax is charged for the year ending on that date. For the purposes of the Income Tax Acts incomes are classified under five Schedules, according to the various sources from which they are derived, as follows : — Land and buildings. Occupation of land. Interest out of public funds, etc. Salaries, trading profits, etc. Salaries, etc. payable out of the public revenue or by public companies. Schedule A. 35 B. )» C. J) D. J» E. Schedule A. Under Schedule A is taxed all income from the owner- ship of land and house property in the United Kingdom. It is the owner's tax, and is ultimately paid by the land- lord. One of the leading principles in the levying of income tax is to tax all income at its source. By this means INCOME TAX 303 many small collections of the tax are avoided, and there is less likelihood of any person evading payment of his fair share. As an illustration of the effect of taxing income at its source, and how matters adjust themselves so that no one need pay more than his proper share of the tax, take the case of a house proprietor, A, the owner of houses having a rental of £1200 a year. Suppose that a feu-duty of £100 a year is payable by A to B in respect of part of the property, and that there is a bond over the property in favour of C, to whom £300 a year is payable in respect of interest. The income-tax assessors charge A on the net annual value of his property, and allow a deduction of one-sixth from the gross rental in respect of repairs and other expenses- A therefore pays tax on ..... . £1000 He, however, deducts the tax in paying the feu- duty of £100 and the interest on the bond of 300 400 He is, therefore, really only taxed on his net income . £600 B pays tax through the deduction being made from the feu-duty payable to him on . . . . 100 C pays tax through the deduction having been made from the interest payable to him on . . . 300 So that, in place of there being three collections, there is in this case only one collection of tax on £1000 If the only income of B is the feu-duty of £100, he would be entitled to claim repayment of the tax from the Inland Revenue, his income being under £160. If the only income of C is the £300 of interest, ne would be entitled to claim repayment of the tax upon £160. Schedule B. Under Schedule B is included the income from the occupation of lands. The farmer has the right to say whether he will be assessed under this Schedule or under 304 ACCOUNTING IN THEORY AND PRACTICE Schedule D. If he elects to be assessed under this Schedule his income is estimated at one-third of the rent of his farm. The farmer may, however, elect to be assessed under Schedule D upon his actual profits. If a farmer's actual income does not amount to the sum at which he is assessed, he may claim repayment of the tax over-paid. The occupiers of gardens and pleasure-grounds are assessed under this schedule. Schedule C, Under Schedule C is assessed all income in respect of interest and annuities payable out of any Government funds. Schedule D, Under Schedule D are included the profits of trades, professions, employments, or vocations carried on by persons residing in the United Kingdom, or carried on in the United Kingdom by persons resident elsewhere. Ordinary business profits under Schedule D are determined on the basis of the average of the three years preceding. If the business has been commenced within three years, the assessment is upon the average from the period of com- mencing the same. If the business has been commenced within the year of assessment, the profits have to be esti- mated according to the best knowledge and belief of the tax-payer. Ordinary business profits are determined on the basis of the average annual profit for the three years ending on the date of the balancing of the books of the business, which is immediately previous to the 5 th April commencing the year of assessment. In submitting the Profit and Loss Account of a con- cern to the assessors, sometimes special Profit and Loss Accounts are prepared containing only the items which should be included according to the principles laid down by the assessors. The better method is to submit copies of the Profit and Loss Accounts of the concern as they appear in the business books, and in an appended state- ment show any deductions or additions which require to be INCOME TAX 305 made to give effect to the requirements of the assessors. There is submitted such a statement showing various de- ductions and additions, and there is also shown the Profit and Loss Accounts for the three years, giving effect to all these deductions and additions in the accounts themselves. Schedule E. Schedule E is in respect of income derived from public offices and employments of profit. The deductions allowed from the gross income are the actual expenses incurred in the performance of the duties of the office. KEID & CO., ENGINEEES Abstract of Profit and Loss Accounts Income. By Contracts and sales ,, Rents received . Gross income 1899. 1900. 19CL £31,000 200 £38,000 200 £50,000 200 £31,200 £38,200 £50,200 Expenditure. To Material . Wages and salaries Charges . Rent, rates, taxes, etc. Discount . Depreciation Interest on mortgage Interest on capital Salaries to partners Profit allocated to partners 1899. 1900. 1901. £13,000 £18,000 £25,000 12,000 13,000 17,600 700 800 900 600 500 500 500 600 700 400 500 600 300 200 100 500 600 700 1,000 1,000 1,000 £29,000 £35,200 0. £47,100 2,200 3,000 3,100 £31,200 £38,200 £50,200 3o6 ACCOUNTING IN THEORY AND PRACTICE Statement showing Assessable Income Profit allocated to partners as above Add— Salaries to partners . Interest on capital . Interest on mortgage Depreciation . Deduct — Rents received, upon which tax already deducted . Depreciation allowed by- Assessable income Equal to an average o/£4500 "per annum. Abstract of Profit and Loss Accounts, with Items not assessable and not chargeable eliminated Income. 1899. 1900. 1901. £2200 1000 500 300 400 £3000 1000 600 200 500 £3100 1000 700 100 600 £4400 £5300 £5500 £200 300 £200 400 £200 400 £500 £600 £600 £3900 £4700 £4900 By Contracts and sales £31,000 £38,000 £50,000 1900. Expenditure. To Material ,, Wages and salaries ,, Charges ,, Rent, rates, taxes, etc. . ,, Discount ,, Depreciation . Assessable profit 1S99. 1900. 1901. £13,000 12,000 700 600 500 300 £18,000 13,000 800 500 600 400 £25,000 17,600 900 500 700 400 £27,100 3,900 £33,300 4,700 £45,100 4,900 £31,000 £38,000 £50,000 INCOME TAX 307 About May or June in each year the income-tax assessors send out large notices asking each tax-payer to furnish a return of his income for the year which will close on the 5 th April following. Immediately such a return is received the tax-payer should prepare such a return as is given above and send it to the assessors. The tax is payable on or before 1st January. If the actual profit earned in any particular year is less than the average profit of the three preceding years, repayment is allowed of the tax on the difference between the assessment and the average profit of the three years, including the year of assessment. If the profit for any year is greater than the average of that year and the two preceding years, repayment is only allowed of the amount of the tax upon the original assessment and the profit actually earned in that particular year. Thus : — Actual profit for 1897, £1400 ^ Average, £1200, upon which Do. 1898, 1200 V assessment for 1900 would Do. 1899, 1000 J be made. If the profit for 1900 is, however, only £500 then return may be claimed on £300, as foUow^s : — . Actual profit for 1898, £1200) Do. 1899, 1000 \ Average, £900. Do. 1900, 500 J Assessment made on . . . . £1200 Average, as above . . . . . 900 Amount recoverable . . . • £300 If the profit for 1900, however, was £1130, the average would be £1110, as follows: — Actual profit for 1898, £1200) Do. 1899, 1000 V Average, £1110. Do. 1900, 1130) The return of tax can only be claimed on the difference between the assessment, £1200, and the actual profit, £1130, that is on £70, not on the difference between the amount of assessment, £1200, and the average of £1110. 3o8 ACCOUNTING IN THEORY AND PRACTICE In the case of a regular fall each year in the profits, the rule as to the three years' average results in the tax- payer being over-assessed to the extent of the fall in his profits, as will be seen from the following statement : — Statement showing working of Three Years' Average Method of assessing Income Tax. Year to 5th April. Actual Profits, Assessment. Tax repaid on Net Assessment. 1890 £10,000 1891 9,000 1892 1893 8,000 £9,000 £1,000 £8,000 £7,000 1894 6,000 8,000 1,000 7,000 1895 5,000 7,000 1,000 6,000 1896 4,000 6,000 1,000 5,000 1897 3,000 5,000 1,000 4,000 1898 2,000 4,000 1,000 3,000 1899 1,000 3,000 1,000 2,000 1900 nil. 2,000 1,000 1,000 tit for 8 years £28,000 £44,000 £8,000 £36,000 During the eight years, therefore, in which the total profits have amounted to £28,000, the tax chargeable in terms of the Act has been £36,000, or £8000 too much. If, on the other hand, we assume that the profits increase by £1000 each year, then in the eight years the profit earned amounts to £52,000, and the tax is paid on only £36,000, so that the tax-payer benefits to the extent of the tax upon £16,000. In both cases the tax for the first three years has been omitted. Where income tax is paid by a firm it is preferable to have each partner assessed individually, so that the amount paid for each may be charged to his individual account. When this is not done, the tax should not be debited to the Profit and Loss Account, except in those cases where the capital of the partners and their interests in the profits bear the same ratio to one another. Where the partners' capital and the interest of the partners in the business bear the same proportion, and the Profit and Loss Account is debited with the income tax, the result is that each partner bears his proper share of it ; but where these con- INCOME TAX 309 ditions as to capital and profits do not hold, debiting the income tax to the Profit and Loss Account would have the effect of making an unjust apportionment, although perhaps the extent of the error would be very small. Thus, suppose A, B, and C have capital in a firm of £1000, £500, and £100 respectively; that A is entitled to a salary of £2000, and B to a salary of £500, and. that after crediting interest at 5 per cent the profits fall to be divided equally. Then on the assumption that the total assessable profit is £4680 for the year, the income tax payable at 8d. per £1 would be £156. If this were charged to the Profit and Loss Account each partner would bear £52, whereas the proper allocation is as follows : — Salary. Interest. Profit. Total Profit. 1 Tax on Total Profit. £2000 500 £50 25 5 £700 700 700 £2750 1225 705 £91 13 4 40 16 8 23 10 £2500 £80 £2100 £4680 £156 Exercise. The average net profit of a business for the past three years amounted to £1000. Por the purpose of ascertaining the amount liable to income tax, it was necessary to re- consider certain items which had been charged against the profit, and the following list of items was prepared : — Income tax paid . . £30 Feu-duty .... 25 Interest on mortgage . 100 Interest on loan . 60 Interest on capital 300 Partners' salaries 500 Bank interest on current account 36 Life insurance premium 10 Prepare statement showing the assessable profit for the year. 3IO ACCOUNTING IN THEORY AND PRACTICE EATES OF LOCAL AUTHOEITIES In connection with the levying of the rates of local authorities there are some interesting questions. A con- siderable amount of economy may be effected in the manner in which the various rates are calculated and collected. The tendency at the present time is to consolidate the various rates so as to have one local rate for all purposes. The economy which would thereby be effected is consider- able. One of the strongest objections which can be raised against such consolidation is that it removes the spending authority farther from the ratepayers, and so may lead to the local authority spending more than they would other- wise do. The Poor and School Eates, as a rule, are collected together, and the following are given as examples of the preparation of Assessment Tables to be used in preparing the Assessment Eoll : — Edinburgh Parish Council Preparation of Assessment Tables for Year ending 15th May 1900. The rates as fixed by the Edinburgh Parish Council in July 1899 were as follows : — Owners. Occupiers. Total. Poor Eate, 3yVh per £. d^\d. per £. 6|d. per £. School Eate, 4i^d. per £. U^d. per £. 9|d. per £. In terms of the 37th Section of the Poor Law Act, 1845, the Council, in fixing the annual value of the herit- able subjects in the parish, granted in respect of expenses and repairs a deduction of 10 per cent from the rental of all lands and heritages within the parish, with the exception of water- works, tramways, and railways, in connection with which a greater deduction was allowed. RATES OF LOCAL AUTHORITIES 311 Formerly, in giving effect to this deduction of 10 per cent, the rentals as given in the Assessment Eoll were reduced by 1 per cent, and thereafter the rate was calculated on the nine-tenths rental. To obviate this preliminary step it is only necessary to prepare a table in which the one-tenth has been deducted from the tax, and this is done in the foUowinoj method. I. To jprepare the Owners' Assessment Table. The Owners' Eates as fixed were : Poor Rate, S^^d. per £ ; and School Eate, 4^d. per £ ; a total rate of 7-|^d., or 7'8375d., per £ on the nine-tenths, or valued rental, as it is termed. Now, as stated before, instead of deducting one- tenth from the rentals the deduction is made from the tax, which becomes 7'05375d. per £ on the gross rental. In preparing the tables it is necessary to have every figure to the nearest halfpenny, and in order to get this '5 of a halfpenny is added to the initial value, which makes all the other values come automatically to the nearest half- penny. Otherwise it would be necessary to go over the whole table after it had been calculated, and treat every '5 or greater fraction of a halfpenny as a halfpenny. 7*05375 reduced to the decimal of a halfpenny is 7 pence '1075 halfpence. Therefore, in order to get each succeeding figure to the nearest halfpenny '5 is added to this initial value, which becomes 7 pence -6075 halfpence. It is now only necessary to add to this continuously 7 pence '1075 half- pence as far as the increments of £1 in the rental are desired. The table is calculated by increments of £1 up to the rental of £280. From £280 to £300 by increments of £5, which is got by adding on continuously 5 times 7*05375 pence, which is equal to 2s. nd^'^^^^ (^^^^p-->* From £300 to £1000 the table goes up by increments of £100, and from £1000 to £10,000 by increments of £1000. The working for the first ten places is as follows : — 312 ACCOUNTING IN THEORY AND PRACTICE Rental. £ 1 £ Tax, 5. Half- (?. pence. 0-6075 7 2 1 0-7150 2 3 1 0-S225 9 4 2 0-9300 4 5 2 1-0375 11 6 3 1-1450 6 7 4 1-2525 1 8 4 1-3600 8 9 5 1-4675 3 10 5 1-5750 10 From the above it will be seen that the tax has been calculated to the nearest halfpenny at once by adding on the '5 of a halfpenny to the initial value before starting to prepare the table. After the table has been calculated it is best to have it printed from the original manuscript, in which case the printer disregards the decimal places and prints the rest as it stands, the small figure at the right of the pence representing halfpence. For example, the tax on £10 is 5s. lOjd. The table may be proved, when calculating, at intervals of 5 or 10. For instance, the figure which is added on continually is 7*05375 pence, and this multiplied by 10 should give the tax on £10. Now 7*0 5 3 75 multiplied by 10 is 70-5375 pence, or 5s. x^^y^'^^^^'^h^^^^^- If we add on -5, which was added to the starting figure, in order to have every value to the nearest halfpenny, we get 5s. lOd.^"^'^ ^^^^p"''^"' which is the figure already shown by the table. The table may thus be proved at every interval of 10 either by using the original figure, 7*05375 pence, and multiplying by the RATES OF LOCAL AUTHORITIES 313 rental, or by using intermediate figures, the accuracy of which has already been proved. II. To prepare the Occupiers' Assessment Table. The Occupiers' Rates as fixed were : Poor Rate, S^^d. per £ ; and School Rate, 4^d. per £ ; a total rate of 8-J-Jd., or 8-162od., per £. Deducting 10 per cent from 8 -16254, we obtain 7*346 2 5d., and this figure expressed in the decimal of a halfpenny is 7 pence '6925 halfpence. We therefore add '5 to this, which gives 7^'-^^^^' Starting with this figure, and adding 7°'^^^^ continually, we construct the table. The working out for the first ten places is as follows : — Rental. £ 1 £ Tax. Hair- ed, pence. 1-1925 7 2 1 1-8850 2 3 1 0-5775 10 4 2 1-2700 5 5 3 1-9625 6 3 0-6550 8 7 4 1-3475 3 8 • 4 0-0400 11 9 5 0-7325 6 I 1-4250 10 6 1 This table should also be proved at intervals of 10 in a similar way to that of the Owners' table, which has been already explained. 314 ACCOUNTING IN THEORY AND PRACTICE LOANS EEPAYABLE BY INSTALMENTS A favourite method of repaying loans is by equal annual instalments, which include a payment of principal and the interest due on the principal outstanding. For municipal bodies who are allowed to borrow on the condition that the loan is paid off during a certain period this method is of great advantage, as otherwise the local authority would have to accumulate a sinking fund, and by setting aside and in- vesting so much out of the rates each year have the neces- sary funds out of which to repay the amount borrowed. The local authority thus saves the expense of investing the sinking fund, the risk of the sinking fund investment proving bad, and the risk of the rate of interest realisable falling. In respect of these risks local authorities are usually willing to give a slightly higher rate of interest for money repayable by equal annual instalments than they would give for a permanent loan. When a loan is repay- able by equal annual instalments of principal and interest it practically amounts to the corporation investing the sinking fund in the security of the loan itself The rate now charged by the Local Government Loan Commissioners is only 2|- per cent for loans repayable within thirty years, and these terms are as low as can be obtained anywhere. Such loans are also granted on the footing that the same instalment of principal is repaid each year. In this case the amount of interest gradually decreases as the loan is paid off. The charge for interest and repayment of capital is thus heavier during the beginning of the loan than by the method of having an equal annual instalment of principal and interest. Loans repayable hy Equal Annual Instalments, including Principal and Interest. "When the rate of interest charged by the lender and the rate of interest at which the sinking fund can be accumu- lated are the same, or when the sinking fund is paid to the LOANS REPA YABLE BY INSTALMENTS 315 lender in redemption of the loan, the following is the method of arriving at the annual instalment : — Rule. Eefer to a table showing the annuity which £1 will purchase for any number of years at the given rate of interest, and opposite the given number of years will be found the annuity bought by paying down £1. This multi- plied by the amount of the loan will give the annual instalment to pay off the loan, principal and interest, in the given time. Exarrfple. — To find the annual instalment of principal and interest to pay off a loan of £1000 in five years at 3 per cent. Referring to a table showing the annuity which £1 will purchase, and opposite five years and under 3 per cent we find -218355. This multiplied by 1000 gives 218-355, which is the annual instalment to pay off the loan, with interest. The annual instalment is £218 : 7s. Id., and of this sum there is given to the lender for interest each year the sum of £30, and the balance of £188 : 7s. Id. is the instal- ment of principal to be accumulated at 3 per cent or paid to the lender. This balance of £188 : 7s. Id. invested each year at 3 per cent amounts at the end of five years to the £1000. Schedule of BepaymenL When the loan is made repayable by annual instalments, including principal and interest, it is usual to have a schedule showing the interest and capital in each instalment annexed to the bond. The receipts for the payments of the instal- ments should also separate the interest and capital, because income tax should be deducted from the interest and not from the whole instalment. The method of preparing these schedules will be seen from the following examples. Suppose a borrower obtains a loan of £1000 from an investment company at 5 per cent interest, repayable in six years by equal annual instalments. To find the instalment 3i6 ACCOUNTING IN THEORY AND PRACTICE we refer to a table, and find that the instahnent to repay a loan of £1 under the given conditions is '19701747. Multiplying by 1000 we get as the instalment £197-01747, or £197 : Os. 4d. It is evident that for the first year the interest is £50; hence the first instalment of capital is £147 : Os. 4d. For the next year the instalment of capital will be this sum, together with 5 per cent upon it, as interest will no longer be chargeable upon the capital repaid, but the amount of such interest will go to liquidate tlie debt. Hence the capital repaid each year is got by adding interest at 5 per cent to the capital repaid in the previous year. The schedule when completed is as follows : — SCHEDULE No. I. Showing the Interest and Capital contained in each Instalment of a Loan of £1000, repayable in Six Years BY Equal Annual Instalments of £197 :0s. 4d. Interest, 5 per cent. Number of Instalment. Date when due. Interest in Instalment. Capital in Instalment. Capital outstanding after Instalment paid. £ s. d. £ s. d. £ s. d. 1 15th May 1899 50 147 4 852 19 8 2 Do. 1900 42 13 154 7 4 698 12 4 3 Do. 1901 34 18 7 162 1 9 536 10 / 4 Do. 1902 26 16 6 170 3 10 366 6 9 5 Do. 1903 18 6 4 178 14 187 12 9 6 Do. 1904 9 7 7 187 12 9 1000 As another example, suppose a borrower obtains a loan of £1000 at 5 per cent, repayable in three years by equal annual instalments of £367 :4s. 2d. The schedule of re- payments would be as follows : — LOANS REP A YABLE BY INSTALMENTS 517 SCHEDULE No. 11. Showing the Interest and Capital contained in each Instal- ment OF A Loan of £1000, repayable in Three Years BY Equal Annual Instalments of £367 : 4s. 2d. Interest, 5 per cent. Number of Instalment. Date when due. Interest in Instalment. Capital in Instalment. Capital outstanding after Instalment paid. 1 2 3 15th May 1899 Do. 1900 Do. 1901 £ 50 34 17 2 9 d. 10 8 £ 317 333 349 s. 4 1 14 d. 2 4 6 £ 682 349 s. 15 14 d. 10 6 1000 Taking the loan given in Schedule No. 11. as an illustra- tion, the transactions in the borrower's ledgers would appear as follows : — Investment Company. 