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Principles 
 Rules and Definitions 
 
 FOR BOOKKEEPING 
 
 BY 
 
 LLOYD E. GOODYEAR 
 
 Author of Progressive Business Accounting, Bank Accounting, Farm Accounting 
 
 and Certain Sets in the American Bookkeeping Series. Joint Author of 
 
 Commission, Real Estate and Insurance, Railroading, Corporation, 
 
 Manufacturing and Wholesaling Sets of Goodyear's 
 
 Higher Accounting, New Inductive 
 
 Bookkeeping, Etc. 
 
 SIXTH EDITION 
 
 American Bookkeeping Series 
 
 Good year-Marshall Publishing Co. 
 Cedar Eapids, Iowa 
 
Copyright, 1913 
 Copyright. 1915 
 Copyright, 191G 
 Copyright, 1918 
 GOODYEAR-MARSHALL PUBLISHING CO. 
 Cedar Rapids. Iowa 
 
PREFACE 
 
 This little book was prepared to place at the disposal 
 of students of bookkeeping, and business people gen- 
 erally, the principles and rules needed to make intel- 
 ligible the bookkeeping work. 
 
 A set of books in any business should be planned for 
 a purpose. Knowledge of the end sought is essential to a 
 single-minded effort to attain that end. The business 
 man views a set of books as so much machinery for the 
 collection and classifying of the vital facts of his busi- 
 ness, for his guidance. The accountant plans the books so 
 as to meet the business man's requirements. It is hoped 
 that reference to the following pages, during the stu- 
 dent's progress through the bookkeeping work, may 
 enable him to take the attitude of the accountant, look- 
 ing beyond the necessary details of entering, posting, and 
 filing, to the general plan and purpose. 
 
 From the accounting standpoint, all sets of books 
 have a likeness in certain particulars. In other particu- 
 lars there is dissimilarity. We shall begin by referring 
 to the matters which all ordinary bookkeeping systems 
 have in common. 
 
 The first record which is similar in every business is 
 the statement of assets and liabilities showing the items 
 comprising the net worth. Such a statement is necessary 
 before opening a set of books, in order that the standing 
 or financial strength may be made a matter of record. 
 
 After the business operations are under way, at regu- 
 lar intervals of time similar statements are made showing 
 the changed values of the items of assets and liabilities, 
 and the resultant changes in the net worth. These finan- 
 cial statements thus afford a picture of the history and 
 progress of the business through a period of years, with a 
 definite analysis of the condition of the business at the 
 close of any given accounting period. 
 
 After the first statement is made, the items compos- 
 ing the statement are transferred to the ledger, each item 
 
 5#! '? 1 6 
 
iv PREFACE 
 
 under its proper heading, or account title, and each ac- 
 count showing the amount. During the accounting 
 period, or interval between statements, the additions to 
 or deductions from the several accounts of assets and 
 liabilities are entered in the ledger, so that the accounts 
 show, at the end of the period, the amounts to be trans- 
 ferred to the next statement. 
 
 The accounts that make up the net worth of the busi- 
 ness are called Real accounts. The rules observed for 
 keeping them properly are the same in any business, and 
 may be learned once for all. 
 
 In addition to the statement of financial condition 
 referred to ,a statement of profit and loss is made at the 
 end of the accounting period. The latter statement does 
 not show any existing property or debts, but merely class- 
 ifies the incomes and loss expenditures. The difference 
 between the total incomes and loss expenditures is either 
 the net profit or the net loss of an accounting period. The 
 net profit or loss agrees in amount with the increase or 
 decrease in net worth shown by the statement of assets 
 and liabilities made at beginning and end of the account- 
 ing period. 
 
 The varieties of incomes and loss expenditures shown 
 in the profit and loss statement are given ledger accounts 
 where the amounts are entered as received or expended, 
 under the proper headings, until, at the end of the ac- 
 counting period, the totals are transferred to the profit 
 and loss statement. The accounts making up this state- 
 ment are called Nominal accounts and represent no value 
 except as summaries of results. 
 
 Every set of double entry books should be so con- 
 structed as to exhibit the elements making up the net 
 worth in the real accounts and the elements making up 
 the net profit or loss in the nominal accounts. The fore- 
 going are essentials in opening and operating any double 
 entry set of books, and if clearly in mind, comprise a suf- 
 ficient basis for debit and credit. 
 
PREFACE v 
 
 . The principles governing the financial statements 
 and the ledger accounts are discussed in Part One of the 
 text. 
 
 After the ledger plan, which follows much the 
 same order in any business, is clearly in mind, the princi- 
 pal, and by far the most extensive study in bookkeeping 
 is the methods used to record transactions and operations 
 preparatory to transferring their amounts to the ac- 
 counts. Different businesses require books in great 
 variety of form to accommodate suitable and economical 
 original entries. You may have the ledgers planned on 
 the same outline for a grocery store, a printing establish- 
 ment, a hotel, a coal yard, and a farm, but the details 
 of these separate businesses are so diverse that the books 
 of original entry will be very dissimilar in form. This is 
 not because the statements of results differ in form, but 
 because each kind of business requires first records 
 peculiar to itself. Each type of business must be studied 
 individually to determine the number and form of books 
 of original entry suitable for its records. General sug- 
 gestions about books of original entry are given in Part 
 Two of the text. 
 
 A successful bookkeeper should be able to read the 
 ledger after he has posted it, and to keep in touch with 
 the tendencies of the business as reflected in the, accounts. 
 Suggestions about examining books are given in the final 
 chapter on Auditing. 
 
 The author of this volume has uesd due diligence in 
 gathering here accounting principles and bookkeeping 
 rules in convenient form for prompt reference. The 
 Index-Commentary, to be found on the last pages, will 
 serve as a reference to all topics discussed. Our purpose 
 is to present these matters briefly, yet with enough com- 
 pleteness for practical purposes. 
 
CONTENTS 
 
 PART ONE— PRINCIPLES 
 
 Chapter Subject Page 
 
 I. Introduction 1 
 
 II. Statement of Assets and Liabilities 10 
 
 III. Plan of Ledger 18 
 
 IV. Asset Accounts 24 
 
 V. Liability Accounts 47 
 
 VI. Proprietorship Accounts 53 
 
 VII. Statement of Profit and Loss 59 
 
 VIII. Nominal Accounts 70 
 
 PART TWO— RULES 
 
 IX. Single and Double Entry 83 
 
 X. Business Papers 85 
 
 XL The Journal— Original Entries 98 
 
 XII. The Journal— Debit and Credit 104 
 
 XIII. The Journal— Forms of 119 
 
 XIV. The Cash Book 124 
 
 XV. The Sales Book 132 
 
 XVI. The Purchases Book 136 
 
 XVII. The Inventories Book 140 
 
 XVIII. Special Books 142 
 
 XIX. Auxiliary Books 144 
 
 XX. The Ledger 145 
 
 XXL Auditing 155 
 
 PART THREE— DEFINITIONS 
 Index-Commentarv 189 
 
 VI 
 
PART ONE -PRINCIPLES 
 CHAPTER I 
 
 INTRODUCTION 
 
 1. Bookkeeping is defined as the art of recording 
 business transactions. A definition is a summary, more 
 or less complete, of many details required to describe the 
 thing defined. It is the purpose of this chapter to en- 
 large in a general way on some of the functions of book- 
 keeping as an aid to business. 
 
 2. Bookkeeping in Business. Business is the word 
 generally used to indicate any kind of useful occupation 
 or employment. It refers especially to activities engaged 
 in for the purpose of earning a livelihood. 
 
 The necessities and refinements essential to the wel- 
 fare of any person are produced by many persons in all 
 parts of the world, and offered in exchange for money. 
 One's ability to secure the useful things included under 
 the general term "a living" depends on the amount of 
 money he has to pay for them ; so that business, from the 
 standpoint of the person engaged in it, may be consid- 
 ered an effort to acquire money. This statement should 
 not be construed in an unfavorable sense. Business that 
 does not serve a useful purpose, or that does not produce 
 full value for the money received, is objectionable even 
 though gainful financially. 
 
 The efforts of men to improve their condition by in- 
 creasing their earnings are applied to different kinds of 
 business enterprises; among them, extraction of raw 
 materials, transportation, manufacturing, trading, and 
 banking are leading businesses. All of these enterprises 
 are subject to financial laws. They require an invest- 
 ment of money or its equivalent to start them going, and 
 they are maintained by the earnings derived from their 
 operations. 
 
2 PRINCIPLES 
 
 The same laws govern the beginning and continu- 
 ance of societies, clubs, institutes, colleges and other pub- 
 lic institutions. They also are maintained by their 
 money income. 
 
 It is the money, or financial, side of business that is 
 considered in bookkeeping. The object sought in book- 
 keeping is a record of all 'things and activities of business 
 that can be valued in money. Other considerations are 
 beyond the province of bookkeeping. Every transaction 
 and operation of business is measured at the book- 
 keeper's desk, and assigned its proper place as an ele- 
 ment of financial progress. By this means those respon- 
 sible for business success are informed step by step re- 
 garding the tendencies of their activities. 
 
 This knowledge is valuable to the individual who 
 would leave the ranks of the great majority of men who 
 are unable, through ignorance of their financial position, 
 to achieve financial independence. That a firm or com- 
 pany should attempt a grasp of its complex business re- 
 lations without bookkeeping is practically out of the 
 question. And it is^not too much to expect that the 
 knowledge and use of bookkeeping by the average citizen 
 will do much to strengthen an intelligent attitude toward 
 questions surrounding the relative rewards of capital and 
 labor, that will have a favorable effect on the present 
 inequitable distribution of wealth. 
 
 3. How Money Is Earned. The simplest way to se- 
 cure income is to work for wages or salary. This re- 
 quires no investment risks, and the amount one Receives 
 is settled by an agreement to sell one's services for a 
 price. Increased income is secured by improving the 
 quality of services. However, if one uses his entire in- 
 come in living expenses, he will act without proper fore- 
 sight, for any condition throwing him out of employment 
 would diminish his ability to live. So it is generally con- 
 ceded that a part of one's earnings should be saved to 
 make up for diminished earnings later on. 
 
 Money or property saved constitutes capital; that 
 is, savings may be used in such a way as to produce addi- 
 
INTRODUCTION 3 
 
 tional income. If the savings are placed in a savings 
 bank, the depositor will receive income at the rate of two 
 to four per cent interest annually in addition to his wages 
 or salary. He can invest his savings in bonds or stocks, 
 receiving an income of interest or dividends. If he in- 
 vests his savings in land or buildings, he may receive an 
 income from rent or from the increase in the value of the 
 property. He may invest his savings in trade and give 
 to the business his time, and receive income from the 
 profits which his labor and capital jointly earn. Nearly 
 everyone possesses money or property that will produce 
 income if wisely used. But some uses of capital will re- 
 sult in losses ; hence it is desirable to keep informed as to 
 the relative income from different kinds of investments. 
 One way to do this is simply to memorize all the facts, 
 and some business men do this with a considerable de- 
 gree of success. Yet, it is unquestionably more eco- 
 nomical of time and mental energy for a person to keep 
 a record of his business matters in well arranged books, 
 even though his financial interests are small. He is 
 then sure of the facts without waste of time or thought. 
 The successful business man does not permit his thought, 
 time, or capital to be tied up in any unnecessary way, but 
 uses all these resources as far as practicable in produc- 
 tion. 
 
 4. Bookkeeping a Financial Record. When speak- 
 ing of bookkeeping as the "art of recording business 
 transactions,'' it is important to remember that the pur- 
 pose of the record is to afford financial information. The 
 term "finance" implies the handling of money and is 
 closely associated with the idea of receipt and expendi- 
 ture of cash. Bookkeeping fulfills its purpose only when 
 it states clearly the financial weight, or the money value 
 of business transactions as they affect some one person 
 or firm, or other association in whose interest the books 
 are kept. The financial weight is expressed in state- 
 ments, accounts, and reports which summarize several 
 items of like financial effect in one combined financial 
 effect. 
 
4 PRINCIPLES 
 
 There are two principal manual phases of bookkeep- 
 ing: (1) the preservation of a true business history of 
 some certain concern; (2) the classification of the items 
 recorded in such a way as to show the receipts and dis- 
 bursements of cash, and the cost and yield of the other 
 component parts of the given concern. 
 
 A bookkeeper, as such, should know: (1) how to 
 record all transactions that occur in a given business; 
 (2) how to post all entries to the proper accounts; (3) 
 how to show the condition of any account, by means of 
 a statement; (4) how to verify his work by a trial bal- 
 ance; (5) how to* preserve vouchers relating to his 
 records. 
 
 5. Accounting is the governing element in book- 
 keeping. It is employed in determining the forms, ar- 
 rangement and terms used in financial statements, ac- 
 counts, and reports; and interprets their meaning. The 
 accounting profession, as a result of long study and ob- 
 servation of business conditions, has defined the funda- 
 mental elements of financial importance found in busi- 
 ness concerns generally, and in so doing has developed 
 a standard system of accounts. 
 
 The science of accounting is essentially very simple 
 and easily understood. But it is a branch of learning 
 that has been greatly neglected, although the time spent 
 in its practical mastery would tend to greater average 
 prosperity among people in business. Accounting is the 
 one science that measures the utility of all other sciences. 
 
 There has been a strong tendency to disassociate ac- 
 counting and bookkeeping as though they have two dif- 
 ferent functions. But it is impossible to tell where 
 bookkeeping ends and accounting begins. In large es- 
 tablishments, the " bookkeepers' ' enter transactions, post 
 and do other mechanical work; the "accountants" devise 
 the bookkeeping plan, prepare the general statements, 
 and audit (examine) the books. But the work of both 
 may be classed under the general designation, bookkeep- 
 ing. The person who keeps his own books must be 
 
INTRODUCTION 5 
 
 familiar with the principles of accounting in order to 
 keep books effectively. 
 
 6. Transactions. A business transaction is some 
 single business performance, as, a sale, a purchase, the 
 collection of a sum due from another, the payment of a 
 debt due to another, the discounting of a note, etc. 
 
 But dealings with others, such as the above, are not 
 the only business occurrences that affect the business 
 financially. The property of a business may be of such 
 a nature that it will depreciate in value more or less rap- 
 idly, and thus diminish the entire value. Fire losses, 
 theft or other things of an unexpected nature may hap- 
 pen to the advantage or disadvantage of the concern. A 
 record of all such matters should be kept and the effect 
 of them recorded. The term "transactions" as found 
 in the definition of bookkeeping, must be used in a broad 
 sense, covering every operation, occurrence or circum- 
 stance that has any bearing on the capital or income of 
 the business undertaking. 
 
 7. How Transactions Are Recorded. The trans- 
 actions of a business concern are recorded, as a rule, in 
 two ways: 
 
 (a) The first record, or original entry, recites in 
 the briefest manner possible, all of the essential facts 
 about the transaction. This explanatory matter should 
 be abbreviated as much as possible, but should contain 
 all the details necessary to inform one unacquainted with 
 the circumstances as to what actually occurred. One 
 desirable feature in a business record may be noted here : 
 The record should be written as something done by the 
 person for whom the books are kept. In the following 
 examples the words enclosed are understood, but do not 
 appear. (I, the proprietor,) "Sold John Smith, for cash, 
 5 lb. sugar @ .08 = $.40;" not, "John Smith bought of 
 me," etc. (I, the proprietor,) "Received from W. Mills," 
 ect. ; not "W. Mills paid me," etc. Every transaction is 
 an act of the proprietor, so far as the books are con- 
 cerned, and is recorded so as to show results to the pro- 
 
6 PRINCIPLES 
 
 prietor, regardless of the acts of dr results to others. The 
 first record is made so as to satisfy any future inquiry 
 as to what the proprietor actually did, and should be 
 complete to that extent. 
 
 (b) The second record is made to show the financial 
 effects of the transactions on the concern as a source of 
 income to the proprietor. The concern as a whole is 
 made up of elements all of which are classified as to their 
 financial weight in summing up the capital and income. 
 Each element is given a name which is used as the head- 
 ing of an account, 
 
 An account consists of an entry or group of entries 
 made to show the financial weight of transactions having 
 bearing on the element named or indicated by the ac- 
 count heading. This weight is shown by either debit 
 entries made in the left of two money columns, or credit 
 entries made in the right. 
 
 A debit entry shows a value passed into the element 
 named or indicated by the heading. 
 
 A credit entry shows a value passed out of the ele- 
 ment named or indicated by the heading. 
 
 When the proprietor performs a business transac- 
 tion, he causes a value to pass into one or more elements 
 out of one or more other elements of the concern; hence 
 every transaction requires debit entry in one or more ac- 
 counts and credit entry in another or others, the debits 
 and credits being in equal amounts. 
 
 The net amount of any account, found by subtract- 
 ing the lesser from the greater side, is called the balance. 
 The balance of the account shows the weight of the 
 named element in increasing or decreasing the capital or 
 the income. 
 
 The necessity for recording transactions in two ways 
 — consecutive record as to transactions and classified rec- 
 ord as to bearing on the elements involved — gives rise to 
 two general classes of books found in bookkeeping, viz., 
 journals and ledgers. 
 
INTRODUCTION 7 
 
 8. The Journal is an original record of daily trans- 
 actions and events, written in the order of their occur- 
 rence. In this book all transactions of a given day are 
 to be found in one portion, regardless of the accounts af- 
 fected by the transactions. 
 
 Formerly, the matter recorded in the book now 
 known as the journal was divided into (1) the continu- 
 ous account of the particulars of the transactions, writ- 
 ten in a "day book," (2) the indication of the accounts 
 to be debited or credited as a result of the transactions 
 written in a "journal." This division of record is now 
 little used in the United States, since it is very easy to 
 indicate accounts to which posting is to be made along 
 with the narrative of transactions; so that the book con- 
 taining both the full explanation and an indication of 
 the accounts affected is understood when we speak of a 
 journal. The plain journal contains two money columns, 
 one for debit entries, the other for credit entries. 
 
 The plain journal, referred to in the preceding para- 
 graph, is modified in many ways, in practical bookkeep- 
 ing, for labor-saving and convenience. The principal pur- 
 pose of these modifications is to adapt the form used to 
 the nature of the business, so as to reduce the writing of 
 original entries to the minimum and partially classify 
 the results so as to reduce the labor, of posting to the 
 accounts. These modifications, or special journals as they 
 are often called, may be used to contain given kinds of 
 routine entries. Among them are the "cash book," 
 which contains a journal record of cash receipts and dis- 
 bursements; the "sales book," which contains .a journal 
 record of sales, etc. All books containing a special class 
 of original entries from which posting is done, may be 
 classed as special journals. 
 
 Another modification of the original journal is the 
 many-column journal, in which special columns are used 
 for amounts that otherwise would be posted one by one 
 to the same account in the ledger, but by means, of a 
 special column, the items pertaining to one account can 
 
8 PRINCIPLES 
 
 be added and the total posted instead. Many-column 
 journals are made containing from one to forty or more 
 special columns. 
 
 The rules governing the two modifications of the 
 journal referred to — i. e., the special journal and the 
 many-column journal — comprise a large part of the study 
 of practical bookkeeping. After the general accounting 
 basis, common to all bookkeeping systems, is fairly in 
 mind, the choice of books of first entry, and the special 
 forms of these books required under different business 
 conditions, are the principal considerations. The form of 
 the books of first entry, or journals, is governed by the 
 nature of the business transactions, and would differ 
 very much in banking, trading, manufacturing, farming, 
 contracting, etc. 
 
 9. The Ledger contains the accounts. Entries are 
 posted to the accounts from the journals. Unlike the 
 journal forms which, for convenience, differ very much 
 in different businesses, the form and arrangement of the 
 ledger accounts are comparatively uniform. The ac- 
 counts are divided into two classes: (1) those that ex- 
 plain the condition of the capital of the concern — real ac- 
 counts, (2) those that explain the income — nominal 
 accounts. 
 
 All varieties of business are so similar in their finan- 
 cial organization that one uniform set of real account 
 titles may be looked for in the ledgers of all concerns. 
 By this is not meant that any one concern will have need 
 of all the regularly named and defined real accounts, 
 but that so far as its organization extends, standard ac- 
 count titles may be selected to represent all of its real 
 component parts. 
 
 The nominal account titles, however, though quite 
 extensively standardized, are subject to great variation, 
 for they represent the results of ever-expanding human 
 operations and sometimes number as many as several 
 hundred in the same concern. They are subject largely 
 to the special needs of a given business. 
 
INTRODUCTION 9 
 
 10. Financial Statements are exhibits containing in- 
 formation bearing on the financial condition and prog- 
 ress of the business as a whole. 
 
 There are two general - phases covered in financial 
 statements: (1) the " statement of assets and liabilities, ' ' 
 which shows in detail the property and indebtedness of 
 the business and the resultant net worth or insolvency; 
 
 (2) the "statement of profit and loss," which shows the 
 causes and amounts of its incomes and expenses for a 
 given period of time, and the resultant net profit or loss. 
 
 The statement of assets and liabilities is a summary 
 of the amounts itemized in the real accounts; the profit 
 and loss statement, of the amounts itemized in the nom- 
 inal accounts. 
 
 Recapitulation — 1 to 10. The main processes of 
 bookkeeping are determined by the principles of ac- 
 counting, and consist of: (1) the making of true original 
 entries in the journal or in the books taking the place of 
 the journal; (2) the posting of the original entries to the 
 ledger, where they appear classified in account form; 
 
 (3) the preparation of the statement of a business which 
 exhibits the condition of its finances and the results of 
 its operations, as shown by the records, in compact form 
 for examination and comparison. 
 
CHAPTER n 
 
 STATEMENT OF ASSETS AND LIABILITIES 
 
 11. The general term, financial statements, refers 
 to classified lists and summaries of the value of things 
 owned by a business concern, of its deb ts, of its profits 
 or its losses, or of any conditions that affect it in a money 
 way. Two kinds of statements are commonly used to 
 summarize the results of business enterprises-: the state- 
 ment of assets and liabilities discussed in this chapter, 
 and the statement of profit and loss discussed in Chapter 
 VII. The former summarizes the value of the property 
 owned by the concern, and the latter, the income. 
 
 12. A statement of assets and liabilities is designed 
 to show what the person or firm owns (assets), what he 
 owes (liabilities), and the difference which is called the 
 "net worth' ' if the total owned is greater than the total 
 owed, and the "net insolvency" if the total owed is 
 greater than the total owned. 
 
 This statement shows the financial condition of the 
 concern; that is, how much money or property is at the 
 disposal of the owner, what part of the total may be ex- 
 pended on short notice, what part is permanently in- 
 vested, what part is nonproductive, what part, if any, is 
 intangible. It also shows what part must be held in 
 readiness to meet existing obligations. The owner is 
 limited in his operations by the condition of the property. 
 
 The condition as shown on a statement is for one 
 date only, for a business transaction always causes one 
 or more of the things in the business to increase or de- 
 crease in value and changes the statement to that ex- 
 tent. It is customary to prepare a statement of assets 
 and liabilities at the beginning of the business history, 
 and once annually thereafter. It is often made on Janu- 
 ary 1, each year, or if the nature of the business is such 
 that the operations of the business year close on some 
 
 10 
 
STATEMENT OF ASSETS AND LIABILITIES 11 
 
 other date, the most convenient date is used; as May 1, 
 July 1, etc. The statement is made monthly, when the 
 nature of the business is such as to make frequent com- 
 parisons desirable. Such a statement is made when re- 
 quired by bankers or creditors who desire to satisfy 
 themselves as to the ability of the concern to pay its 
 debts. The amount of a concern's resources is an impor- 
 tant matter in determining its credit, or capacity to bor- 
 row money. The statement of assets and liabilities is 
 often called a ''statement of condition," a "statement 
 of position," a "statement of capital," a "balance 
 sheet," or simply a "financial statement." 
 
 It is considered in three parts in the following dis- 
 cussion: (1) the assets, (2) the liabilities, and (3) the 
 net worth. 
 
 13. The Assets may include cash in hand, or 
 amounts owed to the concern by others, property such 
 as merchandise, live stock, machinery, land, buildings, 
 etc., and any other things of cash value. The aim is to 
 include in the statement as assets everything that could 
 be sold if the firm were to discontinue business and wind 
 up its affairs, and to place it in the statement at a value 
 which it would reasonably be supposed to bring if sold. 
 
 It is of interest to the owner or creditor of the per- 
 son or firm making the statement to know not only the 
 total value of the assets, but also the part which can be 
 used, on short notice, for purchases or payment of debts. 
 Thus, cash in hand is immediately available, accounts 
 and notes are available within a certain period. Goods 
 kept in stock for sale will not be turned into cash ordi- 
 narily as soon as accounts and notes, while property such 
 as furniture, machinery, and the buildings and land oc- 
 cupied are not intended for sale, and cannot be consid- 
 ered as furnishing funds to be paid out. It is quite gen- 
 erally the rule to list the current (quickly available) 
 assets at the top of the list in order that they may be 
 compared readily with current payments to be made, 
 while assets not intended for sale or disposition are 
 placed lower down. 
 
12 PRINCIPLES 
 
 Where of sufficient importance and extent, the as- 
 sets are considered in several groups. Among these 
 groups are: 
 
 Current assets, consisting of cash, accounts, notes 
 and property that is to be converted into cash in the 
 regular order of business at an early date. 
 
 Fixed assets, consisting of things owned for use, not 
 sale, and thus occupying a fixed place in the business. 
 Example: furniture and fixtures, machinery, building, 
 or land owned for use. 
 
 Invested Assets, consisting of things owned for the 
 income to be derived from them but not for the use of 
 the business; or investments made to create a fund to 
 meet some future maturing debt. 
 
 "Wasting Assets, consisting of properties which are 
 being drawn upon and thus losing value gradually, as 
 mines and timberland. 
 
 Deferred assets, consisting of payments made for ex- 
 penses which should apply in part to a future time and 
 are carried as assets until charged off, part at a time, 
 during several periods. Example : the expenses of or- 
 ganizing a company, paid at once but charged to expense 
 in parts during several periods, and meantime carried 
 as an asset. 
 
 Such distinctions as "intangible," "speculative," 
 and "contingent" refer to different classes of assets. 
 
 Assets are resources of the business and a statement 
 of assets and liabilities is often called a statement of 
 "resources and liabilities." The term "resources," 
 however, is not so much favored by accountants in this 
 connection. It is a more general word and might apply 
 to things which, though advantageous to the owner of 
 the business, really have no salable value. 
 
 14. The Valuation placed on assets is an important 
 matter, since property entered in the statement greatly 
 above or below its real value would cause the total to be 
 misleading. Persons often place entirely different 
 valuations on the same thing, and nothing is more com- 
 mon than that one should consider his property to be 
 
STATEMENT OF ASSETS AND LIABILITIES 13 
 
 worth more than it would bring. For this reason, it is 
 generally conceded that property should be entered "at 
 cost," since the purchase price of anything is the last 
 agreement between persons as to how much it is worth. 
 It is true, however, that the value of a given thing does 
 not remain the same, but may become greater or less 
 with the lapse of time. When the same piece of prop- 
 erty is included in a statement year after year, it is con- 
 sidered safer always to enter it at cost, and if the value 
 has depreciated to deduct the evident depreciation, thus 
 basing the revision on the cost. Therefore, the cost is 
 considered the safest basis to work from in establishing 
 the value. On the other hand, property may greatly ap- 
 preciate in value, and such appreciation may be noted. 
 But a valuation placed on any single thing at the outset 
 is entered in the books, where it remains, and, to distin- 
 guish it from later estimates, is called the "book value." 
 In preparing a statement which includes items of 
 which the cost cannot be ascertained, it is necessary to 
 fix a valuation upon such items by the safest means 
 possible. 
 
 15. The Liabilities of a concern include all debts 
 which are to be paid out of the assets. These may be 
 current liabilities such as accounts or notes payable to 
 others. The current liabilities are usually placed at the 
 top of the list of liabilities to afford a convenient com- 
 parison with the current assets. 
 
 Besides current liabilities, other groups of liabilities 
 may be considered as opposed to corresponding groups or 
 items of assets. Example: a loan payable some years 
 hence as opposed to an invested fund which is set aside 
 to meet it. 
 
 16. The Net Worth is the difference between the 
 sums of assets and liabilities. It is the remainder at the 
 disposal of the person or firm after applying the assets 
 to the settlement of all debts. It is also called the net 
 capital, or where the capital is set at a fixed amount, the 
 excess may be termed "surplus." 
 
14 PRINCIPLES 
 
 17. The Form. The statement is made for the pur- 
 pose of exhibiting the condition in brief compact form. 
 Asset amounts always are written in the left column, 
 liabilities in column to the right. The excess of assets 
 over liabilities is written in the same column as the 
 liabilities, as a balance completing the equality of left 
 and right columns. A very compact statement of assets 
 and liabilities is illustrated in model Forms 1 to 3. A 
 more elaborate statement is illustrated in model Form 5. 
 
 The property and debts of persons or firms as a gen- 
 eral rule can be itemized under a few general divisions. 
 Among these divisions are cash, accounts receivable, 
 notes receivable, stocks, bonds, merchandise, goods for 
 sale or use, furniture and fixtures, equipment, plant and 
 real estate. The liabilities commonly are included under 
 a very few general headings ; among them are accounts 
 payable, notes payable, mortgages payable, bonds 
 payable. 
 
 The statement may be- so compact that, while it af- 
 fords a view of the whole, it does not go into detail as 
 much as may be desired. To supplement this informa- 
 tion the details explaining any one item may be written 
 on separate schedules and attached as explained here- 
 after. 
 
 18. Schedules, or lists, may be made showing the 
 items of which the total only appears on the statement. 
 Lists of furniture and fixtures, equipment, notes receiv- 
 able, notes payable, and other lists may be made, and 
 attached to the statement so far as they are needed to 
 explain fully any of the items. 
 
 18 B. The Inventory of merchandise is usually the 
 most important schedule attached to the statement of a 
 business. This is a list of all goods for sale at the time 
 the statement is made. The items making up the in- 
 ventory should be extended at cost price and the total 
 found. The total, however, should be reduced by the 
 estimated depreciation in value due to deterioration in 
 quality or loss in market value of any of the items. 
 
STATEMENT OF ASSETS AND LIABILITIES 15 
 
 Not infrequently certain kinds of goods or merchan- 
 dise will increase in market value while awaiting sale. 
 Such increase should not be added to inventory value for 
 the reason that the increase is estimate and not fact un- 
 til realized by actual sale. The best gauge of the value 
 of property is the consideration actually given in the last 
 bargain and sale, and not an estimate of what the prop- 
 erty might be sold for. However, the sum set by the 
 purchase price must be reduced, when the value has evi- 
 dently decreased, because safe business management de- 
 mands that any impairment of the assets be noted. 
 
 Other items of value not included under regular 
 general headings in the statement, are also listed and in- 
 cluded by inventory, such as inventor of accrued inter- 
 est, inventory of miscellaneous property or debts. 
 
 19. Relation of Statement to Books. Although the 
 statement of assets and liabilities is the summary of the 
 entire property resources of the concern, it exhibits the 
 condition on one date only. As business progresses, the 
 parts of the business differentiated m tl*e statement are 
 likely to increase or decrease in quantity. Thus, cash 
 received will increase the amount of cash on hand; 
 cash paid will decrease it. Accounts receivable col- 
 lected will decrease the total of accounts receivable on 
 hand; sales on account will increase it. Merchandise, 
 furniture, equipment, or other classes of property pur- 
 chased will increase the total quantity and the total value 
 of the particular kind of goods purchased, while the sale 
 of any of these articles will decrease the remaining quan- 
 tity and value of the kind sold. 
 
 In order that each item in the statement, which is 
 limited to a given date, may be shown together with sub- 
 sequent increases and decreases on any date, a ledger 
 section of real accounts is opened. Each item in the 
 statement is given a ledger page, or other sufficient 
 space, the name of the item is placed as a heading, or 
 title, at the top ; and the book value is placed in the left, 
 or debit, of two columns as in the statement. The cost 
 
16 PRINCIPLES 
 
 of additions to the quantity under any heading is placed 
 in the left column, and the cost of any quantity taken 
 away is placed in the column to the right under the head- 
 ing. By this means, changes in the book value of all 
 items comprising the statement of assets and liabilities 
 so far as those changes are brought about by purchase, 
 sale or transfer, are noted in separate accounts, 
 
 The account headings in the ledger need not be 
 exactly the same as the divisions in the statement, for 
 the statement is condensed, and one item in the state- 
 ment may correspond with several accounts in the 
 ledger. Also, new ledger accounts may be opened at any 
 time for assets acquired or liabilities incurred after open- 
 ing the business. But the mere matter of condensation 
 in the statement or expansion in the ledger should not 
 obscure the main idea that the accounts of assets and 
 liabilities in the ledger comprise a "running statement" 
 of condition. 
 
 19 B. Statements of assets and liabilities taken at 
 the close of any accounting period are written from the 
 results shown by the accounts of assets and liabilities. 
 The amounts taken to the statement are the account bal- 
 ances, with such revisions in valuation as could not be 
 entered conveniently in the accounts. 
 
 Recapitulation 11 to 20. A statement of assets and 
 liabilities is made to show the net worth or insolvency of 
 the business. It consists of a listing of all assets against 
 all liabilities, showing the difference, which is net worth, 
 if assets exceed the liabilities, or net insolvency, if the 
 liabilities exceed the assets. 
 
 It is important that no items of value be entered in 
 a financial statement at more than their asset value, 
 especially when such items are subject to waste, shrink- 
 age, or depreciation. 
 
 As a guide to a correct valuation, current property 
 should first be entered in detail on schedules, where the 
 cost is shown and appropriate deductions for diminish- 
 
STATEMENT OF ASSETS AND LIABILITIES 17 
 
 ment" are made, after which the net amount or amounts 
 are carried to the financial statement in the column of 
 
 assets. 
 
 Fixed property should be earried to the statement 
 at cost, but diminishment in value should be deducted 
 on the statement from the cost, leaving the present value 
 of the property to be extended in the column of assets. 
 
 Care should be taken to include all liabilities at their 
 amounts when the statement is made in the column of 
 liabilities. 
 
 The statement of assets and liabilities taken at the 
 beginning of business is the basis for opening the real 
 accounts in the ledger. The results shown in the real ac- 
 counts are again summarized in statements of assets and 
 liabilities subsequently taken. 
 
CHAPTER III 
 
 PLAN OF LEDGER 
 
 21. The Ledger is the book of accounts. Each ac- 
 count is identified by a distinctive heading. The account 
 heading designates the part, process, operation, or cir- 
 cumstance that a business man finds important in itself 
 as having separate financial weight in summing up the 
 condition or progress of the entire business. This finan- 
 cial weight is expressed by debits and credits. 
 
 In a modern accounting plan, four kinds of simple 
 accounts are used, divided into two classes, real and 
 nominal. To these four may be added the mixed ac- 
 count, formerly common, but now practically eliminated 
 from the best bookkeeping systems. In addition to the 
 four or possibly five kinds mentioned, it seems most con- 
 venient to consider as a separate kind, the accounts of 
 net worth, which are summaries of the real accounts; 
 and the accounts of profit and loss, which are summaries 
 of the nominal accounts. 
 
 (1) Accounts of Assets. These show under their 
 classified headings: as debits, the book value of the 
 things owned by the person or firm; as credits, the book 
 value of anything removed from the classification in 
 which it previously appeared as a debit. 
 
 A credit in an asset account serves to annul in whole 
 or in part a debit previously made in the account, both 
 debit and credit referring to the same thing. 
 
 Example. A certain firm under the heading "Cash," 
 enters as a debit the amount of money on hand at beginning, 
 $1000. Of this amount, $50 was paid out, the expenditure being 
 shown by crediting the account. Later, $100 of the amount on 
 hand was placed in a savings bank and considered as set aside 
 for some special purpose. Cash would be credited. The account 
 would then show a debit, $1000 partially annulled by credits, $150. 
 leaving a remainder of $850 as cash on hand, to be used in the 
 ordinary business transactions. Example: "Delivery Equip- 
 ment" is a heading under which four cars costing $600 each may 
 
 18 
 
PLAN OF LEDGER 19 
 
 be debited. The book value would be $2400. Later, one of the 
 cars is sold. The account would be credited $600. The balance 
 of the account would show the book value of the cars remaining. 
 Note. — As a principle, the credit entry for the sale of an 
 asset is in the same amount as the previous debit for the cost of 
 the same thing, regardless of the price received. In the last 
 example, if the car costing $600 were sold for $400, the Equip- 
 ment account would be credited $600, thus annulling the pre- 
 viously made debit for the cost of the sold car. The amount lost, 
 $200, would be carried to a nominal account, as explained later. 
 If credited in the Equipment account at $400, the actual proceeds 
 of the sale, the account would thereby become "mixed," and the 
 account balance would not be reliable as exhibiting either the 
 book value of the remaining cars or the loss on the sale made, 
 until such time as the mixture would be separated. 
 
 (2) Accounts of Liabilities. These show under sep- 
 arate headings: as credits, the amounts owed to outside 
 persons or firms; as debits, the amounts of reduction in 
 the sums owed. 
 
 Example: Under the heading of the person's name, John 
 Dale, for instance, $100 may be placed in the credit column, a 
 sum which the firm has agreed to pay him. Later the firm pays 
 him $50 on this account. The amount is entered in the debit 
 column. Later, John Dale agrees that the amount credited him, 
 $100, is $10 more than it should be. This amount would be en- 
 tered in the debit column. The balance of the account would 
 show a liability of the remainder, $40. 
 
 Summary of Assets and Liabilities. The excess of the 
 total assets over the total liabilities is entered as a credit 
 in an account, or accounts, of proprietorship, or capital. 
 The accounts of proprietorship show the net worth of the 
 business concern. 
 
 (3) Accounts of Incomes. These show as credits, 
 under separate descriptive headings, the amounts earned 
 or gained; as debits, deductions from the amounts 
 earned. Thus, the amount of goods sold is credited to 
 ' ' Sales, ' ' the amount of interest received to i ' Interest In- 
 come, " etc. 
 
 (4) Accounts of Expenses. These show as debits 
 the value of things regarded as consumed, or losses sus- 
 tained in conducting the business; as credits, deductions 
 from the amounts previously debited as consumed. Thus, 
 a single account headed " Expense" may be debited with 
 all such payments, or the expenses may be divided into 
 
'20 PRINCIPLES 
 
 several groups with more specific headings, such as 
 "Building Expense," "Interest Expense," "Commissions 
 Paid," etc. 
 
 Summary of Incomes and Expenses. The income and 
 expense totals are combined at the end of an accounting 
 period in a Profit and Loss account; incomes on the 
 credit side, expenses on the debit side, showing as a re- 
 sult of all debits and credits assembled, a net profit or a 
 net loss for the period. 
 
 (5) As noted above, all accounts found in a ledger, 
 except the summaries found in the proprietorship and 
 profit and loss accounts, may be classed so as to exhibit 
 one of four things; viz., an asset, a liability, an income, 
 or an expense amount. And it is desirable that the ac- 
 counts be planned so as to come under one of these four 
 groups, since by so doing, the results shown by the ledger 
 are easily understood and show day by day, without re- 
 adjustment, the condition and progress. An account that 
 shows as a result one only of the four things mentioned 
 is called a simple account. But, occasions arise where it 
 may be thought necessary to use mixed accounts, that is, 
 accounts from which two or more results are to be found, 
 as an asset and an income in the same account. In for- 
 mer times mixed accounts were used quite freely, but 
 since it is necessary in such accounts to separate the sev- 
 eral elements, one from another, before the significance 
 of the account is apparent, mixed accounts are, generally 
 speaking, too indefinite for practical purposes, and do 
 not seem to be necessary in ordinary bookkeeping. 
 
 In the following work, each of the above kinds of 
 accounts is discussed in a separate chapter. But before 
 considering accounts more closely, it is well to fix in mind 
 an entire ledger in which there are several sections of ac- 
 counts, which follow the order illustrated in the follow- 
 ing diagram: 
 
PLAN OF LEDGER " 
 LEDGER 
 
 21 
 
 (divided) 
 
 REAL ACCOUNTS 
 
 NOMINAL ACCOUNTS 
 
 (divided) 
 
 (divided) 
 
 Asset Accts. 
 
 Liability Accts^ , 
 
 Expense Accts. 
 
 (Dr. balances) 
 
 (Cr. balances) 
 
 (Dr. balances) 
 
 Income Accts. 
 
 (Cr. balances) 
 
 (summarized) 
 
 (summarized) 
 
 NET WORTH ACCOUNTS 
 
 PROFIT AND LOSS ACCOUNT 
 
 The ledger as a whole will be considered in two 
 parts, which will be called "the section of real accounts," 
 and "the section of nominal accounts." 
 
 The section of real accounts comprises in effect a 
 running or current statement of assets and liabilities. 
 
 The section of nominal accounts likewise comprises 
 a running statement of incomes and expenses. 
 
 It is thought that the student will secure a quicker 
 and better idea of the significance of accounts by viewing 
 them as found in a well arranged ledger following the 
 order of the diagram. 
 
 21 A. The Forms of Ledger Account. The ordinary 
 form of the account may be found in Model Form 10 E, 
 which serves as an illustration of an entire ledger page. 
 The account is divided by vertical ruling in the center, 
 
22 PRINCIPLES 
 
 the space at the left is for debits and at the right for 
 credits. Comparing with Model Form 10 C, observe that 
 debit and credit sides are spaced off in the same way, 
 making (1) column for dates, (2) column for explana- 
 tions, (3) column for post marks, (4) column for amounts 
 of the debit or credit entries. "When a page is filled, the 
 totals of the debit and credit columns are carried for- 
 ward to the next succeeding page (see Form 10 E for- 
 warded to Form 10 F). The account is balanced by writ- 
 ing the difference between debit and credit totals in the 
 lesser side (ordinarily in red ink), addition and closing 
 lines are ruled, after which the account is continued by 
 placing the balance below the ruling on the side which 
 was previously shown to be greater. 
 
 Ledger accounts are ruled In many other forms suited to 
 different purposes. Model Form 17 D illustrates an account in a 
 three-column balance ledger, wherein the debit and credit columns 
 are side by side, and a third column carries the balance. This 
 form is often used for customer's accounts, where all balances are 
 normally debit balances. An occasional overpayment will result 
 in a credit balance which in this form of account is entered in 
 red ink. 
 
 A form suited to accounts having either debit or credit bal- 
 ances is illustrated in Model Form 27 H. where there are two 
 balance columns making a four-column balance ledger. 
 
 Form 27 Y is an account in a cost ledger, ruled and printed 
 in suitable form for entry of all amounts charged to a given 
 piece of work. 
 
 The student will find it advantageous to clearly 
 understand two common methods of rearranging the ac- 
 counts in order to make either a clearer or a more com- 
 pact ledger exhibit. The one refers to subdividing an 
 account so that the parts may be carried in the ledger 
 under separate headings; the other refers to grouping a 
 number of accounts of a common kind in order that their 
 aggregate may be carried in the ledger under one 
 heading. 
 
 21 B. Divided Account. This may be illustrated 
 by referring to Form 10 D, wherein the proprietor classi- 
 fied his machinery, tools, etc., under the one heading, 
 Equipment. Under this heading, the several items mak- 
 ing up the entire account are explained as a motorcycle 
 
PLAN OF LEDGER 23 
 
 and a tool chest. He might find it would serve the pur- 
 pose better to carry two accounts, one for the motorcycle 
 and another for tool chest and the tools which he was to 
 buy later, in order to exhibit the cost of each separately. 
 In that case, the two amounts would be debited under 
 two separate headings, and the account, Equipment, 
 would be credited with the amounts redebited, thus 
 closing it. This simple illustration will serve to show 
 how accounts generally may be subdivided in order to 
 exhibit some classification of sufficient financial weight 
 to justify separate consideration. 
 
 21 C. Controlling Accounts. A certain group of ac- 
 counts of the same kind may become too numerous, or re- 
 quire too much detail to be carried in a ledger arranged 
 in the form of a current statement of all the conditions 
 of the business. As an illustration, a ledger of 200 pages 
 — large enough to contain all accounts needed to explain 
 all general phases of the business — could not contain the 
 separate accounts of a thousand customers, for lack of 
 room. The customers' accounts would be placed in a 
 separate special ledger for customers' accounts only, and 
 the sums of all debits and credits pertaining to the cus- 
 tomers' accounts would be placed under one heading in 
 the general ledger. The ledger containing the customers ' 
 accounts would be called a special, or subsidiary, ledger, 
 and the account exhibiting the aggregate in the general 
 ledger would be called a controlling account. Control- 
 ling accounts are introduced in the general ledger when- 
 ever it is necessary to carry a group of accounts of the 
 same kind in a subsidiary ledger or other special record. 
 
CHAPTER IV 
 
 ASSET ACCOUNTS 
 
 22. Accounts of Assets. We have seen that in the 
 financial statement, the assets of the business are consid- 
 ered under groups. Current, fixed and invested prop- 
 erty, invested in securities, wasting, speculative, de- 
 ferred, contingent, intangible and good-will assets are 
 mentioned. Regarding the ledger as a continuous and 
 daily revised statement, the accounts will be described in 
 like order. The accounts, as a whole, should be kept in 
 such a way as to exhibit the amount of the entire capital 
 represented by each, so far as it is practicable and cus- 
 tomary to do so. 
 
 23. The Current Asset Accounts represent the 
 amount of the entire capital that is free to be used in the 
 business operations. If one's capital consisted of $5000 
 in current assets and $95000 in fixed or invested assets, 
 he would be said to have a large proportion of his capital 
 ' ' tied up, ' ' in such a way that it could not be immediately 
 used, and the business operations would be hampered to 
 that extent. It has been characteristic of farm owners 
 that, though owning valuable land, they are frequently 
 short of money and current property with which to do 
 business. The Federal Government has recognized this 
 condition by making special provision for loans to 
 farmers, in order, among other things, to supply them 
 with current funds for operating the farms to advantage. 
 
 The merchant is able to do a large volume of busi- 
 ness by reason of the large proportion of his assets being 
 current, or easily available. Bankers recommend that 
 every effort be made to keep the amount of cash, ac- 
 counts, notes and merchandise in the right proportions. 
 These, and similar reasons, suggest that the bookkeeper 
 distinguish the current asset accounts. 
 
 24 
 
ASSET ACCOUNTS 25 
 
 23 B. The Cash Account is debited to show the 
 amount of cash at beginning. Additional receipts of cash 
 are debited; payments or other deductions from cash are 
 credited. The "account is balanced when it is desired to 
 show the remainder. 
 
 This account is the most used and is referred to the 
 most frequently. Cash is a part of the business that may 
 be stolen or lost most easily, and needs constant atten- 
 tion. Cash receipts and disbursements should be 
 promptly recorded. The cash balance should be easily 
 ascertained by consulting the cash book. For such rea- 
 sons, the cash account is usually kept in a cash book, 
 apart from the other accounts, where it can be used and 
 consulted at will, although it is sometimes kept in the 
 ledger. 
 
 Cash Accounts in Ledger. Form 12 C illustrates the cash 
 account in the ledger. The debits show the amount at beginning 
 and subsequent receipts, the credits show payments. All items 
 are posted to this account from a journal in which full explana- 
 tions can be found. In the example, the account is balanced at 
 the close of Oct. 2, the balance being carried down as the begin- 
 ning of Oct. 3. 
 
 One-Page Cash Book. Form 10 A, illustrates a cash account 
 in which the debit and credit columns are placed side by side at 
 the right, in order to allow more room for explanations at the 
 left. The cash account shown here is kept in a cash book, 
 in which the original entries are made. A cash book contains 
 the journal record of cash transactions, together with the account 
 of cash. The account has been balanced on the 5th and 12th of 
 the month. 
 
 Form 10 B. This is the same cash book as 10 A, with the ad- 
 dition of the entries of the ledger account titles and the pages of 
 the ledger where they are found. These page numbers are to be 
 entered prior to posting, and serve as guides to the pages in the 
 ledger. As each item is posted, a check mark is placed after the 
 page number. In the form, the entries from Jan. 1 to Jan. 5 are 
 shown to have been posted; the entries from Jan. 6 to Jan. 12 
 are shown ready to be posted. Thus, the first entry on Jan. 1 
 may be found posted to the credit of the Capital account on 
 page 3 of the ledger. ( See Form 10 E. ) The last entry on Jan. 
 5 may be found posted to the debit of the Savings Fund account 
 on page 1 of the ledger. (See Form 10 C.) 
 
 Two-Page Cash Books. Form 13 B, illustrates a cash book 
 wherein receipts and payments are entered on left and right 
 pages, respectively. The cash receipts are entered, after proper 
 explanation, in the first column, and, when deposited, the amounts 
 of the deposits are entered in the second column. Likewise on 
 
26 PRINCIPLES 
 
 the credit side, checks for amounts paid out are entered in the 
 first column and totals carried to second column at the time de- 
 posits are made. This is a good form of cash book where cash 
 discounts are not common. 
 
 Form 13 L, illustrates a cash book of the ordinary two- 
 column form, but arranged with special columns for cash dis- 
 counts given and received, as does also Form 17 P. 
 
 Form 17 B, illustrates an ordinary single entry cash book. 
 
 Form 18 C, illustrates a cash book with several special col- 
 umns, both debit and credit. 
 
 Forms 23 E and 23 G, illustrate a cash book divided into two 
 books: the cash received register, and the check register. A 
 somewhat different form of the same division is illustrated in 
 Forms 27 J, and 27 K. 
 
 Form 13 Q, illustrates a petty cash book. 
 
 23 C. Accounts of Temporary Funds are debited to 
 
 show the amounts set aside for the object explained by 
 
 the heading; are credited to show the amounts applied 
 
 out of the fund, or withdrawn for other uses. 
 
 Form IOC. Certain amounts of cash may be separated 
 from the general cash, and held apart for some particular class 
 of expenditures, or for some special purpose in a fund of which 
 an account having a descriptive title may be kept. 
 
 Funds are set up for temporary purposes: thus, a 
 Contingent Fund consists of amounts set aside to pay 
 obligations likely to arise, but not yet fully determined; 
 a Cashier's Fund, or Imprest Fund, consists of amounts 
 entrusted to the cashier, out of which he makes payments 
 as occasions arise, and reports the • payments, later, for 
 entry. 
 
 23 D. Accounts Receivable are debited to show the 
 amounts to be collected from others on book accounts; 
 are credited, to show reductions in the amounts 
 collectible. 
 
 Where goods are sold on credit, the individual ac- 
 counts receivable become a continual care, in order to 
 make collections according to terms and to avoid carry- 
 ing past due accounts on the books. To aid in doing this, 
 the accounts are kept in somewhat different form under 
 different conditions, a brief survey of which is here 
 given. 
 
 The heading of the account is the name of the person 
 or firm who is to pay it ; some exceptions to this rule be- 
 
ASSET ACCOUNTS 27 
 
 > 
 ing noted later. In addition to the name, the address 
 should be added, if it is needed in locating the person. 
 Other memoranda as to rating, or information affecting 
 the account, may be added as needed. 
 
 In the explanatory space, debit side, may be written 
 such descriptions as terms of sale, invoice numbers, or 
 other data that will aid either in collecting the account 
 on time, or explaining the debit to the customer. It is 
 often advantageous to explain credits, specifying cash, 
 discount, note, rebate, etc. Of course, no time should be 
 wasted in writing explanatory matter not really needed 
 in effecting the purpose of the account. 
 
 Form 12 H, illustrates some features of an account receiv- 
 able. The heading states name and address of a city customer. 
 The debits specify that the customer is charged for merchandise. 
 The credits show that the total debits were reduced by receipts 
 of cash in part, and in part by goods returned. The account may 
 be balanced at any time to show the remainder. 
 
 Form 17 D, illustrates an account with a customer. 
 
 Both forms mentioned are accounts of retail sales which are 
 assumed to- be settled monthly and have no cash discount offer. 
 
 Form 11 B. It is not uncommon to have a number of single 
 amounts due from as many persons, to be settled in full without 
 further debit entries. In such instances a full ledger account 
 takes so much room and causes so much labor that a single ac- 
 count heading "Sundry Accounts Receivable" may answer for the 
 amounts due from a number of persons. In the form mentioned, 
 each debtor is given a line, his name is entered in the explanatory 
 space, and when payment is received the credit entry should be 
 posted on the same line as the debit. 
 
 Form 14 M. The C. O. D. (Collect on Delivery) account 
 contains the charges to sundry customers for goods to be deliv- 
 ered, and paid for when delivery is made. In this account, a line 
 is reserved for each sale, in which is posted the date, name of 
 buyer and amount on the debit side. Sometimes the sale-number 
 or the name of the collector is entered instead of the buyer's 
 name. At any rate, the explanation should be such as readily 
 to refer to the item. When the sale is delivered and the cash is 
 returned, a credit is entered on the sale line as the corresponding 
 charge. The C. O. D. account is kept among the other customers' 
 accounts. 
 
 Place in Ledger. The accounts receivable are usually 
 
 by far the most numerous group of accounts, and require 
 
 ledger space by themselves. Where all accounts are kept 
 
 in one ledger, the author recommends that after spacing 
 
 the ledger to contain all other accounts, the accounts re- 
 
28 PRINCIPLES 
 
 ceivable be given the remainder of the ledger, so as to 
 allow as much room as possible for the addition of new 
 accounts. 
 
 In a business where it is the rule to sell goods on 
 account, a special ledger for the accounts receivable is 
 likely to be needed. When so kept, the heading "Ac- 
 counts Receivable" is carried in the general ledger as a 
 controlling account (see Form 18 B), to which is posted 
 monthly the debit and credit totals of the items which are 
 posted separately, under the names of the persons owing, 
 in the several accounts of the special ledger. 
 
 23 E. The Notes Receivable Account is debited to 
 show the amount of the principal of notes or acceptances 
 owned by the concern; is credited, to show payments or 
 other deductions from the principal of the notes. 
 
 Under this heading are to be included notes running 
 but a few months, at any rate not over a year. Notes 
 running for a period of years are better classed as Long- 
 term Loans Receivable in a separate account. 
 
 Notes ordinarily draw interest, but interest on a note 
 is not entered in the Notes Receivable account, for the 
 notes are debited at face, and when paid, are credited off 
 the account at face. When the face and interest of a 
 note are collected, two credits are made — the face being 
 credited to Notes Receivable account, and the interest to 
 a separate nominal account as explained later under 
 "Accounts of Income." 
 
 Form 11 C illustrates a Notes Receivable account containing 
 a brief explanation of each note received. The explanation shows 
 the payer and date due, sufficient to be a reminder of whom and 
 when collection should be made. The payment of notes is credited 
 on a line with the debit, thus annulling that part of the account. 
 A partial payment may be credited above the line as in Form 12 D. 
 By this means it is easy to see which notes are yet unpaid. This 
 form may be used where few notes are handled and it is not con- 
 sidered advisable to keep a special note record. 
 
 Notes Receivable may very well follow Accounts Re- 
 ceivable in the ledger. When the notes become too 
 numerous for full entry in the general ledger, or it is 
 advisable to keep a separate complete record of them, 
 
ASSET ACCOUNTS 29 
 
 they are entered by number in a notes receivable record 
 (see Form 13 M), and their totals are carried in a con- 
 trolling account headed, Notes Receivable. 
 
 23 F. Jhe Inventory Account is debited to show the 
 value of merchandise, goods and other floating assets on 
 hand as per inventory taken at the date of entry; is 
 credited, with the amount standing as a debit in the ac- 
 count as per , previous inventory replaced by the one 
 debited later. 
 
 Taking inventory, or taking stock, is the means of 
 finding the value of the kind of assets that cannot be 
 carried in asset accounts because they are ever changing 
 as to things themselves or by reason of accrual, consump- 
 tion, etc. They cannot be permanently recorded as can 
 fixed property, but must be investigated and listed on a 
 given date. Merchandise is ordinarily the prominent 
 item in the inventory. Merchandise, when continually 
 bought and sold', is constantly varying as to the quantity 
 and kind of goods on hand. Under prevailing bookkeep- 
 ing methods, merchandise is debited at the cost when 
 bought, but is credited when sold at the selling price, so 
 that a comparison between debits and credits lacks a 
 common unit of application. A part of the proceeds from 
 sales represents the cost of goods taken from stock, the 
 other part of the proceeds from sales is income. If at 
 time of sale the cost of the goods sold had been ascer- 
 tained by me^ans of a cost system, so that cost could be 
 credited in a Merchandise account against the cost of the 
 goods when bought, then the Merchandise account as 
 thus kept would show day by day a balance theoretically 
 equal to the value of the goods on hand. This method, 
 referred to later, is growing in favor and use. But, as 
 records as ordinarily kept, an account showing the book 
 value of floating property on hand at a given date by 
 actual inventory is more reliable as a basis for use in a 
 statement of assets than an account containing the 
 amounts of subsequent purchases and sales. For this 
 reason it is recommended that the accounts of Merchan- 
 dise Purchases and Merchandise Sales be carried among 
 
.30 PRINCIPLES 
 
 the nominal accounts, to be disposed of at the close of an 
 accounting period as shown in a later chapter. 
 