1899. May 15. To Cash . £367 4 2 1898. May 15. By Cash . £1000 1900. May 15. „ do. . 367 4 2 1899. May 15. ,, Interest 50 1901. May 15. „ do. . 367 4 2 1900. May 15. 1901. May 15. „ do. ,, do. 34 2 10 17 9 8 £1101 12 J £1101 12 6 The Ledger Account of the lender as given above would at the end of the three years be square, as the loan would be paid off. If the borrower balanced his books on the 15th May in each year after the transactions of the day were over, the Ledger Account at that date annually would show the balance of capital due to the investment company as given in the schedule, as follows : — 31 8 ACCOUNTING IN THEORY AND PRACTICE Investment Company. 1899. May 15. To Cash ,, Balance To Cash „ Balance To Cash . £367 4 . 682 15 £1050 2 10 1898. May 15. 1899. May 15. 1899. May 16. 1900. May 15. 1900. May 16. 1901. May 15. By Cash ,, Interest By Balance ,, Interest By Balance ,, Interest . £1000 50 £1050 1900. May 15. . £367 4 . 349 14 £716 18 2 6 8 . £682 15 34 2 10 10 £716 18 8 1901. May 15. . £367 4 £367 4 2 2 . £349 14 17 9 6 8 £367 4 _2 If the borrower closed his books as at 31st December in each year the proportion of interest due to that date would require to be calculated, and the Ledger Account would be as follows. It will be observed that the interest is credited also at 15th May, because it is compounded at that date. Investment Company. 1898. Dec. 31. To Balance 1899. May 15. To Cash Dec. 31. ,, Balance 1900. May 15. To Cash Dec. 31. ,, Balance 1901. May 15. To Cash . £1031 10 2 £1031 10 2 £367 4 2 704 6 £1071 10 2 £367 4 2 360 14 10 £727 19 £367 4 2 £367 4 2 1898. May 15. Dec. 31. 1899. Jan. 1. May 15. Dec. 31. 1900. Jan. 1. May 15. Dec. 31. 1901. Jan. 1. May 15. By Cash „ Interest By Balance ,, Interest do. By Balance „ Interest do. By Balance ,, Interest £1000 31 10 2 £1031 10 2 £1031 10 2 18 9 10 21 10 2 £1071 10 2 £704 6 12 12 8 11 4 £727 19 £360 14 10 6 9 4 £367 4 2 LOANS REP A YABLE BY INSTALMENTS 319 When the rate of interest charged by the lender and the rate of interest that can be obtained on the investment of the annual instalment of principal are not the same, the following is the method of arriving at the annual instal- ment : — Rule. Eefer to a table showing the amount of £1 per annum in any number of years, and opposite the term of years of the loan under the rate per cent at which the sinking fund can be invested will be found the amount produced by setting aside £1 yearly. The amount of the loan divided by this sum will give the annual instalment of sinking fund required to pay off the loan so far as the principal is con- cerned. Add to this a year's interest on the loan at the rate agreed on, and the total will be the total annual charge. Example. — The sum of £10,000 is borrowed at 3^ per cent per annum, and the principal is payable at the end of thirty years. The instalment of principal can only be invested at 3 per cent. Find what annual sum must be set aside. The sum of £1 per annum accumulated at 3 per cent per annum will amount to £47*57542 in thirty years. £10,000 divided by 47-57542 gives £210 :3s. lOd., which is the sum which must be set aside each year and invested at 3 per cent to amount to £10,000 in thirty years. The total annual charge is therefore : — Interest on loan of £10,000 at 31 per cent £350 Annual sum to be put to the sinking fund, and invested at 3 per cent . 210 3 10 £560 3 10 Loans repayahle hy Equal Annual Instalments of Principal. When a loan is repayable by equal annual instalments of principal, to find the principal sum payable each year we 320 ACCOUNTING IN THEORY AND PRACTICE have merely to divide the total loan by the number of years. The interest each year is merely the interest on the capital outstanding at the beginning of the year. For the sake of comparison with the figures already given, the following schedules are shown, together with specimen Ledger entries in the books of the borrower. SCHEDULE No. Ill Showing the Payment of Interest and Capital of a Loan OF £1000, repayable in Six Years by Equal Annual Instalments of Principal of £166 :13s. 4d. Interest, 5 ]per cent. Number of Date when due. Sum payable Interest Capital Capital out- standing after Instalment. each year. payable. paj'able. Instalment paid. £ s. d. £ s. d. £ s. d. £ s. d. 1 15th May 1899 216 13 4 50 166 13 4 833 6 8 2 Do. 1900 208 6 8 41 13 4 166 13 4 66Q 13 4 3 ■ Do. 1901 200 33 6 8 166 13 4 500 4 Do. 1902 191 13 4 25 166 13 4 333 6 8 5 Do. 1903 183 6 8 16 13 4 166 13 4 166 13 4 6 Do. 1904 175 8 6 8 166 13 4 175 1000 SCHEDULE No. IV. Showing the Payment of Interest and Capital of a Loan OF £1000, repayable in Three Years by Equal Annual Instalments of Principal of £333 : 6s. 8d. Interest, 5 per cent. Number of Instalment. Date when due. Sum payable each year. Interest payable. Capital payable. Capital out- standing after Instalment paid. 1 2 3 15th May 1899 Do. 1900 Do. 1901 • £ 383 366 350 s. d. 6 8 13 I 4 OlO £ 50 33 16 s. 6 13 d. 8 4 £ 333 333 333 1000 s. 6 6 6 d. 8 8 8 £ 333 s. 13 6 d. 4 8 100 LOANS REP A YABLE BY INSTALMENTS 32; Borrower's Ledger Investment Company. May 15. To Cash (capital) 1 £333 6 8 ,, do. (interest) 50 1900. May 15. ,, do. (capital) 333 6 8 ,, do. (interest) 33 6 8 1901. May 15. ,, do. (capital) 333 6 8 ,, do. (interest) IJ 13 4 £1100 1898. May 15. By Cash . 1899. May 15. ,, Interest 1900. May 15. „ do. 1901. May 15. ,, do. . £1000 50 33 6 8 16 13 4 £1100 Squaring off the books at 15 th May in each year, the above Ledger Account would show the amount of principal due at that date annually, as follows : — Investment Company. 1899. May 15. To Cash (capital) £333 6 8 ,, do. (interest) 50 „ Balance . . 666 13 4 £1050 1900. May 15. To Cash (capital) £333 6 8 ,, do. (interest) 33 6 8 ,, Balance . . 333 6 8 £700 1901. May 15. To Cash (capital) £333 6 8 ,, do. (interest) 16 13 4 £350 1898. May 15. By Cash . 1899. May 15. ,, Interest 1899. May 16. By Balance 1900. May 15. ,, Interest 1900. May 16. By Balance 1901. May 15. ,, Interest £1000 50 £1050 £mQ 13 4 33 6 8 £700 £333 6 8 16 13 4 £350 If the borrower closes his books on the 31st December in each year, the following would be the Ledger Account : — Y 322 ACCOUNTING IN THEORY AND PRACTICE Investment Company. 1898. Dec. 31. 1899. May 15. Dec. 31. 1900. May 15. Dec. 31, 1901. May 15. To Balance . £1031 10 2 £1031 10 2 To Cash (capital) £333 6 8 ,, do. (interest) 50 „ Balance . . 687 13 5 £1071 1 To Cash (capital) £333 6 8 ,, do. (interest) 33 6 8 „ Balance . . 343 16 9 £710 10 1 To Cash (capital) £333 6 8 „ do. (interest) 16 13 4 £350 1898. May 15. By Cash . Dec. 31. ,, Interest 1899. Jan. 1. By Balance May 15. ,, Interest Dec. 31. ,, do. 1900. Jan. 1. By Balance May 15. ,, Interest Dec. 31. ,, do. 1901. Jan. 1. By Balance May 15. ,, Interest . £1000 31 10 2 £1031 10 2 . £1031 10 18 9 21 2 10 1 £1071 1 . £687 13 12 6 10 10 5 7 1 £710 10 1 . £343 16 6 3 9 3 £350 _0 REDEMPTION OF LEASES There are three methods used for the purpose of making provision for those cases in which aNblump sum has been paid down in respect of property held on leasehold, which will have to be abandoned at the end of the lease. The slump sum is paid in respect of the right to the use of an asset for a limited period. It is evident that the sum so paid must be written off during the period so that at the close no asset may appear in the books of the concern. The three methods are : — 1. To write off each year an equal proportion of the cost. 2. To set aside each year such a sum as accumulated at compound interest at a certain rate will amount at the end of the lease to the cost. 3. To consider the cost of the lease as the purchase price of an annuity-certain for the term of the duration of the lease. REDEMPTION OF LEASES 323 The first method has the advantage of simplicity, and is the same each year, but no account is taken of the fact that the money has been paid down, and that interest could have been earned upon it. The second method is the Sinking Fund method, and the third method the Annuity Fund method. In actuarial symbols these methods are represented as follows : — First method = Second method = — Third method = — or + e. The last method is the most scientific, and is theoreti- cally the most correct. To illustrate the three methods, take the case of £1000 paid down for a lease which has three years to run. By the first method £1000 divided by 3, which is £333 : 6s. 8d., is set aside each year on the assumption of 5 per cent ; by the second method, during the first year £317 : 4s. 2d. is set aside. In the second year this sum, together with interest upon it at 5 per cent, will be set aside, and during the third year interest will again be added. By the third method £367 : 4s. 2d. is set aside each year. The amount written off by the three methods each year is accordingly as follows: — First year Second year Third year First Method. Second Method. Third Method. £333 6 8 333 6 8 333 6 8 £317 4 2 333 1 4 349 14 6 £367 4 2 367 4 2 367 4 2 £1000 £1000 £1101 12 6 The Ledger Account of the lease under the third method would be as follows : — 324 ACCOUNTING IN THEORY AND PRACTICE Lease Account. 1900. 1900. Jan 1. To Cash . . £1000 Dec. 31. By Profit and Loss £367 4 2 Dec. 31. ,, Interest 50 1901. 1901. Dec. 31. do. 367 4 2 Dec. 31. „ do. . 34 2 10 1902. 1902. Dec. 31. do. 367 4 2 Dec. 31. „ do. . 17 9 8 £1101 12 6 £1101 12 _6 By the second and third methods the net profit is the same. Under the third method the amount debited to the Profit and Loss Account in respect of the lease is greater than by the second method, but a sum is taken credit for in respect of interest on the outlay in connection with the lease. HIEE-PUECHASE SYSTEM OF ACQUIEING EAILWAY WAGGONS Colliery companies, as a rule, purchase railway waggons under a hire and purchase agreement by which the price of the waggons is paid by yearly instalments spread over from three to seven years, and the waggons only actually become the property of the colliery company on the pay- ment of the last instalment. There are two methods of treating such a transaction in the books of a colliery company. The transaction may be looked upon really as a purchase, but subject to the payment of the instal- ments as they fall due, or the exact letter of the contract may be given effect to in the books of the colliery company. Suppose that on the 1st January sixty waggons are purchased from the North British Waggon Co., Ltd., on the footing that they are to be paid for by five annual instalments of £600, being a total payment of £3000. It is quite evident that these instalments as they fall due and are paid by the colliery company cannot be charged altogether against Eevenue or altogether to Capital. It is evident that each instalment consists of interest on the amount of the purchase price of the waggons outstand- THE HIRE-PURCHASE SYSTEM 325 ing from time to time, together with a payment of capital to extinguish the purchase price. To find out what rate of interest should be taken as the basis of calculation it is necessary to ascertain as exactly as possible the price of the waggons on the assumption that cash was paid for them. If it is assumed that this cash price is £2597 :13s. 9d., from a table of annuities it is found that the rate of interest involved is 5 per cent, and the following schedule can then be prepared : — Schedule showing the division of Instalments for the PURCHASE OF WaGGONS INTO PRINCIPAL AND INTEREST, THE Annual Instalment for Five Years being £600, PAYABLE ON 31 ST DECEMBER, AND THE CaSH VaLUE OF THE Waggons at date of agreement £2597: 13 s. 9 d. Interest, 5 'per cent. Principal out- Date -when Instalment due. Interest Principal standing after Instalment paid. £ s a. £ s. d. £ s. 6. 31st December 1900 129 18 470 2 2127 11 9 Do. 1901 106 8 493 12 1633 19 9 Do. 1902 81 14 518 6 1115 13 9 Do. 1903 55 15 9 544 1 4 3 571 9 6 Do. 1904 28 10 6 571 9 6 2597 13 9 If the colliery company assume that the waggons are purchased outright, then immediately the agreement is signed and the waggons delivered the colliery company would credit the North British Waggon Co., Ltd., and debit the Eailway Waggon Account, with £2597:13 s. 9d. When the first instalment of £600 fell due the total amount would be posted from the Cash Book to the debit of the North British Waggon Co., Ltd., but at the same time a Journal entry would be made crediting the North British Waggon Co., Ltd., with £129 : 18s., the interest on the first instalment, and the Interest Account would be debited with this amount. The working of these two 326 ACCOUNTING IN THEORY AND PRACTICE accounts for the five years is shown in the following example, and it is further assumed that from the Waggon Account 6 per cent is written off each year for depreciation. North British Waggon Co., Ltd. 1900. Dec. 31. To Cash, first instalment . £600 „ Balance . . . 2127 11 9 £2727 11 9 1901. Dec. 31. 1902. Dec. 31. 1903. Dec. 31. 1904. Dec. 31. ToCash, second instalment £600 ,, Balance . . . 1633 19 9 £2233 19 9 To Cash, third instalment £600 „ Balance . . . 1115 13 9 £1715 13 9 To Cash, fourth instalment £600 „ Balance . . . 571 9 6 £1171 9 6 To Cash, fifth instalment £600 £600 1900. Jan. 1. Dec. 31. 1901. Jan. 1. Dec. 31. 1902. Jan. 1. Dec. 31. 1903. Jan. 1. Dec. 31. 1904. Jan. 1. Dec. 31. By Railway "Waggon Ac- count, for sixty wag- gons purchased per agreement . ,, Interest • By Balance ,, Interest By Balance ,, Interest By Balance „ Interest By Balance ,, Interest £2597 13 J . 129 18 ( £2727 11 { . £2127 11 J . 106 8 ( £22:j3 19 { . £1633 19 { 81 14 ( £1715 13 ( £1115 13 i 55 15 1 £1171 9 ( £571 9 ( 28 10 ( £600 ( Railway Waggon Account. 1900. Jan. 1. To North British Waggon Co., Ltd., for sixty waggons purchased per agreement . . £2597 13 9 1900. Dec. 31. 1901. Dec. 31. By Depreciation Account £155 17 ' „ Balance , . . 2441 16 : £2597 13 9 £2597 13 1901. Jan. 1. To Balance v . . £2441 16 2 By Depreciation Account £146 10 ; „ Balance . . . 2295 5 ' £2441 16 2 £2441 16 : THE HIRE-PURCHASE SYSTEM 327 Railway Waggon Account — Continued. 19C2. Fail. 1. To Balance 11503. JTan. 1. To Balance 1904. l^an. 1. To Balance 1905. an. 1. To Balance £2295 5 9 £2295 5 9 . £2157 11 9 £2157 11 9 . £2028 2 9 £2028 2 _9 £1906 9 2 1902. Dec. 31. By Depreciation Account £137 14 ,, Balance , . . 2157 11 9 £2295 5 9 1903. Dec. 31. By Depreciation Account £129 9 ,, Balance . . . 2028 2 9 £2157 11 9 1904. " Dec. 31. By Depreciation Account £121 13 7 „ Balance . . . 19O6 9 2 £2028 2 9 I I Suppose now that the transaction is looked upon by the colliery company more as a hire than a purchase, then the colliery company must still give effect to the fact that part of the price is in payment of the waggons, and that when the full price is paid the waggons will have depre- ciated to the same extent as under the first method. The colliery company would have to treat part of the price as hire and part as payment of the waggons, and as the waggons would depreciate to the same amount as formerly, deprecia- tion would require to be written off each year of the same amount as by the first method, so that at the end of the five years the Eailway Waggon Account would have the same amount at its debit as by the first method. The portions of the instalments which by the first method were treated as interest are by the second treated as hire, and would be posted from the Cash Book to a Hire Account. The first method is undoubtedly preferable to the second, as it shows more clearly what is the practical effect of the agreement, although it may not so exactly follow out the letter of the contract. Under the second method the Eailway Waggon Account would appear as under. 328 ACCOUNTING IN THEORY AND PRACTICE Railway Waggon Account. 1900. )ec. 31. To Cash, capital in first instalment paid to the North British Waggon Co., Ltd. . To Balance ,, Cash, capital in second instalment paid to the North British Waggon Co., Ltd. . To Balance , . ,, Cash, capital in third instalment paid to the North British Waggon Co., Ltd. . To Balance ,, Cash, capital in fourth instalment paid to the North British Waggon Co., Ltd. . To Balance ,, Cash, capital in fifth instalment paid to the North British Waggon Co., Ltd. . To Balance £470 2 1900. Dec. 31. 1901. Dec. 31. 1902. Dec. 31. 1903. Dec. 31. 1904. Dec. 31. By Depreciation Account ,, Balance By Depreciation Account ,, Balance By Depreciation Account ,, Balance By Depreciation Account ,, Balance By Depreciation Account ,, Balance £155 17 314 4 7 5 £470 2 £470 2 c, 1901. an. 1. )ec. 31. £314 4 493 12 5 £146 10 661 6 5 £807 16 _5 £807 16 £137 14 1041 18 5 1902. an. 1. )ec. 31. £661 6 518 6 £1179 12 _0 £1179 12 1903. an. 1. )ec. 31. £1041 18 544 4 3 £129 9 1456 13 3 £1586 2 3 £1586 2 3 1904. an. 1. )ec. 31. £1456 13 571 9 3 6 £121 13 1906 9 7 2 £2028 2 9 £2028 2 9 1905. an. 1. £1906 9 2 A simpler method than that given above is as follows. Suppose that a colliery company has a lease of ten waggons for twenty years at an annual charge of £30. If the present worth of the waggons is £60 each, or £600 in all, and it is considered that at the end of twenty years, when the waggons will become the property of the colliery com- pany, they will be worth £20 each, or £200 in all, and INVES TIG A TIONS 329 considering that during these twenty years there will be paid to the waggon company £600 in all, and that the value of the waggons at the end of twenty years will only be £200, it is evident that £400 must be charged to the Profit and Loss Account, or £20 per annum. The balance of the annual payment, namely, £10, goes to the Waggon Purchase Account, and at the end of the twenty years there will be £200 at the debit of this account, which will represent the value of the waggons. INVESTIGATIONS There is no branch of accounting in which the ability of an accountant to grasp business details, and also to appre- ciate the total effect of these details, has better play than in making investigations into business concerns, and in no branch of the profession is there wider scope for the exercise of special ability or genius as an accountant. Por such work it is absolutely essential that the accountant should not only have received a good general education, but that he should have specially studied the subjects of mathematics and economics. In fact, if the accountant has made a special study of the higher mathematics, and has gone deeply into the problems of economics, he will find his work as an in- vestigator all the easier, and the results at which he will arrive, and the advice he will be able to give, will be all the more exact and valuable. The purposes in connection with which an accountant may be called upon to make an investigation into the accounts of a concern are various, but may be shortly grouped under the following heads : — 1. Where a client is considering the advisability of pur- chasing or becoming a partner in a business. 2. Where it is proposed to convert a business into a limited liability company. 3. Where the bankers, creditors, or shareholders of a business concern wish to have an independent investigation into the business. 