 The Inventory account, then, shows floating assets at 
 book value on a certain date only, usually when an an- 
 nual or other periodic statement is made. Its amount 
 must be raised or lowered by estimate, for statement pur- 
 poses, during the interval. 
 
 The assets in the inventory list consist of merchan- 
 dise or other goods for sale or use, items of various kinds 
 collectible from others, but not already on the books, such 
 as interest accruing on accounts or notes receivable, — 
 anything of value for which no current account is kept. 
 They may all be entered under one title, Inventory, each 
 different kind being explained in a separate line; or, if 
 of sufficient importance, the general inventory account 
 may be divided, and the several kinds of assets be given 
 separate accounts such as "Merchandise Inventory/' 
 "Grain Inventory," "Live Stock Inventory," "Interest 
 Inventory," etc. 
 
 The cost of merchandise is the purchase price and all 
 the expenses necessary to lay the goods down in the sales 
 room. These expenses consist of freight and transfer 
 charges necessary to place same in the store. It is cus- 
 tomary for large stores to purchase goods long before 
 they are to be placed in the sales room. Such goods are 
 left in warehouses for storage until the sales season ar- 
 rives. The warehouse expenses with the -freight and 
 transfer expenses, are included as part of the cost of the 
 merchandise. 
 
 When the same articles have been bought at different 
 times for different prices, the last price paid is often 
 used. After the cost of merchandise is found, deprecia- 
 tion in value of any of the articles should be taken into 
 account before the real value can be determined. (See 
 Form 4H.) 
 
 Form 13 E illustrates the Inventory account. On Nov. 1, the 
 book value of merchandise on hand was entered as a debit. On 
 Nov. 30, a later inventory was entered as a debit. This later in- 
 ventory replaced the one previously entered, as was indicated by 
 the credit entry annulling the debit of Nov. 1. 
 
ASSET ACCOUNTS 31 
 
 Under the same heading could have been placed the amount 
 of material previously charged to Expense, but not used up to 
 that date, explained by writing "Expense" in the same way in 
 the explanatory space, as "Mdse." was written. So also Inter- 
 est accrued or any other inventoried items. At the close of an 
 accounting period each of these entries would be annulled by a 
 credit entry, and the later inventories debited. 
 
 23 G. The Merchandise Account (as recommended 
 when the account is headed "Merchandise") is debited 
 to show the cost of merchandise on hand at beginning 
 and to show the cost of subsequent additions to merchan- 
 dise ; is credited to show the cost of merchandise sold, or 
 otherwise removed from the merchandise classification. 
 This account takes the place of the Inventory account so 
 far as merchandise is concerned. Since goods are both 
 debited and credited at cost, the account balance is pre- 
 sumed to be the cost of merchandise on hand. This re- 
 sults in placing Merchandise account on the same footing 
 as other simple asset accounts. A Merchandise account 
 does not do away with inventory taking, but it serves as 
 a controlling account which the inventory is to verify. 
 Discrepancies between the Merchandise account balance 
 and the actual inventory should be reconciled by an 
 adjustment entry. 
 
 To keep a current merchandise account at cost in- 
 volves the use of a "cost system" suitable for quickly 
 finding the cost of all articles sold. 
 
 Merchandise Account Divided. Additions to the cost 
 of merchandise in stock may come from several sources 
 which the manager of a business may find it advantageous 
 to consider under separate account headings. The 
 account may be divided into the following or other sub- 
 sidiary accounts, all of which close monthly or at the end 
 of an accounting period into the general merchandise 
 account : 
 
 (1) Invoice Purchases; debited to show the invoice 
 cost of the goods only ; credited, to show the invoice cost 
 of any goods returned to, or other deductions allowed by 
 the firm from whom purchased ; or, where it is the policy 
 of the firm to consider cash discounts on invoices as a de- 
 duction from the cost, cash discounts should be credited 
 
32 PRINCIPLES 
 
 also. The result is the net invoice of cost of goods to be 
 carried periodically as a debit in the Merchandise 
 account. 
 
 (2) Freight In; debited to show the freight and 
 transfer charges on merchandise received; credited, to 
 show any reductions for overcharges or rebates diminish- 
 ing the freight cost. The result, the net freight, is car- 
 ried periodically to the Merchandise account. 
 
 (3) Returned Goods; debited to show the cost of 
 goods returned after being sold to customers. The total 
 is carried to the debit of merchandise. 
 
 23 H. The Merchandise Account (as often kept, but 
 not recommended) is debited to show the cost of mer- 
 chandise at the beginning, and to show the cost of subse- 
 quent merchandise purchases or other merchandise ex- 
 penses, return goods, etc., (thus far agreeing with 23 F 
 above) ; it is credited to show the total amount of sales, 
 or other disposition of merchandise. When thus kept, 
 the account is a mixed account, since the account balance 
 shows neither the book value of goods in stock, nor the 
 profit from sales, but both together. These are separated 
 at the close of an accounting period by crediting the ac- 
 count with the closing inventory, the balance after that 
 credit being profit or loss. The account is ruled and the 
 inventory is carried down (debit side) as a continuation 
 of the account into the next accounting period. 
 
 This form of the Merchandise account was formerly 
 prevalent, and is now extensively used. For that reason, 
 it is mentioned here, since the student is likely to meet 
 with it. Though the principle governing it may be ap- 
 plied probably to advantage in some instances, it does not 
 seem desirable to represent this most important ele- 
 ment in many businesses, by using a mixed account. 
 
 231. The Manufactured Goods Account, Finished 
 Goods account, or Completed Product account is debited 
 to show the factory cost of the goods made by the con- 
 cern; is credited to show the cost of the goods sold or 
 otherwise disposed of. 
 
ASSET ACCOUNTS * 33 
 
 The cost consists of three items: materials, pro- 
 ductive labor, and manufacturing expenses or factory 
 overhead, referred to in Prin. 23 J-K-L. This account is 
 handled in the same way as the Merchandise account ex- 
 plained in Prin. 23 G. 
 
 23 J. The Materials Account is debited to show the 
 cost of material to be made into manufactured articles ; is 
 credited to show the cost of materials used in making the 
 manufactured articles. The balance of this account 
 should show cost of materials in stock. This is a manu- 
 facturing account. It may be divided, t6 suit the pur- 
 pose, into accounts for several classes of materials. 
 Among such distinctions are: 
 
 Kaw Materials, consisting of material in its raw state, 
 as lumber, ore, sand, etc. 
 
 Finished Parts, consisting of materials on which some 
 work is done after which it is returned to stock. 
 
 The raw material of one factory is frequently the 
 completed product of another, so that the divisions of 
 materials in any factory is made in accordance with the 
 classification applicable to that particular concern. 
 Materials may be carried in as many accounts as desired. 
 
 231C. The Labor Account is debited to show the 
 amount of wages paid workmen in a shop or factory; is 
 credited to show the labor reapportioned as a part of the 
 cost of the things manufactured. The balance of this ac- 
 count shows the amount of labor on material in the mak- 
 ing, and to be apportioned to manufactured articles when 
 they are completed. This account is divided into Pro- 
 ductive Labor, and Nonproductive Labor; or it may be 
 divided by departments, as "Productive Labor Dept. A," 
 Dept. B, etc. 
 
 23 L. Factory Overhead is debited to show the 
 amount of factory or shop expenses that are chargeable 
 to the things made as a part of the cost of making ; cred- 
 ited, to show the overhead reapportioned to completed 
 products. 
 
 23 M. Grain, Produce, Etc. The accounts of goods 
 
34 PRINCIPLES 
 
 kept for sale or consignment that are not very well called 
 "merchandise" may be kept under headings similar to 
 these named. They are probably best included in Inven- 
 tory account in most instances, or they may be handled 
 as in the Merchandise account, depending on conditions. 
 
 24. Fixed and Invested Property Accounts refer to 
 property of a permanent nature owned by the concern for 
 use either in conducting the business or in bringing 
 income. 
 
 The items comprising the fixed property are, as a 
 rule, easily distinguishable things, such as building, furni- 
 ture, machinery, delivery equipment, etc. These things 
 remain in the business year after year so that it is econ- 
 omy of time to plainly name them when first entered in 
 ledger accounts, where the book value of each remains as 
 a permanent record. 
 
 Thus, under the heading "Furniture and Fixtures" 
 may be entered on separate lines, office desk, $28.00; 
 bookkeeper's desk, $16.50; 3 showcases, $78.40; cash 
 register, $210, etc. The purpose is to so describe the items 
 that the cost of any one thing of importance may be as- 
 certained by referring to the account. 
 
 Should the items in an account be too numerous for 
 convenient space in the ledger, they may be carried in a 
 separate ledger or record book, and their total carried in 
 the general ledger in a controlling account. 
 
 In case of sale or other disposition of any of them, 
 the account under which it had formerly been debited 
 should be credited at cost, the credit entry being written 
 on the same line as the debit entry, thus annulling that 
 debit item. The difference between the total of debit and 
 credit entries is the cost of the items remaining. 
 
 Depreciation. In view of the wear and tear incident 
 to permanent property, the value of such property is 
 constantly undergoing depreciation, that is, reduction in 
 value by use. This depreciation is easily computed from 
 a knowledge of the ordinary term of usefulness of the 
 kind of property considered. In order that depreciation 
 may not impair the capital of the business, the correct 
 
ASSET ACCOUNTS 35 
 
 practice is to charge as an expense, at the close of each 
 accounting period, an amount equal to the loss through 
 depreciation ; that is, to enter depreciation as an expense 
 belonging in the accounting period in which the deprecia- 
 tion occurs. The account credited in the ledger for the 
 amount thus charged is entitled General Reserve for 
 Depreciation if one reserve is kept for depreciation on 
 all accounts. It is frequently advisable to open a sep- 
 arate reserve account for each fixed asset account: thus. 
 Reserve for Depreciation on Office Furniture, Reserve 
 for Depreciation on Delivery Equipment, etc. 
 
 The Reserve account serves as a credit offset against 
 the debit in the Property account. Thus, the account of 
 a building may show (debit side) the cost to be $10,000. 
 Assuming that three per cent per year is allowed for de- 
 preciation, the amount $300, would be credited to the 
 "Reserve for Depreciation on Building" account and 
 debited in an Expense account, as is explained later 
 when nominal accounts are discussed. This credit in the 
 Reserve account would act as an offset, showing that the 
 building is carried on the books at cost $10,000 less $300 
 depreciation. 
 
 If a Reserve account is carried for each invested as- 
 set account, it may very well be placed next to the ac- 
 count of the property to which it refers, conveniently 
 showing, by a comparison of the cost with the reserve, 
 the net amount at which the property is carried on the 
 books. 
 
 Appreciation. The ground on which a building 
 stands, or any ground or other property, may increase 
 in value, and frequently does. But accountants, as a 
 rule, do not recommend that any account of appreciation 
 be kept in the books. It is true that a lot costing $1000 
 may possibly have risen in value so as to be salable at 
 $10,000. This would clearly strengthen the position of 
 the concern to the extent of $9,000. But to place the ap- 
 preciation on the books as an added asset of $9,000 would 
 simply be making a record of an estimate. Accountants 
 generally regard entry of appreciation on the books as 
 
36 PRINCIPLES 
 
 being subject to so many chances of bad judgment as to 
 make entire exclusion the rule. 
 
 It is better to consider accounts of permanent prop- 
 erty as showing how much capital has been invested in 
 immobile things, not as showing how much those things 
 may bring if sold. Asset accounts do not show what 
 property may be, could be, might be, or even what it 
 probably is worth, but what it was decided to be worth 
 by both buyer and seller when it was bought. 
 
 Income from Property. Property used in the ordi- 
 nary operations of the business produces no income; or 
 rather, the income from it consists in its use. The ex- 
 penses of such property, repairs, replacements, etc., are 
 expenses of the business as a whole. But property owned 
 for income, as a house to be rented, should be accom- 
 panied by a special Income account, showing, as a credit, 
 the income from that specific source. The expenses per- 
 taining to that particular piece of property should be 
 debited in the same Income account, resulting in a bal- 
 ance showing the net income from that source as ex- 
 plained in the chapter on nominal accounts. Such an 
 
 account may be headed " Income and Expense of ," 
 
 or simply "Income from ." In any case, the ex- 
 pense of the property is entered against the incomes from 
 that property. 
 
 Speculative Investments, including property bought 
 and held for a possible rise in the market, are not consid- 
 ered in this number, but are discussed in Prin. 27. 
 
 24 A. The Real Estate Account is debited to show 
 the cost of the land, buildings, or both, as represented 
 by the heading ; is credited to show the cost of the prop- 
 erty sold or otherwise gone out of possession. 
 
 The cost of the property includes expenses of secur- 
 ing title and preparing for occupancy, for the cost of any 
 additions to buildings or permanent improvements; but 
 not for expenses in repairing or replacing damages. 
 When credited at cost, the difference between cost and 
 selling price is credited or charged, as the case may fae, 
 to Profit and Loss account ; or if Profit and Loss account 
 
ASSET ACCOUNTS 37 
 
 is reserved for the operating profits only, to Surplus 
 account. 
 
 Remark. — The ordinary expenses for repairs and upkeep 
 and the income derived from the rent of the property are entered 
 to an Income and Expense account, of the property. 
 
 Division of the account is desirable so far as may be 
 necessary to separate pieces or parts that are distinct 
 one from another. There should be a separate account 
 of each separate property, and an account heading 
 should be used describing it; thus, " Building and Lot 
 No. 58-60 Market St.," "Lot 7, Blk 2, McGrew's 1st Ad- 
 dition to Chicago," "Farm Property S. E. % N. "W. %, 
 S. 5, Twp. 27, R. 5 W., 6 P. M.," etc. 
 
 These titles are long and cumbersome for ordinary 
 posting entry, although useful in the ledger. They can 
 easily be abbreviated in the books of original entry. 
 
 Land and buildings are, as a rule, better carried in 
 separate accounts. A depreciation on buildings is abso- 
 lutely certain. The buildings must be replaced in course 
 of time, and by accumulating a reserve for this purpose, 
 year by year, a part of the business earnings will be held 
 to replace the buildings or equalize their loss. 
 
 The land itself cannot be said to depreciate or ap- 
 preciate in any fixed or certain way, so that its value 
 should not be included with the building cost as a base 
 on which to compute depreciation. 
 
 A controlling account, headed "Real Estate" may 
 be used to show the aggregate amount of the accounts of 
 several properties kept in a separate ledger or record 
 book. 
 
 24 B. Furniture and Fixtures account is debited to 
 show the cost of office and store appliances such as desks, 
 chairs, counters, lighting fixtures, etc., used in the busi- 
 ness; is credited to show the cost of any of these items 
 sold or disposed of. 
 
 If the items are numerous they may be kept in a 
 subsidiary record and a controlling account carried in 
 the general ledger. 
 
 The account may be divided among different depart- 
 ments of the same business. 
 
38 PRINCIPLES ■ 
 
 . Depreciation is carried in a reserve account as ex- 
 plained in Prin. 24. 
 
 24 C. Machinery Account is debited to show the 
 cost of machinery purchased; credited, to show the cost 
 of machinery sold or disposed of. It is better to distin- 
 guish machinery in a factory from equipment and from 
 tools. 
 
 Depreciation in the value of machinery is an impor- 
 tant item of expense wherever machinery is used ; for all 
 machinery in course of time wears out, or becomes use- 
 less as compared with newer styles that replace the old. 
 This loss in value of the machinery, as in the case of any 
 other depreciation, should be charged among the ex- 
 penses of the accounting period in which it occurs, and 
 credited in a Eeserve for Depreciation account. How 
 much to carry to the reserve annually depends on the life 
 of the machine, which may be five, ten, or fifty years, 
 more or less, depending on the kind of machine and how 
 it is used. 
 
 Accountants recommend keeping a subsidiary record 
 of each machine, showing its cost and term of usefulness. 
 Other entries, such as cost of repairs and replacements, 
 add to its value as a record. 
 
 24 D. Tools Account is charged to show the cost of 
 small tools when bought; credited, to show the proceeds 
 of any tools sold. 
 
 Tools are comparatively small articles which it is 
 difficult to keep record of individually in the ledger, more 
 especially as they are frequently lost or used up and re- 
 placed. For this reason, accountants recommend that an 
 inventory of tools be taken regularly and that the tools 
 be revalued at statement time. In that case, the total of 
 the inventory taken when the books are closed takes the 
 place of the balance previously standing in the Tools 
 account. 
 
 An account of reserve for depreciation on tools is not 
 necessary because tools, considered separately as a part 
 of the assets, are not sufficiently fixed to continue in the 
 
ASSET ACCOUNTS 39 
 
 statement for a period of years. Where the tools are not 
 revalued at statement time, and there is a purpose to 
 make a record of an estimated depreciation or diminish- 
 ment in the value of tools, the amount of depreciation 
 would better be credited directly to the Tools account, 
 instead of being credited in a Reserve account. 
 
 The Controlling Account of Tools may be explained 
 by a tools ledger or tools record. 
 
 24 E. Equipment Account is debited to show the 
 cost of the appliances used for some general or specified 
 purpose in business; is credited at cost when sold to an- 
 nul the debit for the items sold. 
 
 The heading, Equipment, is in common use as a desig- 
 nation for the entire outfit of appliances used in a busi- 
 ness, as a carpenter's or contractor's equipment; or it is 
 divided, as Delivery Equipment of a store, Heating 
 Equipment, etc. 
 
 In factory, accounting a distinction is commonly 
 made between three classes of appliances as distin- 
 guished by the following headings : Machinery, Tools, and 
 Equipment; the last named referring to appliances in 
 general use, as shafts, belts, pulleys, trucks, etc. 
 
 If carried as a controlling account, a list of the items 
 should be kept in a subsidiary ledger or record book, 
 otherwise the items should be listed in the ledger account. 
 
 Equipment of all kinds wears out or is obsolescent 
 with time, so that the profits of a business will be over- 
 rated unless the loss of a given period, through deprecia- 
 tion, is deducted from the income of that period. This 
 charge to income should be credited in a Reserve ac- 
 count unless the equipment is of such a nature as to re- 
 quire a revaluation, from period to period, by inventory. 
 The reserve serves as an offset reducing the amount at 
 which the equipment is carried on the books; or if the 
 equipment is revalued, the latest inventory replaces the 
 former total charge in the account. 
 
 25. Accounts of Invested Funds are debited to show 
 
40 PRINCIPLES 
 
 the amounts placed in the fund; credited, to show 
 amounts applied or withdrawn from the fund. 
 
 A permanent "fund indicates something set aside from 
 the general business expenditures, and saved to meet a 
 future obligation. This money set aside is, as a rule, 
 made productive by investing it in stocks, bonds, mort- 
 gages or other securities which will yield a fair rate of 
 income to be added to the fund. 
 
 25 A. Sinking Fund. As an instance illustrating 
 the purpose of a sinking fund, assume that the owners 
 of a coal mine borrow money to develop the property, 
 giving a ten-year bond and mortgage. Inasmuch as the 
 coal mine may be worked entirely out within ten years 
 and be worth nothing from which collection of the mort- 
 gage could be realized, the lenders may make it a con- 
 dition of the loan that a certain amount of the annual 
 earnings of the property be set aside in a fund until the 
 fund be sufficient to pay the indebtedness. This Jund is 
 held by a trustee, who- sees that the conditions are com- 
 plied with and who invests the fund so that it may be in- 
 creased by the income earned thereby. When the indebt- 
 edness of the concern matures, it is paid out of the fund, 
 and, of course, any remainder is turned back to the 
 owners. 
 
 The payment of city, county, state and public bonds 
 is commonly provided for by means of sinking funds into 
 which certain amounts are set aside annually from the 
 tax collections. 
 
 25 C. Mortgage Loans are long-time (from one year 
 to ten or more years) obligations, and draw a stated rate 
 of interest payable annually, semi-annually (every six 
 months), or quarterly (every three months). 
 
 A ledger asset account under the title, Mortgage 
 Loans Receivable, may be kept. This is in the same form 
 as the account of Notes Receivable (see Form 11 C). The 
 account is debited for the face of the loans, and credited 
 for the payment of principal. The interest receipts col- 
 lected from them are credited to Interest account, which 
 
ASSET ACCOUNTS 41 
 
 is kept in the part of the ledger reserved for nominal 
 accounts. 
 
 Loan securities are often purchased for an amount 
 equal to both principal and accrued interest. In that case 
 the interest accrued should be charged to Interest ac- 
 count, not to Mortgage Loans, so that the charge to the 
 latter account will be the face of the paper. When paid, 
 a credit is made directly opposite, on the same line, to the 
 charge for the given payment. 
 
 Loan records may be kept in a separate subsidiary 
 ledger or record, of which a controlling account in the 
 general ledger will give the aggregates ; or they may be 
 recorded in an auxiliary book. This subsidiary book con- 
 tains ruled columns for description of each item, like the 
 notes receivable book. 
 
 25 D. Bonds for the repayment of loans are issued 
 by the nation, state, city, county, township, school dis- 
 trict, or other public corporations; by transportation, 
 trading, manufacturing, or service corporations ; by firms 
 and by private persons, as evidence of their promise to 
 pay, at a future time, a sum of money with annual, semi- 
 annual or quarterly payments of interest thereon. Bonds 
 are frequently secured by mortgage on property. Bonds 
 are bought by the investor at par, at a premium, or at a 
 discount. When bought, an account headed Bonds may 
 be debited to show the face of different kinds as anno- 
 tated in the explanatory space of the account; or, a sep- 
 arate account may be kept for each kind. When sold, the 
 account is credited at face, and the difference is carried 
 to Profit and Loss. 
 
 25 E. Stocks Account is charged at cost, for the pur- 
 chase of stocks by the concern. Each purchase is given 
 a line in which is entered, in the explanatory column, the 
 date, name and the par amount of the share, or block of 
 shares ; and the cost in the money column. 
 
 Brokers who handle stocks freely, open separate 
 ledger accounts for each kind of stock. In that case, the 
 name of the issuing company appears as the heading : 
 thus, D. & R. G. Ry. Stock. 
 
42 PRINCIPLES 
 
 When stock is sold, an entry is placed to the credit 
 of the account on the same line as the debit for the same 
 shares, and at the same price. As it often happens that 
 the stocks are sold for either more or less than their pur- 
 chase price, the difference, if the selling price is less than 
 the cost, is debited, or if greater, is credited, to Profit 
 and Loss. 
 
 26. Wasting Asset Accounts are debited to show 
 the cost of the property; credited, period by period, to 
 show the amounts of depletion from the original value. 
 Such accounts are distinguished from other fixed prop- 
 erty in that they represent something that is being ab- 
 sorbed gradually; as a coal mine, a tract of timberland, 
 a stone quarry, and the like. A part of the asset value 
 is being withdrawn day by day in the regular course of 
 business. The property is not to be replaced, but is to be 
 absorbed more or less depending on the value for other 
 purposes after it is worked out. A Reserve account for 
 depletion would be out of place. The amount written 
 off each year is to be credited directly in the account. It 
 should be "written down'' so as to appear at a safe valua- 
 tion as an asset. 
 
 There is often special reason for considering de- 
 pletion with care. A manufacturer who uses timber, 
 sand, clay, etc., taken from his own property, must in- 
 clude depletion as a part of the cost of his product. 
 
 27. Speculative Asset Accounts are debited for the 
 cost of the property bought (or the appraised value of 
 gifts), also, for expenses attached to the speculation; and 
 are credited for incidental incomes derived therefrom. 
 When the speculation is closed out by sale, the account 
 is credited for an amount equal to the debit balance ; and 
 the difference between the debit balance of the account 
 and the amount realized from the sale, is posted to Profit 
 and Loss. 
 
 Speculation is business venture that involves un- 
 usual risk for the purpose of realizing unusual gain. 
 Thus, a piece of land may be bought for a certain sum 
 in the hope that a customer will be found who will buy 
 
ASSET ACCOUNTS 43 
 
 it for a greater sum than that paid for it. Such specula- 
 tion differs from business investment. In the latter, 
 property is bought for use or for trading, that is, dis- 
 tributing goods to consumers by purchase and sale 
 primarily without reference to market fluctuations. 
 Speculation may consist in buying commodities for ship- 
 ment and sale in a distant market; development of pat- 
 ents or copyrights, or securing property or claims of any 
 kind with a view to realizing more than their present 
 current value. It may also consist in buying the obliga- 
 tion of another concern to deliver a commodity at a future 
 date, as is frequently the case in board of trade transac- 
 tions. 
 
 Property taken for debt is similarly treated, as when 
 a bank or lender takes over property given for security. 
 Likewise, when an educational or eleemosynary institu- 
 tion receives property as a gift to be disposed of for its 
 benefit, the account of the property so treated would be 
 that of a speculative account. 
 
 Any account of a speculation is headed with a de- 
 scriptive title, as: Shipment to Central Commission Co., 
 Speculation in Oregon Timber, Publication of Base Ball 
 Score Cards, Futures in May Wheat, Salvage of Jackson 
 Elevator, Maywood Addition. 
 
 28. Intangible Asset Accounts are debited to show 
 their valuation on the books at cost; credited, to show 
 diminishment in value through lapse of time, or other 
 reasons. The purpose is to write them down periodically 
 until their book value entirely disappears. 
 
 Such accounts represent the valuation placed on some 
 right, privilege, condition, or circumstance that cannot 
 be bought and sold as ordinary Teal or personal property, 
 but that is plainly a factor in the profitable operation of 
 the business. The value expires with time. 
 
 Such accounts should be debited for the actual cost 
 (not an estimated value), and ordinarily should be re- 
 duced by credit at the close of succeeding accounting 
 periods for an estimated diminishment in value, if such 
 
41 PRINCIPLES 
 
 is plainly apparent, or arbitrarily reduced with a view to 
 final extinguishment. 
 
 28 A. Patent Rights Account should be debited at 
 the price paid to a patentee for a right to manufacture 
 and sell his patented article. Such patents expire by time 
 limitation. The account should be credited from time to 
 time for an amount sufficient to equalize the diminishing 
 value of the patent. The account heading should de- 
 scribe the particular patent. 
 
 28 B. Copyrights Account is debited for the cost of 
 matter for publication which is protected by registry 
 under the copyright laws of the United States or other 
 nations. The account is treated in the same way as patent 
 rights. 
 
 28 0. Franchise Account is similarly debited for the 
 cost of a franchise conveyed to the business. A franchise 
 is granted for a term of years so that this cost should be 
 extinguished during the period it is in effect, and there- 
 fore represents a diminishing asset that should be equal- 
 ized by charging Profit and Loss and crediting the Fran- 
 chise account each year with the amount of the expired 
 portion. 
 
 28 D. Accounts of Deferred Expense Items are deb- 
 ited to show amounts paid or incurred for items that will 
 be chargeable to expense at a later time, but before that 
 time are carried as assets; credited, to show a portion or 
 all of the deferred items written off as expenses. 
 
 Expense accounts should show what amount of ex- 
 penses were consumed in a given period of time, regard- 
 less of when the expenses happened to be paid. Hence, 
 expense items, sometimes paid in one period, that should 
 be charged as expense in a later period, are carried over 
 as assets. Thus, a certain sum paid for advertising 
 material to be used in the year following its charge, might 
 be carried as an asset on the books until the time when it 
 should appear among the expenses; at which time the 
 credit in the Asset account, and the corresponding debit 
 in the Expense account, is made. Where the proportions 
 
ASSET ACCOUNTS 4", 
 
 existing between sales or production and expenses are 
 computed closely, care must be taken to limit the expense 
 charges to things actually consumed in a given period. A 
 few examples following will illustrate the principle and 
 enable one to identify other instances of like nature. 
 
 28 E. Insurance Account is debited, ordinarily as a 
 deferred item, for the annual cost of premiums on insur- 
 ance policies. At the close of regular periods, sometimes 
 monthly, sometimes annually, the account should be cred- 
 ited for the consumed portion and the Expense account 
 of the business, or of the department to which it belongs, 
 debited. 
 
 28 F. Taxes, usually paid annually or in semi-annual 
 installments, may be debited as a deferred item, while 
 one-twelfth of the annual cost is credited monthly and a 
 corresponding debit made to the expenses of the month. 
 
 28 G. Organization Expenses of a corporation some- 
 times are in excess of, or at any rate out of proportion to 
 the income of the first year ; so instead of charging them 
 as expense in total during the first year, they are carried 
 in an Asset account to be transferred to expense, part at 
 a time, during succeeding periods. 
 
 29. Contingent Assets are those that may or may not 
 be realized in cash, depending on some unforeseen circum- 
 stance. Among them are accounts, notes, judgments, and 
 disputed adjustments that might be collected. Accounts 
 of this nature are very well kept in a memorandum 
 ledger. It is well understood that these accounts are not 
 worth face value, in fact it is presumed that few of them 
 will be collected; but, included in this list are all that 
 might be collected. This record of contingent assets may 
 have a controlling account in the ledger, kept more as a 
 notice of the existence of the list than anything else. As 
 a reminder that such a list is to be found, a nominal value 
 of one dollar may be charged to a controlling account in 
 the general ledger. 
 
 30. The Good-will Account is debited to show the 
 valuation placed upon the reputation, standing or trade 
 
46 PRINCIPLES 
 
 advantages of a business, and included as a part of the 
 assets when the business changes hands ; credited, at regu- 
 lar periods out of profits earned, with a view to finally 
 writing it off the books. 
 
 The opening of a Good-will account may be illustrated thus : 
 Firm B buys Firm A's business which shows the net worth, by a 
 statement of property and debts, to be $40,000, but pays for it 
 $50,000. The $10,000 paid in addition to the listed net assets, is 
 the value placed upon the trade advantages developed by Firm A. 
 The new firm will open an account headed Good-will, debiting 
 the amount allowed in that account. It seems clear that the good- 
 will developed and sold by Firm A will begin to diminish as soon 
 as the business is operated by Firm B, so that after a given num- 
 ber of years, the thing bought would have been entirely ex- 
 haused, even though the Firm B continues the business profitably 
 and could sell it to another firm at an equally good or even better 
 estimated good-will ; so that the amount standing in the Good-will 
 account does not seem to represent any subsequently favorable 
 or unfavorable development in the business, and, as a consequence, 
 is entitled to no permanent place in the books. 
 
CHAPTER V 
 
 LIABILITY ACCOUNTS 
 
 31. The Accounts of Liabilities show the amounts 
 that the proprietor is under obligation to pay to persons 
 outside the business. The funds to pay liabilities are 
 taken from the assets. Asset amounts are found as debit 
 balances, while liability amounts are credit balances. 
 
 Under liabilities are included accounts payable, notes 
 payable, liability inventory of otherwise unrecorded pay- 
 ables, long-term obligations including mortgages, bonds 
 and loans payable, and contingent liabilities. 
 
 They are classified as current liabilities (within the 
 year), long-term liabilities (one year or more), or con- 
 tingent liabilities. 
 
 32. Current Liabilities: Accounts Payable are cred- 
 ited to show the amounts the firm has assumed to pay 
 others; debited, to show reductions in the amounts pay- 
 able. 
 
 When accounts payable are opened for goods bought 
 at retail, or for services as of transfer concerns, doctors, 
 mechanics, etc., it is customary, unless otherwise specified, 
 to settle about the first of every month for the amounts 
 credited during the preceding month. 
 
 "When keeping an account payable for goods bought 
 at wholesale, it is usually better, and often necessary, to 
 pay each credit separately. This is done because whole- 
 salers usually allow a specified term of credit, running 
 from the date of the bill. Thus, an invoice of goods 
 bought June 19th, on account at 30 days, should be paid 
 by July 19. Such terms of credit as 30, 60, or 90 days, 
 or 2, 3, or 6 months, are allowed. The difference in time 
 varies in different lines of trade. 
 
 Such accounts should show the credits entered when 
 the invoices are allowed, and in the explanatory space 
 of the ledger, date of invoice, and the term of credit 
 
48 PRINCIPLES 
 
 should be entered, if any special term is granted. (See 
 Form 13 H.) The payment of a specified credit should 
 be debited on the same writing line as the credit, thus 
 showing what charge is canceled. It is a good plan to 
 use a sign "x" before the credit amounts that have been 
 paid, as a convenience in easily picking out the unpaid 
 credits later. (See Form 13 I.) 
 
 "When a deduction or allowance is made from an 
 invoice of goods bought, it is a good plan to debit the 
 allowance opposite the . credit to which it applies above 
 the writing line, so that full settlement of the credit may 
 be charged on the writing line. (See Form 12' D.) 
 
 A controlling account headed Accounts Payable rep- 
 resents the aggregate of all unpaid accounts in favor of 
 other persons or firms. Sometimes the titles Purchase 
 Ledger or Trade Creditors are used, meaning the same 
 thing. When the voucher system is in operation, the title 
 Vouchers Payable bears the same relation. The account 
 is credited at the close of the month, or other posting 
 period, for the total credits to firms for merchandise 
 bought ; and charged for the total debits to firms for pay- 
 ments or allowances. The balance shown by the control- 
 ling account can be verified by a comparison with the 
 total of a list of unpaid balances taken from the pur- 
 chases ledger or, if a voucher system is used, from a list 
 of the vouchers payable. 
 
 32 E. Notes Payable Account is credited to show 
 amounts of notes or accepted time drafts issued for pay- 
 ment later; is debited to show payment made, or other 
 allowance reducing the amount to be paid. 
 
 Notes given by the concern are recorded in similar 
 manner to notes receivable under similar conditions. (See 
 Prin. 23 D.) 
 
 32 F. Liability Inventory Account. At the close of 
 an accounting period, certain liabilities that have not been 
 recorded, may be taken into account. Among these, are 
 accrued interest on notes or accounts payable, wages and 
 salaries earned but not yet paid, and other payments to 
 be made for unrecorded benefits already received. These 
 
LIABILITY ACCOUNTS 49 
 
 should be listed in the inventory book and their total 
 credited to the account of Liability Inventory. A corre- 
 sponding debit is then made .in the nominal accounts to 
 which they pertain. At the close of the following period, 
 the Inventory account is debited and the nominal ac- 
 counts involved are credited, thus balancing out the old 
 inventory. The new, or current, inventory is then entered 
 as before. 
 
 33. Long-Term Indebtedness. Bonds, loans and 
 long-term notes payable are credited in the books to 
 show the total obligation under the appropriate headings ; 
 debited, to show the obligation canceled in part or wholly. 
 
 The long-term obligations require full records as to 
 terms of payment, also rate of interest, and other essen- 
 tials. 
 
 Where few such obligations are issued, an ordinary 
 ledger page may be made to contain the records; but 
 where there are a series of such obligations, a separate 
 record book is needed. 
 
 As mentioned in Prin. 25 A, a sinking fund is com- 
 monly accumulated in order to provide for long-term ob- 
 ligations in full, or to retire bonds or notes payable part 
 at a time. 
 
 34. Contingent Liabilities are obligations that may 
 become current, should another person, who is the prin- 
 cipal debtor, fail to pay them. They consist principally 
 of notes receivable discounted and accommodation paper. 
 Should the principal debtor fail to pay them, they become 
 serious matters and therefore should be followed up 
 closely. 
 
 34 A. Notes Receivable Discounted Account should 
 be credited for the face of all notes receivable which have 
 been endorsed over to the bank or to individuals for cash 
 or credit. The items should be entered and described 
 as in the Notes Payable account. The corresponding 
 charges are to Cash and to Interest and Discount. When 
 the notes are paid by the makers to the holders, entries 
 are to be made debiting Notes Receivable Discounted ac- 
 count and crediting Notes Receivable account. 
 
50 PRINCIPLES 
 
 If the endorsee fails to collect, the endorser is 
 obliged to pay the amount of the paper. In that case he 
 charges Notes Receivable Discounted for the notes re- 
 turned to him, the Notes Receivable account standing 
 without any change. 
 
 34 B. Accommodation Paper Account is credited for 
 the face of the paper signed for the accommodated party. 
 Each item should be entered with the same attention that 
 is given to a note payable. The corresponding charge 
 is to the party accommodated, thus, "John Smith, Ac- 
 commodation." When the obligation is met by the prin- 
 cipal debtor, an entry is made charging Accommodation 
 Paper, and crediting the party who was charged for the 
 accommodation. 
 
 35. Reserve Accounts are credited to indicate an ad- 
 dition to the book value of the assets. Such additions are 
 made to anticipate losses in the accounts named in the 
 reserve. The Reserve account is debited with the amounts 
 of such losses when they actually occur. 
 
 The effect of a reserve is to withhold a certain part 
 of the apparent profits from distribution. 
 
 The ^accounts of assets and liabilities, taken as a 
 whole at the amounts entered as the result of transac- 
 tions, may overstate the real net worth of the concern. 
 This overstatement may occur in several accounts. For 
 example, an account of fixed property may show the cost 
 to be $10,000 ; but would not show that it had depreciated 
 to the extent of $1000. Or, an account of notes receiv- 
 able may show that the concern has received notes to the 
 amount of $25,000, but would not show, what might be 
 the case, that $500 face value of those notes will be found 
 to be uncollectible, and will result in a loss. 
 
 Before allowing all apparent profits to be with- 
 drawn, the prudent directors of a concern may find it 
 advisable to keep or reserve some of the profits, either as 
 an offset against diminishing capital, through deprecia- 
 tion in value of property owned, or as an offset against 
 bad debts, or as an addition to the general resources of 
 
LIABILITY ACCOUNTS 51 
 
 the business. % Such amounts reserved are represented by- 
 Reserve accounts, which receive credit for the amount 
 retained. The cash or property reserved is included in 
 the aggregate of the Asset accounts, and balances the 
 credit in the Reserve account in the same way that the 
 accounts of the remainder of the assets (less liabilities) 
 balance the Capital account. 
 
 35 A. Reserve for Depreciation Account is credited 
 to offset loss sustained through the diminishing value of 
 fixed property through ordinary wear. The credits to 
 this account should show, in the explanatory column, the 
 particular property account that each item pertains to 
 if one reserve for Depreciation account is kept for all 
 property. A separate Reserve account may be opened 
 for each property account; as, Reserve for Depreciation 
 (Plant), Reserve for Depreciation (Delivery Equipment), 
 etc. These accounts should show enough reserve to equal 
 the difference between the cost of the property and its 
 present market value. Depreciation is an expense, as 
 real as the payment of rent or salaries, and should be 
 charged regularly regardless of whether the business is 
 being run at a profit or at a loss. 
 
 When any given building or machinery carrying a 
 reserve for depreciation is sold, the entry of the sale 
 should contain a debit in the Reserve for Depreciation 
 for an amount to balance the credit in the Reserve ac- 
 count which applies to the sold property. 
 
 35 B. Reserve for Doubtful Accounts. When an 
 examination of the accounts receivable discloses the fact 
 that any of the accounts are doubtful, or that losses will 
 probably occur in enforcing collection, it is apparent 
 that the total of the accounts receivable balances is 
 greater than the asset value of the accounts. The shrink- 
 age in value may be offset by an estimated amount 
 taken from profits and credited to an account of Reserve 
 for Doubtful Accounts. This reserve should be revised 
 annually to show an amount equal to the probable losses 
 that will be incurred through bad debts. When a reserve 
 
52 PRINCIPLES 
 
 has been set up in one accounting period, the actual 
 losses incurred from accounts becoming worthless in the 
 following period should be charged to the Reserve ac- 
 count until the reserve is charged off, rather than to 
 Profit and Loss. 
 
 35 C. General Reserve Account. This account may 
 be used to contain credits of reserve for depreciation, for 
 bad debts, or to meet any future contingencies of the 
 business; or it may be used to increase the amount of 
 working capital. 
 
 The objectionable feature of carrying reserves be- 
 yond business needs is, that such reserves may be made 
 without the knowledge or consent of stockholders or in- 
 terested investors, who would be entitled to a larger 
 share of profits, if such profits were distributed in the 
 period when earned. 
 
 36. Surplus Account. This account is credited to 
 represent profits reserved to increase the financial re- 
 sources of the business, or simply to represent profits 
 prior to distribution in dividends. The report of the 
 United States comptroller of the currency shows state- 
 ments from many banks that have permanent Surplus 
 accounts equal to, or greatly in excess of the Capital 
 Stock account. Surplus account represents earnings 
 which may be retained in the business as capital, paid 
 out in dividends, or applied on losses. 
 
CHAPTER VI 
 
 PROPRIETORSHIP ACCOUNTS 
 
 37. The Capital Account of an Individual Proprie- 
 torship is the account credited for the money and other 
 assets invested, or owned as parts of the concern for 
 which the books are kept. The amount of this credit is 
 diminished by the amount of any liabilities that are to be 
 paid out of the assets. It shows, therefore, the net worth 
 of the concern, though not necessarily the net worth of 
 the owner, who may or may not have his entire posses- 
 sions included in the concern.- - 
 
 The Capital account shows as a credit amount the 
 excess of total assets over total liabilities of a given con- 
 cern. This credit is the amount that the proprietor could 
 expect to have for other purposes if the business in 
 which it is now used should be discontinued. 
 
 37 B. The .incomes of the business increase the capi- 
 tal, and the expenses diminish it. If they were credited 
 or charged to the Capital account, as they occur, the 
 Capital account would at all times represent the worth 
 of the business. This may be done, but the custom is to 
 credit the incomes and charge the expenses to certain 
 nominal accounts which, once a year or other period 
 (called the accounting period), are combined into one 
 result and carried to the Capital account. Thus, the 
 Capital account of an individual proprietorship shows 
 the exact capital or net worth of a business only at the 
 close or beginning of an accounting period, the nominal 
 accounts showing the increase or decrease in that capi- 
 tal during the intervening time. 
 
 37 C. As a general rule, in the larger concerns, as 
 well as in many of the smaller ones, the capital is fixed 
 at afti amount not to be increased or diminished by the 
 profits and losses. In this case, the amount of the net 
 profit or loss of a given period is not carried from the 
 
 53 
 
54 PRINCIPLES 
 
 nominal accounts to the Capital account, but is carried 
 to the proprietor's Drawing account, an account that is 
 credited for amounts which he may draw out of the con- 
 cern for his personal use. 
 
 37 D. The title of the Capital account is written in 
 various ways; thus, John Smith, Capital; John Smith, 
 Proprietor ; John Smith, Investment ; John Smith, Stock ; 
 or simply John Smith. The title may also be unpersonal, 
 as Stock, or Capital. The form John Smith, Capital, is 
 preferred. The position in the ledger assigned to the 
 Capital account varies with different bookkeepers. It 
 seems preferable to place it last in the division of real 
 accounts, wherein Asset accounts appear first, in the 
 order of their convertibility, followed by liability ac- 
 counts in the order of their immediate or remote demand 
 for payment, followed by the summary in the Capital 
 account. 
 
 This is also the most convenient place for reference 
 when making a trial balance or a financial statement; 
 especially since, once a year, all the nominal accounts 
 following in the real accounts are closed, leaving the 
 ledger intact to that point. 
 
 37 E. Forms of individual Capital account: 
 
 Forms 10 E and 10 F. The account is here credited for in- 
 vestment and for incomes and charged for expenses item by item. 
 The balance of this account, taken at any time, is the amount of 
 net worth. 
 
 - Form 10 H. The Capital account remains as at the begin- 
 ning of the accounting period, while the incomes are credited in 
 one nominal account (Form 101) and the expenses in another 
 <Form 10 J). 
 
 The same accounts, copied on the opposite page, show the 
 income (Form 10 M) and the Expense (Form ION) carried to 
 Profit and Loss (Form IOC) from which account the balance is 
 carried to the Capital account (Form 10 L). This account, when 
 balanced, exhibits the same amount as did Form 10 F by the 
 former process. 
 
 If, after showing the net profit of $4.75 (Form 10 O) it had 
 been decided not to increase the capital, but to withdraw the 
 profits, the balance of the Profit and Loss account would have 
 been carried to the credit of another account entitled, Charles 
 Burton, Drawing. This account would be charged later for the 
 amounts drawn out by Burton for his personal expenditures. 
 
PROPRIETORSHIP ACCOUNTS 55 
 
 38. The Capital Accounts, of a Partnership are cred- 
 ited for the investments of each of the partners separ- 
 ately. Thus, if John Smith and Lewis Jones enter into 
 partnership, upon opening the firm books, an account en- 
 titled, John Smith, Capital, or John Smith, Partner, will 
 be credited for the capital which he invests, as is done 
 in the capital account of a sole proprietor; an account 
 entitled, Lewis Jones, Capital, or Lewis Jones, Partner, 
 will be similarly credited for the capital contributed by 
 the latter. If there are several partners, a like entry 
 will be made crediting the Capital account of each. 
 
 When the Profit and Loss account is made up at the 
 close of the accounting period, the net profit or loss, in the 
 absence of any agreement to the contrary, is divided 
 equally among the partners. If there is a special agree- 
 ment as to the proportion each is entitled to, the profits 
 are divided according to that agreement, and the part 
 belonging to each partner is carried to his Capital ac- 
 count or to his Drawing account. 
 
 39. The Capital Account of a Corporation is cred- 
 ited for the amount of the authorized capital of the con- 
 cern. If this amount is paid into the company in cash 
 or property by the investors when the concern is estab- 
 lished, the opening entry is very simple — the asset 
 accounts are deducted, and the Capital account is credited 
 But this condition rarely exists, for the reason that the 
 entire capital cannot ordinarily be secured from the 
 investors at one time, but is frequently collected in in- 
 stallments. Furthermore, subscriptions for the entire 
 amount of the authorized capital stock may not be found 
 at the time of organization. Again, the legal obligations 
 of each of the members to the company, and the obliga- 
 tion of the corporation to the state, require special record 
 to guide in their enforcement. Thus, if the capital is not 
 all paid in, the Capital Stock account should be dimin- 
 ished by certain accounts, the debits of which show how 
 much of the amount credited to the Capital Stock account 
 exceeds the real capital of the business. The principal 
 
56 PRINCIPLES 
 
 accounts of this nature are entitled, Subscriptions, Un- 
 subscribed Stock, and Treasury Stock. 
 
 The net profit or loss is not carried to the Capital 
 Stock account of a corporation, but is carried to Surplus ; 
 except where a deficit results, when the amount of the 
 deficit should be debited in an Assessment account which 
 shows losses to be pro-rated among stockholders and col- 
 lected from them. 
 
 39 B. The Share of Each Stockholder in the capital 
 stock must be recorded also. If there are few stock- 
 holders, and these do not expect to transfer their shares 
 actively, a line in the Capital Stock account may be given 
 to each stockholder, showing his name and the amount 
 to his credit. The amount standing to the debit of Un- 
 subscribed Stock will also be given a line following these 
 credits, making the total equal to the entire capital as 
 shown by the articles of incorporation. 
 
 If a stockholder transfers his shares to another per- 
 son, a debit opposite his credit is entered, and the person 
 receiving the transferred shares is credited on the next 
 line below. If unsubscribed stock is taken, the line in 
 the Capital Stock account credited for unsubscribed 
 stock is debited for the full amount, and two credits are 
 entered — one for the new stockholder, and one for the 
 remainder unsubscribed. Thus, the Capital Stock ac- 
 count shows the names of stockholders and the amount 
 of stock belonging to each, together with the unsub- 
 scribed portion. 
 
 39 C. When there are many stockholders, and when 
 the shares are transferred from one holder to another 
 quite freely, a subsidiary Stock Ledger should be used 
 which will contain separate accounts with all stock- 
 holders. Each is credited for his holdings, and charged 
 for his transfers of stock to others. It should be remem- 
 bered that the transfer of stock from one shareholder to 
 another does not involve any change of values so far as 
 the company is concerned, but merely shows who is en- 
 titled to the benefits of the stock, and the face value. " 
 
PROPRIETORSHIP ACCOUNTS 57 
 
 The total credits in the stock ledger should be equal 
 to the credits of the Capital Stock account, less the 
 amounts standing in Unsubscribed or Treasury Stock 
 accounts. 
 
 39 D. Treasury Stock is stock duly issued as fully 
 paid, and later purchased by the issuing concern, or re- 
 ceived by it as a gift. Treasury Stock may be sold by 
 the concern at market price, which is not the case when 
 stock is first issued, for then it must be paid for at face. 
 The account of Treasury Stock is simply a property ac- 
 count, to be debited at cost for the amount paid for the 
 stock, and, if resold, to be credited as accounts of other 
 stocks not issued by the concern. When Treasury Stock 
 is received by the concern as a gift from stockholders, it 
 is frequently the practice to debit Treasury Stock ac- 
 count at par, and balance this entry by an account en- 
 titled Reserve for Treasury Stock. 
 
 Recapitulation 21-40. The section of real accounts 
 is kept to show the current financial condition of the as- 
 sets and liabilities. 
 
 It is recommended that this section of the ledger be 
 subdivided into (1) Asset accounts, (2) Liability ac- 
 counts, and (3 accounts of Net Worth. 
 
 The Asset accounts begin with cash, and continue, 
 followed by accounts and notes receivable and other cur- 
 rent property, after which follow fixed and invested 
 property, and that in turn by accounts of things less 
 available or real. 
 
 The Asset accounts represent things at cost valua- 
 tion, diminished by depreciation, which in the case of 
 fixed property is shown in Reserve accounts. Current 
 property is revalued from time to time by inventory. Ap- 
 preciation in the value of fixed property is not entered 
 in the accounts. 
 
 The Liability accounts follow the Asset accounts. 
 They begin with accounts and notes payable, which are 
 followed by long-term liabilities, contingent liabilities, 
 etc. 
 
5S PRINCIPLES 
 
 Following the Liability accounts, is the part contain- 
 ing the accounts of Net Worth. These accounts include 
 reserves, surplus, capital and drawing accounts of owners 
 or partners. 
 
 The real accounts should be kept as far as possible 
 in such a way as to comprise a current statement of assets 
 and liabilities, and for this reason it is recommended that 
 mixed accounts be excluded. At the close of an account- 
 ing period, the real accounts are the basis of the state- 
 ment of assets and liabilities. 
 
CHAPTER VII 
 
 STATEMENT OF PROFIT AND LOSS 
 
 41. Statements of Profit and Loss. Any increase in 
 the net worth of a concern realized from sources other 
 than proprietorship investments, is classed as net income 
 or profit. Thus, if the net worth on a certain date is $25,- 
 000, and on a following date, is $30,000, the difference, 
 $5,000, if it is not additional investment, is the income, 
 or profit, of the intervening period of time. The simplest 
 way to find the amount of income for a period of time is 
 to compare statements of assets and liabilities dated at 
 the beginning and the close of the period. In preceding 
 chapters, general rules have been given for making state- 
 ments of assets and liabilities, or balance sheets, suitable 
 for comparisons of this kind. The real accounts must be 
 kept so as to occasion no false impressions as to the ac- 
 tual additions to or subtractions from the net worth. 
 The real accounts, however, do not show by what means 
 the income is brought into the concern. They show 
 merely, when summarized in comparative statements, the 
 bare fact that the concern on a given date shows more or 
 less net worth than it did before. If the concern stands 
 better, the increase must be the result of business oper- 
 ations or circumstances that the proprietor should find 
 worth while to consider in more detail. 
 
 Further information explaining the elements of in- 
 come of expense is summarized in a statement of profit 
 and loss. In this statement the financial weight of the 
 various activities of business are reflected. A name is 
 given to each element of income under which the amount 
 flowing into the concern is credited; likewise a name is 
 given to each element of expense under which the amount 
 flowing out of the concern through that channel is deb- 
 ited. These descriptive names are the headings of "nom- 
 
 59 
 
60 PRINCIPLES 
 
 inal" accounts which are carried in the ledger as a cur- 
 rent statement of profit and loss, or income. 
 
 Note. — A statement of incomes and expenses is usually called 
 a "profit and loss statement" or a "loss and gain statement" when 
 it refers to the operations of a trading or manufacturing business. 
 However, the heading "statement of income," meaning a state- 
 ment of all elements entering into net income, is not out of order 
 in this connection. 
 
 Annual statements of income are now demanded by 
 the government from all citizens whose annual net in- 
 come or profits exceeds a specified sum. These state- 
 ments must be made, regardless of what books are kept. 
 The distinctions made in them relative to sources of in- 
 come are of interest as indicating to some extent what 
 nominal accounts should be kept in a ledger and how 
 they should be kept. But the income statement de- 
 manded by the government does not indicate all the ac- 
 counts desirable in business, for the purpose of the gov- 
 ernment is to make only such rules as are necessary to 
 arrive at the taxable income, while the business man has 
 the additional purpose, that of discovering how he may 
 increase the earnings of the business and how he may 
 reduce unnecessary expenses. 
 
 42. Period Covered by Statement. A statement of 
 income, or profit and loss, refers to a definite accounting 
 period. One year is the time commonly covered by this 
 statement. But a monthly statement is a common thing 
 in some businesses, and a daily statement, or report, 
 covering the same matters of information, is also used 
 where the nature and magnitude of the business makes 
 frequent reports desirable. 
 
 It is well to note that the income from a given source 
 is not necessarily confined to the money received from 
 that source during a given period. Thus, a house may 
 be let at a rental of $600 per year, or $50 per month. As- 
 suming that only $400 of this rental has been collected 
 during an accounting year and that the remaining $200 
 is collectible, the income from the house would be the 
 entire $600 earned, although only part of it has been re- 
 ceived. Accounts of income do not necessarilv show cash 
 
STATEMENT OF PROFIT AND LOSS 61 
 
 collected, but are quite likely to include cash to be col- 
 lected as well. 
 
 The expenses 'of a period are not necessarily iden- 
 tical with the cash actually paid out for expenses. Thus, 
 in the last month of an accounting year a premium of 
 $60 may be paid for one year's insurance. Assuming 
 that only one month's insurance cost, or a twelfth of the 
 whole, applies in the accounting period, only $5 of this 
 total payment should be included as an expense of that 
 year. 
 
 In a recent government form for income tax returns 
 of individuals is the following instruction : ' i If you keep 
 books showing income accrued, you may report such in- 
 come instead of cash received, and you may also report 
 expenses incurred instead of expenses paid." 
 
 It makes little difference to the government in the 
 collection of taxes whether the percentage is based on 
 the one or the other, for either plan will include in the 
 second year what was omitted in the first; but it does 
 make a difference to the business man whether he bases 
 his income calculations on the amounts earned or on the 
 amounts collected. For accounting purposes, the income 
 earned, whether fully collected or not, and the expenses 
 incurred, whether paid for or not, are to be considered 
 the incomes and expenses of a given period. By this 
 means only can the totals be kept in condition for per- 
 centage comparisons. 
 
 43. Income and Profit. A concern may profit (1) 
 from the "primary incomes" which flow in as a result of 
 the ordinary operations of the business; (2) from the 
 "secondary incomes" which flow in as a result of busi- 
 ness activities or investments not essential to the plan 
 and purpose of the business; and (3) from irregular or 
 accidental sources. 
 
 The first requirement of a profit and loss statement 
 is to exhibit the primary income as separate and apart 
 from the other sources of profit, since the success of the 
 business, as such, is measured by the primary income. 
 The object of a business undertaking is to sell some speci- 
 
62 PRINCIPLES 
 
 fied line of goods or service, hence the primary income is 
 the proceeds of the sales of the regular stock in trade. 
 The thing sold may be merchandise in a trading or manu- 
 facturing business; land in a real estate business; pro- 
 duce or live stock in farming ; transportation in railroad- 
 ing; light, heat, power, water, telephone service in public 
 utility companies ; labor or service by the individual, etc. 
 Whatever the concern sells in accordance with its plan 
 of organization or purpose, is called the "Sales" of the 
 business; or a modifying word may be used, as merchan- 
 dise sales, produce sales, light sales. Sales may be 
 divided in one concern ; as, grocery sales, meat sales, and 
 bakery sales. 
 
 The sales of goods is the principal source of income 
 in most businesses, such as trading, manufacturing, and 
 farming. For this reason, the manner of arriving at the 
 income from dealing in goods is referred to here. 
 
 The first item in the statement is the total amount 
 of sales; or if any allowances have been made for re- 
 turned goods or other reasons, the first item will be the 
 total amount of sales less allowances. This amount is 
 placed in the right hand column of a two-column state- 
 ment, or on the right hand page of a two-page statement. 
 
 The second item is the cost of the sales, placed in the 
 left column as a deduction. The cost of sales is ordi- 
 narily found by adding to the inventory of goods at the 
 beginning of the period the purchases during the period, 
 and from the sum deducting the inventory at the close 
 of the period, leaving as a remainder the cost of sales. 
 The cost of sales deducted from sales leaves, as a remain- 
 der, the gross trading profit, which is the principal in- 
 come of the business. This gross trading profit is entered 
 as a balance, the statement is ruled and the gross trading 
 profit is carried down to a second section of the state- 
 ment. 
 