330 ACCOUNTING IN THEORY AND PRACTICE 4. On the death or retirement of a partner. 5. Where fraud is suspected. 6. "Where it is necessary to ascertain the compensation to be awarded in respect of the compulsory acquisition by a corporation of business premises. 7. Where accounts have become confused from any cause. Investigations have frequently to be undertaken on behalf of a client who is considering the advisability of becoming a partner in a business concern. Without such an investigation the client might find, after he had become a partner, and when it was too late to retrieve his position, that the business he had joined on the faith of those per- sonally interested was hopelessly bad. The accountant steps in as an independent party, and after careful investigation is enabled to advise his client either to join the business on the terms proposed, to have these terms altered, or to have nothing whatever to do with the concern. In such in- vestigations it is the duty of the accountant not only to ascertain the solvency of the business, but its capabilities as a profit-earning concern, and one likely to meet the expec- tations of his client. Investigations have also to be made into businesses which it is proposed to convert into limited liability com- panies, and perhaps the work involved in no other branch of accounting has increased so rapidly within recent years as the work in connection with such investigations. The object of the investigation is to determine the profits earned for a period of years, and the accountant may also be asked to advise as to the capital which should be invested in the business, and upon other matters which enable the price to be given for the business to be fixed. The accountant some- times is simply employed to give a certificate of the profits for a period of years, but if this certificate is required for the purpose of floating the business as a company he should be careful not to grant a certificate of the average annual profits merely, if he finds that these profits have been steadily decreasing. In such a case he should reveal the true state of matters to his employers and to the public. In fact, all such certificates should state the profits earned INVESTIGATIONS 33] during each year covered by the period of investigation. The accountant should be careful not to indulge in prophetic speculations as to the profit to be earned in the future, but should merely state the facts which he has ascertained as having prevailed in the past. In beginning such an in- vestigation the accountant should carefully compare the revenue accounts for the years available, with the view of seeing if the turnover and expenditure are constant each year, and where they are not he should ascertain the extent and cause of their varying. He should see how the ratio of the gross profit and net profit to turnover varies, and should be specially suspicious of any large increase in the ratio of net profit in the last year embraced by his investigation. Investigations have also to be made on behalf of creditors and shareholders of concerns which have not been successful, and it is then the duty of an accountant to ascertain the reasons of the want of success. In such investigations the accountant may have the disagreeable duty to perform of reporting upon the inefficiency or misconduct of some of the officials of the concern. Sometimes it is found that the directors are personally liable — as, for example, if they have paid dividends out of capital, have issued false Balance Sheets, or made representations to creditors knowing them to be false. Investigations have to be made into the estates of insolvent debtors, not only for the purpose of ascertaining how the business has become insolvent, but also very often for the purpose of finding out and recovering any assets which may have been parted with by the debtor to the detriment of the general body of the creditors. A debtor, for example, sometimes gives a preference to certain of his creditors, such as relations, and thereby defrauds his other creditors. There have been also many cases of insolvent debtors concealing their assets. Sometimes also it is found that fictitious liabilities are alleged by insolvent debtors, with the view of getting a lower rate of composition accepted. On the death or retirement of a partner it is usually advisable to have the books of the concern gone over by an accountant, in order that the representatives of the deceased 332 ACCOUNTING IN THEORY AND PRACTICE partner or the retiring partner may be satisfied that the firm's affairs are being settled impartially, and in terms of the deed of co-partnery. When business premises are acquired by a corporation under the powers of an Act of Parliament, the amount of compensation to be paid to the owner of the business depends to a large extent upon the profit he has been earning, as it is this profit which has become endangered by the compulsory removal, and it is usually upon so many years' purchase of the average profit that the amount of compensation is based. Investigations also require to be made when accounts become confused either through incompetency, fraud, or, it may be, the death of those in charge of executries and trusts. Accounts which require to be investigated are, as a rule, in all states of incompleteness, and it is the duty of the accountant to place them upon a proper footing, so far as the particulars available will allow. Thus the books sub- mitted to an accountant may be kept by " single entry," as it is called, and the accountant will have to prepare such accounts as will enable him to frame a true Profit and Loss Account. Sometimes in trusts and executries the only in- formation available is of the most meagre description, and recourse has to be had to banks and others for statements of their accounts, and the Trust or Executry Accounts have to be framed from such material as can be thus obtained. Such matters involve much labour, and the resulting states are, of course, never so satisfactory and reliable as properly framed accounts. Liabilities. The accountant should satisfy himself that all the liabilities appear in the books. The Order Books, Invoices, and Purchases Day Book should certainly be examined for the last month or two, if it is impossible to examine them thoroughly. It should be seen that rents, rates, taxes, light, water, interests, and other fixed or periodical payments are fully charged up to date. In bankruptcy investigations the INVESTIGATIONS 333 accountant should get, if at all possible, statements of their accounts direct from the creditors, together with particulars of any securities they may hold. It is usual to put a request for this in the notice calling the meeting of creditors at which the state of affairs is to be submitted. Assets,, The accountant should be careful that the book debts in the Balance Sheet are correct in amount, and that all trade discounts are provided for. Sometimes the cash dis- counts are also provided for. The accounts due by customers should be divided into good, doubtful, and bad. The length of time a debt has been standing often indicates in which category it should be entered. A certain percentage may be written off for debts which may prove bad, but which are not definitely known to be either bad or doubtful. The past experience of the business in this respect will be the best guide. The stock sheets should be carefully checked, and if at all possible it is advisable to have independent valuations by outsiders. The arithmetical accuracy of all extensions and additions of the stock sheets should be carefully checked. The value of the plant and machinery should be certified by valuations made for the special purpose of the investiga- tion, unless there are valuations of recent date in existence which are of sufficient weight to be accepted. Fro fit and Loss Account. The item of net profit is not by any means the most important item in a Profit and Loss Account. Accountants are often required to investigate the books and accounts of a concern with the view of ascertaining not only what the profit has been, but mainly with the view of advising how the profit may be increased in future. To facilitate such investif;rations the Profit and Loss Account must be modified from our usual notions of how it should be formed, and for 334 ACCOUNTING IN THEORY AND PRACTICE each different business the most suitable form must be adopted. The margin of profit is now so very small, and competition in every branch of trade necessitates prices being cut so fine, that a merchant or manufacturer requires to know with exactness the cost of production and the expenses of managing his business, so that he may always be sure of earning a fair profit. The Profit and Loss Account of a business, properly arranged and classified, for a series of years enables any one comparing one year with another to ascertain the cause of any variation in the profits. The figures of a Profit and Loss Account standing alone are not easily grasped; and as in an investigation it is absolutely essential that the full significance of the figures of the revenue accounts should be appreciated, it is necessary to take advantage of every means by which these figures may be more easily comprehended. More especially is this the case with Profit and Loss Accounts for a series of years where the gross profit, charges, and net profit seem to go up and down without any apparent law, and it is only when the figures are reduced to some common ratio that the extent of such fluctuations can be ascertained, and the reason of such changes found out. The common ratio to which all the entries in a Profit and Loss Account are usually reduced is the percentage of the various items to either the sales or the cost of the goods used. It is a convenient method to show the percentage which each item in a Profit and Loss Account bears to the total sales or turnover in a column adjoining the items of income and expenditure. It is then possible to grasp the full significance of the figures and their relation to one another. One year's trading may be compared with that of another year or of several years, and any fluctuation becomes at once apparent, and its cause may be investigated. Sometimes it is desirable to show the percentages in a separate statement, more especially if two or more Profit and Loss Accounts are to be compared. PERCENTAGE STATEMENTS 335 PEECENTAGE STATEMENTS PREPARED FROM PROFIT AND LOSS ACCOUNTS It is not sufficient for a merchant or manufacturer to know merely the amount of the profit he has made during any period. He must know exactly how it has arisen, and ne ascertains this from the Profit and Loss Account and its various branches. In any business, when a series of such accounts for a number of years have been regularly prepared on the same basis, the reason of any variation in the profit can by comparison be ascertained, and any deficiency or weakness in the business located, and steps can then be taken to prevent further leakage. A merchant is thus enabled to lay his finger on the weak point in his business, and by taking action at once may avert ruin and disaster. A fall in net profit may be due (1) to a decrease in the turnover, (2) to a fall in the prices realised, or (3) to an increase in the cost, (4) a rise in the expenses of manage- ment, or (5) to a combination of these causes. To compare Profit and Loss Accounts for a series of years it is necessary to reduce the items of which they are made up to a common denominator, and this is accomplished by finding the ratio which each item in the series bears either to the sales or to the cost of the goods. A convenient way to do this is to calculate the percentage of sales or cost of goods which is gross profit, expenses, and net profit. In most businesses it is better to take the sales or the turnover as the standard of comparison, while in others it is preferable to take the cost of goods. Sometimes the basis of comparison is the cost of each article produced. In the case of colliery companies the basis is usually the cost per ton of coal sold. When the percentages which the expenses, the gross profit, and the net profit of a business amount to are considered, it is usually with reference to the selling price of the goods. Percentage statements are frequently also drawn up in relation to the cost price. Thus, suppose that the expenses of a business amount to 30 per cent of the ^ 336 ACCOUNTING IN THEORY AND PRACTICE turnover, and a net profit is desired at the rate of 10 per cent of the turnover. These percentages together make 40 per cent, but it would not do to add 40 per cent to the first cost of an article in order to arrive at the price. If the selling price of the article be taken as £100, then the cost of the article is evidently £60, and the amount reserved for profit and expenses being £40, it is evident that the expenses and profit borne by each £1 of original cost is ■!§. £100 of cost must therefore bear fj} x 100, = 66|-, so that, if a merchant wishes to make a net profit of 1 per cent on the selling price of an article, of which the original cost is 60 per cent and the expenses 30 per cent, he must add to the cost price 66-| to arrive at the selling price. Thus if the cost of an article is 5s., if we add 40 per cent to this sum we have 7s., but as of this selling price of 7s. 30 per cent, or 2s. Id., is required for incidental expenses, we would really be selling the article at a loss of Id., or more exactly, 1-Jd., and the more articles we sold the more we would lose. The proper selling price of the article is 8s. 4d., and of this 5 s. is the original cost, 2s. 6d., or 30 per cent, is the amount required for incidental expenses, and lOd. is the amount of net profit. The treatment of sioch Items as Bepairs in preparing Percentage Statements. In adjusting Profit and Loss Accounts with the view of calculating percentages, such items as repairs, which fluctuate very much from year to year, should be averaged, and the same amount charged against profit each year. As the repairs actually incurred vary from year to year, if the same amount is debited each year to the Profit and Loss Account a balance will require to be carried forward in the Repairs Account each year, which may either be on the debit or credit side. This balance, if a debit one, will appear in the Balance Sheet as an asset under the head of " Repairs paid in advance," or " Repairs taken as an asset," and if a credit balance, among the liabilities under the heading of " Reserve for Repairs." I PERCENTAGE STATEMENTS 337 To calcidate a Series of Percentages. When it is required to find the percentages which a number of figures, such as the expenditure items in a Profit and Loss Account, bear to one figure, such as the turnover, there are various ways in which a considerable amount of the labour involved may be saved. The resulting per- centages are not, as a rule, required to extend beyond two places of decimals, and the method of using four-place logarithms works out very satisfactorily. A very accurate method, and one involving little labour, is to prepare a table of the products of the divisor. Another method is to reduce the divisor to a decimal and multiply the different items by this figure, thus substituting one division and several multiplications for several divisions, division being a much more tedious operation than multiplication. The working of the three different methods is shown in the following example : — It is required to find the percentages which the different items on the expenditure side of the following Profit and Loss Account bear to the sales : — Profit and Loss Account of a Military Tailor and Clothier's Business for One Year. Expenditure. Income. To Cost of goods :— stock at beginning of year . . . £3165 Purchases during year 3 073 By Sales • . £9199 £6238 . Deduct— Stock at end of year . 3179 £3059 „ Wages. . . . 2053 £5112 „ Gross profit carried down . . . 4087 £9199 £9199 338 ACCOUNTING IN THEORY AND PRACTICE Profit and Loss Account — Continued. Expenditure. Income. To Rent and taxes ,, Trade charges ,, Salaries ,. Bad debts . ,, Net profit . £633 . 340 . 263 . 120 By Gross profit brought down . . . £4087 £1356 . 2731 £4087 £4087 The items on the expenditure side of the above Profit and Loss Account are as follows : — Cost of goods . Wages . Gross profit . Rent and taxes Trade charges Salaries . Bad debts Net profit £3059 2053 4087 633 340 263 120 2731 It is required to find the percentages which the above figures bear to the item of Sales, £9199. First Method. — Using four-place Logarithms. The working-out of the percentages of the different items, using four-place logarithms, will be seen from the following statement : — Name of Item Amount Logarithin of Amount. Adding 2-0363 to each figure in the previous column. Percentages to Sales. Cost of goods . Wages . Gross profit Rent and taxes Trade charges . Salaries . Bad debts Net profit £3059 2053 4087 633 340 263 120 2731 3-4856 3-3124 3-6115 2-8014 2-5315 2-4200 2-0792 3-4364 1-5219 1-3487 1-6478 -8377 •5678 •4563 •1155 1-4727 33-26 22-32 44-44 6-88 3-70 2-86 1-31 29-70 i PERCENTAGE STATEMENTS 339 The first and second columns give the description of the item and the amount. The third column gives the logarithm of each amount. The fourth column is arrived at by adding 2'0363 to the figures in the third column. In order to find the percentage of any one of the items to Sales, we must multiply that item by , the 9199 being the amount of the sales, and the logarithm of is 2*0363, y J. y y as follows : — Logarithm = logarithm 100 - logarithm 9199 ; y X y y = 2-3-9637, = 20363. 2-0363 is therefore added to each logarithm given in the third column, and the result, as given in the fourth column, is the logarithm of the percentage required. By finding the natural numbers of the logarithms in the fourth column the percentage to Sales is found. These percent- ages are not absolutely correct in the last figure of the decimal, but are usually sufficiently accurate for practical purposes. Second Method. — Using Tables of Products. The divisor is 9199, and to form a table of products it is only necessary to write the numbers from 1 to 1 under- neath each other. Opposite 1 put 9199; also place 9199 at the foot of a slip of paper; place it over the 9199 opposite the 1, and add it to the 9199, placing the sum opposite the 2 ; again add 9199 to the figure opposite the 2, which will give the figure to go opposite the 3, and so on. When 1 is reached, the accuracy of the intervening figures is at once proved by the figure opposite 10 being the same figure as that opposite 1 multiplied by 10. The table so produced is simply an extended multiplication table, and, instead of multiplying, reference is merely made to the table and the figures copied down. The working may be 340 ACCOUNTING IN THEORY AND PRACTICE still further simplified by adopting the rules of contracted division, as shown in the second half of the figures given. The table of products in this case would be as follows : — 1 9199 2 18398 3 27597 4 36796 5 45995 6 55194 7 64393 8 73592 9 82791 10 91990 Using the above table of products, the working of the first half of the items, using the ordinary method of division, is as follows ; — 1 , Cost of goods. 9199)305900(33-253 27597 2. Wages. 9199 )205300(22-317 18398 29930 27597 21320 18398 23330 18398 29220 27597 49320 45995 16230 9199 33250 27597 70310 64393 \ PERCENTAGE STATEMENTS. 341 3. Gross profit. 9199)408700(44-428 36796 40740 36796 39440 36796 4. Rent and taxes. 9199)63300(6-88: 55194 81060 73592 74680 73592 or THF '^ X UNIVERSITY J 26440 18398 80420 73592 10880 9199 The working of the other half of the items, using con- tracted division and the table of products, is as follows : — 5. Trade charges. 6. Salaries. 9199)34000(3- 27597 696 9199) 26300(2-859 18398 6403 5519 7902 7359 884 828 543 460 56 55 83 83 342 A ceo UNTING IN THEOR V AND PRA CTICE 7. Bad debts. 8. Net profit. 9199)12000(1' 9199 ■304 9199)273100(29-688 18398 2801 2760 89120 82791 41 37 6329 6519 810 736 74 74 Third Method. — Beducing the Divisor to a Decimal and Multiplying. The divisor is 9199, and this reduced to a decimal is •0001087. Any of the items multiplied by this figure would give the amount per unit, and in order to get the amount per cent it is necessary to multiply this figure by 100. The different items are, therefore, multiplied by •01087, and the results are the percentages of these items to Sales. This method may be still further simplified by using the contracted method of multiplication, as shown in the working-out of the second half of the items. 1. Cost of goods. 2. Wages. 3059 2053 •01087 -01087 •21413 ^14371 2-4472 1-6424 30-590 20-530 33-25133 22-31611 i p PERCENTAGE STATEMENTS 343 3. Gross profit 4087 •01087 4. Rent and taxes. 633 •01087 •28609 3-2696 40-870 •04431 •5064 6-330 44-42569 6-88071 Using the contracted method of multiplication, the working of the second half of the items is as follows : — 5. Trade charges. 