 After the gross trading profit, or principal income, 
 of the business is carried down, secondary incomes, and 
 miscellaneous gains may be itemized in the statement 
 and the amounts carried to the right hand column and 
 
STATEMENT OF PROFIT AND LOSS 63 
 
 added to the principal income, while the expenses are 
 itemized to the extent, desired, and carried to the left 
 hand column as deductions from total income. The sec- 
 ond section may then be balanced, showing a net profit 
 remainder. Where additional profits consist of a num- 
 ber of items, or where the expenses are divided into sev- 
 eral classes, the additions and deductions may be entered 
 in several sections, each of which explains some special 
 phase of the business operations, as will be referred to in 
 detail later. But the main point "to be made is that hav- 
 ing obtained the gross trading profit, the income is re- 
 duced, step by step, until the net business profit is found. 
 
 44. Losses are expenditures which result in a dimin- 
 ishment of the assets of the business. They are divided 
 into (1) expenses; (2) unclassified losses. 
 
 Expenses are the outlays for things to be consumed 
 in carrying on the business. Such outlays may be for 
 rent, light, heat, insurance, interest, taxes, hired help, 
 and like things; also for such property as coal for fuel, 
 office stationery, office blank books, and such other 
 things as would be - consumed within the accounting 
 period, or, if lasting over, would be so impaired by use 
 as to be unsalable. 
 
 Unclassified losses arise from irregular causes, such 
 as theft, gifts, fires, accidents, or speculations. 
 
 43 A. Expenses Divided. The term, Expense, with- 
 out any qualifying word, means a loss expenditure of the 
 business as a whole. If there is no reason to make any 
 distinctions, all such expenditures may be grouped under 
 the one heading. Expenses are divided, however, to a 
 greater or less extent, as serves the purpose, on two gen- 
 eral lines: 
 
 (1) to show, for comparative purposes, the cost of 
 different kinds of services, as suggested by the following 
 classifications : Building Expense, Salaries, Delivery Ex- 
 
 (2) To show the cost of the expenses grouped as 
 charges applying to some specified activity of the busi- 
 book; so that it is not necessary for the depositor to 
 
64 PRINCIPLES 
 
 ■ness. Thus, a manufacturing concern may divide the ex- 
 penses into Manufacturing Expense, Selling Expense, Ad- 
 ministrative Expense, Capital Expense. These several 
 divisions are debited, to show, as separate items, the ex- 
 penses connected with making, selling, managing, and 
 securing capital, although the sum of all is a charge 
 against the entire income of the business. 
 
 45. Statement in One Section. The simplest income, 
 
 or profit and loss statement, contains one general section 
 
 in two columns — the right for incomes and gains of any 
 
 nature; the left, for expenses, or losses of any nature. 
 
 The statement is closed by a balancing entry which 
 
 shows the excess of the opposite column, resulting in a 
 
 net profit or net loss. 
 
 Model Form 10 R shows the arrangement. In this very sim- 
 ple exhibit, Charles Burton shows that at the date of statement 
 he has earned an income of $26.70, entered in the column to the 
 right. During the same period his expenses were $21.95, entered 
 in the column to the left; resulting in a net income, or profit, of 
 $4.75. 
 
 The more extensive and diversified the business, the 
 
 more occasion there is for dividing the profit and loss 
 
 statement, so that there are statements of two, three, and 
 
 more sections. Statements of two or more sections are 
 
 discussed in the following, numbers. 
 
 46. Statements in Two Sections. When two sections 
 are used, the first section exhibits the items comprising 
 the primary income. The net result of the first section 
 is carried down and united with items of a general char- 
 acter, closing by a balance showing the net profit or loss. 
 
 Form 12 N is a good illustration of a two-section statement 
 for a trading business. In the first section, right hand column, is 
 found the amount of sales. In the same section, left hand col- 
 umn, is the cost of the goods sold, explained by some computa- 
 tions showing the means for arriving at the cost. The balance 
 is carried down and united with other incomes and expenses of a 
 general character, resulting in a net profit balance. 
 
 Compare with Form 9, on which the annual incomes and ex- 
 penses of a salaried man and general investor are combined in a 
 profit and loss statement. The first section contains items that 
 have a bearing on the net amount taxable under the Federal In- 
 come Tax Law. The result is a balance of $2512.10, which is 
 carried down to the second section. 
 
STATEMENT OF PROFIT AND LOSS 65 
 
 In the second section are the expenses which are not de- 
 ductible from income for taxation purposes, but are of interest 
 to the householder in making up his annual personal expense 
 budget. 
 
 47. Statement in Several Sections. When goods are 
 manufactured by the concern selling them, a manufactur- 
 ing statement or manufacturing section of the profit and 
 loss statement is necessary in order to exhibit the cost of 
 the product. This manufacturing section may be placed 
 first for convenience, although a statement of profit and 
 loss logically begins with the amount of the principal in- 
 come from which are deducted successively the cost of 
 goods sold, the expenses of selling, the expenses of man- 
 agement, and finally the expenses of capital, together 
 with miscellaneous gains or losses. 
 
 Form 6 illustrates the divisions. In the first section (6 A) 
 the cost of the several items entering into the manufacture of 
 flour are added together, deductions are made, showing that the 
 cost of making the product of that year was $45,934.78. 
 
 The second section (6B) begins with net sales, and after 
 deducting the cost of sales, leaves a remainder of $13,705.70, called 
 the gross trading profit, or income. 
 
 In the third section (6 C) the gross trading profit is carried 
 down, to be diminished by the selling expenses, leaving as a re- 
 mainder $7416.40 to be carried down as net trading profit. 
 
 In the fourth section (6D) the net trading profit is further 
 diminished by managing expenses, leaving a remainder which is 
 carried down to 
 
 The fifth section (6E), where it is increased or diminished 
 by secondary incomes and expenses, leaving the net profit for in- 
 vestors as the final result. 
 
 The form here explained permits of percentage comparisons 
 which are very valuable in themselves. It also gives information 
 as to the profit of the business operations as apart from incidental 
 or accidental gains or losses which are not necessarily connected 
 with the operations of the business. 
 
 48. Departmental Statement. Where a business is 
 divided into selling departments, the goods for sale are 
 entered by departments and charged as though each de- 
 partment were a separate store. The total sales of each 
 department are exhibited as separate items and the ex- 
 penses are likewise allocated, resulting in a separate 
 profit and loss statement for each department. 
 
 Form 18 C illustrates a departmental statement. There are 
 six departments, numbered from 1 to 6. The totals of sales, cost 
 
66 PRINCIPLES 
 
 of sales, and expenses for the entire store are given in the first 
 column, and following it, the figures that make these totals in the 
 several departments. The result shown is the entire gross profit 
 or loss, and the net profit or loss, both for the concern as a whole 
 and for each department separately. 
 
 49. Relation of P. & L. Statements to Ledger. The 
 
 profit and loss statement is a financial summary of busi- 
 ness operations taken from records. Its practical pur- 
 pose is to point out the business activities that brought 
 profit and the business necessities that caused loss. The 
 more clearly these elements are separated and compared, 
 the better able is the management to guide the business 
 into profitable undertakings. 
 
 The section of nominal accounts in the ledger may 
 be regarded as the current profit and loss statement. It 
 contains the accounts preferably arranged and divided 
 with reference to the items in the statement. At the be- 
 ginning of an accounting period all nominal accounts are 
 started anew, for a new financial record of business oper- 
 ations is to be entered upon. The manager of the busi- 
 ness endeavors to increase income and to cut down un- 
 necessary expense. His success in doing so is shown by 
 the amounts posted day by day to the nominal accounts. 
 At the close of the accounting period the nominal ac- 
 count balances are transferred to the profit and loss 
 statement, where they are rearranged, condensed and 
 divided in the order and manner thought most illuminat- 
 ing. At that time, all nominal accounts, having served 
 their purpose, are closed. In a following accounting 
 period, the nominal accounts are opened anew, and con- 
 tinued until they are again summarized in a succeeding 
 profit and loss statement. 
 
 50. Illustration of Profit and Loss Statements. In 
 order to illustrate the general resemblances in the state- 
 ments of profit and loss for representative kinds of busi- 
 ness, and to draw general distinctions between them, we 
 refer, in the following paragraphs, to model statements 
 suitable for the following enterprises that have to do 
 with a loaf of bread from the time the flour is made to 
 the time when the bread appears on the table. The lines 
 
STATEMENT OF PROFIT AND LOSS 67 
 
 of business involved are: (1) milling; (2) transporta- 
 tion; (3) wholesaling; (4) retailing; (5) household; (6) 
 banking. 
 
 The student will bear in mind that the business state- 
 ments used for illustration can be made only from care- 
 fully kept business accounts. Yet any business man, 
 whether he can keep books or not, should be able to read 
 and understand the points to be looked for in a business 
 statement. 
 
 Form 6. The statement here given is that of the miller who 
 converts the wheat into flour. This is a manufacturing business, 
 and the results of the bookkeeping for a year should be condensed 
 into a Profit and Loss statement similar to the given form. Note 
 that the first section gives in general items the costs entering into 
 the production of flour and other output. These costs are taken 
 from a complete record of the payments and expenses, the total 
 of which constitutes the "cost of product." 
 
 The trading section shows that there was billed out during 
 the year, mill product valued at $53,887.74, but that the mill took 
 back product amounting to $2,959.66, leaving net sales $50,928.08. 
 The cost of these sales is found by adding to the inventory at be- 
 ginning of year, $10,583.26, the cost of the year's product, 
 $45,934.78, and from the sum, deducting the inventory of stock on 
 hand, $19,295.66, leaving $37,222.38, the net cost of the product 
 sold. 
 
 The difference, or gross trading profit, $13,705.70, is carried 
 down to the next section. Against this are entered selling ex- 
 penses, office expenses and capital expenses, given in some detail. 
 
 The final result, after all deductions, is the "net profit for 
 investors." 
 
 Form 7. The railroad, which carries the flour to the whole- 
 sale house, secures its profit from carrying passengers, freight, 
 express and mail. The original accounts of income and expen- 
 ditures in a large undertaking of this kind may number 200, more 
 or less, but these several accounts are brought together into gen- 
 eral accounts, of which the items in the statement are repre- 
 sentative. First, are listed four items of revenue; the first is 
 from ticket sales; the second from freight charges; the third, 
 from an express company for carrying express; and the fourth, 
 from the government for carrying mail. These combined produce 
 the gross earnings which are carried down to the next section. 
 
 Against the gross earnings are charged five general divisions 
 of operating expenses. 
 
 A proper understanding of the operating expenses necessi- 
 tates some knowledge of railroading. Under the regulation of 
 railway accounting through the Interstate Commerce Commission, 
 each of the five items represents a definite kind of charges apply- 
 ing to all roads. For example, the first expense. Maintenance of 
 
6S PRINCIPLES 
 
 Right of Way and Structures, represents a group of over twenty 
 separate charges ; among these are, cost of repairing and replacing 
 ballast, ties, rails, bridges, buildings, etc. The fourth expense, 
 Transportation Expenses, include about fifty primary charges, 
 among them fuel, water, lubricants, wages to conductors, brake- 
 men, switchmen, telegraph and telephone operation, etc. 
 
 After deducting operating expenses from the gross earnings, 
 there remain the net earnings which, in the following section, are 
 diminished by the capital charges. The item, "Interest on Bonds," 
 in this group, arises from the fact that a large part of the capital 
 of many railroads is provided by the sale of bonds on which in- 
 terest must be paid periodically. 
 
 This profit and loss statement for a railroad is referred to 
 as a representative statement for a service business, and may be 
 adopted for any other service business, such as stables, garages, 
 hotels, repair shops, gas or electric light and power companies, 
 educational institutions, etc., the titles for sources of income and 
 for operating expenses being varied to suit the business. 
 
 Forms 12 N and 8. The statements of profit and loss for 
 trading' business here given are typical for wholesale and retail 
 trading business generally, and may be in more or less elaborate 
 form. The statement may be written on a single page (like Form 
 12 N) or on two opposite pages like Form 8, depending on the 
 amount of analysis thought desirable. 
 
 In Form 8, the first section, 8 A, shows the sales for the 
 period, diminished by the cost of the merchandise sold, leaving as 
 a remainder the gross trading profit. This section is of the ut- 
 most value, as from it may be taken the volume of business, and 
 the per cent of gross profit. 
 
 The second section, 8 B, shows the gross trading profit, dimin- 
 ished by selling expenses, leaving net trading profit. 
 
 The third section, 8C, shows net trading profit diminished 
 by office or administrative expenses, producing the business profit. 
 
 The fourth section, 8D, shows the business profit diminished 
 by capital expenses, or the expenses of borrowing, and maintain- 
 ing the value of capital accounts. The remainder is the net profit 
 for distribution. 
 
 Form 9. In the household profit and loss statement, there 
 appears first a list of the incomes and profits received from vari- 
 ous sources. The item, "5th Ave. Property," shows the rents re- 
 ceived, diminished by the expenses for maintenance of the prop- 
 erty. The net income is carried to the second section. 
 
 From the net income are taken the current expenses divided 
 into such special accounts as desired, leaving net profit or deficit 
 for the year. 
 
 Form 7D. The bank statement of profits and losses is the 
 simplest of all. As shown from the first section of the statement, 
 the profits are derived from, (1) interest on the money loaned to 
 customers; (2) exchange on drafts sold to customers who buy 
 drafts for remittance; (3) interest on bonds or other securities 
 owned by the bank; (4) charges for collecting paper for cus- 
 
STATEMENT OF PROFIT AND LOSS 69 
 
 tomers. The losses are, (1) salaries paid to the working force 
 of the bank; (2) interest paid to certain depositors who leave 
 money at interest; (3) general expenses, including cost of books 
 and stationery, heat, light, rent, insurance, etc. 
 
 The second section shows the distribution of profits into two 
 reserve accounts, and the remainder paid as dividend to the 
 owners. 
 
 Recapitulation 41-50. The profit and loss statement 
 of a business is derived from the accounts that show the 
 incomes and expenditures of the business operations, 
 covering a definite period of time, called the accounting 
 period. In a typical profit and loss statement, the lead 
 ing section exhibits the income derived from the ordinary 
 business operations, diminished by the direct cost of pro- 
 ducing any utilities sold. This section thus exhibits 
 gross business profit. The gross business profit is dimin- 
 ished by selling, administrative, and capital expenses, 
 and increased by capital earnings, if any. The result is 
 an exhibit of the net profit for distribution. 
 
 The detail to which the various items of income and 
 expenditure given in the statement may be carried, de- 
 pends on the amount of information sought, but, in the 
 typical statement, shows the following distinct items of 
 information: (1) the gross volume of business and the 
 gross profit in the form to derive the percentage of profit ; 
 (2) the cost of securing sales; (3) the cost of supervision; 
 (4) the cost for capital, and the profit from surplus capi- 
 tal; (5) the net profit for distribution. 
 
CHAPTER VIII 
 
 NOMINAL ACCOUNTS 
 
 51. Nominal Accounts have descriptive names for 
 headings, to indicate the operations or conditions that 
 result in profit, or in loss. The ordinary sources of in- 
 come and of expense are named by a practically stand- 
 ard set of account titles. But one business is likely to 
 develop at one point or another in ways out of the ordi- 
 nary, and will need distinctive nominal accounts by 
 means of which to locate unusual incomes and profits or 
 unusual expenses and losses. Eules for the use of stand- 
 ard nominal accounts and principles covering the intro- 
 duction of special nominal accounts are discussed in this 
 chapter. 
 
 52. Income Accounts. All incomes of a concern 
 may be credited in an account headed, Income (see Form 
 10 I). The credits in this account serve to specify the in- 
 come amounts added to the assets. If all income is from 
 one source, a man's salary, for instance, the single ac- 
 count would be satisfactory; but as soon as it is worth 
 while to examine into several sources of income, it is de- 
 sirable to use several income accounts instead of the one 
 general account. For example, the ordinary income of a 
 railway company may be shown in four accounts: Pas- 
 senger Earnings, Freight Earnings, Express Earnings, 
 and Mail Earnings; or, the income of an individual may 
 be shown in such accounts as Salary, Interest on Money 
 Loaned, Rents from Property, Dividends from Stocks, 
 and Miscellaneous Profits. 
 
 In the above examples, the several accounts would 
 be credited with the amounts as received, item by item, 
 until, at the end of the accounting period, the totals from 
 the several sources are shown. 
 
 The income accounts may be divided and subdivided 
 to the extent found necessary for full information as to 
 
 70 
 
NOMINAL ACCOUNTS 71 
 
 the sources of profit. A few headings for income ac- 
 counts, suggestive of headings that might be used, 
 follow : 
 
 Wages, earnings of a person, usually computed on 
 work by the day. ■ 
 
 Salary, earnings of a person for personal service 
 rendered for a period of time. 
 
 Attorney's Fees, earnings of a lawyer for legal 
 counsel. 
 
 Livery Hire, earnings of a liveryman for use of 
 vehicles. 
 
 Light, earnings of a light company for furnishing 
 light. 
 
 Lodging, earnings of a hotel for the use of rooms. 
 
 Passenger Earnings, earnings of a railroad for carry- 
 ing passengers. 
 
 Cartage,, earnings received by a dray line for moving 
 goods. 
 
 Collections, earnings received by a bank or person 
 for collecting paper. 
 
 Commission, earnings of a commission merchant for 
 selling another's goods. 
 
 Trading, earnings of a merchant or dealer for 
 collecting and distributing goods. 
 
 After the titles of the income accounts are deter- 
 mined, such accounts receive credit from the books of 
 first entry, for the income as earned, and are debited for 
 any deductions from such earnings. At the close of the 
 accounting period, the income accounts are closed and 
 the balances carried to the credit of Profit and Loss. (See 
 Form 10 M closed directly into Form 10 ; or 12 S closed 
 by journal entry, 12 0, into 12 Y.) 
 
 53. Expense Accounts. All the loss expenditures 
 of a concern may be debited in one account headed Ex- 
 pense (see Form 10 J). Thus, expenditures for rent, light, 
 heat, insurance, taxes, supplies, salaries, wages, interest, 
 and other things consumed may be debited to expense; 
 also depreciation, or loss in value of the business prop- 
 erty through use. Expense covers the value of things 
 
72 PRINCIPLES 
 
 consumed by the business. The debits in this account 
 specify the amounts withdrawn from the assets. 
 
 The Expense account may be divided, according to 
 the needs of a business, into several accounts. A separate 
 expense account should be opened whenever it is neces- 
 sary to inquire closely into any one kind of loss expendi- 
 ture. A small retail dealer may find it advantageous to 
 keep special accounts of Delivery Expense, Freight In, 
 Interest Expense, grouping all other expense items under 
 the heading, General Expense. A manufacturing con- 
 crn may classify expenses in ten groups, distributing the 
 items under separate account headings, such as Building 
 Expense, Labor, Power, Depreciation, Repairs, Supplies, 
 Salaries, Insurance, Taxes, and Miscellaneous Expenses. 
 A railroad, in order to watch carefully each class of the 
 great variety of things consumed, uses between 200 and 
 300 expense accounts. 
 
 In finding the total expense loss of a given account- 
 ing period, it may be that some things charged in the ac- 
 count have not been used during that accounting period, 
 but are carried over for use in the period next following. 
 For instance, a winter supply of coal purchased in the 
 fall and charged to Expense may be only partially con- 
 sumed on December 31, when the books are closed. The 
 value of the unconsumed portion, as well as the value of 
 any other items charged but not used, should be credited 
 in the Expense account as a deduction from total ex- 
 penses of the period covered. Occasionally, articles 
 charged to expense are sold. In that case, the Expense 
 account is credited with the amount of the sale. 
 
 The General Expense account is closed into Profit 
 and Loss at the close of the accounting period. (See 
 Form 10 N closed into 10 O.) But when expenses are 
 divided on the basis of operations, they are not always 
 closed directly into Profit and Loss, but may be charged 
 to the business operation involved, as discussed in 
 Prin. 54. 
 
 54. Charges Against Operations. Certain loss ex- 
 penditures are not closed directly into Profit and Loss at 
 
NOMINAL ACCOUNTS 73 
 
 the close of an accounting period, but are debited to an 
 Operative account, to which they directly apply. 
 
 54 A. Expense of Income Bearing Property. If a 
 
 concern owns a building which is let to a tenant, the ex- 
 penses for the upkeep of the building would be a charge 
 against the rent income from the building. In Form 11 F, 
 an account of the income from a property owned by a 
 concern and carried in the books under the heading "Lot 
 8, Blk. 3 of Conrad's Addition," is credited to show the 
 rent income, and debited to show the expenses of that 
 particular piece of property. The account shows, as a 
 result, the net income from that property, which is to be 
 carried to Profit and Loss instead of carrying the total 
 income as a separate credit and the total expense as a 
 separate debit. Any income bearing property, that is, 
 property not used by the concern in its regular business 
 but by another for a compensation, should show the net 
 results of an Income and Expense account, separate from 
 the Investment account. 
 
 In entering the expenses of a property, such items as 
 repairs, renewals, depreciation, and commissions paid to 
 a renting agency are to be debited against the income, 
 together with interest on any loans against the property 
 and ordinary taxes thereon. 
 
 54 B. Expenses of Speculations. When any prop- 
 erty is purchased purely for speculation, as a tract of 
 land bought and held for sale, the original cost and all 
 expenses are, as a rule, debited in one account as a charge 
 against the proceeds of the contemplated sale. But 
 should the property change from a speculative venture 
 to an income bearing investment, it would be advisable 
 to divide the account, carrying the investment as an 
 asset, and the income and expense pertaining to it in a 
 separate nominal account. 
 
 A course followed by conservative real estate com- 
 panies and highly commended by accountants, is to 
 charge the expenses of tracts of land which they are pre- 
 paring for sale to Expense accounts separate from the 
 
74 PRINCIPLES 
 
 Property accounts ; so that the expenses, instead of being 
 " capitalized, ' ' are closed into the Profit and Loss account 
 of the year in which they occurred. When so done, a 
 memorandum entry of the expenses is made in the Prop- 
 erty account for convenience in determining the entire 
 amount of money placed in the venture. 
 
 54 C. Freight and Transfer Charges In. The freight 
 charges on goods, materials, or equipment bought are 
 chargeable to the same account as the thing bought. 
 Thus, freight on merchandise purchases is debited to the 
 Merchandise Purchases account, on materials to Ma- 
 terials account, on furniture to the Furniture account, 
 etc. A separate account of Freinght-in is often kept and 
 debited for all expenditures on incoming freight, but 
 should be closed later into the accounts to which the 
 specific items apply. 
 
 54 D. Freight- Outward. An account of freight on 
 sales is to ( be handled in one of two ways: (1) If it rep- 
 resents freight prepaid and charged to the customer in 
 his bill — a custom in many houses — the amount of 
 freight-out is credited in the Trading account as sales. (2) 
 If it is prepaid but not charged to the customer, that is, 
 if the prepayment is a selling inducement to the pur- 
 chaser, the account is treated as a selling expense. 
 
 54 E. Expenses of Shipments. When goods are sent 
 to commission houses for sale on account of the con- 
 signor, the shipping, insuring, and any incidental ex- 
 penses connected therewith are debited to the Shipment 
 account, together with the cost of the goods sent. All ex- 
 penditures connected with the shipment are treated as 
 one combined charge against the proceeds of the sale. 
 
 54 F. Expenses of Departments. When business is 
 departmentalized, the expenses should be charged to the 
 consuming departments instead of to the organizations 
 as a whole. Thus, in a department store, which may have 
 all the way from two to two hundred departments, sell- 
 ing as many kinds of merchandise, each department or 
 department group is under a manager, or buyer, who is 
 
NOMINAL ACCOUNTS 75 
 
 responsible for the success of his department. Each de- 
 partment is charged for all expenses incurred for its 
 maintenance, including its share of floor space, light, 
 heat, salaries, advertising, depreciation, stationery, etc. 
 
 A branch store is similarly conducted by a manager, 
 and the expenses are included in a separate expense ac- 
 count for that store. 
 
 54 G. Expenses of Manufacturing. Manufacturing 
 expenses include all the items of loss expenditures in- 
 volved in making goods, except the cost of material and 
 productive labor. The expenses of making are, of course, 
 distinguished from the selling and general expenses of 
 the business, the first mentioned only being considered 
 manufacturing expense or, as the term is often used, 
 "factory overhead," or "burden." These expenses in- 
 clude the rent and upkeep of the shops and storage space 
 where the work is done, the nonproductive labor of stock 
 keepers, watchmen and other employees, power, deprecia- 
 tion on factory machinery and equipment, repairs, fac- 
 tory supplies, salaries of factory officers, insurance, taxes, 
 etc., — in fact all expenses incurred in making goods, as 
 opposed to the expenses incurred in disposing of the 
 goods after they are made. Manufacturing expenses are 
 charged as a part of the cost of the manufactured articles 
 and therefore are treated as assets and not as losses. 
 
 55. Gross Trading Profit. Buying and selling goods 
 is the principal activity of the trading business and the 
 principal source of income. For this reason, the business 
 man should watch closely as separate items (1) the 
 amount of sales as shown by the Sales account, (2) the 
 amount of purchases as shown in the Purchases account, 
 (3) the amount of capital tied up in this activity as 
 shown in the Inventory account. In the absence, of a unit 
 cost system, which is impracticable in handling the many 
 small articles sold in retail stores generally, the three ac- 
 counts mentioned are combined, at the close of an ac- 
 counting period, in a Trading account, the purpose of 
 which is to show the gross income, or profit, from buying 
 
76 PRINCIPLES 
 
 and selling. These accounts are carried and closed as 
 explained in the following numbers. 
 
 55 A. Sales. The Sales account (Form 12 Q or 14 G) 
 is credited to show the amounts of trading goods sold, as 
 found in the sales records; is debited, to show any re- 
 bates, allowances, or deductions which diminish the 
 amounts received, or to be collected, from the sale of 
 goods. 
 
 By "Sales" is meant the sales out of the stock in 
 trade only. Any chance sale of fixed property or expense 
 material should not be included in the Sales account, but 
 should be entered as a separate item. 
 
 At the close of the accounting period, the account is 
 closed and the balance is carried into the Trading 
 account. 
 
 55 B. Purchases. The Purchases account (Form 
 12 R or 14 H) is debited to show the cost of trading 
 goods bought; is credited, to show any rebates, allow- 
 ances, or other deductions from the amount paid, or to 
 be paid, for the trading goods bought. 
 
 Included in this account are the invoice cost of the 
 goods, the freight and transfer charges in, storage and 
 warehouse charges, import duties, or other expenses at- 
 tached to the goods before they are placed in the sales 
 stock. 
 
 At the close of the accounting period, the account is 
 closed and the balance is carried to the debit of the Trad- 
 ing account. 
 
 The invoice purchases, freight-in, and returned pur- 
 chases, are sometimes carried under separate headings, 
 but these divisions of the Purchases account close into 
 Purchases, or into the Trading account which amounts to 
 practically the same thing. 
 
 55 C. Manufactured Goods. When the goods sold 
 are manufactured instead of being purchased ready 
 made, the cost of material, labor, and expenses of making 
 are ascertained and debited in an account headed Manu- 
 factured Goods, or Finished Goods, or Completed Prod- 
 
NOMINAL ACCOUNTS 77 
 
 uct, which is related to the Sales account in precisely the 
 same way as Purchases. 
 
 55 D. Inventory as Related to Trading. If there 
 were no stock in trade at either the opening or the clos- 
 ing of the accounting period, the Purchases account 
 would show the cost of the goods sold, and when sub- 
 tracted from sales would leave the gross trading profit. 
 In a going business, however, there is stock on hand at 
 the beginning and also at the close of the accounting 
 period. If the stock at the beginning is greater than the 
 stock at closing, the difference has passed out and 
 should be regarded as an addition to the amount of pur- 
 chases in the Trading account to show the entire cost of 
 the goods sold. If the stock on hand at the beginning 
 was less than the stock at closing, the difference repre- 
 sents purchases that have not been sold but are carried 
 by inventory over into the next accounting period. 
 
 In order to take into account the increase or decrease 
 in stock of goods, it is customary to close the amount of 
 the inventory at beginning into the Trading account 
 (debit side), thus adding the beginning inventory to the 
 purchases. The amount of the inventory at the close of 
 the accounting period is entered in the Trading account 
 (credit side), thus adding the amount to sales. In the 
 trading statement, as before explained, the opening in- 
 ventory, plus purchases, less closing inventory, leaves an 
 amount called the "cost of sales." The Ledger account 
 does not lend itself to both addition and subtraction in 
 the same column, hence the same effect is secured by add- 
 ing the closing inventory to the credit side instead of 
 subtracting it from the debit side. 
 
 At the close of the accounting period, the Trading 
 account is closed into Profit and Loss. 
 
 56. Selling Expense includes the outlays made in 
 effecting sales of the trading goods from the time the 
 goods are laid down in the store, until disposed of. It is 
 often best to charge all selling expenses to one account, 
 while under some conditions, a number of special divi- 
 sions will serve the purpose better. Among these are 
 
78 PRINCIPLES 
 
 (1) Salaries of sales manager and sales clerks; salaries, 
 commissions and road expenses of traveling men; sal- 
 aries and wages of shipping clerks; (2) Cost of free sam- 
 ples and expenses of demonstrations, exhibits, etc; (3) 
 Advertising, including postage and expressage applied to 
 advertising; (4) Supplies, including cartons, wrapping 
 material and incidentals; (5) Delivery expense (not 
 charged to customers) ; and (6) Depreciation (in prop- 
 erty used by the selling department). 
 
 Such special accounts are to .be opened as they are 
 needed to give detailed information about this class of 
 expenditures, and are to be discontinued when they are 
 not needed. 
 
 At the close of the accounting period, the special ac- 
 counts are closed into Profit and Loss, or they may be 
 closed into the general Selling Expense account which, in 
 turn, is closed into Profit and Loss. 
 
 57. General Expenses, or General Overhead, in- 
 cludes the expenses of the general oversight and manage- 
 ment of the business, and may be charged to either of 
 the foregoing titles, or may be charged to various special 
 accounts, such as: (1) Salaries of the office force; (2) 
 Office Supplies, including blank books, stationery and 
 postage, not directly applied to advertising; (3) Light, 
 Heat, Rent, Taxes and Insurance; (4) Depreciation, in 
 property for office use; (5) Interest and Discount. 
 
 Such special accounts may be closed directly into 
 Profit and Loss at the close of the accounting period, or 
 they may be closed into Office General Expense, which in 
 turn is closed into Profit and Loss. 
 
 58. Diminishment in the value of things owned by 
 a concern is to be included among the expenses. This 
 factor bearing on income is not brought to the attention 
 by business transactions, and unless looked for in a sys- 
 tematic way will be disregarded often with disastrous re- 
 sults. Included under this heading are: (1) Shrinkage 
 in value of accounts and notes receivable due to certain 
 items becoming uncollectible or doubtful; (2) Deprecia- 
 tion, the ordinary loss in value of fixed property assets 
 
NOMINAL ACCOUNTS 79 
 
 through wear and tear or obsolescence; (3) Expiration of 
 the benefits of patent rights, copyrights, franchises, pat- 
 terns and drawings, etc.; (4) Depletion, the exhaustion 
 of resources such as mines, timber, or land through crop- 
 ping. The diminishment in the value of assets during an 
 accounting period is a real subtraction from income. 
 
 58 A. Shrinkage in Accounts and Notes. The loss 
 sustained through accounts and notes becoming doubtful 
 or uncollectible is probably best taken care of, in ordi- 
 nary books, by charging the accounts to Profit and Loss. 
 If bad accounts are few in number, and are to be followed 
 up as though collectible, they may be plainly marked, 
 ' 'charged to Profit and Loss" so as not to be included in 
 a list of accounts receivable, and otherwise left in the 
 ledger as before. The collection of any such accounts 
 should be credited to Profit and Loss. 
 
 Where there are many such accounts, to be consid 
 ered separately, they may be removed to a '/doubtful 
 ledger," after being charged off, and there kept as a 
 memorandum record. 
 
 If an estimate of the loss through doubtful accounts 
 is made, as when one considers a number of doubtful ac- 
 counts to be worth on the whole one-half their face, the 
 assumed shrinkage may be charged to Profit and Loss 
 and credited to Reserve for Doubtful Accounts. 
 
 58 B. Depreciation. The loss in the value of build- 
 ings, machinery, and equipment through depreciation 
 should be debited as an expense of factory, office, or any 
 part of the business making use of the property. The 
 balancing entry is a credit to an account headed, Reserve 
 for Depreciation, as explained in Prin. 24. 
 
 No standard tables of depreciation appear to have 
 been made, since the term of usefulness of property de- 
 pends on what it is and how it is used. The government 
 income tax instructions seem to set a maximum of three 
 per cent annually on buildings and ten per cent annually 
 on machinery. 
 
 If an account of Depreciation is carried, all deprecia- 
 
80 PRINCIPLES 
 
 tion is first debited in that account and then credited out 
 by distribution to the expense accounts. 
 
 58 C. Expiration. Patent rights expire in seventeen 
 years, copyrights in forty-two years, and franchises ac- 
 cording to terms granted. Their commercial value, how- 
 ever, frequently expires long before the legal expiration. 
 The book value of these items should be written off pro- 
 portionately year by year by a debit to Profit and Loss, 
 with a view to finally clearing the accounts from the 
 books. The credit is most clearly shown in the Asset ac- 
 count, since there is no reason for setting up a reserve for 
 something that is not to be replaced. 
 
 58 D. Depletion. The value taken from mines, quar- 
 ries, timberland, etc., does not call for any Reserve ac- 
 count, since the property consumed is not to be replaced ; 
 but as in the case of expirations, should be credited in the 
 asset account, the balancing debit being in Profit and 
 Loss. 
 
 59. Secondary Incomes and Expenses arise from the 
 use of money or property or from operations in other than 
 the regular channels of the business. In the preceding 
 numbers of this chapter have been outlined the accounts 
 showing in consecutive order Sales, diminished by Cost 
 of Sales, further diminished by Selling Expenses, and the 
 remainder by General Expenses, the final result being the 
 Business Profit. 
 
 In addition to the principal operation of the business 
 reflected in these accounts, the concern may derive in- 
 come or incur expense in a number of ways, as shown in 
 the following accounts: 
 
 59 A. Interest and Discount. An account headed, 
 Interest and Discount, or Interest, is debited to show loss 
 expenditures for money or credit received by the con- 
 cern ; credited, for income from money or credit given by 
 the firm. 
 
 The discount referred to is the interest charged by 
 bankers for discounting notes or accounts. 
 
NOMINAL ACCOUNTS 81 
 
 The Interest account is often better divided into In- 
 terest Expense and Interest Income. 
 
 59 B. Cash Discounts. An account headed, Cash 
 Discounts, or Merchandise Discounts, is debited, to show 
 amounts allowed customers for settlement of invoices 
 within a specified time; credited, to show the deductions 
 from creditors' invoices for payment within a specified 
 time. 
 
 This account is frequently divided into Sales 
 and Purchase Discounts. It is quite customary in 
 retailing to credit purchase discount to the Purchases ac- 
 count, especially in department stores where discounts 
 received are considered as a credit to the management of 
 the buyer, hence a deduction from Purchases rather than 
 as secondary income. In wholesaling, cash discounts are 
 generally treated as secondary incomes or expenses. 
 
 59 C. Income and Expense of property owned by the 
 concern but not used in the business is classed as second- 
 ary income. 
 
 59 D. Miscellaneous Profits and Losses. Theft, loss 
 of money, fire losses, gifts, gains or losses on sales of fixed 
 property, and other unusual losses or gains are suf-. 
 ficiently well located if debited or credited directly in thcv. 
 Profit and Loss account when they occur. 
 
 60. The Profit and Loss Account is the permanent 
 ledger record of the incomes or profits (credit side), and 
 the expenses or losses (debit side), accumulated during 
 the accounting period. 
 
 Unclassified gains or losses are carried directly to 
 this account from the original entries, so that the Profit 
 and Loss account is, up to the time of closing the books., 
 a current list of the odds and ends of gain and loss aris- 
 ing from unuausl channels. This part of the account, or,' 
 occasion, may be separated from the closing Profit and 
 Loss account by being carried in a current account en- 
 titled Miscellaneous Losses and Gains, or Loss and Gain 
 which at the close of the period should be closed into 
 Profit and Loss. 
 
82 PRINCIPLES 
 
 The regular income and expense accounts, that is, all 
 nominal accounts, should be closed into Profit and Loss 
 at the end of the period. After all nominal account bal- 
 ances are found in Profit and Loss, this account is bal- 
 anced and the balance disposed of as follows : 
 
 (1) In a sole proprietorship, the balance may be car- 
 ried to the Capital account, or, if the capital is to remain 
 at a stated amount/to the proprietor's Drawing account. 
 
 (2) In a partnership, the balance of the Profit and 
 Loss account is divided among partners in accordance 
 with their terms of agreement, and carried to their Capi- 
 tal or Drawing. accounts as in the case of a sole pro- 
 prietorship. 
 
 (3) In a corporation, the balance is carried to the 
 Surplus account, provided there is a surplus ; if not, to a 
 Deficit, or Assessment account. 
 
 Having closed the Profit and Loss account, all nom- 
 inal accounts are closed and completed. The results ex- 
 hibited by them are summarized in the accounts of net 
 worth. 
 
 Recapitulation 51-60. The nominal accounts, kept to 
 indicate the operations or conditions that have resulted 
 in profit or loss, are divided into accounts of income and 
 accounts of expense. Income accounts are credited to ex- 
 plain increases in the net assets; Expense accounts are 
 debited to explain decreases in the net assets. 
 
 The expenses of specific business operations are 
 charged against the income from the operations, leaving 
 a balance which at the end of the accounting period is 
 carried to Profit and Loss. 
 
 General Expense accounts close directly into Profit 
 and Loss. 
 
 Incidental or unusual gains or losses are posted to 
 Profit and Loss from the original entries. 
 
 When all nominal accounts are closed into Profit and 
 Loss, the latter account shows, as credits, all profits and 
 as debits, all losses, of a given accounting period. The 
 balance of the Profit and Loss account is closed into the 
 accounts summarizing the net worth. 
 
PART TWO— RULES 
 CHAPTER IX 
 
 SINGLE AND DOUBLE ENTRY 
 
 61. Single and Double Entry. Bookkeeping systems 
 are known as single entry and double entry. Several 
 points of difference between the two are discussed under 
 Auditing ; a practical distinction is referred to here. 
 
 Single Entry. By single entry there is usually at- 
 tempted a record of three kinds of accounts only — the 
 Cash account, Accounts Keceivable, and Accounts Pay- 
 able. Hence, an entry is made with a view to the effect 
 of transactions on the three elements of the concern men- 
 tioned regardless of other elements of the concern for 
 which no accounts are kept. This implies an entry, 
 either debit or credit, for only one side of a transaction, 
 disregarding the other side — hence single, or one-sided, 
 entry; but in single entry a debit is made in Cash 
 and a corresponding credit in a customers' account, be- 
 ing double entry to that extent. A " single entry" sys- 
 tem seems to be any bookkeeping system that falls short 
 of double entry. 
 
 Double Entry. In double entry bookkeeping, an at- 
 tempt is made to keep accounts of all elements involved 
 in all transactions. The effect of any transaction is 
 shown by debit entry in one or more accounts, and credit 
 entry in another or other accounts. Both debits and 
 credits are entered — hence " double entry." The equality 
 of debits and credits in each transaction is followed by 
 equality of the sum of all debits and the sum of all credits 
 after posting. This makes possible the proof of accu- 
 racy by trial balance, which is impossible in single entry. 
 
 The mere fact that every debit entry must have a 
 corresponding credit entry, gives the bookkeeper occa- 
 
 83 
 
84 RULES 
 
 sion to look into the debit and credit elements involved, 
 transaction by transaction, thus stimulating inquiry into 
 the forces that contributed to the success of the business. 
 Double entry does not necessarily imply an effective ac- 
 count classification, but it does necessitate some sort of 
 attention to all the elements of property and operations. 
 And it is on the values within a business concern as 
 shown by the accounts, and their relation one to another, 
 that the manager must depend for an effective use of the 
 resources at his command. 
 
 In the study of bookkeeping as a science, single 
 entry is given but limited attention, not because it is use- 
 less, but because double entry is more comprehensive. It 
 must be kept in mind, however, that such accounts as are 
 kept in single entry are kept in precisely the same way, 
 and mean precisely the same as though found in double 
 entry. Many business men, especially in small concerns, 
 may find that a few accounts are desirable, and can be 
 kept in memorandum form by a person who would find it 
 difficult to use a double entry system properly, 
 
CHAPTER X 
 
 BUSINESS PAPERS 
 
 Business Papers. The first records of business trans- 
 actions are usually made on business papers, partly 
 printed and partly written. These forms pass between 
 the parties to the transactions. Thus, when goods are 
 sold, a bill or invoice, naming the terms and listing the 
 things sold with prices and amount, is passed by the 
 seller to the buyer. If one makes a cash payment, the per- 
 son receiving the payment should give the payer a re- 
 ceipt. Transactions sometimes occur without a written 
 form passing between the parties, but this is not the rule. 
 The papers that give the particulars about transactions: 
 are used as vouchers by the bookkeeper in making his- 
 records. A voucher is a written evidence of a transaction. 
 After the entries are made, the vouchers should be pre- 
 served for future reference. 
 
 In the following numbers, Prin. 62-69, forms of busi- 
 ness papers, many of which are used as vouchers, are 
 discussed. 
 
 62. Forms Used in Banking Transactions : 
 
 Signature Card (Form 15 A) . When a depositor 
 opens an account with a bank, he is required to write his 
 signature on a signature card or in a blank book pro- 
 vided for that purpose. Depositors' signatures are 
 kept where the paying teller may quickly refer to 
 them for comparison with the signatures on the de- 
 positors' checks, when checks are presented for payment. 
 A depositor should write his name in his ordinary, plain 
 hand writing without attempt at peculiarity in style. 
 In signing his checks he should make no variation in the 
 form of his signature. While a teller is responsible to 
 the depositor for the genuineness of the signature on 
 the checks which he pays, the depositor is responsible 
 for delays or losses occasioned by signing checks in an 
 
 85 
 
86 RULES 
 
 unusual form or handwriting. A teller is justified in 
 refusing a check, even though genuine, when the signa- 
 ture shows any material variation from the signature 
 as filed with the bank. 
 
 Deposit Tickets (Form 15 B) are provided by the 
 banker. On these the depositor enters the amount to 
 be deposited. On making a deposit, the bills should be 
 face side up, all bills of the same denomination being 
 placed together. Coin in any quantity should be brought 
 in a sack. The deposit ticket and the currency are 
 passed to the teller. The form shows the deposit made 
 up of currency, coin, and other cash items. When a 
 great many items are included in a deposit, bankers pre- 
 fer, and sometimes insist, that they be entered on the 
 ticket in considerable detail. 
 
 Depositors' Pass Books (Form 15 C). On receipt of 
 the first deposit, the teller opens a Depositor's Book, 
 which he delivers to the depositor. This is a book to be 
 carried by the depositor, and presented by him to the 
 bank teller with his deposits. The teller enters each de- 
 posit in this book, when made, in the proper columns to 
 show the date, explanation and amount. This book serves 
 the depositor as receipts, from the bank, for the amounts 
 deposited. 
 
 Formerly, it was the custom among banks to enter 
 the deposits on the left page of the pass book, as above 
 explained, reserving the right page for the entries of 
 paid checks, which were written in by the bank book- 
 keeper when the pass book was left at the bank to be 
 balanced, usually at the end of the month. After enter- 
 ing the checks, the bank bookkeeper balanced the pass 
 book, ruled it, and carried the balance down; then re- 
 turned the book with the cancelled checks to the deposi- 
 tor. This custom yet prevails in many small banks, 
 pense, Commission, Interest Expense, Repairs, etc. 
 
 At present, commercial banks find it more satis- 
 factory to render monthly statements (see Form 15 G) 
 to depositors, without any reference to the bank pass 
 
BUSINESS PAPERS 87 
 
 leave his book at the bank to be "written up," as for- 
 merly. When the statement method is in use, the bank 
 pass book is merely the teller's memoranda of deposits 
 to be carried by the depositor. 
 
 Check Books (Forms 15 D-E) are usually supplied to 
 the depositor by the bank. They may contain from twenty 
 to several hundred checks, with one or several checks to 
 the page. At the left of each check is the stub, which is 
 separated from the check at a perforated line, and re- 
 mains in the book after the check is detached. 
 
 A very good form of check stub is illustrated in Form 
 15 D, in which the first deposit, $1000, is entered by the 
 depositor in the space provided for that purpose. The 
 record of the first check drawn is written on the. stub, 
 and the amount deducted from the deposit shows a bal- 
 ance of $970, carried forward. Stub No. 2 (Form 15 E) 
 shows the balance carried from Stub No. 1, and a second 
 deposit of $50.25, making a total of $1020.25. From this 
 amount, check No. 2 is deducted, leaving a balance of 
 $856.05 to be carried forward to the third stub, so con- 
 tinuing. Thus, when a check is to be written, the balance 
 remaining in the bank is always shown on the last stub. 
 
 In some check books, the stubs are interleaved al- 
 ternately with the checks. In check books of this form, 
 there is more space on the stubs for figuring. 
 
 Endorsements (Form 15 F). Checks or drafts when 
 taken to the bank for deposit, or when transferred to 
 other holders, must be endorsed. For endorsements trans- 
 ferring title, five different forms are given. Of the trans- 
 fer endorsements, No. 1 is called an "endorsement in 
 blank; " No. 2, an "endorsement in full;" No. 3, an "en- 
 dorsement without recourse;" No. 4, a "restrictive en- 
 dorsement;" No. 5, an "endorsement for deposit." The 
 last named form would be used in endorsing the checks 
 included in a deposit, although the first form is fre- 
 quently used. 
 
 Note. — The two endorsements to the right of the form apply 
 to notes. 
 
88 RULES 
 
 Statement of Checking Account (Form 15 G) . At the 
 -close of the month, the bank bookkeeper renders to the 
 depositor a statement of his checking account, and re- 
 turns with the statement the depositor's paid and can- 
 celed checks. In the form referred to, two columns are 
 reserved for the entry of checks, and one column for de- 
 posits. The check columns show the date paid and the 
 amounts of the checks. The checks are entered in num- 
 bered lines, so that the statement readily shows how 
 many checks are paid during the month. The model 
 shows forty-five checks charged; hence the bank book- 
 keeper must return that number of vouchers (canceled 
 checks). 
 
 The deposits are entered in a column to the right. 
 These entries should agree with the entries made by the 
 teller in the depositor's pass book. (See Form 15 C.) 
 
 After entering all checks and deposits on the state- 
 ment, the bank bookkeeper enters the total of deposits at 
 the foot of the statement, and the total of checks below. 
 The difference between these amounts is the balance 
 remaining to the depositor's credit. 
 
 Bank Drafts (Form 15 H). Persons, in transferring 
 funds from one city to another, find it convenient to do 
 so by remitting bank drafts. Any local bank will sell a 
 draft drawn on its correspondent bank, payable at par in 
 any part of the country. 
 
 The form illustrates a draft drawn by a bank in 
 North Platte, Nebr., on a bank in New York City. This 
 draft, under ordinary conditions, may be cashed in any 
 city in the United States at par. The bank cashing it 
 will remit it to New York for credit. Local banks sell 
 drafts on banks in the different large cities. It is cus- 
 tomary to purchase drafts that are payable in the large 
 city nearest the point remitted to. 
 
 Persons buying bank drafts may instruct the banker 
 to make the draft payable to their own order or to the 
 order of the person to whom they make remittance. It 
 is a very good plan to have the draft made payable to 
 
BUSINESS PAPERS 89 
 
 the purchaser's order. In that case, before sending it, 
 
 the purchaser must endorse it. The form of endorsement 
 
 to use is shown on Form 15 F, second endorsement. 
 
 Banks charge exchange on the drafts sold. Rates 
 
 differ, but are based on the amount of the draft. Many 
 
 banks charge ten cents exchange on every hundred 
 
 dollars. 
 
 ». Note. — Post office money orders and express orders serve the 
 same purpose as bank drafts, for limited amounts. 
 
 Notes Discounted (Bank Form 151). Business men, 
 when temporarily in need of funds, regularly apply to 
 their banker for loans or discounts. It is a principal 
 service of a bank to loan money to those whose credit is 
 good. When taking a loan or discount, the borrower de- 
 livers a note payable to the bank. 
 
 The form illustrates a note given to a certain bank. 
 The note does not draw interest until after maturity, the 
 form indicating that the payment for the use of the 
 money from date of maturity is in the form of a 
 discount deducted from the amount that the banker 
 passes to the borrower. Assuming that the interest for 
 sixty days is $20, the banker would discount the note 
 by deducting $20 from the face, and pass $1980 to the 
 customer. At the end of sixty days the customer would 
 pay $2000 in settlement. 
 
 If the interest clause in the note read "with interest 
 from date," instead of "with interest from maturity/ ' 
 the form of the note would indicate a loan. In that 
 case, the customer would receive full face when the note 
 was delivered, and pay face, plus interest, at maturity. 
 
 Discount Ticket (Form 15 L). When depositors dis- 
 count their customers' notes and acceptances at a bank, a 
 discount ticket is used. The items should be entered so 
 as to show amounts and net proceeds, as illustrated in 
 the form. 
 
 Certificate of Deposit (Form 15 J) . Occasions arise 
 when it is desirable to leave a certain amount of money 
 on deposit, not subject to check, but withdrawable in one 
 
90 RULES 
 
 amount by the depositor, or on his order. When money 
 is left in this way, it is customary for the banker to issue 
 to the depositor a Certificate of Deposit. 
 
 The form illustrates a certificate of deposit issued by 
 a certain bank to Henry S. Miller, who may return it 
 with endorsement, and receive the amount stated, or he 
 may endorse the certificate to another person, who can 
 cash it. 
 
 Certified Check (Form 15 K). The payee of a check 
 sometimes demands special assurance that the check will 
 be paid when presented to the bank. This assurance may 
 be given by having the check certified by .the banker. The 
 form illustrates a Certified Check. This check has been 
 presented to the bank teller, who has written across the 
 face a certification obligating the bank to pay the check 
 whenever properly presented. 
 
 63. Forms Used in Buying and Selling : 
 
 The Order Blank (Form 15 N) is a form used by 
 dealers in ordering goods. A book of order blanks 
 should contain duplicates as well as original orders. 
 When the- original is sent, the duplicate is kept for refer- 
 ence, as a reminder in case the order is not filled 
 promptly; and later, to be compared with the goods 
 received. Order blanks should be numbered consecu- 
 tively as a means of ready reference in correspondence. 
 
 An Invoice, or Bill (Form 15 0) is sent by the 
 seller to the buyer at the time an order for goods is 
 filled. On it are listed the items sold, the prices and 
 the amount. On the form are written the customer's 
 ledger page (for the convenience of the seller), the route 
 by which the shipment was made, and the terms. The 
 buyer, on receiving an invoice, should check the items 
 carefully with the goods received, and compare with his 
 order to note discrepancies in articles, quantity, or errors 
 in prices or extensions. 
 
 64. Forms Used in Shipping: 
 
 Bill of Lading (Form 15 V). When a shipper de- 
 livers goods to a carrier for shipment, he usually brings 
 
BUSINESS PAPERS 9i 
 
 a shipping book, or a set of loose sheets, describing the 
 shipment in triplicate. The printed matter is different 
 on each of the three sheets, but the blank spaces to be 
 filled in by the shipper are the same in each form, so 
 that the set may be completed in one writing by using 
 carbon sheets. 
 
 A bill of lading form to be used by all common car- 
 riers has been prescribed by the Interstate Commerce 
 Commission. The original copy is a shipping order that is 
 kept by the transportation company. The two duplicates 
 are signed by the agent of the transportation company, 
 the first being a bill of lading which is sent to the con- 
 signee, and the second being a memorandum of the bill of 
 lading which is kept by the shipper. 
 
 The form represents a set of shipping bills filled out 
 by Cyrus Martin, the signature of the transportation 
 agent, A. H. Hooper, being written on the bill of lading 
 and memorandum. 
 
 65. Forms Used in Settling Obligations: 
 
 A Statement of Account (Form 15 P) is usually ren- 
 dered to the customer on the first of the month, from the 
 ledger account. The form, a statement for December, 
 shows a balance of $250.19 carried over from November. 
 To this are added the sales made to the customer during 
 the month closed, the total debit being carried to the sec- 
 ond column. Below are entered the customer's credits 
 as they appear in the account, the total credits being also 
 carried to the second column, where they are subtracted 
 from the debit total, showing $493.14, the amount due. 
 
 The receipt at the bottom of the statement, written 
 on a subsequent date, shows that the customer made full 
 payment on Jan. 9. 
 
 An Account Sales (Form 15 Q) is a statement or re- 
 port sent by the commission firm to the consignor of goods 
 sent for sale on the market. The commission firm under- 
 takes to sell at market prices goods, consigned to it, and 
 to remit to the consignor the proceeds from the sales 
 
92 RULES 
 
 after taking out different charges for services in effecting 
 the sales. 
 
 The form shows that forty-nine barrels of cranberries 
 have been sold for the consignor in four lots amounting 
 in all to $278.40. The commission merchants' charges are 
 entered in detail, amounting to $24.89, leaving $253.51, 
 net proceeds, due the consignor. 
 
 Receipts (Form 15 R) . The model shows that Camp- 
 bell & Crane, being indebted to T. M. Carpenter, 
 have paid the debt, and that Mr. Carpenter acknowl- 
 edges this payment. The form shows the receipt, with 
 the accompanying stub, before the receipt is removed 
 from Mr. Carpenter's receipt book. 
 
 That portion of the form to the left of the receipt is 
 called the "stub." It supplies the maker of the receipt 
 with a record of the date, amount, to whom given, and 
 purpose of the receipt. At the time of writing a receipt, 
 always fill out the stub before removing the receipt from 
 the book. 
 
 Note.— A receipt form like the one illustrated is frequently 
 unnecessary. In Form 15 P, the payment of the account is re- 
 ceipted on the statement. Invoices (see Form 15 O) are often 
 receipted in like manner. A check returned from the bank with 
 the endorsement of the payee is a receipt for the amount of the 
 check, although not a receipt for the payment of a specified 
 obligation. 
 
 A Promissory Note (Form 15 S) is a written promise 
 to pay a stated sum of money at a specified time. 
 
 The original parties to a note are the Maker, or party 
 who, by the act of signing the note, makes the promise; 
 and the Payee, or the party to whom the note is made 
 payable. In business, notes are usually made payable at 
 a bank which is specified in the note. In the absence of 
 such specification, the law makes a note payable at the 
 legal residence of the maker. 
 
 The form illustrates a promissory note and its stub 
 properly filled out. In entering the amount on a note the 
 same care should be observed to prevent " raising" or 
 other alteration as in the case of a check. 
 
BUSINESS PAPERS 98 
 
 Drafts (Form 15 T-U) are used to adjust accounts 
 without the transmission of money. If J. C. Rogers 
 owes the student $75, and H. C. Preston owes J. 
 C. Rogers, the latter firm can draw on Preston payable 
 to the Student, and the payment of this draft will adjust 
 the several accounts. When the draft is made payable 
 at sight or on demand, the drawee is expected to pay the 
 draft when first presented. 
 
 Form 15 T is a draft drawn at thirty days sight, 
 meaning thirty days after presentation. It should be pre- 
 sented to Preston as soon as possible, for acceptance. 
 To accept this draft, Preston should write across the face 
 of the draft the word " Accepted/ ' the current date, and 
 his signature. The draft, after Preston has accepted it, 
 is called an acceptance. (See Form 15 U.) 
 
 Commercial drafts are commonly used as a means of 
 •making collections from distant firms through the agency 
 of a bank. In this case, the drawer makes out the draft 
 payable to the order of "Myself," or "Ourselves," and 
 endorses the draft in favor of the bank "for collection," 
 or he makes the draft payable directly to the collecting 
 bank, which forwards it for payment or acceptance. 
 
 Goods are often paid for with the buyer's acceptance 
 at the time of purchase, the acceptance in such case being 
 used in place of a promissory note and entered in the 
 same way. 
 
 If, upon the presentation of a draft, the drawee 
 declines either to pay it or accept it, the draft is said to 
 be dishonored. In the case of a refusal to pay an ac- 
 ceptance it should at once be protested, as in the case of 
 a refusal to pay a promissory note. 
 