340 •01087 6. 8. Salaries. Net prof 263 •01087 3400 272 24 2630 210 18 3-696 2-858 7. Bad debts. 120 •01087 it. 2731 •01087 1200 96 8 27310 < 2185 1 191 1-304 29-686 ^ 1 .- K 344 ACCOUNTING IN THEORY AND PRACTICE Profit and Loss Account OF Military Tailor and Clothier Showing Percentages, Expenditure. Income. To Cost of goods . „ Wages . . . Per Cent of Sales. 33-25 22-32 £3059 2053 £5112 4087 Per Cent of Sales. By Sales . . . 100-00 £9199 „ Gross profit carried down . 55-57 44-43 100-00 £9199 100-00 By Gross profit brought down . . . 44-43 £9199 To Rent and taxes „ Trade charges . ,, Salaries . „ Bad debts 6-88 3-70 2-86 1-30 £633 340 263 120 £1356 2731 £4087 £4087 „ Net profit ^ . 14-74 29-69 ! 44-43 44-43 £4087 In filling up the above statement the results by the second method have been adopted, as these are more correct than by the first method, although for practical purposes either of the other methods is usually quite satisfactory. Curves and Diagrams, For showing the rise and fall of purchases, sales, charges, gross profit, and net profit, the graphic method of demonstration is of considerable value. The study of such graphs enables those who have little knowledge of the relative values of numbers to grasp at once the trend of a series of figures. The graphic method of displaying com- parative results of all kinds in connection with commerce is of immense value. It is impossible to grasp the correct meaning of column after column of figures, and even when these are reduced to percentages the difficulty is still great. ^Tien, however, the figures are displayed in the form of RECONCILIA TION ST A TEMENTS 345 diagrams or curves, their effect is at once apparent, and valu- able hints may be derived from the study of the resulting curves. The subjects to which this method may be applied are numerous, and of course the results vary considerably. Thus, in an engineering establishment the tons of coal consumed each month may be shown by taking a sheet of paper ruled into small squares, sometimes called logarithmic paper, through being used to a large extent for calculations in which logarithms are used. The vertical divisions may be taken to represent hundreds of tons, and the horizontal divisions to represent time in months. By this means the coal consumed may be compared one year with another, and the effect of the introduction of a new system of heating or a new kind of coal may be at once seen. In the event of the engine being stopped for any number of days this would require of course to be carefully noted, and duly allowed for. Where it is desired to arrive at an average in com- plicated cases, in which the paucity of the data makes other methods unreliable, the graphical method is of great assist- ance. The facts are recorded by small dots in pencil, and when these have been completed a curve is run through among these dots in ink, which forms the average. EECONCILIATION- STATEMENTS When an accountant is employed to prepare Profit and Loss Accounts of a concern where such accounts have already been regularly prepared, either by the managers of the concern or by some other accountant, the resulting Profit and Loss Accounts often differ from those already in existence. In such cases it is of great advantage to have the new accounts reconciled with the old. In arbitration cases, for example, the accountants on the two sides may submit Profit and Loss Accounts which differ considerably, and it is of great adwjitage to have a concise statement showing exactly where the differences occur. The details of 346 ACCOUNTING IN THEORY AND PRACTICE the accounts may be very conveniently compared by placing the items of each account in parallel money columns with other two money columns showing the increase and the decrease opposite each item. By this means the items in which the two accounts differ are at once seen, and the differences are narrowed down so as to be readily discussed. The statement prepared should be such an one as counsel — who, as a rule, have little liking for figures — can readily comprehend, and if it is advisable that it should be lodged in process it should be such a statement as will appeal to the arbiter. Items which appear in one account for which there are no corresponding items in the other would be at once apparent, as well as items which were the same in both accounts. From this statement a further statement could be prepared showing the differences, and explaining them in detail. The accountant would then have state- ments to submit to his own counsel or to the arbiter show- ing exactly the differences and how they were accounted for. Thus, supposing the capital of a trust estate had been given as £8000, and that after you had examined the accounts you found that the capital amounted to £7897, you would have some such paragraph in your report as follows : " The amount of the capital of the estate as given by the defenders is £8000, the amount of the capital as shown in the abstract appended to this report is £7897, a decrease of £103, which is accounted for thus: — "The following payments which have been charged against Eevenue should be charged against Capital : — '•June 30. Duplicand in connection with the London Road property . . £40 *' July 3. Law expenses in connection with the allocation of Oswald Street feu- duty 3 "14. Cost of new pavement at London Road property required by local authority 60 " Decrease as above . . . £103 0" RECONCILIA TION S TA TEMENTS 347 A Keconciliation Statement in connection with a firm's profits, prepared for the information of counsel, is also sub- mitted. Statement prepared by John Scott, C.A., for the infor- mation of Counsel, reconciling the Net Profit of the firm of Messrs. Craig & Young for the year, as shown in the Statement prepared by the Claimant's Accountants, with the true Net Profit. Profit for year, as per statement submitted by firm's accountants . . . . £2047 8 9 Deductions : — Rent of premises, as per Valua- tion Eoll, which should be charged . . . . £120 Depreciation on furniture, fittings, machinery, etc. . 50 Sum included under dona- tions, but really chargeable as expenses . . . 112 7 £171 12 7 Provision for bad debts : — 5 percenton£l6,022 6s.5d.of sales . . . . 801 2 3 £972 14 10 Additions : — Donations and charities, sura charged before arriving at net profit given above . . £61 19 1 Bad debts actually incurred. .185 9 Carry forward £247 8 1 £972 14 10 £2047 8 9 348 ACCOUNTING IN THEORY AND PRACTICE Brought forward £247 8 1 £972 14 10 £2047 8 9 New packing machine, pur- chased 5th January, and debited errone- ously to Charges 120 16 Interest on bonds for £1900 over buildings, de- bited errone- ously to Charges 78 446 4 1 526 10 9 True net profit as certified by ac- countant £1520 18 THE DUTIES AND EESPONSIBILITIES OF AN AUDITOE The duties and responsibilities of an auditor are to a large extent undefined, but the tendency of recent decisions is to make an auditor's responsibilities much greater than formerly. It is the auditor's duty to conscientiously employ every faculty, and exercise every precaution, to the utmost of his ability, in conserving the rights of his clients and arriving at the true results disclosed by his examination and audit of the accounts submitted to him. His report on his examination should be prepared with the utmost impartiality, and he should see that his clients are thoroughly informed upon all important matters which may have arisen in the course of his work. The examination of accounts by an auditor is undertaken for the following purposes : — 1. To detect any error, whether of omission or commission. 2. To see that the concern is properly and economically managed on business lines, so that the main object of the existence of all businesses, namely, the yielding of a return to those interested, may be achieved. AUDITORS' DUTIES AND RESPONSIBILITIES 349 3. To ascertain that all regulations of a financial kind, whether contained in Acts of Parliament, deeds of co-partnery, agreements, resolutions, or other regula- tions which apply to the accounts under examination, have been properly complied with. 4. To certify the accuracy of the accounts. The auditor should inspect all vouchers, contracts, securities, and other evidence which instruct the receipts and payments. All vouchers should be initialled in red ink or stamped to prevent their being used again. No voucher for a payment should be accepted of which the details are not known or given, but which merely states " to balance due." It is sometimes necessary to examine the paid cheques, both as to date and endorsation, to see that a pay- ment was really made to the proper party at the time stated. The auditor should also have produced to him satis- factory vouchers in support of the various assets in the Balance Sheet, both as regards their existence and the value put upon them. He should personally inspect and initial all bonds, stock certificates, and other evidence of the exist- ence of the assets. The values put upon all stocks and shares can be readily verified by reference to the published lists which the auditor should keep filed in his office. It is one of the auditor's most important and most difficult duties to see that suitable provision is made for all probable losses, that proper reserves are made, and that all sinking funds have the proper sum placed to their account. An auditor should be specially careful that nothing which should be charged to Eevenue has been capitalised, and that an adequate sum has been charged against Eevenue for depreciation. Such assets as preliminary expenses, expiring patent rights, and goodwill should be carefully scrutinised in order to determine that they have been in the past sufficiently written down, and that the value put upon them is reasonable. The auditor should also see that full provision has been made for bad debts, discounts, etc. He should also satisfy himself that all accrued liabilities in respect of rent, taxes, wages, etc., have been provided for. He should see that stock has been taken at cost, and that ^-^ 350 ACCOUNTING IN THEORY AND PRACTICE all assets are fairly stated and every liability included in the Balance Sheet. First Audits, In auditing the accounts of a business for the first time the auditor should have submitted to him a complete list of the books kept, and he should prepare a list giving the titles of the books, particulars of the period covered by the entries in the books, and the name of the clerk or clerks in charge of each book. In making investigations it is a very good plan for an accountant to initial or stamp each book in some corner where his initials will not be readily seen, but by means of which he will be able to tell at any future time that he has examined the book. It is well also for an auditor or his clerks to initial or stamp all vouchers, securities, contracts, or other important papers produced to him, as he is thus enabled to identify at any future time any books or documents which have passed through his hands. Gash on Hand, Where the cash on hand is not regularly paid into bank, so that only a nominal sum appears on hand, the auditor should actually count the cash on hand on the day of the balance. If he does not do so he should check it on the day of his audit by getting the Cash Book written up to date, auditing the entries that have been made since the close of the accounts, and counting the cash on hand on the day of his audit. The first thing an auditor should do in entering upon his duty of audit of a business is to reconcile the Bank Account with the Bank Pass Book and the certificate of the bank balance signed by the bankers. PcCrtTiersMp Accounts. In auditing the accounts of a partnership the auditor should, to begin with, obtain possession of the deed of co-partnery, and make an exact copy of it for his use in AUDITORS' DUTIES AND RESPONSIBILITIES 351 future. He should then prepare short notes on the contract showing the financial regulations which will re- quire to be given effect to. These notes should show the capital subscribed by the partners, the allocation of the profits, the allowance of interest on the partners' Capital Accounts, any limitation of partners' drawings, the date upon which the books are to be. balanced, and any stipula- tion as to the period within which the accounts are to be docquetted as correct and accepted by the partners. The auditor should also take note of the duration of the co- partnery, together with the method of its dissolution. These notes are meant to be referred to at each period of balance, and obviate the necessity of reading over the whole contract at each audit. It is the auditor's duty to see that the accounts are prepared exactly on the lines laid down in the contract, and where any deviation is necessitated it is his duty to get the sanction of the members of the co-partnery. When slight alterations are made on a contract it is convenient to get the partners to sign a short minute endorsed on the deed of co-partnery. Com'panies. In a company audit it is the duty of the auditor to peruse the Prospectus, Memorandum and Articles of Association of the company, together with the minutes both of the directors and of the shareholders' meetings, to see that they contain authority for any of the transactions of the company requiring such authority. The accounts must be prepared in conformity with the regulations of the company, whether these are contained in a special Act or the general Companies Acts. In the case of a first audit, the books relating to the issue of the share capital should be carefully checked with the applications for shares and the letters of allotment which will have been returned to the company in return for the share certificates. The counter- foils of the share certificates should also be checked. All transactions in connection with the share capital, whether in the allotment book or in the register of 352 ACCOUNTING IN THEORY AND PRACTICE transfers, should be recorded in the minutes of the directors. The item of preliminary expenses, as a rule, requires to be carefully scrutinised. Preliminary expenses consist of the law expenses in connection with the preparation of the Memo- randum and Articles of Association, printing these and the Prospectus, issuing the Prospectus, expenses of registration, brokerage or under- writing, stamp duties, etc., which are directly incurred in floating the company. Preliminary expenses should be written off as soon as possible. Where the title-deeds and other securities instructing the assets of a company are, as is usual, in the custody of the law agents of the company, the auditor, in addition to satisfying himself that the deeds are in existence, should get a list of all such deeds from the law agents, with a certificate appended stating that they are in order, and are held by them for the company. On the completion of the audit the auditor as a rule appends his docquet to the Balance Sheet, and should he not have verified any portion of it, it is his duty to state the fact, and he should also specially mention anything he has come across during his audit with which he is not fully satisfied, or which he considers tliose interested should be made acquainted with. Partial Audits. Sometimes an auditor is instructed only to make a partial audit of accounts, and it may be left to him to determine on his own judgment what he should do. In such a case the additions of all the books of original entry should be verified. Journal entries should be carefully scrutinised, and the posting of all goods, revenue, and property accounts should be checked. The Cash Book should, if at all possible, be fully vouched. Where the posting of personal ledgers is not checked, the auditor should endeavour to get the books put upon such a system as will enable him to make the personal ledgers self- balancing by abstracts of them being kept in the General Ledger. In many large concerns it is obviously impossible and inexpedient to check thoroughly at each audit the A UDITS 353 r \ whole transactions, and the auditor should therefore vary his work from time to time. This will have the same moral effect upon the staff as a complete audit, as they will be uncertain as to which portion of the work will next come under the close examination of the auditor. AUDITS Commercial Accounts, The steps in the audit of the usual run of commercial accounts may be shortly set forth as under : — Eeconciliation of Bank Pass Book with Bank Account and amount shown in Ledger. Examination of the vouchers of the Cash Book as to date, amount, sufficiency of voucher and dis- charge, correctness of entry, specially distinguish- ing between Eevenue and Capital. Examination of Travellers' Cash Books, Petty Cash Books, Postage Books, and wages sheets. Summation of Cash Book. Invoice Book. Day Book or Sales Book. Bill Book, bills receivable, accommodation bills. Journal for opening and closing entries. Depreciation. The posting should be checked from the Ledger Accounts outwards, if not of all, certainly of the Profit and Loss and Property Accounts. Examination of stock sheets, securities, title-deeds, etc. Comparison of Profit and Loss Account and Balance Sheet with those of previous years. Preparation of report on audit, giving, where necessary or advisable, percentages. Office Regulations to prevent Fraud. The following office regulations have been framed with the view of preventing loss through fraud, and have been found in practice to work satisfactorily : — 2 A 354 ACCOUNTING IN THEORY AND PRACTICE Cash received to be paid into bank daily. All payments to be made by cheque wherever practic- able. The cashier not to keep the personal ledgers. Counterfoil receipt books to be used, and receipts given for all cash received. Vouchers to be produced for all payments. Cash to be balanced daily, and details of cash shown in book kept for the purpose. Invoices for goods purchased to be initialled as correct by the receiver of the goods, and by the person who ordered them. Accounts, wages sheets, and statements of payments to be initialled by a partner before being paid. The extensions of all invoices for goods sold to be checked before the invoices are sent out. Clerks in charge of personal ledgers to be changed. Cashier and clerks to take their regular holidays, and in their absence their work to be done as usual by other clerks. AYEEAGE DUE DATE "When sums are due at various dates it is often desir- able, instead of paying the sums at the dates when they fall due, to find the date upon which the total sum may be paid so as to equitably give effect to the various dates upon which the various portions of the total sums are payable. This date is called the average due date, or the equated time. To calculate the average due date upon WHICH THE TOTAL OF SEVERAL SUMS FALLING DUE AT VARIOUS dates should be PAID, FIX UPON ANY ONE OF THE VARIOUS DATES, AND MULTIPLY THE VARIOUS AMOUNTS BY THE NUMBER OF DAYS BETWEEN THIS DATE AND THE DATES UPON WHICH THE SUMS FALL DUE : DIVIDE THE SUM OF THESE PRODUCTS BY THE SUM OF THE AMOUNTS, AND THE RESULT IS THE NUMBER OF DAYS BETWEEN THE DATE FIXED UPON AND THE AVERAGE DUE DATE. The reason why one of the various dates is AVERAGE DUE DATE 355 taken as the date to start from is that by doing so one multiplication is saved. In practice it is usual to count either from the first date forwards or from the last date backwards. Thus, suppose a sum of £1000 is payable as follows : — £250 on 1st February, £50 on 21st March, £500 on 20th May, and £200 on 30th May; the average due date, or the equated time, upon which the £1000 should be paid is 22nd April. The dates, amounts due, days, and products may be arranged very conveniently in a tabular statement, as follows : — Date. Amount due. Days from 1st February. Product. February 1 March 21 May 20 30 £250 50 500 200 48 108 118 2,400 54,000 23,600 £1000 80,000 Dividing 80,000 by 1000 gives 80 days from 1st February as the equated time. This may be proved as follows : — The last sum of £200 is not due until 118 days from the 1st of February, therefore interest on £200 for 118 days must be taken into account; but interest on £200 for 118 days is the same as interest on their product, namely £23,600, for one day. Similarly, the total interest on the £1000 payable on the dates above from the 1st of February to these dates is the same as interest on the total of the products, namely £80,000, for one day; but interest on £80,000 for one day is the same as interest on £1000 for -~— days, which is equal to 80 days. Eighty days added to 1st February gives as the equated time upon which the £1000 should be paid 22nd April. That this is the correct time may be shown either by actually working out the interest on the various sums payable on the various dates, and showing that it i^ 356 ACCOUNTING IN THEORY AND PRACTICE equal to the interest on the £1000 payable on 22nd April, or it may be proved by showing that the products of the sums payable before the equated time equal those payable after the equated time, as follows : — Sums deferred. Days to 22nd April. Product. February 1. £250 March 21. 50 80 32 20,000 1,600 21,600 Sum paid iu advance. Days from 22nd April. Product. May 20. £500 30. 200 28 38 14,000 7,600 21,600 Exercises. 1. What is the average due date of the following, viz.- July 12 . . . 24 . . . Aug. 16 . . . 23 . . . 2. The following sums are due by and to a merchant on the dates given. When should he send his cheque in settlement of the balance ? Due by Merchant. Due to Merchant. Jan. 4 . . £600 Jan. 15 . . £100 Feb. 2 . .200 Feb. 1 . .300 28 . . 500 £300 100 90 250 £740 INTEKEST ON CUEEENT ACCOUNTS Interest is very often charged on the debit balances and allowed on the credit balances of current accouhtS: INTEREST ON CURRENT ACCOUNTS 357 Thus, in the case of a trust estate the factor might charge the trust interest, say at 5 per cent or at bank overdraft rates, on all monies advanced by him, and might allow the trust interest at, say 2 per cent or at bank deposit receipt rates, on sums belonging to the trust in his hands. There are various ways in which current accounts with interest are stated, but the working-out of the various methods are either performed by means of interest tables or by products, as now shown. Let the following be taken as an example of a current account : — John Smithy Current Account. June 1. To Balance £100 July 5. By Cash . . £250 July 1. „ Goods . 300 Aug. 12. „ do. . . 300 Aug. 4. „ do. . 200 Nov. 9. „ do. . . 350 Oct. 3. „ do. . 400 Dec. 12. ,, do. . . 100 Dec. 4. „ do. . 150 The methods in which the account may have interest charged on it are as follows : — I. — Using Interest Tables Form I. Interest Interest Days. per Tables. Days. per Tables. £ s. d. £ s. d. £ s. d. £ s. d. rune 1 To Balance 100 213 2 18 4i July 5 By Cash . 250 179 6 2 7i ruly 1 „ Goods ,. 300 183 7 10 5 Aug. 12 „ do. . 300 141 5 15 10| ^ug. 4 „ do. . 200 149 4 1 7| Nov. 9 „ do. . 350 52 2 9 lOi Dot. 3 „ do. . 400 89 4 17 6i Dec. 12 „ do. . 100 19 5 2^ Dec. 4 „ do. . 150 27 11 11 31 ,, Balance 31 ,, Interest To Balance 5 5 5| 1 of interest ,, Balance, includ- ing in- terest . 155 5 5| 5 5 5| 1 ^an. 1 1155 5 5| 19 19 Of 1155 5 5| 19 19 Of 155 5 5| 358 ACCOUNTING IN THEORY AND PRACTICE In the above example interest is charged at the rate of 5 per cent on the debit items and allowed at the same rate on the credit items up to 31st December. The difference between the two interest columns gives the interest due on the whole account for the year. Another way of arriving at the same result is by cal- culating interest on the balances from day to day. The account would, in this case, appear as follows : — Farm II. Days. Interest per Tables. June 1. July 1. To Balance „ Goods By Cash . To Goods By Cash . To Goods By Cash . To Goods. By Cash . To Interest le Br Br Br Br Br Br Br Br £100 300 30 4 30 8 52 37 25 8 19 £0 8 2| 5. £400 250 4 4J Aug. 4. £150 200 12 4 12. £350 300 7 Si Oct. 3. £50 400 7 \\ Nov. 9. £450 350 2 5 7i Dec. 4. £100 150 6 10 12. £250 100 5 5| 31. £150 5 5 51 7 9| Balance di £155 5 5| £5 5 5| II. — By means of Products The other method of calculating interest is by means of products, and the foregoing example, with interest calcu- lated in this way, would appear as follows : — INTEREST ON CURRENT ACCOUNTS 359 Form IIL Days. Products. Days. Products. £ s. d. & s. d. June 1 To Balance 100 213 21,300 July 5 By Cash . 250 179 44,750 July 1 ,, Goods . 300 183 54,900 Aug. 12 „ do. . 300 141 42,300 kMg. 4 „ do. . 200 149 29,800 Nov. 9 „ do. . 350 52 18,200 Oct. 3 ,, do. . 400 89 35,600 Dec. 12 „ do. . 100 19 1,900 Dec. 4 „ do. . 150 27 4,050 31 ,, Balance 31 ,, Interest To Balance 5 5 5| of interest numbers „ Balance, includ- ing in- terest . 155 5 5| 38,500 1155 5 51 145,650 1155 5 5| 145,650 Jan. 1 55 5 5| The rule for arriving at the interest by means of pro- ducts is as follows : — Multiply each item in the account by the number of days from its date to the date of settlement, or to any given date to which it is desired to find the interest. Take the balance of the products, multiply by twice the rate per cent, and divide by 73,000. This gives the interest on the account. If the interest on the debit and credit sides is at different rates, the multiplication by twice the rate should be performed on the totals of the two sides, and thereafter the balance should be divided by 73,000. In the example given the balance of interest numbers is 38,500. Twice the rate per cent, which is 5 per cent, is 10. Then 38,500 multiplied by 10 gives 385,000. Dividing 385,000 by 73,000 we get £5 : 5s. 5f d., as follows, using contracted division : — 36o ACCOUNTING IN THEORY AND PRACTICE 73000)385000(5-2739 = £5 : 5s. 5|d. 365000 20000 14600 5400 5110 290 219 71 66 Working out this example by products, but taking the balances from day to day, the account would appear as follows : — Farm IV. Days. Products. June 1. July 1. To Balance ,, Goods Br By Cash . Br To Goods Br By Cash . Br To Goods Br By Cash . Br To Goods Br By Cash . Br To Interest Balance due £100 300 30 4 30 8 52 37 25 8 19 3,000 5. £400 250 1,600 Aug. 4. £150 200 4,500 12. £350 300 2,800 Oct. 3. £50 400 2,600 Nov. 9. £450 350 16,650 Dec. 4. 12. 31. £100 150 £250 100 £150 5 5 5f 2,500 2,000 2,850 £155 5 5| 38,500 INTEREST ON CURRENT ACCOUNTS ^6i USING INTEREST TABLES John Smith — Current Account. Interest at 5 ;per cent on Debit Items, and 3 per cent on Credit Items. Interest at Interest at Days. 5 per cent Days. 3 per cent per Tables. per Tables. £ s. d. £ 6. d. £ s. d. £ s. d. June 1 To Balance 100 213 2 18 ii July 5 By Cash . 250 179 3 13 6i July 1 ,, Goods . 300 183 7 10 5 Aug. 12 „ do. . 300 141 3 9 6i Aug. 4 „ do. . 200 149 4 1 7| Nov. 9 „ do. . 350 52 1 9 10| Oct. 3 „ do. . 400 89 4 17 6* Dec. 12 „ do. . 100 19 3 li Dec. 4 „ do. . 150 27 11 l| 31 ,, Balance 31 ,, Interest To Balance 11 2 Hi of interest ,, Balance 161 2 lU 11 2 Hi 1161 2 Hi 19 19 Of 1161 2 m 19 19 Of Jan. 1 161 2 lU BY MEANS OF PRODUCTS John Smith — Current Account, Interest at 5 per cent on Debit Items, and 3 per cent on Credit Items. Days. Products. Days. Products. June 1 July 1 Aug. 4 Oct. 3 Dec. 4 31 To Balance ,, Goods . „ do. . „ do. . „ do. . ,, Interest To Balance £ 8. d. 100 300 200 400 150 11 2 11 213 183 149 89 27 21,300 54,900 29,800 35,600 4,050 145,650 10 July 5 Aug. 12 Nov. 9 Dec. 12 31 By Cash . „ do. . ,, do. . „ do. . ,, Balance of interest numbers ,, Balance £ s. d. 250 300 350 100 161 2 11 179 141 52 19 44,750 42,300 18,200 1,900 107,150 6 1,456,500 642,900 813,600 1161 2 11 1,456,500 1161 2 11 1 1,456,500 Jan. 1 161 2 11 362 ACCOUNTING IN THEORY AND PRACTICE In the example given, interest has been charged and allowed on the debit and credit items at the same rate. Very often, however, interest at one rate is charged on the debit items, and interest at another rate on the credit items. Suppose that 5 per cent is to be charged on the debit items and 3 per cent on the credit items, then the account would appear as given on the previous page. The calculation by interest tables is very simple, as 3 per cent is merely substituted instead of 5 per cent. The working by products is slightly different. After obtaining the total of the products on the debit and credit sides, namely 145,650 and 107,150, the total of the debit side is multiplied by 10, being twice the rate per cent, which is 5 per cent for debit items, and the total of the credit side is multiplied by 6, being twice the rate per cent which is 3 per cent for credit items. The balance of pro- ducts, namely 813,600, is divided by 7300, which gives £11 :2s. lid., as follows:— 73000)813600(11-145 = £11 : 2s. lid. 73000 83600 73000 lOGOO 7300 3300 2920 380 365 In this case, where the rates of interest charged and allowed are different, there occurs a difference of \^. between the interest per the tables and that calculated by products. The interest as calculated by products is the more correct method, because fractional parts are not taken into account in the interest tables. m DECIMALS OF £i 363 Rule for expressing Shillings, Pence, and Farthings as Decimals of £1. In the first decimal place put the number of florins contained in the given number of shillings. If there be an odd shilling put 5 in the second place. Reduce the pence and farthings to farthings, and put the number in the third place, or the second and third places if it be ten or more, adding 1 if the amount be 6d. or more. The first three decimal places are now complete. To complete the fraction it only remains to divide the pence and farthings, expressed as the decimal of a penny, by 6, and insert the quotient in the fourth and following places. If the pence and farthings are 6d. or more, deduct 6d before dividing, for otherwise the first figure of the quotient would be 1, belonging to the third place, which has been allowed for already. Examjples. I— £3 :16s. 5jd. Integer, £3 = £3 1st decimal place, 16s. = 8 florins = '8 2nd and 3rd decimal places, 5jd. =21 farthings = "021 4th and following places, 5-25 -^ 6 = -000875 £3-821875 which is the decimal required. IL— £8: 19s. 8|d. Integer, £8 =<£8 1st and 2nd decimal places, 1 9s. = 9 florins and Is. = -95 2nd and 3rd decimal places, 8|d. = 35 farthings, and add 1 = -036 4th and following places, 8-75, less 6, and divide by 6 = '000458333 £8-9864583 the decimal required. 364 ACCOUNTING IN THEORY AND PRACTICE III— £3: 19s. 7-738d. Here multiply the fraction of a penny by 4 to bring it to farthings, 'VSSd. = 2*952 farthings. Now proceed as before : — Pounds and shillings =£3-95 Pence and farthings, 28 + 2-952, and add 1 = '031952 Addendum, 7*738, less 6d., and divide by 6 = -0002896666 . . £3-9822416 To express Decimals of a Pound in Shillings and Pence, To transform a sum in decimals into pounds, shillings, and pence the simplest course is first to extract the pounds and shillings, and then multiply the remainder of the fraction by 240, to bring it to pence. Take the same three examples: — I— £3-821875 3-8 = £3 16 * This is evidently be- tween 5d. and 6d., for by the rule 5d. is *020 ... and 6d. *025 -- -021875 12 £3 16 = £8 = £8 -2625 20 IL— 5*25 £8*9864583 8*95 19 * This is evidently be- tween 8d. and 9d., for 8d. is •033 ... and 9d. is -037 . . . * -0364585 12 -4375000 20 8-750 8J 19 8f * This is evidently be tween 7d. and 8d., for 7d. is -029 and 8d. is '033 LOGARITHMS 365 III— £3-9822416 3-95 = £3 = 19 T be- * -0322416 r 7d. 12 •3869000 • 20 7-738 7-738 £3 19 7-738 FOUE-PLACE LOGAEITHMS The theory of logarithms can only be understood by those who have a knowledge of the algebraic laws of indices, but logarithms may be used by all having a knowledge of the elementary rules of arithmetic. If N and x be numbers, and N = 10* then X is the logarithm of N to base 10, and is the index of the power to which the base must be raised in order to produce the number. Thus, if N = 100, we have 100 = 102, and 2 is the logarithm of 100 to the base 10. The base of the common table of logarithms is 10. The logarithms of multiples of 10 are shown in the following table : — Number. Equivalent. Logarithm of Number. 10,000 104 4 1,000 103 3 100 102 2 10 101 1 1 100 •1 10-1 -1 •01 10-2 -2 •001 10-3 -3 •0001 10-4 -4 366 ACCOUNTING IN THEORY AND PRACTICE Since the logarithm of 10,000 = 4, and the logarithm of 1000 = 3, it is evident that the logarithm of all the numbers between 10,000 and 1000, such as 8432, must be 3 plus a fraction. This fraction is expressed as a decimal fraction, and is called the mantissa of the logarithm, the integral part being called the characteristic. Similarly, the logarithm of '0001 being — 4, and the logarithm of '001 being — 3, all numbers between must have as their logarithm — 3 and a fraction, or — 4 plus a fraction. For the sake of readiness in computation it is as a rule only the characteristic that is used negatively, and the mantissa is expressed positively. Hence the characteristic of the logarithm of any number having an integral part is positive, and is one less than the number of digits in the integral part. The characteristic of the logarithm of any number having no integral part is negative, and is one more than the number of zeros that follow the decimal part. The minus sign is written above the characteristic. The characteristic to base 10 of the logarithm of any number can thus be determined by inspection, and this is why logarithms to base 1 are used in practical calculations to the exclusion of all others. To find the Mantissa or Decimal Part of a Logarithm, using the Four-place Table of Logarithms. Suppose it is required to find the logarithm of 62*37. It is evident that the integral portion of the logarithm is 1. To find the decimal portion, referring to the Table of Logarithms, we find 6 2 in the first column on the second page. Then, opposite 62 and under 3 wdll be found 7945. This is the logarithm of 623. For the 7, referring on the same line to the columns of differences, and under 7 there is 5, which must be added to the figures already found, making 7950. Hence log 62-37 = 1-7950. LOGARITHMS 367 To find the Numler corresponding to a Logarithm. Suppose the logarithm is 1*7950. Then the character- istic being 1, it is evident that the number contains two figures in the integral part. To find the digits, referring to the Table of Anti-logarithms, on the second page in the first column going to the line "79 and under 5 will be found 6237. Hence the number required is 62*37. Had there been another figure in the logarithm, by referring to the table of differences on the same line as the '97 the figure to add would have been found. The following are the leading properties of logarithms : — (1) The logarithm of the product of numbers is the sum of the logarithms of the numbers. (2) The logarithm of the quotient of two positive numbers is the excess of the logarithm of the dividend over the logarithm of the divisor. (3) The logarithm of any power of a number is equal to the logarithm of the number multipHed by the index of the power. If m, n, and x are any numbers, these properties may be shown thus : — (1) Multiplication — log mn = log m + log 7?.. (2) Division — loor — = losr m - loer n. ° n ° ° (3) Involution — , log m^ -X log m. To multiply 68*43 by 3*6912 :— log 68*43 = 1-8353 log 3-6912 = 0-5672 Adding, we have 2-4025 =log 252*6. The exact answer is 2 5 2*5 8 8 8 1 6. Four-place logarithms should only be used where we do not require accuracy in the fourth significant figure. St^ii ACCOUNTING IN THEORY AND PRACTICE To divide 7-107 by -2369 :— log 7-107 = 0-8517 log -2369 = 1-3746 Subtracting, we have 1-4771 = log 30. To find the value of '7107 cubed :- - log -7107 = 1-8517 multiplying 3 r-5551 = = log -3590 The exact figure is -358970654043. To find the cube root of -358970654043 we have log •3590 = r5551 dividing by 3, we have -3 + 2-5551 3 = 1-8517 = log -7108. This is 1 too much in the fourth place. \ TABLE OF DA YS 369 TABLE For finding the Days between two given Dates WITHIN Two Years The following table is to facilitate the finding of the number of days between any two dates within two years of each other. The method of using the table is very simple. If the tabular number opposite the earlier date is subtracted from the tabular number opposite the later date, the differ- ence is the number of days between the two dates. Thus, to find the number of days between I7th August and 15 th May in the following year we have — 15th May 500 17th August ..... 229 Number of days in period . . 271 2 B 370 ACCOUNTING IN THEORY AND PRACTICE Table for finding the Days betwee Jan. Feb. Mar. April. May. June. July. Aug. Sept. Oct. Nov. Dec. 1 1 1 32 1 60 1 91 1 121 1 152 1 182 1 213 1 244 1 274 1 305 1 33 2 2 2 33 2 61 2 92 2 122 2 153 2 183 2 214 2 245 2 275 2 306 2 33 3 3 3 34 3 62 3 93 3 123 3 154 3 184 3 215 3 246 3 276 3 307 3 33 4 4 4 35 4 63 4 94 4 124 4 155 4 185 4 216 4 247 4 277 4 308 4 33 5 5 5 36 5 64 5 95 5 125 5 156 5 186 5 217 5 248 5 278 5 309 5 33 6 6 6 37 6 65 6 96 6 126 6 157 6 187 6 218 6 249 6 279 6 310 6 34 7 7 7 38 7 66 7 97 7 127 7 158 7 188 7 219 7 250 7 280 7 311 7 34 8 8 8 39 8 67 8 98 8 128 8 159 8 189 8 220 8 251 8 281 8 312 8 34 9 9 9 40 9 68 9 99 9 129 9 160 9 190 9 221 9 252 9 282 9 313 9 34 10 10 10 41 10 69 10 100 10 130 10 161 10 191 10 222 10 253 10 283 10 314 10 34 11 11 11 42 11 70 11 101 11 131 11 162 11 192 11 223 11 254 11 284 11 315 11 34 12 12 12 43 12 71 12 102 12 132 12 163 12 193 12 224 12 255 12 285 12 316 12 34 13 13 13 44 13 72 13 103 13 133 13 164 13 194 13 225 13 256 13 286 13 317 13 34 14 14 14 45 14 73 14 104 14 134 14 165 14 195 14 226 14 257 14 287 14 318 14 34 15 15 15 46 15 74 15 105 15 135 15 166 15 196 15 227 15 258 15 288 15 319 15 34 16 16 16 47 16 75 16 106 16 136 16 167 16 197 16 228 16 259 16 289 16 320 16 35 17 17 17 48 17 76 17 107 17 137 17 168 17 198 17 229 17 260 17 290 17 321 17 35 18 18 18 49 18 77 18 108 18 138 18 169 18 199 18 '230 18 261 18 291 18 322 18 35 19 19 19 50 19 78 19 109 19 139 19 170 19 200 19 231 19 262 19 292 19 323 19 35 20 20 20 51 20 79 20 110 20 140 20 171 20 201 20 232 20 263 20 293 20 324 20 35 21 21 21 52 21 80 21 111 21 141 21 172 21 202 21 233 21 264 21 294 21 325 21 35 22 22 22 53 22 81 22 112 22 142 22 173 22 203 22 234 22 265 22 295 22 326 22 35 23 23 23 54 23 82 23 113 23 143 23 174 23 204 23 235 23 266 23 296 23 327 23 35 24 24 24 55 24 83 24 114 24 144 24 175 24 205 24 236 24 267 24 297 24 328 24 35 25 25 25 56 25 84 25 115 25 145 25 176 25 206 25 237 25 268 25 298 25 329 25 35 26 26 26 57 26 85 26 116 26 146 26 177 26 207 26 238 26 269 26 299 26 330 26 36 27 27 27 58 27 86 27 117 27 147 27 178 27 208 27 239 27 270 27 300 27 331 27 36 28 28 28 59 28 87 28 118 28 148 28 179 28 209 28 240 28 271 28 301 28 332 28 36 29 29 29 88 29 119 29 149 29 180 29 210 29 241 29 272 29 302 29 333 29 36 30 30 30 89 30 120 30 150 30 181 30 211 30 242 30 273 30 303 30 334 30 36 31 31 31 90 31 151 31 212 31 243 31 304 31 36 N.B. — In leap years, when the period includes 29th Februar TABLE OF DA YS 371 rwo GIVEN Dates within Two Years Jan. Feb. Mar. April. May. June. July. Aug. Sept. Oct. Nov. Dec. 1 366 1 397 1 425 1 456 1 486 1 517 1 547 1 578 1 609 1 639 1 670 1 700 2 367 2 398 2 426 2 457 2 487 2 518 2 548 2 579 2 610 2 640 2 671 2 701 3 368 3 399 3 427 3 458 3 488 3 519 3 549 3 580 3 611 3 641 3 672 3 702 4 369 4 400 4 428 4 459 4 489 4 520 4 550 4 581 4 612 4 642 4 673 4 703 5 370 5 401 5 429 5 460 5 490 5 521 5 551 5 582 5 613 5 643 5 674 5 704 6 371 6 402 6 430 6 461 6 491 6 522 6 552 6 583 6 614 6 644 6 675 6 705 7 372 7 403 7 431 7 462 7 492 7 523 7 553 7 584 7 615 7 645 7 676 7 706 8 373 8 404 8 432 8 463 8 493 8 524 8 554 8 585 8 616 8 646 8 677 8 707 9 374 9 405 9 433 9 464 9 494 9 525 9 555 9 586 9 617 9 647 9 678 9 708 10 375 10 406 10 434 10 465 10 495 10 526 10 556 10 587 10 618 10 648 10 679 10 709 11 376 11 407 11 435 11 466 11 496 11 527 11 557 11 588 11 619 11 649 11 680 11 710 12 377 12 408 12 436 12 467 12 497 12 528 12 558 12 589 12 620 12 650 12 681 12 711 13 378 13 409 13 437 13 468 13 498 13 529 13 559 13 590 13 621 13 651 13 682 13 712 14 379 14 410 14 438 14 469 14 499 14 530 14 560 14 591 14 622 14 652 14 683 14 713 15 380 15 411 15 439 15 470 15 500 15 531 15 561 15 592 15 623 15 653 15 684 15 714 16 381 16 412 16 440 16 471 16 501 16 532 16 562 16 593 16 624 16 654 16 685 16 715 17 382 17 413 17 441 17 472 17 502 17 533 17 563 17 594 17 625 17 655 17 686 17 716 18 383 18 414 18 442 18 473 18 503 18 534 18 564 18 595 18 626 18 656 18 687 18-717 19 384 19 415 19 443 19 474 19 504 19 535 19 565 19 596 19 627 19 657 19 688 19 718 20 385 20 416 20 444 20 475 20 505 20 536 20 566 20 597 20 628 20 658 20 689 20 719 21 386 21 417 21 445 21 476 21 506 21 537 21 567 21 598 21 629 21 659 21 690 21 720 22 387 22 418 22 446 22 477 22 507 22 538 22 568 22 599 22 630 22 660 22 691 22 721 23 388 23 419 23 447 23 478 23 508 23 539 23 569 23 600 23 631 23 661 23 692 23 722 24 389 24 420 24 448 24 479 24 509 24 540 24 570 24 601 24 632 24 662 24 693 24 723 25 390 25 421 25 449 25 480 25 510 25 541 25 571 25 602 25 633 25 663 25 694 25 724 26 391 26 422 26 450 26 481 26 511 26 542 26 572 26 603 26 634 26 664 26 695 26 725 27 392 27 423 27 451 27 482 27 512 27 543 27 573 27 604 27 635 27 665 27 696 27 726 28 393 28 424 2o 452 28 483 28 513 28 544 28 574 28 605 28 636 28 666 28 697 28 727 29 394 29 453 29 484 29 514 29 545 29 575 29 606 29 637 29 667 29 698 29 728 30 395 30 454 30 485 30 515 30 546 30 576 30 607 30 638 30 668 30 699 30 729 31 396 31 455 31 516 31 577 31 608 31 669 31 730 3ne day must be added to the result deduced from the table. DA YS AS DECIMALS OF A YEAR 373 TABLE Showing Days as Decimal Feactions of a Year of 365 Days The table, showing what decimal of a year of 365 days any number of days less than a year is, which is given on the next two pages, is of considerable service in solving questions of interest and apportionment, more especially where the rates involved are those for which ordinary in- terest tables do not exist. Thus, to find the interest on £50 for 108 days at 3^ per cent, we have — 108 days = -2959 of a year, ^ =-03125 per £1, and £50 X -2959 X -03125 - '46234375 = 9s. 3d. Also, to apportion £100 per annum for 108 days, we have — £100 X -2959 = £29-59 =£29 :11s. lOd. 374 ACCOUNTING IN THEORY AND PRACTICE Days as Decimal Fractions Decimal Decimal Decimal Decimal Days. of a Days. of a Days. of a Days. of a Year. Year. Year. Year. 1 •0027 47 •1288 92 •2521 138 •3781 2 •0055 48 •1315 93 •2548 139 •3808 3 •0082 49 •1342 94 •2575 140 •3836 4 •0110 50 '1370 95 •2603 141 •3863 5 •0137 51 •1397 96 •2630 142 •3890 6 •0164 52 •1425 97 •2658 143 •3918 7 •0192 53 •1452 98 •2685 144 •3945 8 •0219 54 •1479 99 •2712 145 •3973 9 •0247 55 •1507 100 •2740 146 •4000 10 •0274 56 •1534 101 •2767 147 •4027 11 •0301 57 •1562 102 •2795 148 •4055 12 •0329 58 •1589 103 •2822 149 •4082 13 •0356 59 •1616 104 •2849 150 •4110 14 •0384 60 •1644 105 •2877 151 •4137 15 •0411 61 •1671 106 •2904 152 •4164 16 •0438 62 •1699 107 •2932 153 •4192 17 •0466 63 •1726 108 •2959 154 •4219 18 •0493 64 •1753 109 •2986 155 •4247 19 •0521 65 •1781 110 •3014 156 •4274 20 •0548 %^ •1808 111 •3041 157 •4301 21 •0575 67 •1836 112 •3068 158 •4329 22 •0603 68 •1863 113 •3096 159 •4356 23 •0630 69 •1890 114 •3123 160 •4384 24 •0658 70 •1918 115 •3151 161 •4411 25 •0685 71 •1945 116 •3178 162 •4438 26 •0712 72 •1973 117 •3205 163 •4466 27 •0740 73 •2000 118 •3233 164 •4493 28 •0767 74 •2027 119 •3260 165 •4521 29 •0795 75 •2055 120 •3288 166 •4548 30 •0822 76 •2082 121 •3315 167 •4575 31 •0849 77 •2110 122 •3342 168 •4603 32 •0877 78 •2137 123 •3370 169 •4630 33 •0904 79 •2164 124 •3397 170 •4658 34 •0932 80 •2192 125 •3425 171 •4685 35 •0959 81 •2219 126 •3452 172 •4712 36 •0986 82 •2247 127 •3479 173 •4740 37 •1014 83 •2274 128 •3507 174 •4767 38 •1041 84 •2301 129 •3534 175 •4795 39 •1068 85 •2329 130 •3562 176 •4822 40 •1096 86 •2356 131 •3589 177 •4849 41 •1123 87 •2384 132 •3616 178 •4877 42 •1151 88 •2411 133 •3644 179 •4904 43 •1178 89 •2438 134 •3671 180 •4932 44 •1205 90 •2466 135 •3699 181 •4959 45 •1233 91 •2493 136 •3726 182 •4986 46 •1260 91i •25 137 •3753 182i •5 DA YS AS DECIMALS OF A YEAR 375 OF A Year of 365 Days Days. Decimal of a Year. 183 184 185 186 187 1 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 •5014 •5041 •5068 •5096 •5123 •5151 •5178 •5205 •5233 •5260 •5288 •5315 •5342 •5370 •5397 •5425 •5452 •5479 •5507 •5534 •5562 •5589 •5616 •5644 •5671 •5699 •5726 •5753 •5781 •5808 •5836 •5863 •5890 •5918 •5945 •5973 •6000 •6027 •6055 •6082 •6110 •6137 •6164 •6192 •6219 •6247 Days. Decimal of a Year. 