 Form 16 L illustrates the matter written on pro- 
 tested paper, a note or draft being protested in the same 
 manner as a check. Forms 16 M-N illustrate the papers 
 written and sent out at the time of protest. 
 
 66. Forms Connected with Real Estate. Contracts 
 relating to houses and lands are more formal than those 
 relating to personal property. Real property continues 
 
94 RULES 
 
 perpetually. In the course of years many different per- 
 sons become interested in it either as successive owners 
 or as having rights in it. The rights of different persons 
 in the same property often would be confused if all trans- 
 fers were not clearly made and recorded in the county 
 records as a notice to the public. Common forms relat- 
 ing to real estate are here referred to. 
 
 Deed (Form 16 A) . In business language, a deed is 
 a conveyance of land. (In law, a deed is any instrument 
 written under seal.) The usual conveyances of real prop- 
 erty are made by "warranty" deed or "quit claim' ' 
 deed: in the one, the grantor guarantees good title; in 
 the other, the grantor merely relinquishes his rights in 
 the property. 
 
 In the model form James P. Herbert conveys by war- 
 ranty deed to John Manning the property described. The 
 signature of the grantor is certified to by a notary pub- 
 lic, a public official authorized to certify as to the 
 genuineness of documents. 
 
 Mortgage (Form 16 B). In the model form the 
 grantors, James B. and Mary Long, convey to John Man- 
 ning their interest in the described property subject to 
 the condition that if the grantors pay the four notes 
 named in the mortgage, the conveyance shall be void. 
 Mortgages are also acknowledged in the same form as 
 deeds. 
 
 Lease (Form 16 C). A lease is a contract between 
 the owner of property and the tenant, permitting the lat- 
 ter to occupy the property a stated time for a stated com- 
 pensation. In the model form the owner, or landlord, is 
 the Coleman Real Estate Co., and the tenant, John 
 Manning. 
 
 Contract of Sale (Form 16 0). It is quite common 
 for persons to buy real property on installment pay- 
 ments, the title not to pass until certain payments are 
 made. This agreement is evidenced by a Contract of 
 Sale. In the model, the owner, A. H. Avery, agrees to 
 grant D. B. Isaacs a deed to the described property after 
 
BUSINESS PAPERS 95 
 
 certain payments are made. On the back (Form 16 P) 
 is space for recording the payments as made. 
 
 67. Formal Papers Connected with Personal Prop- 
 erty. Contracts or conveyances of personal property of 
 special importance may be evidenced by more formal 
 documents than those referred to in Prin. 63. Forms fre- 
 quently met with are mentioned. 
 
 Bill of Sale (Form 16 D). This is a conveyance of 
 personal property in suitable form for public record. 
 John Manning sells his business property and good will 
 to William A. Goodwin. 
 
 Chattel Mortgage (Form 16 G). This is a convey- 
 ance of the grantor's interest in personal property sub- 
 ject to a condition which, if fulfilled, will void the instru- 
 ment. Care should be used to describe personal property 
 in such a way as to clearly identify it. 
 
 Insurance Policy (Form 16 I). The risks of fire loss, 
 and other losses due to natural causes or risks incurred, 
 are carried in a large measure by insurance companies 
 for a stipulated premium. In the model form the Com- 
 mercial Insurance Co., the insurer, agrees to make good 
 to D. C. Bennett, the insured, fire losses in the property 
 of the latter to the extent of $4,000. The insured has 
 paid the company a premium of $40 for assuming this 
 risk. 
 
 68. Papers Relating to Proprietorship. An indi- 
 vidual enters into no written contract when opening a 
 business, since it is his personal concern, and his rights 
 in the business are not shared by others. A partnership 
 is an association of two or more persons whose business 
 relations should be^ clearly defined in a written agree- 
 ment. In a corporation, the relations of the owners are 
 regulated by agreements in a number of papers. 
 
 Agreement of Co-partnership (Form 16 H). On 
 forming a partnership, the terms and conditions are writ- 
 ten in a form similar to the model. As therein stated, 
 Manning and Finney agree as to the investments, sal- 
 
96 RULES 
 
 aries, and division of profits of each, the time the partner- 
 ship is to continue, and other matters. A copy of this 
 agreement should be kept by each partner. 
 
 Agreement of Incorporation (Form 16 R). In this 
 form are written the general agreements between the per- 
 sons who are about to organize a corporation. 
 
 Articles of Incorporation (Form 16 T). In this form 
 are set forth the general rules and conditions governing 
 the corporation during its period of existence. This, as 
 the preceding form, is signed by the incorporators. 
 
 State Certificate of Incorporation (Form 16 S). This 
 form is issued to the corporation by the state, and is evi- 
 dence of the power of the corporation to do certain speci- 
 fied business acts as a person. 
 
 Certificate of Stock (Form 15 W). This form is is- 
 sued by the corporation to the share holders, and is evi- 
 dence of the holder's proprietorship interest in the 
 concern. In the model referred to, a certificate of 
 stock is issued to a stock holder, Martin Goldman, 
 by the American Steel Corporation, as evidence 
 that Mr. Goldman owns fifty shares of the capital 
 stock of that company. To the left is the stub, on 
 which are recorded the essential facts about its issuance, 
 and at the bottom Mr. Goldman's receipt for the certi- 
 ficate. In this instance, the shares, now in possession of 
 Mr. Goldman, were owrfed by H. B. Rogers, who sold the 
 stock to Mr. Goldman. When one shareholder transfers 
 his shares to another, it is generally necessary for the 
 seller of the shares to surrender his certificate to the 
 company. The company then issues a new certificate to 
 the buyer of the shares. This is called a transfer "on 
 the books" of the corporation. 
 
 69. Filing. All business papers .that have value as 
 vouchers should be filed for possible future reference. 
 
 A Filing System should be adopted with a view to 
 several considerations, some of which are frequently 
 overlooked. It should be such that (1) papers may be 
 
BUSINESS PAPERS 97 
 
 quickly and easily filed; (2) that they may be quickly 
 and easily located; (3) the whole scheme should be on a 
 plan to permit of expansion for future needs, without 
 disarrangement of present methods. 
 
 The easiest way to take care of vouchers is to number 
 them serially from the record books, and file them by 
 number. However, there is a very good reason for not 
 filing invoices by number, although they are referred to 
 by number. Most business men find it better to have all 
 invoices from a given firm in one binder or folder, so that 
 comparison of past prices, terms, etc., can be made. 
 
 All entries to Expense should be explained by some 
 bill, receipt, or ticket. These can very well be given ex- 
 pense voucher numbers from the books of entry, and filed 
 in numerical order. 
 
 Cancelled checks may be called for, months, or even 
 years, after they have been returned by the bank. It is 
 advisable to assort them also by number, when they are 
 returned by the bank, and file them away in this order. 
 
 It is a good practice to file all vouchers in their 
 places at the close of the day. 
 
CHAPTER XI 
 
 THE JOURNAL— ORIGINAL ENTRIES 
 
 71. Original Entries are those made at the time of 
 the transaction, and comprise the basis for the transferred 
 entries, which later appear in the ledger acconnts. 
 
 There are two important phases of the original en- 
 try: (1) the record of the facts about the transaction; 
 (2) the record of the accounts affected by the trans- 
 action. The record of the facts is naturally first. It 
 should be a complete record, giving the essentials in such 
 a way as to make subsequent explanation unnecessary. 
 
 A statement of the transaction may be written in 
 full in the Journal, thus : 
 
 (Date) Bot. of Henry Gardner on account 
 
 20 brl. Flour . @ $10.00 $200.00 
 
 10 sk. Buck Wheat <® 1.90 19.00 
 
 $219.00 
 In the ordinary transactions of business, a voucher 
 of this transaction usually passes hands. Invoices, re- 
 ceipts, notes, drafts, checks, etc., are vouchers of business 
 transactions. In the above transaction, if an invoice was 
 received with the flour, the invoice should be preserved 
 as a voucher of the transaction. With the voucher to 
 refer to, the entry could be abbreviated, thus : 
 
 (Date) Bot. of Henry Gardner on account 
 
 Mdse. per invoice No. 1 $219.00 
 
 The record of a business transaction includes proper 
 filing of the voucher supporting the entry. When the 
 facts are recorded, the next step is to determine and 
 enter, for the purpose of posting, the titles of the ac- 
 counts affected by the transaction. 
 
 In the above transaction, with the facts before him, 
 the bookkeeper indicates the account to be debited by 
 placing the debit account name to the left and the credit 
 
 98 
 
THE JOURNAL— ORIGINAL ENTRIES 99 
 
 account name to the right, and likewise the debit and 
 credit amounts in the left and right money columns, 
 thus: 
 
 (Date) Bot. of Henry Gardner on account 
 
 Mdse. per invoice No. 1 $219.00 
 
 Mdse. Purchases 219.00 
 
 Henry Gardner 219.00 
 
 In a business having numerous account subdivisions, 
 the account to debit or to credit in a given transaction, 
 may be in doubt, and often the matter cannot be decided 
 at the moment. With a correct original record of the 
 facts, the posting titles can be entered at any time before 
 the posting is done. 
 
 For many years, the Day Book was used to contain 
 all records of the facts about transactions, and the Jour- 
 nal was used to show the posting titles and amounts. 
 These two books, in more recent bookkeeping, have been 
 combined into one book, retaining the name Journal. But 
 the latter book is not used now to contain all original 
 entries of a business except under very simple business 
 conditions. In the average office, it contains such entries 
 as other books of original entry cannot properly explain 
 and classify. 
 
 However, it is possible to make every entry in jour- 
 nal form, and the journal form of an entry is the one 
 used in discussing the account analysis of any 
 transaction. 
 
 71 B. The ordinary routine entries of a business are 
 made to the best advantage in a number of books, inter- 
 mediate between journal and ledger, and containing some 
 of the elements of both. 
 
 The first of these is the Cash Book, which contains 
 original entries of cash receipts and payments, in more 
 compact order than if they were spread upon a journal, 
 while at the same time, it is so arranged as to exhibit the 
 cash balance without posting to the ledger. (See Forms 
 10 B, 13 B, etc.) 
 
 The Sales Book is probably next in importance 
 among the books intermediate in function between jour- 
 
100 - RULES 
 
 nal and ledger. This book gives a consecutive record of 
 sales in form to be added to find the entire sales without 
 posting, item by item, to the credit of a Sales account in 
 the ledger. (See Form 13 C.) 
 
 The Purchases Book (Form 13 D), the Bill Book 
 (Form 13 M), the Inventory Book (Form 14N-P), and 
 many other books applying especially to certain lines of 
 business, take the place of the journal, for original en- 
 tries, while they relieve the ledger of more or less details. 
 
 The original entry, then, is the first record of a 
 transaction in the journal or other book designed for 
 first entries of a given class. The original entry should 
 either give all essential facts of the transaction, or else 
 refer to accessible vouchers giving the essential facts. 
 
 71 C. Reliable Original Entries. Bookkeeping rec- 
 ords serve to explain the financial obligations between a 
 given business concern and other persons or concerns, 
 between the members of the same concern, and also to 
 explain the business operations. 
 
 The adjustment of differences between a concern 
 and outside people, or between its several members, may 
 carry with it disputes that must be settled in a court of 
 law. The amounts of such settlements depend largely on 
 the records kept by the parties to the dispute. Account 
 books submitted in court as evidence, are accepted, as a 
 rule, if they comply with certain established rules con- 
 sidered essential to a good record. If they do not com- 
 ply with those rules, the books may be, and generally are, 
 given no consideration. 
 
 A good set of books will be found to show evidence 
 that the entries are complete (Prin. 71 D), systematic 
 (71 E), reliable (71 F), and promptly recorded (71 G). 
 
 71 D. Complete Entries. The books must exhibit 
 evidence that they contain all the records of a given 
 kind, entered according to a definite method and order. 
 The accuracy of other records in the same books not 
 bearing on the particular matter in dispute, has a bearing 
 on the credibility of the records as a whole. The appear- 
 
THE JOURNAL— ORIGINAL ENTRIES 101 
 
 ance of any slackness in making records in any part of 
 the books, tends to destroy the entire record as evidence. 
 Completeness should also extend to a statement of all 
 the essential facts in every entry of every transaction. 
 There should be no need to guess at the meaning of an 
 entry. 
 
 71 E. Systematic Entries. There must be a well 
 defined system for making entries. Varying styles of 
 entry, or even variation in the style of writing, tend 
 to cast doubt upon a set of books. These should show 
 that all entries of the same kind follow the same general 
 routine of entry. 
 
 Any kind of books, whether bound, or loose-leaf, or 
 even cards, or other devices, are admissible, provided 
 they show all reasonable safeguards against inaccuracy. 
 
 71 F. Reliable Entries. A set of books should 
 show the straightforward, open record of one who is 
 accustomed to write facts, and to record them just 
 as they are. Erasures and alterations show uncertainty. 
 Any mistakes made in books are especially damaging, 
 if they are either wholly or partially concealed. 
 
 The best kept books may 'show some errors, but 
 when an error is discovered in an original entry, it 
 should be plainly marked, " error, " and the correction 
 for it should be also plainly marked as a "correction." 
 
 71 G. Prompt Entries. The books should show 
 that all records of transactions were made while the 
 facts were fresh in mind. It should be kept in view 
 that the purpose of books is to carry a great mass of 
 business facts, as a relief to the mind. To carry in 
 memory, any longer than necessary, things that require 
 entry in the books, is certainly a bad method. 
 
 71 H. Ruling in Books of Original Entry. Books 
 of original entry are ruled in a variety of ways to suit 
 different kinds of entries. The ruling should afford 
 convenient spaces for the following elements of record, 
 essential to every entry: 
 
102 RULES 
 
 (1). Date of the transaction. 
 
 (2). Persons with whom the firm has transactions. 
 
 (3). Details of the transaction. 
 
 (4)._ The ledger accounts affected by the trans- 
 action. 
 
 (5). The amounts. 
 
 (6). Posting of the amounts to the accounts. 
 
 All of these points should appear in every original 
 entry that may involve some future dispute. 
 
 A place for each of these points in a record is gen- 
 erally provided, in books of original entry, by vertical 
 columns separated by vertically ruled lines. Thus we 
 have the "date column," the "explanation column,' ' 
 the "account column," the "posting column," the 
 "money column." etc. The order and arrangement of 
 these columns are open to the preference of the book- 
 keeper, and are determined by the following considera- 
 tions : 
 
 (1). Convenience in making original entries. 
 
 (2). Convenience in posting. 
 
 (3). Convenience for future reference. 
 
 A change in arrangement of columns in books of 
 original entry has often increased the efficiency of a book- 
 keeper. To reduce the daily entry and posting time by 
 one hour, should increase the efficiency of a bookkeeper 
 something like fourteen per cent. 
 
 The following points in arrangement of books of 
 original entry have aided the author to keep books ef- 
 fectively. Although they are not uniformly followed by 
 other authors and accountants, it will be found that prac- 
 tical forms sold in stationery stores agree very generally 
 with reference to the following matters of arrangement: 
 
 (1) The date should be at the extreme left in all 
 books of original entry. This enables one to look at one 
 place for the date whatever book is used. 
 
 (2) The memoranda should follow the dates. By 
 memoranda is meant the general explanation of the 
 nature of the entry. 
 
 (3) The account names should follow the memo- 
 randa. There are two reasons for this: The account 
 
THE JOURNAI^— ORIGINAL ENTRIES 103 
 
 classification is derived from the memoranda ; the ac- 
 count names, if placed as near the amounts to be posted 
 as possible, cause less eye strain in glancing at the entries 
 when posting than would be the case if the account 
 names and the amounts, were separated by memoranda 
 which is not essential to posting. 
 
 (4) The account names should be followed by the 
 column for post marks. This places the post mark be- 
 tween the account name and the amount. 
 
 , (5) The amount columns should come last and to 
 the right. A book of original entry will lie on the table 
 to the left of the ledger at posting time, and by having 
 account names, post marks and amounts together, and as 
 close to the ledger as possible, the motions of the eyes 
 and hand are reduced to the minimum. 
 
 711. Reading Amounts. Bookkeepers are fre- 
 quently at a loss to read amounts so as to be quickly and 
 easily understood by the one to whom read. In offices 
 where oral reading is required, a system for calling off 
 the numbers is necessary in order to facilitate work. This 
 system may be learned in five minutes, resulting in fully 
 five minutes saved in every hour's reading. 
 
 To read amounts, divide dollars into parts of three 
 figures each, beginning at the decimal point, and read 
 the cents separately; thus $56947.83 would be divided 
 56-947-83 and read " fifty-six, nine forty-seven, eighty- 
 three. " The following amounts with the manner of 
 reading them orally will probably answer as a sugges- 
 tion for any combination. 
 
 $ 129.58 One twenty-nine, fifty-eight. 
 
 12900.58 Twelve, nine hundred dollars, fifty-eight 
 
 12958.00 * Twelve, nine fifty-eight dollars. 
 
 .58 Cents, fifty-eight. 
 
 . 1.03 One-O-three. (The word "O" is more easily pronounced 
 
 than nought or ought.) 
 
 700.20 Seven hundred dollars, twenty. 
 
 720.00 Seven hundred twenty. 
 
 7.20 Seven, twenty. 
 
 24.00 Twenty-four. 
 
 .24 Cents, twenty-four. 
 
 1308.07 One, three- O-eight, O-seven. 
 
 259546.03 Two fifty-nine, five forty-six, O-three. 
 
CHAPTER XII 
 
 THE JOURNAL— DEBIT AND CREDIT 
 
 72. General Rule. Debit an account to show value 
 passed into the business element named by the account; credit 
 an account to show value passed out of the business element 
 named in the account. 
 
 This rule seems as comprehensive and true to con- 
 ditions as any general rule that the author has seen ; but 
 in order to direct its application, some discussion of the 
 principles underlying it seem to be in place. 
 
 A business concern is made up of a number of con- 
 stituent elements, or essential parts, which are involved 
 in operating the business. Thus, cash, accounts receiv- 
 able and payable, property, proprietorship, trading, ex- 
 pense, interest, etc., are the names of elements entering 
 into the business. These elements are discussed at length 
 in Prin. 1 to 60. A business transaction involves value 
 passing into one or more of the business elements and 
 passing out of one or more business elements. The trans- 
 fers of value are indicated by debit and credit entries in 
 the journal. 
 
 After debits and credits are indicated, the entries 
 are posted to the accounts so that all values passed into 
 and passed out of a given element may be found listed in 
 the debit and credit columns of the account. The account 
 may be balanced. A debit excess shows primarily that 
 more value has passed into the named element than has 
 passed out of it ; a credit excess shows the reverse. 
 
 The bookkeeper undertakes to indicate by debits and 
 credits all values passing into and out of all named ele- 
 ments of the business. The transfer of values occurs in 
 several ways, of which an outline is here given : 
 
 (1) By investment: value passes into one or more 
 property elements of the business out of proprietorship. 
 
 104 
 
THE JOURNAL— DEBIT AND CREDIT 105 
 
 (2) By buying: value passes into one or more 
 property or service elements out of cash or obligations 
 payable. 
 
 (3) By selling: value passes into cash or obligations 
 collectible out of property, services, or both. 
 
 (4) By paying: value passes into obligations pay- 
 able out of cash. 
 
 (5) By collecting: value passes into cash out of ob- 
 ligations collectible. 
 
 (6) By gifts received: value passes into one or 
 more property elements of the business out of donations. 
 
 (7) By manufacturing: value passes into the prod- 
 uct manufactured out of materials, labor and expense. 
 
 (8) By depreciation: value passes into the element 
 of depreciation out of the element of property. 
 
 (9) By appreciation: value passes into property out 
 of the element of rise in value. 
 
 (10) By accident, theft, etc.: value passes into the 
 element of chance out of the element of cash, prop- 
 erty, etc. 
 
 It will be seen in the above instances, that to debit 
 and credit transactions properly, one must have in mind 
 the elements of the business, or at least be able to recog- 
 nize the element into which and out of which value passes 
 by reason of transactions or circumstances. 
 
 The Cash account, and all property accounts, are to 
 be debited to show a value passed into the named ele- 
 ment, and credited with equal value passed out. Prop- 
 erty other than cash, when purchased, is debited at cost 
 and when sold is credited at cost. The difference between 
 cost and selling price of property is attributed to some 
 element named in a nominal account. Thus, the differ- 
 ence between the cost and selling price of merchandise 
 is attributed to the operation of trading and the amount 
 of the difference is found in the Trading account. The 
 difference between the value passed into a note receivable 
 and the amount passed out of it when collected, is attrib- 
 uted to interest, and is credited in the Interest account. 
 
106 RULES 
 
 The nominal accounts show the causes of increase or de- 
 crease in property. 
 
 But the result of increase or decrease is profit or 
 loss ; so when it is not considered necessary to specify the 
 cause in a nominal account, the cause is not mentioned, 
 but the result it carried directly to Profit and Loss. It is 
 apparent, however, that if increase or decrease in the 
 value of property be noted in the account at the time of 
 occurrence, the book value would be the real value, which 
 would be an ideal condition. A practical approximation 
 of this condition is accomplished in good bookkeeping. 
 
 Kesults are exhibited in two ways in current 'book- 
 keeping, which for the sake of distinction we will call the 
 earlier method and the later method. 
 
 In the earlier method, the elements of the business 
 were distinguished in a somewhat loose way. The ac- 
 counts were debited and credited from the transactions 
 without very careful attention to results; until at the 
 close of the year, a review of the entire matter was made. 
 At that time an inventory or appraisal of the value re- 
 maining in each element was made, the account was 
 credited with its estimated value as passing out of the 
 given year into the next, and the remainder was passed 
 to Profit and Loss. Under this method the proprietor 
 was more or less uncertain as to the results during the 
 year, or until the books were closed ; and could not have 
 very effective information from his books as to the prog- 
 ress of the business day by day. The older method made 
 free use of the mixed account, which does not exhibit a 
 financial result until inventory time. This method of 
 keeping accounts was the occasion of many business fail- 
 ures and financial difficulties due to lack of current infor- 
 mation about the business. 
 
 Under the later method, the business man recognizes 
 that the elements of the business can be distinguished in 
 such a way as to make a closer exhibit of results continu- 
 ously, or at least at stated times during the year. 
 Especially can the accounts be kept so as not to cause 
 
THE JOURNAL— DEBIT AND CREDIT 107 
 
 overestimate of profits. In order to do this, mixed ac- 
 counts are abandoned, and simple accounts are substi- 
 tuted. 
 
 Four financial conditions are recognized in the ac- 
 counts — assets, liabilities, profits, and losses — and the ac- 
 counts are named and entries are made so as to hold these 
 accounts as nearly as practicable to a current exhibit of 
 the conditions mentioned. In order to do this, attention 
 must be given to the passage of value out of property ele- 
 ments into profit or loss elements at the time the passage 
 occurs. Thus, by the older method the sale of a building 
 for $6000.00 cash which had been debited in the Real 
 Estate account at $5000.00 would be entered thus : 
 
 Cash 6000.00 
 
 Real Estate 6000.00 
 
 The profit from the sale would be shown at the end 
 of the year when a balance would be carried from the 
 Real Estate account to Profit and Loss. 
 
 Under the later method, the entry would be : 
 
 Cash 6000.00 
 
 Real Estate 5000.00 
 
 Profit 1000.00 
 
 By the latter entry the profit is apparent on the 
 books at once as profit instead of being obscured in the 
 property account until the end of the accounting period. 
 
 The recognition of depreciation in property gives oc- 
 casion for entries which, under older methods, were de- 
 ferred or neglected with the result that the business man 
 suffered from a corresponding uncertainty as to his in- 
 come. Everything made by hand wears or wastes away. 
 A house may last fifty years, a machine ten, a tool one. 
 Whatever the life of the property, its value passes out 
 day by day until it becomes absolutely unfit for the pur- 
 pose intended. This fact is recognized in bookkeeping 
 by estimating the value passed out of fixed property at 
 regular intervals and crediting the Property account 
 either directly or in a subsidiary Reserve account. Thus, 
 on the assumption that a machine costing $1000.00 de- 
 
108 KULES 
 
 predates in value 10% during an accounting period, an 
 entry would be made : 
 
 Depreciation 100.00 
 
 Reserve for Depreciation on Machine. . 100.00 
 
 The account "Reserve for Depreciation" is simply a 
 device for crediting value passed out of the property 
 without writing the credit entry in the Property account. 
 In considering the value remaining in the machine, the 
 credit in the reserve would be taken from the debit in the 
 property account. 
 
 The depreciation in fixed property not to be replaced 
 is shown by writing off a certain amount periodically. 
 Thus, the value of a patent, debited at $3000.00, may be 
 found to pass out at the rate of $500.00 a year. In that 
 case the yearly entry would be: 
 
 Depreciation * 500.00 
 
 Patent 500.00 
 
 In accounts of things which cannot be replaced, the 
 credit for diminishment in value is made directly in the 
 account instead of in a reserve for the account. 
 
 In the case of floating property — movable things that 
 are bought and sold piecemeal — depreciation is not a 
 matter of debit and credit entry. Merchandise, however, 
 depreciates as well as anything else; but the deprecia- 
 tion is deducted from the inventory before entry in the 
 books. 
 
 Value passes out of accounts and notes receivable 
 by reason of inability to collect. This fact is recognized 
 by entry. Thus, John Smith's debit of $50 is uncollect- 
 ible. Entry is made : 
 
 Profit and Loss 50.00 
 
 John Smith 50.00 
 
 Journal entries are used to show value passed into 
 and out of business elements, whether the passage was 
 occasioned by actual transactions between persons or by 
 conditions affecting property. 
 
 Whatever the transaction, the student may deter- 
 mine what account to debit and what to credit by noting 
 the elements into which and out of which value has 
 passed. 
 
THE JOURN AD— DEBIT AND CREDIT 109 
 
 The following entries will serve to illustrate debits 
 and credits for transactions grouped for convenient ref- 
 erence under entries in cash accounts (Prin. 72 A) ; 
 entries in accounts of cash receivable (Prin. 72 B) ; entries 
 in accounts of cash payable (Prin. 72 C) ; entries in ac- 
 counts of assets not cash or cash receivable (Prin. 72 D) ; 
 entries in accounts of profit or gain (Prin. 72 E) ; entries 
 in accounts of loss (Prin. 72 F) ; entries to readjust ac- 
 counts (Prin. 72 G) ; entries to close the books (Prin. 
 72 H). 
 
 72 A. Entries in Cash Accounts. The Cash accounts 
 are carried in an account of general money, headed, 
 Cash ; and in current cash funds kept for special purposes 
 as Cashier's Fund, Traveling Expense Fund, etc. 
 
 Examples : 
 
 (1) 
 
 James Good began business with 
 
 tasb invested $1000.00. 
 Cash Dr. (Value passed into an asset) 1000.00 
 
 James Good, Capital, Cr. (Value passed 
 
 out of proprietorship) 1000.00 
 
 (2) 
 
 Paid cash $25 for rent of store on month. 
 Expense Dr. (Value passed into operations)... 25.00 
 
 Cash Cr. (Value passed out of an asset) . . 25.00 
 
 (3) 
 
 Set aside $50 in a cashier's fund for petty 
 cash payments. 
 Cashier Fund Dr. (Value passed into an asset) 50.00 
 
 Cash Cr. (Value passed out of an asset) . . 50.00 
 
 (4) 
 
 Sold H. C. Hoover for cash 
 
 10 bbl. Flour @ $11.00 110.00 
 
 Cash Dr. (Value passed into an asset) . . 110.00 
 
 Mdse. Sales Cr. (Value passed out 
 of trading operations) 110.00 
 
 (5) 
 
 Bot. of Greely & Co. for cash 
 
 Mdse. per Inv. No. 1 $625.00 
 
 Mdse. Purchases Dr. (Value passed into 
 
 trading operations) 625.00 
 
 Cash Cr. (Value passed out of an asset) 625.00 
 
 72 B. Entries in Accounts of Cash Receivable. These 
 
 accounts include customers' accounts under the debtors' 
 
110 RULES 
 
 names or considered collectively under the heading Ac- 
 counts Receivable, Notes Receivable, Bonds Receivable, 
 and Mortgages Receivable, or other claims for definite 
 amounts of money to be -collected immediately or in the 
 future. 
 
 v Examples: 
 
 (6) 
 Sold H. Bell on account 
 
 5 bbl. Flour @ $11.00 55.00 
 
 H. Ben Dr. (Value passed into an asset) ... 55.00 
 
 Mdse. Sales Cr. (Value passed out of 
 operations) 55.00 
 
 (7) 
 
 Received from H. Bell $25.00 cash on account. 
 