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 265 266 267 268 269 270 271 272 273 2731 •6274 •6301 •6329 •6356 •6384 •6411 Days. Decimal of a Year. •6466 •6493 •6521 •6548 •6575 •6603 •6630 •6658 •6685 •6712 •6740 •6767 •6795 •6822 •6849^ •6877 •6904 •6932 •6959 •6986 •7014 •7041 •7068 •7096 •7123 •7151 •7178 •7205 •7233 •7260 •7288 •7315 •7342 •7370 •7397 •7425 •7452 •7479 •75 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 299 300 301 302 303 304 305 306 307 308 309 310 311 312 313 314 315 316 317 318 319 •7507 •7534 •7562 •7589 •7616 •7644 •7671 •7699 •7723 •7753 •7781 •7808 •7836 •7863 •7890 •7918 •7945 •7973 •8000 •8027 •8055 •8082 •8110 •8137 •8164 •8192 •8219 •8247 •8274 •8301 •8329 •8356 •8384 •8411 •8438 Days. Decimal of a Year. •8493 •8521 •8548 •8575 •8603 •8630 •8658 •8685 •8712 •8740 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 •8767 •8795 •8822 •8849 •8877 •8904 •8932 •8959 •9014 •9041 •9068 •9096 •9123 •9151 335 •9178 336 •9205 337 •9233 338 •9260 339 •9288 340 •9315 341 •9342 342 •9370 343 •9397 344 •9425 345 •9452 346 •9479 347 •9507 348 •9534 349 •9562 •9589 •9616 •9644 •9671 •9699 •9726 •9753 •9781 •9808 •9836 •9890 •9918 •9945 •9973 l^OOOO 376 ACCOUNTING IN THEORY AND PRACTICE Logarithms ■ 0123456789 100 0000 0004 0009 0013 0017 0022 0026 0030 0035 0039 101 0043 0048 0052 0056 0060 0065 0069 0073 0077 0082 102 0086 0090 0095 0099 0103 0107 0111 0116 0120 0124 103 0128 0133 0137 0141 0145 0149 0154 0158 0162 0166 104 0170 0175 0179 0183 0187 0191 0195 0199 0204 0208 105 0212 0216 0220 0224 0228 0233 0237 0241 0245 0249 106 0253 0257 0261 0265 0269 0273 0278 0282 0286 0290 107 0294 0298 0302 0306 0310 0314 0318 0322 0326 0330 ^ 108 0334 0338 0342 0346 0350 0354 0358 0362 0366 0370 ^'^'^oportionate 109 0374 0378 0382 0386 0390 0394 0398 0402 0406 0410 12 3 4 5 6 Parts. 1 7 8 9 10 0000 0043 0086 0128 0170 0212 0253 0294 0334 0374 4 8 11 0414 0453 0492 0531 0569 0607 0645 0682 0719 0755 4 8 12 0792 0828 0864 0899 0934 0969 1004 1038 1072 1106 3 7 13 1139 1173 1206 1239 1271 1303 1335 1367 1399 1430 3 6 14 1461 1492 1523 1553 1584 1614 1644 1673 1703 1732 3 6 12 11 10 10 9 17 15 14 13 12 21 19 17 16 15 25 29 33 37 23 26 30 34 21 24 28 31 19 23 26 29 18 21 24 27 15 1761 1790 1818 1847 1875 1903 1931 1959 1987 2014 3 6 16 2041 2068 2095 2122 2148 2175 2201 2227 2253 2279 3 5 17 2304 2330 2355 2380 2405 2430 2455 2480 2504 2529 2 5 18 2553 2577 2601 2625 2648 2672 2695 2718 2742 2765 2 5 19 2788 2810 2833 2856 2878 2900 2923 2945 2967 2989 2 4 8 8 7 7 7 11 11 10 9 9 14 13 12 12 11 17 20 22 25 16 18 21 24 15 17 20 22 14 16 19 21 13 16 18 20 20 3010 3032 3054 3075 3096 3118 3139 3160 3181 3201 2 4 21 3222 3243 3263 3284 3304 3324 3345 3365 3385 3404 2 4 22 3424 3444 3464 3483 3502 3522 3541 3560 3579 3598 2 4 23 3617 3636 3655 3674 3692 3711 3729 3747 3766 3784 2 4 24 3802 3820 3838 3856 3874 3892 3909 3927 3945 3962 2 4 6 6 6 6 5 8 8 8 7 7 11 10 10 9 9 13 12 12 11 11 15 14 14 13 12 17 19 16 18 15 17 15 17 14 16 25 3979 3997 4014 4031 4048 4065 4082 4099 4116 4133 2 3 26 4150 4166 4183 4200 4216 4232 4249 4265 4281 4298 2 3 27 4314 4330 4346 4362 4378 4393 4409 4425 4440 4456 2 3 28 4472 4487 4502 4518 4533 4548 4564 4579 4594 4609 2 3 29 4624 4639 4654 4669 4683 4698 4713 4728 4742 4757 1 3 5 5 5 5 4 7 7 6 6 6 9 8 8 8 7 10 10 9 9 9 12 11 11 11 10 14 15 13 15 13 14 12 14 12 13 30 4771 4786 4800 4814 4829 4843 4857 4871 4886 4900 1 31 4914 4928 4942 4955 4969 4983 4997 5011 5024 5038 1 32 5051 5065 5079 5092 5105 5119 5132 5145 5159 5172 1 33 5185 5198 5211 5224 5237 5250 5263 5276 5289 5302 1 34 5315 5328 5340 5353 5366 5378 5391 5403 5416 5428 1 3 3 3 3 3 4 4 4 4 4 6 6 5 5 5 7 7 7 6 6 9 8 8 8 8 10 11 13 10 11 12 9 11 12 9 10 12 9 10 11 35 5441 5453 5465 5478 5490 5502 5514 5527 5539 5551 1 36 5563 5575 5587 5599 5611 5623 5635 5647 5658 5670 1 37 5682 5694 5705 5717 5729 5740 5752 5763 5775 5786 1 38 5798 5809 5821 5832 5843 5855 5866 5877 5888 5899 1 39 5911 5922 5933 5944 5955 5966 5977 5988 5999 6010 1 2 2 2 2 2 4 4 3 3 3 5 5 5 5 6 6 6 6 5 9 8 8 8 8 10 11 10 11 9 10 9 10 9 10 40 6021 6031 6042 6053 6064 6075 6085 6096 6107 6117 1 41 6128 6138 6149 6160 6170 6180 6191 6201 6212 6222 1 42 6232 6243 6253 6263 6274 6284 6294 6304 6314 6325 1 43 6335 6345 6355 6365 6375 6385 6395 6405 6415 6425 1 44 6435 6444 6454 6464 6474 6484 6493 6503 6513 6522 1 2 2 2 2 2 3 3 3 3 3 5 5 5 5 6 6 6 6 6 6 8 7 7 7 7 9 10 8 9 8 9 8 9 8 9 45 6532 6542 6551 6561 6571 6580 6590 6599 6609 6618 1 46 6628 6637 6646 6656 6665 6675 6684 6693 6702 6712 1 47 6721 6730 6739 6749 6758 6767 6776 6785 6794 6803 1 48 6812 6821 6830 6839 6848 6857 6866 6875 6884 6893 1 49 6902 6911 6920 6928 6937 6946 6955 6964 6972 6981 1 2 2 2 2 2 3 3 3 3 3 5 5 5 4 4 6 6 5 5 5 7 7 6 6 6 8 9 7 8 7 8 7 8 7 8 LOGAEITHMS 377 LOGARITIJMS ■ 1 2 3 4 5 6 7 8 9 1 234 5 6789 60 6990 6998 7007 7016 7024 7033 7042 7050 7059 7067 1 2334 5 678 51 7076 7084 7093 7101 7110 7118 7126 7135 7143 7152 1 23345678 52 7160 7168 7177 7185 7193 7202 7210 7218 7226 7235 1 2 2 3 4 5 6 7 7 53 7243 7251 7259 7267 7275 7284 7292 7800 7308 7316 1 22345667 54 7324 7332 7340 7348 7356 7364 7372-7380 7388 7396 1 22345667 55 7404 7412 7419 7427 7435 7443 7451 7459 7466 7474 1 2 2 5 4 5 5 6 7 56 7482 7490 7497 7505 7513 7520 7528 7536 7543 7551 1 22 3 45567 57 7559 7566 7574 7582 7589 7597 7604 7612 7619 7627 1 22345567 58 7634 7642 7649 7657 7664 7672 7679 7686 7694 7701 1 12 3 4 4 5 6 7 59 7709 7716 7723 7731 7738 7745 7752 7760 7767 7774 1 12344567 60 77S2 7789 7796 7803 7810 7818 7825 7832 7839 7846 1 12 3 4 4 5 6 6 61 7853 7860 78C8 7875 7882 7889 7896 7903 7910 7917 1 12344566 62 7924 7931 7938 7945 7952 7959 7966 7973 7980 7987 1 12 3 3 4 5 6 6 63 7993 8000 8007 8014 8021 8028 8035 8041 8048 8055 1 12334556 64 8062 8069 8075 8082 8089 8096 8102 8109 8116 8122 1 12 3 3 4 5 5 6 65 8129 8136 8142 8149 8156 8162 8169 8176 8182 8189 1 12334556 66 8195 8202 8209 8215 8222 8228 8235 8241 8248 8254 1 12 3 3 4 5 5 6 67 8261 8267 8274 8280 8287 8293 8299 8306 8312 8319 1 12334556 68 8325 8331 8338 8344 8351 8357 8363 8370 8376 8382 1 12334456 69 8388 8395 8401 8407 8414 8420 8426 8432 8439 8445 1 12 2 3 4 4 5 6 70 8451 8457 8463 8470 8476 8482 8488 8494 8500 8506 1 12234456 71 8513 8519 8525 8531 8537 8543 8549 8555 8561 8567 1 12 2 3 4 4 5 5 72 8573 8579 8585 8591 8597 8603 8609 8615 8621 8627 1 12234455 73 8633 8639 8645 8651 8657 8663 8669 8675 8681 8686 1 12 2 3 4 4 5 5 74 8692 8698 8704 8710 8716 8722 8727 8733 8739 8745 1 12234455 75 8751 8756 8762 8768 8774 8779 8785 8791 8797 8802 1 12233455 76 8808 8814 8820 8825 8831 8837 8842 8848 8854 8859 1 12 2 3 3 4 5 5 77 8865 8871 8876 8882 8887 8893 8899 8904 8910 8915 1 12233445 78 8921 8927 8932 8938 8943 8949 8954 8960 8965 8971 1 12 2 3 3 4 4 5 79 8976 8982 8987 8993 8998 9004 9009 9015 9020 9025 1 12233445 80 9031 9036 9042 9047 9053 9058 9063 9069 9074 9079 1 12233445 81 9085 9090 9096 9101 9106 9112 9117 9122 9128 9133 1 12 2 3 3 4 4 5 82 9138 9143 9149 9154 9159 9165 9170 9175 9180 9186 1 12233445 83 9191 9196 9201 9206 9212 9217 9222 9227 9232 9238 1 12 2 3 3 4 4 5 84 9243 9248 9253 9258 9263 9269 9274 9279 9284 9289 1 12233445 85 9294 9299 9304 9309 9315 9320 9325 9330 9335 9340 1 12233446 86 9345 9350 9855 9360 9365 9370 9375 9380 9385 9390 1 12 2 3 3 4 4 6 87 9395 9400 9405 9410 9415 9420 9425 9430 9435 9440 11223344 88 9445 9450 9455 9460 9465 9469 9474 9479 9484 9489 011223344 89 9494 9499 9504 9509 9513 9518 9523 9528 9533 9538 011223344 90 9542 9547 9552 9557 9562 9566 9571 9576 9581 9586 011223344| 91 9590 9595 9600 9605 9609 9614 9619 9624 9628 9633 112 2 3 3 4 4 92 9638 9643 9647 9652 9657 9661 9666 9671 9675 9680 112 2 3 3 4 4 93 9685 9689 9694 9699 9703 9708 9713 9717 9722 9727 011223344 94 9731 9736 9741 9745 9750 9754 9759 9763 9768 9773 1 1 2 2 3 3 4 4 | 95 9777 9782 9786 9791 9795 9800 9805 9809 9814 9818 011223344| 96 9823 9827 9832 9836 9841 9845 9850 9854 9859 9863 112 2 3 3 4 4 97 9868 9872 9877 9881 9886 9890 9894 9899 9903 9908 112 2 3 3 4 4 98 9912 9917 9921 9926 9930 9934 9939 9943 9948 9952 011223344 99 9956 9961 9965 9969 9974 9978 9983 9987 9991 9996 011223334 378 ACCOUNTING IN THEOEY AND PRACTICE Anti-Logauithms ■ •00 1000 •01 1023 •02 1047 •03 1072 •04 1096 12 3 4 5 1002 1005 1007 1009 1012 1026 1028 1030 1033 1035 1050 1052 1054 1057 1059 1074 1076 1079 1081 1084 1099 1102 1104 1107 1109 6 7 8 1014 1016 1019 1038 1040 1042 1062 1064 1067 1086 1089 1091 1112 1114 1117 9 12 1021 1045 1069 1094 1119 1 3 5 6 7 8 9 112 2 2 112 2 2 112 2 2 112 2 2 12 2 2 2 •05 1122 •06 1148 •07 1175 •08 1202 •09 1230 1125 1127 1151 1153 1178 1180 1205 1208 1233 1236 1130 1132 1135 1156 1159 1161 1183 1186 1189 1211 1213 1216 1239 1242 1245 1138 1140 1143 1164 1167 1169 1191 1194 1197 1219 1222 1225 1247 1250 1253 1146 1 1172 1 1199 1 1227 1 1256 1 12 2 2 2 12 2 2 2 12 2 2 2 12 2 2 3 12 2 2 3 •10 1259 •11 1288 •12 1318 •13 1349 •14 1380 1262 1265 1291 1294 1321 1324 1352 1355 1384 1387 1268 1271 1274 1276 1279 1282 1297 1300 1303 1306 1309 1312 1327 1330 1334 1337 1340 1343 1358 1361 1365 1368 1371 1374 1390 1393 1396 1400 1403 1406 1285 1 1315 1 1346 1 1377 1 1409 1 12 2 2 3 2 2 2 2 3 2 2 2 2 3 2 2 2 3 3 2 2 2 3 3 •15 1413 •16 1445 •17 1479 •18 1514 •19 1549 1416 1419 1449 1452 1483 1486 1517 1521 1552 1556 1422 1426 1429 1455 1459 1462 1489 1493 1496 1524 1528 1531 1560 1563 1567 1432 1435 1439 1442 1 1466 1469 1472 1476 1 1500 1503 1507 1510 1 1535 1538 1542 1545 1 1570 1574 1578 1581 1 2 2 2 3 3 2 2 2 3 3 2 2 2 3 3 2 2 2 3 3 2 2 3 3 3 •20 1585 1589 1592 •21 1622 1626 1629 •22 1660 1663 1667 •23 1698 1702 1706 •24 1738 1742 1746 1596 1600 1603 1633 1637 1641 1671 1675 1679 1710 1714 1718 1750 1754 1758 1607 1611 1614 1644 1648 1652 1683 1687 1690 1722 1726 1730 1762 1766 1770 1618 1 1656 1 1694 1 1734 1 1774 1 12 2 3 3 3 2 2 2 3 3 3 2 2 2 3 3 3 2 2 2 3 3 4 2 2 2 3 3 4 •25 1778 1782 1786 •26 1820 1824 1828 •27 1862 1866 1871 •28 1905 1910 1914 •29 1950 1954 1959 1791 1795 1799 1803 1807 1811 1816 1832 1837 1841 1845 1849 1854 1858 1875 1879 1884 1888 1892 1897 1901 1919 1923 1928 1932 1936 1941 1945 1963 1968 1972 1977 1982 1986 1991 1 1 1 1 1 2 2 2 3 3 4 2 2 3 3 3 4 2 2 3 3 3 4 2 2 3 3 4 4 2 2 3 3 4 4 •30 1995 2000 2004 2009 2014 2018 2023 2028 2032 2037 112 2 3 3 4 4 •31 2042 2046 2051 2056 2061 2065 2070 2075 2080 2084 011223344 •32 2089 2094 2099 2104 2109 2113 2118 2123 2128 2133 112 2 3 3 4 4 •33 2138 2143 2148 2153 2158 2163 2168 2173 2178 2183 011223344 •34 2188 2193 2198 2203 2208 2213 2218 2223 2228 2234 112233445 •35 2239 2244 2249 2254 2259 2265 2270 2275 2280 2286 1 •36 2291 2296 2301 2307 2312 2317 2323 2328 2333 2339 1 •37 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10 11 13 •80 6310 6324 6339 6353 6368 6383 6397 6412 6427 6442 13 4 6 7 9 10 12 13 •81 6457 6471 6486 6501 6516 6531 6546 6561 6577 6592 2 3 5 6 8 9 11 12 14 •82 6607 6622 6637 6653 6668 6683 6699 6714 6730 6745 2 3 5 6 8 9 11 12 14 •83 6761 6776 6792 6808 6823 6839 6855 6871 6887 6902 2 3 5 6 8 9 11 13 14 •84 6918 6934 6950 6966 6982 6998 7015 7031 7047 7063 2 3 5 6 8 10 11 13 15 •85 7079 7096 7112 7129 7145 7161 7178 7194 7211 7228 2 3 5 7 8 10 12 13 15 •86 7244 7261 7278 7295 7311 7328 7345 7362 7379 7396 2 3 5 7 8 10 12 13 15 •87 7413 7430 7447 7464 7482 7499 7516 7534 7551 7568 2 3 5 7 9 10 12 14 16 •88 7586 7603 7621 7638 7656 7674 7691 7709 7727 7745 2 4 5 7 9 11 12 14 16 •89 7762 7780 7798 7816 7834 7852 7870 7889 7907 7925 2 4 5 7 9 11 13 14 16 •90 7943 7962 7980 7998 8017 8035 8054 8072 8091 8110 2 4 6 7 9 11 13 15 17 •91 8128 8147 8166 8185 8204 8222 8241 8260 8279 8299 2 4 6 8 9 11 13 15 17 •92 8318 8337 8356 8375 8395 8414 8433 8453 8472 8492 2 4 6 8 10 12 14 15 17 •93 8511 8531 8551 8570 8590 8610 8630 8650 8670 8690 2 4 6 8 10 12 14 16 18 •94 8710 8730 8750 8770 8790 8810 8831 8851 8872 8892 2 4 6 8 10 12 14 16 18 •95 8913 8933 8954 8974 8995 9016 9036 9057 9078 9099 2 4 6 8 10 12 15 17 19 •96 9120 9141 9162 9183 9204 9226 9247 9268 9290 9311 2 4 6 8 11 13 15 17 19 •97 9333 9354 9376 9397 9419 9441 9462 9484 9506 9528 2 4 7 9 11 13 15 17 20 •98 9550 9572 9594 9616 9638 9661 9683 9705 9727 9750 2 4 7 9 11 13 16 18 20 •99 9772 9795 9817 9840 9863 9886 9908 9931 9954 9977 2 5 7 9 11 14 16 18 20 ANSWERS TO EXERCISES Note. — In most cases the wliole of the solution is not given, but only sufficient of the answer to enable the student to locate any error he may have made in working out an exercise. Pac^e 39, Exercise 1 : — Profit and Loss. Dec. 31. To Wages „ Rent. „ Capital . £350 . 200 . 1587 £2137 Dec. 31. By Goods ,, Discount £2075 62 £2137 Balance Sheet as at 31st December. Liabilities. Assets. Rusk & Co. . George Tait & Son Bills payable Capital . £700 900 1000 2747 £5347 John Harvey Bills receivable Goods . Bank . Cash £300 2000 3000 37 10 £5347 Page 40, Exercise 2 : — Profit and Loss. Dec. 31. To Wages „ Rent. ,, Discount , , Capital . £600 H . 200 . 40 . 520 £1360 Dec. 31. By Goods . £1360 £1360 0. -.82 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet as at 31st December. Liabilities. Assets. A. Ross and Co. . . £200 Capital. . . . 1770 John Adamson Goods . Bank . Cash . . £900 . 1000 . 45 . 25 £1970 £1970 _0 Page 41, Exercise 3 Profit and Loss. Dec. 31. To Wages . £400 ,, Rent . . 150 ,, Discount . 35 „ Capital . 975 £1560 Dec. 31. By Goods . £1560 £1560 Balance Sheet as at 31st December. Liabilities. Assets. James Watt and Co. . £2100 John Reid . . £900 Capital . 2975 Office fittings and furni ture . , . 200 Goods . . 2000 Bank . . . 1515 Cash . • . 460 £5075 £5075 ANSWERS TO EXERCISES 383 Page 93, Exercise 1 :- THE HERITABLE LAND SOCIETY Statement of Affairs Liabilities. Assets. Expected to Estimated to rank. realise. I. Ordinary creditors . £200,000 I. Cash on hand . £100 II. Creditors secured on PROPERTY . £6000 II. III. Cash at bankers Book debts:— Good . . £1000 900 Deducted from Assets, Branch VI. Doubtful, III. Preferable £25,000, pro- duce . . 2000 CLAIMS . . £300 Bad, £1000 . 3,000 Deducted from Assets. IV. Bill of exchange . 22 V. Loans on mortgage. £170,000, produce . 60,000 VI. Property :— 1. Held by secured creditors, value .£12,000 Deduct— Secured debt, per Liabilities, Branch II. . 6,000 £6,000 2. Other pro- perty . 66,000 62,000 VII. Office furniture 100 £126,122 J>ecZtiCi;— Preferable Claims . Assets available for 300 division among ordi- nary creditors, showing a dividend of 12s. 7d. per £, exclusive of ex- penses £125,822 Deficiency . 74,178 £200,000 _o_ £200,000 384 ACCOUNTING IN THEORY AND PRACTICE Page 93, Exercise 2 :- WALLACE & GIBB Statement of Affairs Liahilities. Assets. I. II. OkDINARY CllEDITORS Creditors fully SECURED . . £4000 £6,000 I. II. Cash on hand Customers' accounts:— Good . . £1000 Doubtful, £100, estimated to produce . . 60 Bad, £200 . £50 1,060 III. Deducted from Assets, Branch V. Creditors partly SECURED . . £6300 Deduct — Value of securities assigned per Assets, Branch V. 800 6,500 III. IV. V. Bills receivable . Property, cost £3000, estimated to produce Securities :— 1. Held by credi- tors partly secured. . £800 800 2,000 IV. PREFERENriAL CLAIMS . . £150 Deducted from Assets. Deducted from Liabilities, Branch III. 2. Value of se- c ur i t i e s pledged to fully secured creditors . £6200 Deduct — Claims by fully secured cred itors, per Liabilities, Branch II. . 4000 2,200 Deduct — Prefereu - tial claims Assets available for divi- sion among ordinary creditors, showing a divi- dend of 10s. 4d. per £, exclusive of expenses •. Deficiency £6,110 150 £5,960 5,540 £11,500 £11,500 _0 ANSWERS TO EXERCISES 385 WALLACE & GIBB Deficiency Account To Loss from shrinkage of Assets, as shown in By Capital put into business : — Statement of Affairs : — Wallace .... £2,500 Book debts . . £240 Gibb .... 3,900 Property . 1,000 £6,400 £1,240 ,, Balance, being deficiency „ Stock Exchange losses . . 3,000 shown in Statement of ,, Trade expenses . 2,300 AflFairs . . . .5,540 ,, Business losses . 1,900 ,, Partners' drawings : — Wallace . £2000 Gibb . 1500 ^1 ^00 £11,940 _0 £11,940 _o Page 94, Exercise 3 : — Statement of Affairs Liabilities. as at 1st July. Assets. I. Ordinary creditors : — On open account On bills payable £9,000 . 20,000 £29,000 . Fully secured TORS CREDI- £2300 Deducted from Branch VIII. Assets, . Partly secured TORS . Deduct — Shares CREDI- £35,000 assigned in security, per Assets, Branch VII. 20,000 15,000 IV. Preferable claims £800 Deducted from Assets. Carry forward £44,000 I. II. III. IV. Cash in hand and in BANK . . . . £84 Office furniture, cost £300, estimated to realise .... 200 Four stations, build- ings, PLANT, steamers AND CARRYING CRAFT, cost £40,000, estimated to realise . . . 20,000 Book debts : — Good Doubtful, £200, estimated to realise . Bad, £300 £1000 75 Stock in Liverpool, cost £1500, estimated to realise .• . 1,075 1,200 Carry forward . £22.559 2 386 ACCOUNTING IN THEORY AND PRACTICE Statement of Affairs — continued. Liabilities. Assets. Brought forward , . £44,000 VI. Brought forward . . £22,559 Stock and book DEBTS, LESS SUNDRY LIA- BILITIES AT THE FOUR STATIONS ON COAST . £36,000 Deduct — Estimated loss on realisa- tion : — Stock . £6000 Book debts 9000 1 ^ 000 '^1 000 VII. Shares held . £20,000 These shares are assigned in security of debts amount- ing to £35,000, and their value is de- ducted from Liabilities, Branch III. VIII. Heritable property :— Value . . £3000 Deduct — Creditors' claims per Lia- bilities, Branch II. . . . 2300 700 £44,259 Deduct — Preferable claims per Liabilities, Branch IV 800 Assets available for divi- sion among ordinary creditors, showing a dividend of 19s. 9d. per £, exclusive of expenses £43,459 Deficiency . . . 541 £44,000 £44,000 _0_ ANSWERS TO EXERCISES 387 Deficiency Account. To Loss from shrinkage of Assets, By Capital in business six years as shown in State of ago £42,000 Affairs :— ,, Interest on capital for six Office furniture . . £100 years at £2000 a year 12,000 Buildings, plant, etc. ,, Profit shown in accounts : — at stations . . 20,000 1st vear . . £3,000 Book debts ... 425 2nd year . . 4,000 Stock in Liverpool . 300 3rd year . . 5,284 Stook and hook dehts at stations . . 15,000 £12.284 Deduct Losses : — £35,825 4th year . £1500 5th year . 2500 ,, Drawings at the rate of 6th year . 3000 £4000 a year for six years 24,000 7 c\(\ri 5,284 ,, Balance, being deficiency shown in Statement of Affairs .... 541 £59,825 _0_ _0 £59,825 Page 99, Exercise 1 Profit and Loss Account. To Wages . ,, Rent and taxes ,, Depreciation . „ Capital . £20 150 10 1373 By Silk „ Cloth „ Velvet £1553 £545 400 608 £1553 Balance Sheet as at 31st December. Liabilities. Assets. Webster and Co. Bills payable Capital £2200 2000 2178 £6378 T. Henry £600 Bills receivable .... 4000 Furniture and fittings . . 90 Stock :— Silk . . £400 Cloth . . 300 Velvet . . 708 Bank Cash 1408 50 230 £6378 388 ACCOUNTING IN THEORY AND PRACTICE Pase 101, Exercise 2 :- Frojit and Loss Account. To Department No. 1 . . . £2700 „ Net profit, allocated thus :— Tod, tAvo-thirds . £3300 Dick, one-third . . 1650 4950 By Department No. 2 do. No. 3 . . £3650 4000 £7650 £7650 Balance Sheet as at 31st December. Liabilities. Assets. Creditors : — On open account On bills payable Cash creditors . Capital :- Tod Dick £17,300 . 7,250 £18,000 10,000 28,000 £56,000 24,550 £80,550 _0 Customers ; — On open account , On bills receivable £29,000 . 3,000 Stock .... Sundry debtors on loans , Fixtures, fittings, and trade utensils ..... Business premises . ♦ Bank Cash on hand . . , . £32,000 38,000 1,000 950 6,500 2,000 100 £80,550 Page 103, Exercise 3 : — Profit and Loss Account. To Mace . ,, Office expenses „ Capital . £20 100 333 2453 By Cinnamon ,, Nutmegs , , Discount £180 270 3 £453 ANSWERS TO EXERCISES 389 Balance Sheet as at 31st December. Liabilities. Assets. W. Perkins Bills payable Capital £150 500 4108 £4758 Bills receivable . Stock :— Cinnamon £480 .0 Nutmegs 470 Cash £1125 950 2683 £4758 Pa<]re 104, Exercise 4: — R HAY & SONS, WINE MERCHANTS Profit and Loss Account. To Carriage . . . £50 ,, Wages and salaries 300 ,, Stationery and stamps . . 10 ,, Rent . . . 50 ,, Rates and taxes . 18 ,, Net profit . . 1642 £2070 By Gross profit : — Whisky . . £520 Brandy . . 800 Gin and Wines . 700 ,, Discount £2020 50 £2070 Page 132, Exercise 1 :- Joint Account. To Brown (goods) £1000 By Smith . . £1170 ,, Smith (freight and insurance) . 65 ,, Brown (share of profit) 52 10 ,, Smith (share of profit) 52 10 £1170 _0 £1170 Brown, Capital Account. To Balance . . £1052 10 By Joint Account . £1000 „ do. (share of profit) . 52 10 £1052 10 £1052 10 q 390 ACCOUNTING IN THEORY AND PRACTICE Smith, Capital Account To Joint Account £1170 By Joint Account . £65 , do. (share of £1170 profit) ,, Balance . 52 10 1052 10 £1170 Smith would pay to Brown £10o2:10s. Page 132, Exercise 2 : — E. Allan, Capital Account. To Bank ,, Adventure . £700 . 200 By Bank ,, Adventure (profit) ,, Balance . . £700 . 145 16 . 54 3 8 4 £900 _ — £900 T. Dick, Capital Account To Bank ,, Balance . . £500 . 104 3 4 By Bank „ Adventure (profit) . £500 . 104 3 4 £604 3 4 £604 3 4 Bank Account. To R. Allan . . £700 By Adventure . £900 „ T. Dick . . 500 „ do. . . . 50 „ Adventure . 1200 do. . . 200 „ R. Allan . . 700 „ T. Dick . . 500 ,, Balance . . 50 £2400 _0 £2400 Adventure Account. To Bank (timber) . . £900 ,, do. (charges) . 50 „ do. (freight, etc.) . 200 „ Profit:— R. Allan. £145 16 8 T. Dick . 104 3 4 250 £1400 To Bank . .. R. Allan £1200 200 £1400 T. Dick would get the balance in bank of £50, and R Allan would pay him £54 : 3s. 4d. ANSWERS TO EXERCISES 391 Page 190, Exercise 1 : — Balance Sheet as at 30th June. Assets. Liabilities. Capital liferented by Sum invested for widow . . . £5000 widow's liferent use Residue . . . 1700 onbondat4 per cent Balance in hands of £5000 executor 1700 £6700 £6700 _0^ _0 Page 192, Exercise 2: — Balance Sheet as at 31st December, 1900. .Liabilities. Assets.- Due to beneficiaries John Roberts, Jr. George Roberts . William Roberts Mary Roberts . Frank Smith £627 8 327 8 607 8 1141 2 453 14 £3157 Stock and shares Mortgages . Cash . £1000 1280 877 £3157 Page 223, Exercise 1 : — Balance Sheet as at 1st January. Liabilities. Assets. Partners' capital :- X . Y . . £8000 . 7800 £15,800 Book debts . Goods Heritable property Cash . . £2,800 . 2,000 . 5,000 . 6,000 £15,800 Paore 223, Exercise 2 : — X, Capital Account. Mar. 31. June 30. Sept, 30. Dec. 31. To Cash . „ do. . „ do. . „ do. . ,, Balance £200 200 200 200 1971 5 Jan. 1. By Balance . £2000 Dec. 31. ,, Interest . 85 ,, Share of profit . 686 5 £2771 5 £2771 5 392 ACCOUNTING IN THEORY AND PRACTICE Y, Capital Account. June 30. To Cash . Dec. 31. ,, do. . ,, Balance . £300 . 300 . 1128 15 Jan. 1. By Balance . £1000 Dec. 31. „ Interest . 42 10 ,, Share of profit . 686 5 £1728 15 _0 £1728 15 Page 223, Exercise 3 : — Assets .... £8000 Deduct — \ Cash in bank . £600 \ Liabilities . 4000 Amount business sold for Profit on realisation - 4600 £3400 . 5500 . £2100 of which each partner is entitled to one-half, namely £1050. A therefore receives . . £4050 B receives .... 2050 £6100 To pay this sum there is the cash the busi- ness was sold for ... . And the cash in bank . . . . £5500 600 £6100 Page 223, Exercise 4 Smith's Capital Account. Dec. 31. To Balance . £2550 19 7 Jan. 1. By Cash £500 Mar. 31. ,, do. 400 July 15. ,, do. 600 Dec. 31. ,, Interest ,, Profit ,, Salary 53 17 10 697 1 9 300 £2550 19 J £2550 19 7 ANSWERS TO EXERCISES 393 Brown^s Capital Account £2349 5 Jan. 1. Mar. 15. July 1. Dec. 31. By Cash ,, do. ,, Interest ,, Profit „ Salary . £500 . 300 . 600 51 18 . 697 1 . 200 8 9 £2349 5 £2349 _5 Page 224, Exercise 5 :- John Thin, Capital Account Dec. 31. To Balance £2610 £2610 Dec. 31. By Balance . . £2000 „ Profit and Loss Account (share of profit) . 610 £2610 Dec. 31. To Balance Richard Black, Capital Account. . £2410 £2410 Dec. 31. By Balance . . £1800 ,, Profit and Loss Account (share of profit). . 610 £2410 Profit and Loss Account To Trade expenses . ,, Interest . ,, Wages ,, Capital : — John Thin £610 Richard Black 610 £100 30 350 1220 £1700 By Goods . £1700 £1700 394 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet as at 31st December. Liahllities. Assets. Bills payable . Accounts due . Capital : — John Thin . £2100 . 2380 £2610 Richard Black 2410 5020 £9500 Bank .... Goods on hand Bills receivable Book accounts receivable £3000 2500 3200 800 £9500 Page 224, Exercise 6 : — A, Capital Account. Dec. 31. To Cash „ Balance . £1500 . 4600 Jan. 1. By Balance . £5000 Dec. 31. „ Interest . 250 „ Profit and Loss . 850 £6100 £6100 _0_ _0 B, Capital Account. Dec. 31. To Cash . £1,000 „ Balance . 11,200 Jan. 1. By Balance £10,000 Dec. 31. „ Interest 500 „ Profit and Loss . 1,700 £12,200 £12,200 C, Capital Account. Dec. 31. To Cash . £2,000 „ Balance . 10,200 £12 200 Jan. 1. By Balance £10,000 Dec. 31. „ Interest 500 ,, Profit and Loss . 1,700 £12,200 ANSWERS TO EXERCISES 395 Balance Sheet as at 31st December. Liabilities. Assets. As given . Capital : — A . £4,600 B . 11,200 C . 10,200 . £8,000 26,000 £34,000 As given £34,000 £34,000 Page 225, Exercise 7 : — Profit and Loss Account. To Bad debts ,, Depreciation . ,, Smith . „ Black . £700 150 325 325 £1500 By Balance £1500 £1500 Smith, Capital Account. To Balance . £2325 By Balance ,, Profit and Loss . £2000 . 325 £2325 £2325 BlacTc, Capital Account. To Balance £1825 £1825 By Balance ,, Profit and Loss £1500 325 £1825 396 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet as at 30th June. Liabilities. Creditors' Accounts Bank Partners : — Smith . . £2325 Black . , 1825 £8,000 1,000 4,150 £13,150 Customers' Accounts Less 10 per cent Stock-in-trade . . £7,000 700 Machinery and plant . . £3000 Less 5 per cent 150 £6,300 2,850 . 4,000 £13,150 Black will require to pay Smith £2325. Page 225, Exercise 8 : — A, Capital Account, To Share of discount and bad debts . £250 ,, Share of deprecia- tion . . . 200 , Balance . . 10,850 By Balance „ c. . . £9,800 . 1,500 £11,300 £11,300 JBf Capital Account. To Share of discount and bad debts . £250 ,, Share of deprecia- tion . . . 200 ,, Balance . , 11,050 By Balance . £10,000 . 1,500 £11,500 £11,500 ANSWERS TO EXERCISES 397 Balance Sheet as at 1st January. Liabilities. Creditors . Partners : — A. B. C. £10,850 11,050 10,000 £2,000 31,900 £33,900 Customers' Accounts Less 5 per cent . Bank . £10,000 500 Goods Plant and ma- chinery . . £4000 Less 10 per cent . . 400 £9,500 7,000 3,600 13,800 £33,900 Page 226, Exercise 9 Profit and Loss Account. To Cost of goods :— By Sales . . £20,400 ( Purchases £28,750 Deduct— Stock at close of year 12,600 « £16,150 . ,, Freight and carriage . 120 ,, Salaries and wages 570 ,, Rents, rates, taxes, and insurance 220 ,, Travelling expenses . 190 ,, Discount and commission . 70 ,, Gas and fuel 40 ,, Office and petty expenses . 120 ,, John Kay, three-fifths . £1752 „ W. Mack ay. two-fifths . 1168 2,920 £20,400 _0 £20,400 ( Balance Sheet Liabilities. Assets. Trade creditors Partners — J. Kay . . £12,552 W. Mackay . 8,368 £2,750 20,920 £23,670 Trade debtors . Stock Bank £4,320 ( 12,600 ( 6,750 ( £23,670 ( 398 ACCOUNTING IN THEORY AND PRACTICE Page 227, Exercise 10 : — Brown, Capital Account. To Balance £3800 £3800 By Balance . ,, Share of profit £1500 2300 £3800 Smith, Capital Account. To Bank £9400 £9400 By Balance . „ Share of profit ,, Share of goodwill £1550 2300 5550 £9400 Balance Sheet as at 1st January. Liabilities. Assets. Creditors' openaccounts £4, 000 Bills payable . . 3,000 Bank overdraft . . 8,400 Capital, Brown . . 3,800 £19,200 Customers' open counts Bills receivable . Deduct 5 per cent Stock . Goodwill .£5,000 . 2,000 £7,000 . 350 £6,650 . 7,000 . 5,550 £19,200 ANSWERS TO EXERCISES 399 Pa^e 227, Exercise 11: — Profit and Loss Account. To Cost of goods : — Purchases Deduct — Stock at end of year Rent, rates, taxes, and insur ance .... Office and general expenses Freight and carriage Horse keep . Discounts and allowances Interest, commission, and banli charges Printing, stationery, and ad vertising Travelling expenses Salaries and wages £6000 1000 £5000 150 . 130 . 120 80 40 30 1 20 130 . 1000 By Sales £8500 ,, Interest on partners' draw- ings :— W. Johnston £17 10 E. Brown . 12 10 30 Partners' accounts, for profit : — W. Johnston . £1098 E. Brown . 732 £6700 1830 £8530 Balance Sheet as at 31st December, Liabilities. £8530 I Trade creditors .... I Partners' capital : — W. Johnston . £3380 10 E. Brown , . 2219 10 £500 — 5600 £6100 Trade debtors Stock Plant and machinery . Office furniture and fittings Horses, carts, and harness . . £3000 . 1000 . 1800 . 100 . 200 £6100 _0 Page 228, Exercise 12 : — Trading Account. To Cost of goods :— Stock at 1st Jan. Purchases . £2,100 . 10,300 By Sales ,, Consignments . ,, Commissions . . £5,500 . 6,700 610 Deduct— Stock at 31st Dec. £12,400 2,300 „ Wages . . „ Profit and Loss £10,100 400 . 2,310 £12,810 £12,810 400 ACCOUNTING IN THEORY AND PRACTICE Profit and Loss Account. To Rent, rates, and insur- By Trading Account . £2310 ance .... £185 ,, Interest 50 ,, Interest and discount . 250 ,, Salaries 650 ,, Loss on exchange 400 , , Reserve for losses on bad debts 123 £1608 ,, Partners' salaries : — A . £100 B . 100 G . 50 250 „ Interest on partners' capital : — A . £90 B . 60 C . 30 180 ,, Partners, for share of profits : — ■ A . £161 B . 107 6 8 . 53 13 4 322 £2360 _0 £2360 Balance Sheet Liabilities. Assets. Trade creditors . Loan Partners' capital : — A . . £1601 . £2890 . 1200 1017 6 8 383 13 4 3002 £7092 Book debts Less 3 per cent Stock Plant and fixtures Unexpired insurance pre mium ... Rent paid in advance Cash on hand and in bank £4100 123 £3977 2300 400 10 400 £7092 ANSWERS TO EXERCISES 401 Page 229, Exercise 13:— Manufacturing Account. To Cost of goods :— Stock at beginning of year £3000 Purchases. . . . 6000 By Profit and Loss Account . £9340 £9000 Deduct— ^tock at end of year 4000 £5000 ,, Wages 4040 ., Power, etc 300 £9340 _0 £9340 Profit and Loss Account. Manufacturing Account £9,340 By Sales . . £16,000 , Rent .... 300 ,, Discount . 100 , Travelling expenses 150 , Commission 200 , Discount 160 , Freight outwards . 110 , Fire insurance 60 , Interest and bank charges 60 , Horse keep . 70 , Advertising . . 85 , Bad debts written off . 100 , Do. reserved 100 , Sundry expenses . 170 , Depreciation : — Machinery £245 C Office furniture 19 12 C 264 12 , Interest on partners' capital John Smith . £200 C William Brown 150 C 350 , Salaries of partners : — - John Smith . £700 C William Brown 400 C ■ 1,100 , Partners, for share of profits : — John Smith £1740 4 C William Brown 1740 4 C ■ 3,480 8 £16,100 £16,100 2 1) 402 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet Liabilities. Assets. Creditors' Accounts . . . £600 Bills payable . . . . 500 Wages due .... 40 Partners' capital : — John Smith . £5740 4 William Brown 4690 4 10,430 8 £11,570 8 Customers' Accounts . Deduct 5 per cent , Bills receivable Stock Unexpired insurance . . £2,000 100 £1,900 Machinery Less 7 per cent Buildings . Office furniture . Less 7 per cent £3500 245 £280 19 12 Cash on hand and in bank 885 4,000 20 3,255 1,000 260 250 £11,570 Page 230, Exercise 14 Profit and Loss Account. To Cost of goods : — Stock at 1st Jan. Purchases . Deduct — Stock at 31st Dec. Wages .... Rent, rates, taxes, etc. Patent rights — ^vritten off Coal and lighting . Carriage Trade expenses Depreciation Partners, for share of profit :— John Richards £730 15 5 Robert Low . 456 14 7 £4,500 7,000 £11,500 5,000 £6,500 1,500 100 200 150 100 150 112 10 £8,812 10 1,187 10 £10,000 1 By Sales £10,000 £10,000 ANSWERS TO EXERCISES 403 Balance Sheet Liabilities. Assets. Creditors £1,750 Partners : — John Richards £8130 15 5 Robert Low . 5056 14 7 13,187 10 £14,937 10 Book debts Stock .... Plant and machin- ery . . £2250 Less 5 per cent 112 10 £3,200 5,000 Land and buildings Patent rights Bank 2,137 10 3,000 200 1,400 £14,937 10 Pa^e 231, Exercise 15 : — Profit and Loss Account To Cost of goods :— By Sales . . £8000 Stock at beginning of year £3000 Purchases .... 5000 £8000 Deduct — Stock at end of year 2100 £5900 ,, Rent, rates, taxes, and in- surance .... 400 ,, Freight and carriage . 70 ,, Salaries and wages 430 U ,, Coals, gas, and lighting 40 ,, Printing, stationery, and advertising 60 u ,, General office expenses . 50 ,, Discount and commission 150 u £7100 , , Partners, for share of profit : — Gow . . £600 Erskine . . 200 Scott . . 100 900 £8000 £8000 404 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet Liabilities. Assets. Creditors . Partners : — Gow Erskine . Scott £5400 1800 900 £1100 8100 £9200 Debtors Stock Fixtures and fittings Land and buildings Bank Page 232, Exercise 16 : — Journal Fraser Dr. To Ruby Diamond Co. . . . „ Expenses „ Interest . . . . . £3316 10 £3600 2100 400 2300 800 £9200 £3000 9 307 10 Page 244, Exercise 1 : — The average annual profit from manufacturing is £6000. Page 244, Exercise 2 : — SCOTTISH UNION BANK Profit and Loss Account Expenditure. Income. To Bad debts .... £3,000 „ Expenses .... 11,500 ,, Balance carried down, being profit for year . . . 17,990 By Gross profit . . « £32,490 £32,490 To Interim dividend paid . . £5,720 „ Balance .... 13,830 £32,490 By Balance of profit from last year £1,560 ,, Profit for year as above . 17,990 £19,550 _0 £] 9.550 ANSWERS TO EXERCISES 405 Balance Sheet as at 31st December. Liabilities. Assets. Due to public : — Cash in hand . £38,135 Notes issued , £39,700 Cash at call . 44,230 Customers' credit balanc( JS 897,530 Investments Stamps in hand . 328,465 505 £937,230 Premises 37,250 Due to shareholders : — Customers' debit balances . 762,355 Capital . £114,430 Reserves . 145,210 Unpaid dividends 240 Undivided profit . 13,830 273,710 21,210,940 £1,210,940 Page 244, Exercise 3 : — Eevised Balance Sheet Liabilities. Assets. Capital : — . 15,000 shares of £5 each . . £75,000 Less — Calls in arrear . . 7,500 Creditors £67,500 17,800 £85,300 Expenditure on Capi- tal Account . £74,800 im— Written off. 47,200 Book debts Stock . Cash £27,600 32,100 19,900 5,700 £85,300 4o6 ACCOUNTING IN THEORY AND PRACTICE Page 245, Exercise 4 : — Increase. Decrease. Land and buildings Plant and machinery . Horses and waggons Goods on hand .... Goods receivable .... Cash in bank .... Agency investments . £400 3200 3000 £1700 450 400 170 £6600 £2720 Q Net increase of Assets . . 3880. £6600. 0. Liabilities. Decrease. Increase.. Creditors on open accounts .... Bills payable ...... Mortgage £6000 £200 5000 £6000 £5200 Net decrease of Liabilities 800 £6000 0- The profits earned, amounting to £4680, are accounted for as follows : — Increase of Assets Decrease of Liabilities £3880 800 £4680 ANSWERS TO EXERCISES 407 Pa^re 246, Exercise 5 Profit and Loss Account for Half-year, To Cost of goods :— Stock on hand 1st July . £11,600 Purchases . 33,000 £44,600 Deduct — Stock on hand, 31st December 10,600 £34,000 „ Wages 35,200 ,, Coal . 2,400 ,, Salaries, general 4,400 , , do. manage- ment. . 2,000 U ,, Insurance . 350 ,, Repairs 400 ,, Discount and al lowances . 2,500 ,, Freight 600 ,, Discount and in terest 300 ,, Miscellaneous ex ;)enses ,, A lowance for bac 1,720 debts 940 ,, Depreciation 480 £85,290 , , Profit for year 2,380 £87,670 _0_ _0 To Dividend for half year on prefer ence shares £800 u ,, do. onordi nary shares 600 ,, Balance 2,&80 £3,980 _q _0 By Salea . £87,670 £87,670 By Balance . . £1,600 „ Profit for half. year as above . 2,380 £3,980 4o8 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet. Liabilities. Assets. Accounts payable . Bills payable .... Due to shareholders : — Preference stock . £40,000 Ordinary stock . 40,000 £4,000 c 10,400 ( ) ) Book debts . Less — Allowance debts for bad £18,800 940 £17,860 £80,000 Dividend for half- year on preferred stock ... 800 83,980 C ) Stock on hand Investments . Plant and machinery Less 3 per cent Property and building Patents and goodwill Cash in bank . £16,000 480 10,600 6,200 15,520 13,000 32,000 3,200 Dividend for half- year on ordinary stock ... 600 Undivided profit . 2,580 ?s . £98,380 C ) £98,380 Page 247, Exercise 6 : — Trading Account, To Cost of goods :— Stock at begin ning of year . Purchases . £10,000 60,000 By Sales . ,, Commissions . £80,000 . 1,500 Deduct — Siocl at end of year £70,000 9,000 £61,000 „ Wages . ,, Fire Insurance „ Rent . ,, Rates and taxes ,, Gas, electric light and water . ,, Advertising ,, Price lists . ,, Carriage, etc. ,, General trade ex 4,500 150 3,000 500 600 900 1,600 1,500 • penses ,, Discount . ,, Annual painting of premises ,, Salaries 400 80 : 70 700 ! ,, Balance . carriec to TrafingvAc count ^ . £75,000 1 6,500 £81^00_ £81,500 ANSWERS TO EXERCISES 409 Profit and Loss Account. To Interest . ,, Bad debts ,, Preliminary penses . . £500 . 200 X- . 500 £1200 Balance, profit for year . . . 7300 £8500 To Interim dividend . £1500 ,, Balance . . . 6800 £8300 By Trading Account . £6500 ,, Discount . . 2000 £8500 By Balance from last year . . . £1000 ,, Profit for year as above . . . 7300 £8300 Balance Sheet as at 31st December. Liabilities. Assets. Due to creditors : — ' Sundry creditors . Bills payable . £15,000 2,000 Sundry debtors . St03k .... Land and buildings Fixtures and furniture . Fire insurance paid in ad vance Goodwill Preliminary expenses . Cash on deposit . Cash in bank Cash in hand . . , £3,250 9,000 12,000 700 50 3,000 500 5,000 200 100 Due to shareholders :- Capital Undivided profit . £17,000 £10,000 6.8C0 16,800 _0 £33,800 £33,800 Page 250, Exercise 1 : — Journal Goods .... Book debts Fixtures, fittings, and utensil Plant .... Goodwill To Tod & Co. Tod & Co. To Cash . ,, Capital Dr. Dr. £30,000 8,000 1,000 1,500 9,500 50,000 £50,000 10,000 40,000 410 ACCOUNTING IN THEORY AND PRACTICE Page 251, Exercise 2 1. Closing Entries Journal. Company To Land and buildings Dr £48,000 £10,000 ,, Plant and machinery . 15,000 „ Book debts . 7,000 ,, Goods . 8,000 „ Goodwill . 8,000 Bills payable . Dr. 3,000 Debentures > J 15,000 Preference shares 1) 15,000 Ordinary shares 15,000 To Company . 48,000 2. Opening Entries Journal, Land and buildings Plant and machinery Book debts . Goods . Goodwill To Bills payable ,, Debentures . ,, Preference shares ,, Ordinary shares Dr. >> £10,000 15,000 7,000 8,000 8,000 £3,000 15,000 15,000 15,000 Page 251, Exercise 3 ; — Net Assets Goodwill, say three years' purchase of net profits . Stock to be allotted . Total, £77,000. ABC £14,000 £20,000 £25,000 6,000 9,000 3,000 £20,000 £29,000 £28,000 ANSWERS TO EXERCISES 411 Page 251, Exercise 4 :- Journal Cash ..... To Capital, Land and buildings Coal-gas plant, machinery, and fit tings "Water-gas plant, machinery, and fit tings Mains ..... Meters ..... Supplies Office furniture and fittings . To Private firm ,, Reserve Fund Private firm .... To Cash .... ,, Heritable bond . Dr. Dr. Di £21,000 5,000 2,200 1,800 6,000 300 700 150 16,000 £21,000 16,000 150 13,000 3,000 Page 257, Exercise 1 : — Profit and Loss Account. To Stock at 1st January . ,, Purchases . ,, Wages (making) , , Balance carried down £7,000 8,000 2,400 3,600 £21,000 To Wages (foreman and ware- house) .... ,, Salesman and office expenses . ,, Rent, rates, and insurance . ,, Travelling and commission . ,, Advertising and other trade expenses ,, Discounts and bad debts ,, Bank interest and charges . ,, Interest on loan . , , Net profit . :300 500 100 310 200 350 50 50 740 £3,600 By Sales ,, Stock at 30th June £13,000 8,000 £21,000 By Balance brought down . £3,600 £3,600 Pase 257, Exercise 2 Trading Account. To Stock at beginning of year . . £3,000 „ Purchases . . 25,000 ,, Gross profit on goods . . 4,500 £32,500 By Sales . . £30,000 ,, Stock at end of year 2,500 £32,500 412 A ceo UN TING IN THE OR Y AND PR A CTICE Profit and Loss Account. To Rent, rates, taxes, etc. . ,, General expenses . ,, Petty cash . ,, Wages and salaries ,, Carriage „ Bad debts . ,, Net profit £500 300 98 1300 300 150 2752 By Gross profit goods ,, Discount on . £4500 900 £5400 £5400 Balance Sheet as at 31st December. lAahilities. Assets, Trade creditors . . £3,000 Bills payable . . 1,000 W. S. Black, Capital . 8,752 £12,752 Customers . Bills receivable . Stock Bank . Petty cash on hand . £7,047 . 2,000 . 2,500 . 1,200 5 £12,752 Page 258, Exercise 3 : — Trading Account. To Stock at 1st Jan. . £12,500 By Sales . . . £53,100 0' ,, Purchases . . 41,750 „ Stock at 31st Dec. 16,400 „ Wages . . 7,910 ,, Depreciation on machinery and plant . . 155 „ Balance, carried to Profit and Loss . 7,185 £69,500 _0 £69,500 ,Profit and Loss Account. To Fire insurance ,, Discount ,, Rent, rates, and taxes . ,, Bad debts ,, Trade expenses ,, Net profit £60 310 730 660 345 5080 £7185 By Trading Account . £7185 £7185 ANSWERS TO EXERCISES 413 Balance Sheet as at 31st December. Liabilities. Assets. Creditors :— On open account . On bills payable . £6,225 7,900 Customers : — On open accounts On bills receivable Consignments . Stock .... Machinery and plant Bank .... . £11,100 1,450 £12,550 3,100 . 16,400 2,945 . 3,710 Charges outstanding Advances on consignments Reserve and contingency fund John Dick, capital . £14,125 50 2,400 850 . 21,280 £38,705 £38,705 Page 259, Exercise 4 Profit and Loss Account. 3,230 i £3,830 To Stock at 1st January . £3,000 By Sales .... . £19,000 ,, Purchases . 7,600 ,, Rent of steam power . 300 ,, Wages . . . . 4,800 ,, Stock at 31st December 5,000 ,, Fuel 600 ,, Depreciation of machinery and plant 700 ,, Balance carried down . 7,600 £24,300 £24,300 To Salaries £1,200 By Balance brought down . £7,600 a ,, Travelling expenses . 500 ,, Interest 120 ,, Stationery and printing 240 ,, Rent and taxes . 700 * ,, Discounts and allowances 400 ,, Insurance . 190 „ Freight 300 ,, General expenses 120 , , Balance carried down . 3,830 £7,600 _o £7,600 To Interest on capital :— By Balance brought down . £3,830 A . . . . £400 B . . . 200 £600 ,, Net profit, allocated thus :- — A, two-thirds £2,153 6 8 B, one-third 1,076 13 4 £3,830 414 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet as at 31st December. Liabilities. Assets. Creditors . . . . Bank overdraft Capital : — A . . £10,553 6 8 13 . . 5,276 13 4 £800 1,000 15,830 £17,630 Customers .... Less Discount at 3 per cent . Plant and machinery . £7000 Less Depreciation at 10 per cent . . 700 Stock Unexpired insurance Loan Account . Cash on hand . £5,000 150 £4,850 6,300 5,000 40 1,400 40 £17,630 Page 259, Exercise 5 Trading Account. To Stock at beginning of year Purchases . Coal .... Gas and water . Oil, grease, and waste Wages Repairs Depreciation of machinery, etc. Gross profit on trading £2,500 8,000 70 20 40 1,000 100 200 1,070 £13,000 By Sales . ,, Stock at end of year £10.000 3.000 £13,000 Profit and Loss Account, To Carriage, cartage, and horse expenses . Feu-duty £500 50 Rates, taxes, and insurance 70 Bank interest 20 Discounts and allowances 410 Bad debts . 100 Salaries 400 Incidental expenses 150 Partners' salaries . 300 £2000 By Trading Account . ,, Net loss, allocated thus : — Jamieson . £516 13 4 Robb , . 413 6 8 £1070 030 £2000 ANSWERS TO EXERCISES ii Balance Sheet as at 31st December. Liabilities. Assets. Creditors : — On open account On bills payable Expenses accrued to date . Provision for discount Provision for bad debts Capital : — J. Jamieson . £4483 6 E. Robb . 3586 13 £2,000 3,000 £5,000 50 210 40 8,070 £13,370 Customers : — On open account On bills receivable £4,200 . 1,000 £5,200 Stock 3,000 Buildings, fixed machinery, and plant 3,800 Horses, carts, harness, etc. . . 400 Loose tools, utensils, and furniture 150 Cash at bank . . . . 800 Cash in hand . . . . 20 £13,370 Page 260, Exercise 6 Profit and Loss Account. To Stock at beginning of year £2,000 By Sales . . £10,000 ,, Purchases. 2,000 )» Stock at end of year 2,040 „ Wages . . . ,, Books, labels, etc. 5,000 500 ,, Rates and taxes 40 ,, Insurance . 10 ,, Carriage . 150 ,, Petty cash and postages 95 ,, Interest on loan 50 „ Discount and bad debts 60 ,, Depreciation 135 ^ £10,040 „ Net profit . 2,000 £12,040 i £12,040 4i6 ACCOUNTING IN THEORY AND PRACTICE Balance Sheet as at 31st December. Liahilifies. Assets. Creditors .... £1500 Loans (including interest due, £50) 1050 Capital . , , , . 5700 £8250 Due by customers Less 6 per cent Bills receivable Stock . Machinery and plant Land and buildings Stamps on hand Cash at bank and in hand £1000 60 £940 500 2040 1425 1940 5 1400 £8250 Page 272, Exercise: — Goods Account. Jan. 1. To stock . 31. ,, Purchases . . ,, Gross profit. £3000 4000 1515 £8515 Jan. 31. By Sales „ Stock, . £6000 , 2515 £8515 Page 273, Exercise 1 :- Profit and Loss Account. To Salaries ,, Rent, rates, and taxes ,, Office expenses . ,, Stationery . , Capital £600 90 250 60 £1000 1200 £2200 By Fees and commissions : — Received during year . £2000 Outstanding at close of year . . . . 700 Deduct — Outstanding at beginning of year £2700 500 £2200 ANSWERS TO EXERCISES 417' Balance Sheet as at 31st December. Liabilities. Assets. ¥ Due to clients Capital , £1500 3100 £4600 Due by clients . . . £3000 Fees and commissions out- standing , . . . 700 Office furniture and fittings . 200 Bank 700 £4600 Page 273, Exercise 2 : — Profit and Loss Account. To Wages and salaries . £17,000 By Gross profit on goods £22,300 ,, Sundry expenses 900 ,, Discount 600 ,, Taxes and insurance 175 ,, Profit on sale of consols . 150 ,, Repairs . 300 „ Profit on sale of £1000 „ Bad debts 1,333 6 8 Great Western ordinary ,, Interest . 25 stock . . . . 30 ,, Capital, for net profit 3,346 13 4 £23,080 _0 £23,080 _0 Balance Sheet as at 31st December. Liabilities. Assets. Due to bank Capital £500 10,966 13 4 £11,466 13 4 Sundry debtors Stock . Plant and machinery Warehouse . Cash 2 E £1,766 1,800 2,500 3,000 2,400 £11,466 13 4 4i8 ACCOUNTING IN THEORY AND PRACTICE Page 274, Exercise 3 : — Frojii and Loss Account. To Stock at 1st July . £15,000 By Sales . £34,500 ,, Purchases . 18,500 ,, Stock at 30th June . 13,000 „ Wages .... 3,100 ,, Repairs ,, Balance carried down . 300 10,600 £47,500 £47,500 To Salaries and wages — oflBce £800 By Balance brought down . £10,600 ,, Carriage and freight 1,500 ,, Rates and insurance 1,550 ,, Trade expenses 1,250 ,, Discounts and allowances 1,475 ,, Bad debts . 350 , , Bank interest and charges 250 , , Interest on bond on property' 200 ,, Partners' salaries . 900 ,, Ket profit, allocated thus : — W. Hardie . £1511 5 ( ) T. Allan . 813 15 C ) - 2,325 ' £10,600 _o £10,600 J Balance Sheet as at 30th June. LiaUIities, Creditors .... . £7,500 Customers .... .£11,500 Bankers .... . 3,000 Stock .... . 13,000 Bond over property . Allowance lor bad debts . . 5,000 Heritable property . . 10,000 150 Machinery and plant . . 2,500 Allowance for discounts 575 Loose tools, horses, etc. . 1,550 Trade expenses outstanding 50 Cash in hand 50 Capital :— W. Hardie . £14,511 5 T. Allan . 7,813 15 — 22,325 • £38,600 £38,600 _0 ^ ANSWERS TO EXERCISES 419 Page 275, Exercise 4: — ProM and Loss Account. To Goods on hand at 1st Tulv . £2,741 By Sales (less returns, £330) .£15,670 ,, Purchases . . . . 8,400 ,, Stock on hand at 31st Dec. . 3,500 ,, Wages 1,404 ,, Repairs . . . . 84 ,, Depreciation on plant and machinery 150 ,, Balance carried down . 6,391 £19,170 _0 £19,170 _0 To Discount . £548 By Balance brought down . . £6,391 ,, Rent, rates, and taxes . 100 ,, Royalties , • • 40 ,, Advertising . 460 ,, Traveller's salary . 430 ,, Carriage 390 ,, Bad debts . 100 ,, Interest 120 ,, Trade and general expenses 502 £2,650 ,, Net profit, allocated thus :— Smart, two- thirds . £2520 13 4 t Currie, one- ■#• third . 1260 6 i - 3,781 £6,431 _0 £6,431 _0 Balance Sheet as at 31st December Liabilities. Assda. Creditors Loan on mortgage . Royalty received in advance . Reserve for bad and doubtful debts . . . . • Reserve for discounts on book debts Capital : — Smart . £7320 13 4 Currie . 3540 6 8 £1,970 4,500 500 ■ 540 197 10,861 £18,568 Debtors . Bills receivable •Stock . Buildings Plant and machinery Patent rights Cash at bankers Petty cash on hand £7,365 200 3,500 4,000 a 2,850 50 600 3 £18,568 420 ACCOUNTING IN THEORY AND PRACTICE Page 276, Exercise 5 :- YOUNG, SCOTT, & ALLAN Trop, and Loss Account. To Stock, etc., at 1st January . £1,400 By Sales. . £12,541 ,, Purchases : — ,, Stock at 31st December 1,300 Materials . £2500 Goods . 4000 6,500 u „ Wages .... . 3,800 ,, Repairs and renewals . 70 ,, Depreciation on machinery and plant . 100 ,, Gas for lighting and power . 85 ,, Balance carried down . . 1,886 £13,841 _0 To Salaries and commissior IS . £400 By Balance brought down ,, Postages and stationery 60 ,, Carriage and cartage 70 ,, Rent, rates, and taxes 150 - ,, Insurances . 17 ,, Advertising . 25 ,, Trade expenses 30 ,, Discount 54 „ Goodwill 25 ,, Balance carried down . 1,055 £M86_ ^ _q To Interest on partners* cap ital :— By Balance brought down Young . £80 ,, Interest on partners' draw- Scott 45 ings :— Allan 45 Young .£300 Scott . .200 Allan . .10 •kT i^ _i?j- M i 1J.-1 £170 £13,841 £1,886 Young, one-half £445 10 Scott, one-fourth 222 15 ' Allan, one-fourth 222 15 891 £1,061 £l,i £1,055 £1,061 ANSWERS TO EXERCISES 421 Balance Sheet as at 31st December. Liabilities. Assets. Sundry creditors Allowance for discounts Capital : — Young . . £2022 10 Scott . . 1095 15 Allan . . 1106 15 £230 70 4225 £4525 Page 309, Exercise :- Sundry debtors . Stock . . . . Goodwill Patents Patterns and drawings Plant and machinery . Cash at bank Cash in hand . . £800 1300 175 100 110 1400 600 40 £4525 Net profit per accounts £1000 Add the following items charged before arriving at net profit, but upon which income tax is payable : — Income tax Feu-duty . Interest on mortgagi Interest on loan Interest on capital Partners' salaries £30 25 100 60 300 500 Assessable profit for year 1015 £2015 Pcage 356:— Exercise 1. Exercise 2. 1st August. SOth January. /0 ^ or THF UNIVERSITY INDEX Abstract of Customers' Ledger and Purchases Ledger, method of preparing, 33 Accident insurance, 148 Accountant, classification of business of an, 8 Accounting, definition of, 1 * main branches of, 1 Allotment letter, form of, 241 Analysis of Ledger Accounts, 109 Application and Allotment Book of joint-stock company, 234 Apportionment, Act of 1870, 154 annuities, 165 bonuses returned as capital, 167 casualties, 164 commercial, 157 dividends and interest upon shares and debentures in public com- panies, 166 exceptions to, 170 fore-hand rents, 163 heritors' assessment, 164 in connection with testamentary deeds, 156 interest on money lent, 165 interim dividends and bonuses, 166 minister's stipend, 164 profit from private partnerships, 169 property not producing revenue, 171 rent charges, 164 rents, 160 rents under the Land Clauses Act, 1845, 169 stocks and shares bought and sold, 167 table of particulars of companies, 174 use of interest tables in apportioning sums for different periods, 153 wages and salaries of servants and workmen, 165 Appropriation Account, Profit and Loss, 56 Arrangement of Profit and Loss Accounts, 55 Assessment tables, to prepare, 310 Assets, definition. 67 fixed, 67 floating, 67 in connection with investigations, 333 permanent, 67 valuation of, in bankrupt estates, 83 Assurance, life, 147 Audit, commercial accounts, 353 companies, 351 objects of, 348 ottice regulations to prevent fraud, 353 partial, 352 Partnership Accounts, 350 points to be attended to in a first audit, 350 Auditor, the duties and responsibilities of an, 348 Average due date, to calculate, 354 Balance Account, 72 Balance, contracts not completed at date of, 267 Balance Sheet, 18 arrangement of, 76 connection between the Trial Balance, Profit and Loss Account, and Balance Sheet, 65 definitions of, 69, 70 distinction between Profit and Loss Accoxint and Balance Sheet, 70 double account form of, 79 on which side the assets should be placed, 70 regulations under Companies Act, 1862, 74 Bankrupt, Statement of Afi"airs of a, 83 Bill Book and Journal, 26 Bills of exchange, 8, 9, 149 Book-keeping, basis of accounting, 2 by double entry, compared with single entry, 42 definition of, 4 features of best system of, 23 points to be kept in mind in devising a set of books for a business, 22 424 ACCOUNTING IN THEORY AND PRACTICE Book-keeping, practical, 22 practical, further developed, 32 single eutry, 42 the whole theory of, contained in Ledger, 22 Branches, accounts of, 95 foreign, 288 British currency, 277 Call letter, form of, 243 Capital Account, in double account form of Balance Sheet, 79 the account of the owner of a business, 69 Capital, as excess of assets over liabilities, 69 definition of, 68 insurance of the risk of losing, 47 return from, how divided by econo- mists, 47 Card or loose-sheet system of keeping Ledger Accounts, 114 applied to Shareholders' Ledger, 115 Cash Book, example of columnar, 34 in practical book-keeping, 23 with Discount, Bank, and Cash columns, 27 Cash on hand, in auditing, 350 Charge and Discharge Account, 175, 180 Charges, shop establishment, 265 Check Ledgers, 113 Closing entries, 15 use of Journal for, 25 Colliery sinking or redemption funds, 128 f Columnar Cash Book, description of, 32 posting of, 33 specimen, 34 Companies, joint-stock, exercises, 244, 250 points to be attended to in auditing, 351 table of particulars for apportion- ment, 174 the conversion of a private firm into a joint-stock company,^4^ Consignment Account, 131 Contingent fund, 121 Contingent liability, 68 Contracts not completed at date of balance, 267 Conversion of foreign currencies, 288 Cost Accounts, definition of, 261 Cost, items of, 263 Cost of goods entered in Trading Account, 59 Cost, prime, 263, 265 Course cf the exchanges, 300 Creditors' Ledger, 26 Currencies, foreign, 285 Currency, British, 277 French, 281 German, 281 Indian, 278 United. States, 280 Current Accounts, interest on, 356 Curves and Diagrams, 344 Customers' Ledger, 26 abstract, method of preparing, 33 Day Book, 25 Days, table for finding the days be- tween two given dates, 369 table of days as decimal fractions of a year, 373 Debenture bond sinking fund, 122 Debenture reserve fund, 120 Debenture Ledger, 240 Debtors' Ledger, 26 Decimals, rule for expressing shillings and pence as, 363 Deficiency Account of a bankrupt, 89 Departments and Departmental Ac- counts, 98 Trading Account of business having two, 60 Depreciation, 137 to find the rate to be written oflF, 138 Direct and indirect expenses, 263, 264 Discount, 17 — Double account form of Balance Sheet, 79 Engineers' Accounts, 265 Equated time of payment, 354 Errors, localisation of, 22 Estimated Cost Account, 261 Exchange, par of, 300 Exchanges, foreign, 297 the course of the, 300 the, as published in the newspapers, 301 Expenses, general establishment, 266 direct and indirect, 263 Fire insurance, 143 ' ' Fixed assets, 67 Fixed liabilities, 67 Floating assets, 67 Floating liabilities, 67 Foreign branches, 288 currencies and their treatment in Home Accounts, 285 currencies, rules for conversion of, 2S8 exchanges, 297 moneys, 283 French currcTicy, 281 INDEX 425 General establishment expenses, 266 General Ledger, 26 German currency, 281 Goods Account, 15 a revenue as well as a real account, 105 definition, 51 to ascertain the profit on goods with- out taking stock, 267 Goods destroyed by fire, to find the cost value of, 271 partially manufactured and com- pleted, how valued at stock- taking, 53 sold on commission, 53 treatment of goods on hand at close of year, 1 5 Goodwill, definition, 134 how valued, 135 Gross profit, in percentage statements, 335 shown by Trading Account, 59 Guarantee insurance, 149 Hire-purchase system of acquiring railway waggons, 324 Impersonal Accounts, 105 Income and Expenditure Account, 131) Income tax, 302 Indian currency, 278 Indirect expenses, 263 Instalments, loans repayable by, 314 Insurance, 143 accident, 148 fire, 143 guarantee, 149 life, 147 marine, 145 Interest, on capital, 47 on Current Accounts, 356 on partners' Capital Accounts, 197 Investigations, 32'J Investment fund, 119 Invoice Book, 24 Joint Account, 3- J ^ I Joint-stock companies' books, 233 Journal, Bill, 26 Journal, definition and use of, in practice, 25 Labour, in Cost Accounts, 264 Leases, redemption of, 322 Ledger Accounts, division of, 105 definition of, 4, 104 Ledger balances, statement of, 70 Ledger, Card, 114 Check, 113 Ledger, Customers', 26 definition of, 4, 104 division of, 26 general, 26 private, 26 Purchases, 26 Self-balancing, 33, 109 the essential book in book-keeping, 22 to analyse the accounts in a, 109 to balance Ledgers separately, 107 Legal tender, 278 Letter of regret, form of, 242 Liabilities, classification of, 68 definition, 67 fixed, 67 in connection with investigations, 332 floating, 67 Life assurance, 147 Liquidation Account, 130 Loans repayable by instalments, 314 Local authorities, rates of, 310 Logarithms, explanation of use of, 365 table of, 376 use^ of, in preparing percentage statements, 338 Loss, definition of, 48 Manufacturers' Accounts, 252 Manufacturing Accounts, 61 Margin, 119 Marine insurance, 145 Material, in Cost Accounts, 264 Mint par, 300 Minute Book of joint-stock company, 233 Moneys, foreign, 283 Nominal Accounts, 105, 106 Oflice regulations to prevent fraud, 353 Opening entries, use of Journal for, 25 Original entries, should bo utilised in book-keeping, 22 Original record, books of, 25 Par of exchange, 300 Par, Mint, 300 Partnership, 194 Accounts, points to be attended to in auditing, 350 assumption of a pirtner, 211 dissolution of, 213 division of profits, 205 goodwill in, 195 interest on Partners' Accounts, 197 transactions worked out, 219 426 ACCOUNTING IN THEORY AND PRACTICE Percentage statements, 335 Percentages, to calculate a series of, 337 Permanent assets, 67 Personal Accounts, 105, 106 Preferable claims, treatment of, in bankruptcy statements, 84 Preferable liability, definition of, 68 Prime cost, 163, 265 Private Ledger, method of using, 26 Products, method of calculating interest on Current Accounts by means of, 358 use of table of, in preparing per- centage statements, 339 Professional and other non - manu- facturing and non-trading con- cerns, the accounts of, 272 Profit, 47 division of, in partnership, 205 statutory or legal, 48 to ascertain the profit on the Goods Account without actually taking stock, 267 Profit and Loss Account, 18 arrangement of, 55 connection between the Trial Balance, Profit and Loss Account, and Balance Sheet, 65 definition of, 49 distinction between Profit and Loss Account and Balance Sheet, 70 facts to be shown, 50 in investigations, 333 percentage statements, 334, 335 should contain all the profits and all the charges, 51 I'rolit and Loss Ai^propriation Account, 56 Promissory notes, 149 Purchases Ledger, 26 Purchases Ledger Abstract, met- preparing, 33 Elailway waggons, hire-purchase system of acquiring, 324 Rates of local authorities, 310 Raw material, how valued at stock- taking, 53 Real Accounts, 105, 106 Realisation Account, 130 Receipts and payments, statement of, 133 Reconciliation statements, 345 Redemption fund, 120 colliery, 128 Redemption of leases, 322 Register of members of joint-stock company, 235 Register of transfers for joint-stock company, 235 Rent, treatment of, when outstanding at close of year, 17 Repairs, treatment of, in preparing percentage statements, 336 Reserves and reserve funds, definition, 118 Reserves, secret, 119 Rest, 119 Revenue Account, 132 Scroll-books, use of, not recommended, 22 Secret reserves, 119 Secured liability, 68 Self-balancing Ledgers, 33, 109 Shareholders' Ledger, 235 card system applied to, 115 Shop establishment charges, 265 Single entry, definition of, 42 method of ascertaining net profit, 43 to pass from single to double entry, 45 Sinking funds, 121 colliery, 128 debenture bond, 122 Statement of Affairs, definition, 82 of a bankrupt, 83 Statement of Receipts and Payments, 133 Stock-taking, 52 Stock used lor capital, 69 Surplus applied to a reserve, 119 Suspense Accounts, 134 Tables for finding the days between two given dates, 369 days as decimals of a year, 373 logarithms, 376 income, 302 .egraphic transfers, 300 xxading Account, as first section of Profit and Loss Account, 55 definition, 59 Transfers, telegraphic, 300 Trial Balance, connection between the Trial Balance, Piofit and Loss Account, and Balance Sheet, 65 of books kept by single entry, 45 definition, 63 two methods of preparing, 64 ' Trust and Executry Accounts, 175 Trust transactions, model set of, 175 United States currency, 280 Wages, 17 Wages of management, 47 Wasting assets, 67 rillNTED BY "WILLIAM GllEEN AND SONS, LDIXBURGII. .0 bod _:i 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. DEC ? 1942 2 C rA.ug'64JC DEC 21 1942 RZC LD 4AN — i 1943 IAN 2 5 '65-8 PM n.]A?v'::: J AN 10 1956 Ly 50ct'590lf RECOD'ee-C SEP 18 63 -10 PM LD 21-100m-7,'40 (6936s) YC 8956U »f I n UNIVERSITY OF CALIFORNIA LIBRARY ?^r^V'::3 V V^