 Cash Dr. (Value passed into an asset) 25.00 
 
 H. Bell Cr. (Value passed out of an asset) 25.00 
 
 (8) 
 
 Sold P. D. Fisher for 30-day note 
 
 6 tons hay @ $18.00 $108.00 
 
 Notes Receivable Dr. (Value passed into 
 
 an asset) 108.00 
 
 Mdse. Sales Cr. (Value passed out of 
 
 operations) 108.00 
 
 (9) 
 
 Received Cash $50 from P. B. Fisher to apply on note against 
 him. 
 
 Cash Dr. (Value passed into an asset) 50.00 
 
 Notes Receivable Cr. (Value passed out of an 
 
 asset) 50.00 
 
 (10) 
 
 Received from P. B. Fisher cash $60.00 in payment of balance 
 due on note $58.00 and interest $2.00. 
 
 Cash Dr. (Value passed into an asset) 60.00 
 
 Notes Receivable Cr. Value passed out of an 
 
 asset) 58.00 
 
 Interest Cr. (Value passed out of operations) ..." 2.00 
 
 72 C. Entries in Accounts of Cash Payable. These 
 accounts include all records showing definite amounts of 
 money to be paid, including creditors' accounts under the 
 persons' names, or considered i collectively as accounts 
 payable; also Notes Payable, Bonds and Mortgages Pay- 
 able and other obligations under suitable account 
 headings. 
 
THE JOURNALS-DEBIT AND CREDIT 111 
 
 Examples : (11) 
 
 Bot. of W. Doe on account 
 
 20 tons coal @ $12.00 $240.00 
 
 Coal Purchases Dr. (Value passed into 
 
 operations) 240.00 
 
 W. Doe Cr. (Value passed out of 
 
 liability) 240.00 
 
 (12) 
 Paid W. Doe cash $100 on account. 
 
 W. Doe Dr. (Value passed into a liability) 100.00 
 
 Cash Cr. (Value passed out of an asset) 100.00 
 
 (13) 
 
 Gave W. Doe our 60-day note for $140.00 in settlement of acct. 
 
 W. Doe Dr. (Value passed into a liability) 140.00 
 
 Notes Pay. Cr. (Value passed out of a liability) 140.00 
 
 (14) 
 
 Issued bonds payable for $20,000, receiving cash therefor 
 at par. 
 
 Cash Dr. (Value passed into an asset) 20,000.00 
 
 Bonds Payable Cr. (Value passed out of a 
 
 liability) 20,000.00 
 
 (15) 
 
 Paid W. Doe cash $145.00 in settlement of note due him 
 
 $140.00 and interest $5.00. 
 Notes Payable Dr. (Value passed into a liability) . ..140.00 
 Interest Dr. (Value passed into operations) 5.00 
 
 Cash Cr. (Value passed out of an asset) 145.00 
 
 72 D. Entries in Accounts of Assets Not Cash or 
 Cash Receivable. These accounts cover all property ex- 
 cept cash and cash to be collected. When purchased, a 
 debit is made at cost ; when received by other means than 
 purchase, a fair valuation is debited. They are divided 
 into floating or current property, and fixed or invested 
 property. As a rule, the floating property is entered from 
 inventory so that the Inventory account contains a list 
 of the floating property valued at cost or at cost less 
 depreciation. 
 
 The fixed property is not subject to re-entry in the 
 books from inventory, but remains on the books as first 
 debited, depreciation being shown by a credit in such 
 accounts as do not represent some replaceable property, 
 and by a credit in an account of Reserve for Depreciation 
 annexed to such accounts as represent replaceable prop- 
 erty of considerable value. 
 
11? RULES 
 
 Examples : 
 
 (16) 
 Bot of Graham & Co. for cash 3 delivery 
 
 trucks for use @ $450.00 $1350.00 
 
 Delivery Equipment Dr. (Value passed into an 
 
 asset) 1350.00 
 
 Cash Cr. (Value passed out of an asset) 1350.00 
 
 (17) 
 
 Sold S. H. Gorman for note $425.00 
 1 delivery truck (costing $450.00) 
 
 Notes Rec. Dr. (Value passed into an asset) 425.00 
 
 Profit and Loss Dr. (Value passed into an un- 
 named operation) 25.00 
 
 Delivery Equipment Cr. (Value passed out of 
 
 an asset) _. 450.00 
 
 (18) 
 
 Sold Peter Messner for cash $475.00 
 . 1 delivery truck (costing $450.00) 
 
 Cash Dr. (Value passed into an asset) 475.00 
 
 Delivery Equipment Cr. (Value passed out of 
 
 an asset) 450.00 
 
 Profit and Loss Cr. (Value passed out of an un- 
 named operation) 25.00 
 
 (19) 
 
 It is ascertained that during a certain period a delivery truck 
 costing $450.00 has depreciated 10%. 
 Depreciation Dr. (Value passed into operations)... 45.00 
 Reserve for Depreciation of Delivery Equipment 
 
 Cr. (Value passed out of an asset) 45.00 
 
 (20) 
 
 It is ascertained that the land occupied by the concern, cost- 
 ing $10,000, would now sell for $12,000. No entry made. Account- 
 ants consider appreciation as being so doubtful as to be excluded 
 from entry. An entry of appreciation might cause an over-esti- 
 mate of income which is unsafe. An over-estimate of depreciation 
 might cause an under-estimate of income, but that would not be 
 unsafe. 
 
 72 E. Entries in Accounts of Profit. These accounts 
 are named to designate the nature or cause of an income. 
 Any value coming into the concern from a source other 
 than even exchange for a recorded asset is classed under 
 income or gain. A number of entries crediting income 
 accounts, have been given in preceding examples. The 
 following five examples contain such credits. 
 
THE JOURNAL— DEBIT AND CREDIT 113 
 
 Examples : (21) 
 
 Sold P. Magnus on account 
 Mdse. per Sale No. 24, $129.69. 
 
 P. Magnus Dr. (Value passed into an asset) 129.69 
 
 Mdse. Sales Cr. (Value passed out of an 
 
 operation) 129.69 
 
 Note. — The Trading account is made up of three accounts, 
 Sales, Purchases, and Inventory, which are combined at the end 
 of the accounting period to show the trading income. The Sales 
 account is subsidiary to Trading. 
 
 (22) 
 Bot of Carr & Son on account 
 Mdse. per Inv. No. 5 $461.27. 
 Mdse. Purch. Dr. (Value passed into an operation) .461.27 
 Carr & Son Cr. (Value passed out of a 
 
 liability) • 461.27 
 
 (23) 
 Received cash $15.00 from J. Bennett in settlement of interest 
 due on a note receivable. 
 
 Cash Dr. (Value passed into an asset) 15.00 
 
 Interest Cr. (Value passed out of an operation) 15.00 
 
 (24) 
 Paid P. Magnus cash in settlement of Invoice 
 No. 24, for $129.69, less 2% discount. 
 
 P. Magnus Dr. (Value passed into a liability) 129.69 
 
 Cash Cr. (Value passed out of an asset) 127.10 
 
 Cash Discount Cr. (Value passed out of an 
 
 operation) 2.59 
 
 (25) 
 Sold building and lot (costing $10,000) for cash $12,000. ' 
 
 Cash Dr. (Value passed into an asset) 12,000.00 
 
 Building & Lot Cr. (Value passed out of 
 
 an asset) 10,000.00 
 
 Profit & Loss Cr. (Value passed out of an 
 
 operation) 2.000.00 
 
 72 F. Entries in Accounts of Loss. Loss expendi- 
 tures are debited in an expense account, in an income ac- 
 count or account of operations when considered a special 
 charge, or if of an unusual nature, in Profit and Loss. The 
 following five examples contain such debits : 
 
 (26) 
 Paid cash $39.60 for books and stationery for office use. 
 
 Expense Dr. (Value passed into operations) 39.60 
 
 Cash (Cr. (Value passed out of an asset) 39.60 
 
 (27) 
 Reimbursed the cashier's fund for petty pay- 
 ments out of cashier's fund, $22.78. 
 
 Expense Dr. (Value passed into operations) 22.78 
 
 Cash Cr. (Value passed out of an asset) 22.78 
 
114 RULES 
 
 Note. — The small payments made by the cashier are entered 
 in memorandum form until such time as a check is issued for 
 them, when the amount is debited to expense. The proceeds of 
 the check is returned to the fund without entry in the general 
 cash book for the return. 
 
 (28) 
 Sold coal bins and equipment (costing $1350) 
 for cash $1000.00. 
 
 Cash Dr. (Value passed into an asset) 1000.00 
 
 Profit & Loss Dr. (Value passed into loss) 350.00 
 
 Coal Bins Cr. (Value passed out of an asset) 1350.00 
 
 (29) 
 
 Paid cash for note due D. Maine, face $100, interest $3.00. 
 Notes Payable Dr. (Value passed into a liability) .-.100.00 
 Interest Dr. (Value passed into operations) 3.00 
 
 Cash Cr. (Value passed out of an asset) ■ 103.00 
 
 (30) 
 
 Received cash $98.00 from D. Collings in settlement 
 of a sale on account, $100.00, less 2% cash discount. 
 
 Cash Dr. (Value passed into an asset) 98.00 
 
 Cash Discount Dr. (Value passed into operations).. 2.00 
 
 D. Collings Cr. (Value passed out of an asset) . . 100.00 
 
 72 G. Entries of Readjustment. These entries are 
 made at the close of the accounting period to take into 
 account changes in condition of the elements of the busi- 
 ness that have not been previously recorded from the 
 transactions. They refer principally to inventories and 
 a systematic record of depreciation. After readjustments 
 are made, the accounts are ready to close into Profit and 
 Loss. 
 
 Examples : 
 
 (31) 
 
 The following inventories, entered at the beginning 
 of the accounting period, are found at the close of the 
 period as debits in an account headed Inventory : 
 
 Merchandise 15,290.64 
 
 Expense 60.42 
 
 Interest 50.49 
 
 15,401.55 
 Trading Dr. (Value passed into operations) . . .15,290.64 
 Expense Dr. (Value passed into operations) . . . 60.42 
 Interest Dr. (Value passed into operations)... 50.49 
 Inventory Cr. (Value passed out of an 
 
 asset) 15,401.55 
 
THE JOURNAL— DEBIT AND CREDIT 115 
 
 (32) 
 
 The following inventories at the close of the period 
 are to be entered in the books: 
 
 Merchandise .21,837.90 
 
 Expense (unconsumed) 102.61 
 
 Interest ( receivable ) 32.68 
 
 21,973.19 
 Inventory Dr. (Value passed into an asset).. .21,973.19 
 Trading Cr. (Value passed out of oper- 
 ations) 21,837.90 
 
 Expense Cr. (Value passed out of oper- 
 ations) 102.61 
 
 Interest Cr. (Value passed out of oper- 
 ations) 32.68 
 
 (33) 
 
 The following inventoried liabilities carried from the 
 beginning of the accounting period appear as credits : 
 
 Expense, incurred but unpaid 55.00 
 
 Interest, payable accrued 105.20 
 
 Discounts, payable anticipated 210.40 
 
 370.60 
 Liability Inventory Dr. (Value passed into a 
 
 liability) 370.60 
 
 Expense Cr. (Value passed out of operations) . . 55.00 
 
 Interest Cr. (Value passed out of operations).. 105.20 
 
 Discounts Cr. (Value passed out of operations) 210.40 
 
 (34) • 
 
 The following liability inventories are made at the 
 close of the accounting period: 
 
 Expense incurred but unpaid 73.20 
 
 Interest payable accrued 64.37 
 
 Discounts payable anticipated 150.20 
 
 2.87.77 . 
 
 Expense Dr. (Value passed into operations) 73.20 
 
 Interest Dr. (Vahie passed into operations) 64.37 
 
 Discount Dr. (Value passed into operations) 150.20 
 
 Liability Inventory Cr. (Value passed out of a 
 
 liability) 287.77 
 
116 RULES 
 
 (35) 
 
 The following amounts of depreciation are entered 
 at the close of the accounting period: 
 
 Depreciation in building 500.00 
 
 Depreciation in machinery 1000.00 
 
 Depreciation in f urn. & fixtures 100.00 
 
 Dep. in patterns, drawings, etc 600.00 
 
 Depreciation in good-will 300.00 
 
 2500.00 
 Depreciation- Dr. (Value passed into operations).. 2500.00 
 Reserve for Depreciation in Building Cr. (out 
 
 of asset) . .' 500.00 
 
 Reserve for Depreciation in Machinery Cr. 
 
 (out of asset) 1000.00 
 
 Reserve for Depreciation in Furn. & Fixtures 
 
 Cr. (out of asset) 100.00 
 
 Patterns and Drawings Cr. (out of asset) . . . 600.00 
 
 Good-will Cr. (out of asset) 300.00 
 
 72 H. Entries to Close the Books. The general rule 
 given for debit and credit *(Prin. 72) refers to entries for 
 transactions or operations only, but is not applicable to 
 the entries for closing the books. 
 
 Closing entries are nothing more than indications in 
 the journal that account balances are carried from 
 nominal accounts into more general summaries. 
 
 The nominal account headings are merely names of 
 elements that have entered into former operations 
 brought to completion at the end of the accounting 
 period. The elements of a past period have no value, and 
 the account balances are carried to Profit and Loss, 
 which, when balanced, shows the results of the operations 
 summarized in one amount of net profit or net loss. The 
 balance of Profit and Loss is carried to the summaries of 
 Proprietorship, as explained in Prin. 35-40. 
 
 Examples : 
 
 (36) 
 
 After readjustment of the ledger as *to assets and 
 liabilities, the following are the balances of accounts in- 
 volved in trading : 
 
 Sales, credit balance 41,453.68 
 
 Purchases, debit balance 25,705.72 
 
 Sales (balance carried to Trading) . 41.453.68 
 
THE JOURNAL— DEBIT AND CREDIT 117 
 
 Trading (balance from Sales).. 41.453.68 
 
 Trading (balance from Purchases) . 25,705.72 
 
 Purchases (balance carried to 
 Trading) 25,705.72 
 
 (37) 
 
 After carrying balances of subsidiary trading ac- 
 counts to Trading, the following nominal account bal- 
 ances appear in the ledger : 
 
 Trading, credit balance.... 22,295.22 
 
 Selling Expense, debit balance.. 6,142.92 
 
 General Expense, debit balance. 8,347.29 
 
 Interest and Disc'nt, credit bal.. 162.91 
 Trading (balance to Profit and Loss) 22,295.22 
 
 Interest and Discount (balance to 
 
 Profit and Loss) 162.91 
 
 Profit and Loss (balance from 
 
 Trading and Int. & Disct. ) . 22,458.13 
 
 Profit and Loss (balances from Sell- 
 ing and Genl. Expense).... 14,490.21 
 
 Selling Expense (balance to 
 
 Profit and Loss) 6,142.92 
 
 General Expense (balance to 
 
 Profit and Loss) S,347.29 
 
 (38) 
 After carrying all nominal account balances to Profit 
 and Loss, there is found to be a credit, balance of 
 $7967.92 in the latter account, which balance is to be car- 
 ried to the Capital account of John Smith, the proprietor. 
 
 Profit and Loss (balance carried to Capital acct) .7,967.92 
 
 John Smith, Capital (carried from P. & L) . . 7,967.92 
 
 72 I. Practical Journalizing. A bookkeeper should 
 be able to arrange any entry in journal form, even though 
 that is not the form regularly used for the given entry 
 in his books. There are several reasons for this. 
 
 (1). Complicated transactions may arise wherein 
 he may not see clearly the equality of several debits and 
 credits, unless they are arranged together in journal 
 form. Placing the entry in journal form on a slip of 
 paper will aid him in arriving at the analysis. 
 
 (2). The journal order is the accepted means of ex- 
 plaining to others orally the accounts to be debited and 
 credited. While a bookkeeper may post debits and 
 
118 RULES 
 
 credits from all sorts of books, without direct reference 
 to an equality, yet he should, at any time, be able to 
 form a mental or written picture of the equilibrium of all 
 the accounts involved, as shown in the journal entry. 
 
 (3). In large business concerns, the bookkeeping 
 system may require that a separate voucher, or sheet, 
 be used to describe each transaction. "When this is the 
 case, the debits and credits are written on the voucher, 
 making a statement which is equivalent to a journal 
 entry. 
 
 In referring orally to the accounts to be debited 
 and credited, the debit title or titles are named first; 
 afterward, the credit title or titles, with "to" between 
 the debits and credits. Thus, if an entry requires that 
 John Smith be charged $50, and Sales be credited $50, we 
 would say "John Smith to Sales, $50." If a transaction 
 should require several debits, as Purchases, $60, Ex- 
 pense $5.50; and several credits, as Cash $10 and Notes 
 Payable $55.50, we would say "Purchases $60, and Ex- 
 pense $5.50, to Cash $10, and Notes Payable $55.50." 
 Whatever the number of debits or credits, the sum of the 
 debits must equal the sum of the credits. 
 
CHAPTER XIII 
 
 THE JOURNAL— FORMS OF 
 
 73. Every Business transaction may be entered cor- 
 rectly in the plain journal. In certain simple lines of busi- 
 ness, a journal and a ledger are, all things considered, the 
 only books needed. But commonly, the ordinary routine 
 entries of a business are made in special books, leaving 
 the journal for entries of an unusual nature or impor- 
 tance. 
 
 On account of the importance, for reference, of such 
 journal entries as are made, and their relatively rare 
 occurrence under ordinary working conditions, especial 
 emphasis is placed on a full and complete explanation 
 of the entries rather than on the matter of making them 
 rapidly. Young bookkeepers often think they have done 
 well enough, if they merely indicate the ledger accounts 
 to be debited and credited by a journal entry, with a 
 bare hint at the nature of the transaction in the explana- 
 tory portion. The experienced bookkeeper is more con- 
 cerned about clear and complete memoranda, knowing 
 that in the journal, rather than in other books of origi- 
 nal entry, are to be found records of transactions that 
 may lead to misunderstanding and litigation, especially 
 among the owners of the business, if full facts are not 
 clearly stated. 
 
 73 B. Different Uses for Journal. A complete journal 
 (Prin. 73 C) contains all original entries, of whatever 
 nature, that pertain to a given business. A general 
 journal (73 D) contains such entries as the other special 
 books do not provide for. A special journal (73 E) con- 
 tains entries of a special nature, and may be designated 
 by such names as sales journal, purchase journal, ship- 
 ment journal, credit journal, debit journal, and the like. 
 A columnal journal (73 F) is one that, in addition to the 
 
 119 
 
120 RULES 
 
 two ordinary charge and credit money columns, has other 
 columns in which are grouped entries of a special kind. 
 73 C. The Complete Journal contains all original, 
 entries, and is ruled so as to provide space for date, 
 memoranda, ledger titles, postmark, and amounts. These 
 different parts of the entry are arranged in somewhat 
 different order by different bookkeepers or under vary- 
 ing conditions. 
 
 Form 12 A is recommended as good. To the left is placed the 
 date, which is the first thing looked for in referring to an entry. 
 The wide space in the center provides space for the considerable 
 amount of memoranda usually required in journal entries. Below 
 the memorandum are placed the titles of the ledger accounts af- 
 fected by the transaction. The debit title is placed one space to 
 the left of the memorandum, in order to make it clearly dis- 
 tinguishable, and above the credit title, which is placed slightly 
 to the right of the debit title. Opposite these titles, in the money 
 columns, are the amounts. These are placed in the debit and 
 credit columns, respectively, and on the same writing lines with 
 the titles. Immediately before the money columns is the post- 
 mark column. The postmark column should be close to the 
 amounts for greater convenience in postmarking as the posting 
 proceeds, and to permit the bookkeeper to verify more quickly the 
 posting of the amounts. 
 
 The complete journal is often a journal of several 
 columns as described in Prin. 73 F. 
 
 73 D. The General Journal may be ruled in any 
 form used for the complete journal. The term, general, 
 implies that there are also special books kept for the 
 entries of certain special kinds of transactions, and that 
 the unclassified transactions, or those of a general signifi- 
 cance, are to be recorded in the general journal. 
 
 The complete journal and the general journal may be thus 
 distinguished: The complete journal contains all transactions, 
 whereas the general journal contains only such transactions as 
 have not been entered in other special books. For example, as- 
 suming that in an ordinary trading business, the three most 
 numerous classes of transactions will find record in special books, 
 rather than in the journal, — i. e. cash received and paid in the 
 cash book, merchandise bought in the purchases book, merchan- 
 dise sold in the sales book, — there remain certain kinds of entries 
 to be looked for in the general journal. Among them are: (1) 
 entries affecting the proprietor's accounts; (2) entries showing 
 the closing of the books; (3) entries of an unusual nature; (4) 
 entries of correction or adjustment; (5) entries or memoranda of 
 contracts, agreements, etc.; (6) entries that appear in part in 
 
THE JOURNAL— FORMS OF 121 
 
 some other book of original entry, but cannot appear wholly in the 
 special book. When such occur, the journal entries are regarded 
 as entries to be posted, and the entries in the special books as 
 entries already posted. An entry in a special book is to be checked 
 out, not posted to the ledger, when it is covered by an entry in the 
 general journal. 
 
 73 E. A Special Journal contains a certain kind of 
 entries that, for convenience, are separated from the 
 general journal. In a sense, all books of original entry 
 are journals, and entries in them may be properly re- 
 ferred to as journal entries. A so-called "special jour- 
 nal" is rather in the nature of an abstract of certain 
 entries that have been arranged and put in balance be- 
 fore posting. Thus, a sales journal contains the dates, 
 titles, terms and amounts of sales, that is to say, an ab- 
 stract of sales, gathered from bills, and balanced ready 
 for posting; a purchase journal contains a similar ab- 
 stract of invoices; a shipment journal contains an 
 abstract of shipments, similarly arranged. Debit jour- 
 nals are frequently used in banks and wholesale houses, 
 and contains no entries but the debits; credit journals, 
 on the other hand, contain no entries but the credits. 
 
 73 F. A Columnar Journal has one or more special 
 money columns in addition to the two general- money 
 columns. The special columns are used to separate items 
 of a given kind from the general miscellany of items, so 
 that those thus separated may be added and their sum 
 treated as one amount for posting to a controlling ac- 
 count or for reference. If these were left in the general 
 column, they would have to be posted or collected for 
 reference one at a time. The special column principle, 
 when properly applied, has saved an immense amount of 
 time in bookkeeping; but, on the other hand, when its 
 application was faulty, it has caused a great deal of 
 extra labor. 
 
 A special column can be used advantageously only 
 for frequently repeated entries of the same kind that are 
 recorded consecutively with the other entries by one 
 bookkeeper. Where several persons are working on the 
 same set of books, it is generally more economical of time 
 
122 RULES 
 
 and effort to substitute special books of entry in- 
 stead of adding special columns. There may be instances 
 where a special sales column in a journal, allowing the 
 sales to be entered in the journal along with other items, 
 would work out to better advantage than to separate the 
 sales entries from the journal by the use of a sales book. 
 But this would seldom be advisable. 
 
 The advantage of a special column in a journal must, 
 in each instance, be compared with the alternative ad- 
 vantage of supplying a special book to contain the en- 
 tries which the special column is planned for, or with 
 the extra work of posting singly from a general column 
 the items assignable to the special column. 
 
 A special column should not be added to a journal 
 unless it is clear that the extra labor of making entries 
 in this column, of carrying the footings of the column 
 forward from page to page, and finally of proving the 
 total at the end of the posting period, would be less than 
 the labor of posting the given entries from a general 
 column. i 
 
 73 G. A Cash Journal may be used to great advan- 
 tage under certain conditions. A form of this journal 
 contains four money columns, two for debits and 
 credits that require posting to ledger accounts, 
 and two for deposits in the bank and checks 
 drawn against the deposits. This journal is par- 
 ticularly well suited for private individuals who 
 wish to keep concise, accurate accounts of their 
 property and obligations, together with their incomes 
 and expenses. It contains a complete record of all 
 transactions that involve property, claims receivable, and 
 obligations payable, and may contain any other memo- 
 randa for journal record. A detailed description fol- 
 lows : 
 
 Form 12 W. Referring to this form, there are shown five de- 
 scriptive columns, followed by four money columns. The first col- 
 lumn is for the date, the second for explanatory matter, the third 
 for titles of ledger accounts, the fourth for the check number, 
 (use when the transaction involves the issuance of a check), the 
 fifth for the postmark of amounts in the general columns posted to 
 
THE JOURNAI^-FORMS OF 123 
 
 the ledger. There are four money columns, numbers six to nine. 
 Numbers six and seven may contain all dpbit and credit amounts. 
 In the set which this form illustrates, all cash receipts are de- 
 posited, and cash payments or money required for payments are 
 withdrawn from the bank by checks. The bank account is com- 
 paratively active. Columns numbered eight and nine permit the 
 bookkeeper to carry bank debits or credits from the general col- 
 umns to the bank columns, and to that extent save labor in posting. 
 
 When such a book is used, it is more convenient to balance 
 the bank columns and carry the balance down in the journal to 
 the following month, as shown in the form, than to post the totals 
 of these two columns to a bank account in the ledger, as could be 
 done. 
 
 Note. — For other cash journals, see Forms 17 M, 22 D and 
 231. 
 
CHAPTER XIV 
 
 THE CASH BOOK 
 
 74. The Cash Book contains the daily record of 
 cash receipts and payments. It thus takes the place of 
 the journal as a record of cash transactions. The cash 
 book also provides for the entries of receipts in a column 
 separate from the entries of payments, making it equiva- 
 lent to a ledger account of Cash. 
 
 Besides the general receipt and payment columns 
 used in all cash books, one or more special columns may 
 be added for classifying special kinds of receipts and 
 payments, thus making a columnar cash book. 
 
 The cash book should contain a satisfactory explan- 
 ation of all receipts and payments. Every entry should 
 be fully explained if there is no voucher to support it; 
 or, if there is, this voucher should be described in the 
 entry in such a way as to make it easy to find. This 
 book is to be kept with care; entries are to be made 
 promptly, for it contains the explanation of all re- 
 ceipts and payments. If business is at all active, 
 cash book balances resulting from these receipts and 
 payments should be compared with the cash on hand at 
 the close of the day. Any discrepancy should be ac- 
 counted for at that time. There is the possibility that 
 certain cash has been received, which the cash book does 
 not account for, thus making cash "over;" or cash may 
 have been paid which was not entered and cannot be 
 remembered, thus making cash "short." In either case, 
 if the bookkeeper cannot find the missing entry, he should 
 enter a cash debit for the cash "over," or a cash credit 
 for the cash "short," and post this entry to an account 
 entitled Cash Short and Over. 
 
 Cash receipts are posted to the credit of such ledger 
 accounts as explain the yield to the business; cash pay- 
 
 124 
 
THE CASH BOOK 125 
 
 ments are posted to the debit of such ledger accounts as 
 explain the cost to the business. 
 
 Note. — There may occur certain cash book entries which 
 should not be posted to the ledger; for example, a combined jour- 
 nal and cash book entry like this: Machinery $500 to Notes Pay- 
 able $400 and Cash $100. In this case, the complete entry would 
 be made in the journal, and the payment of $100, after it is en- 
 tered in the cash book, would be postmarked "J" to show that the 
 corresponding charge for the cash credit of $100 is included in the 
 charge to Machinery of $500, which is to be posted from the jour- 
 nal and checked out of the cash book. Likewise, any entries in 
 both cash book and journal are checked out of the cash book to 
 the journal, while the posting is done from the journal. 
 
 The cash book may be balanced and ruled daily, 
 monthly, or at any other period suited to the require- 
 ments of the business. 
 
 74 B. The One Page Cash Book (see Form 10 B or 
 11 A) has a column for date at the left, followed by 
 explanatory space, as wide as possible, with money col- 
 umns for receipts and payments at the right. Just fol- 
 lowing the explanation, and preceding the money col- 
 umns, are two columns, one for the names of the ledger 
 accounts to which the amounts in the money columns are 
 to be posted, the other for the postmarks. In the illus- 
 trated cash book, no distinction is made between currency 
 and check payments. If a bank checking account is kept, 
 a record of deposits, checks and bank balance should ap- 
 pear in the check stubs. 
 
 74 0. In the Two Page Cash Book (see Form 13 B) 
 the cash receipts are entered on the left-hand, or debit 
 page, and the cash payments on the right-hand, or credit 
 page. On the debit side, the first money column is re- 
 served for current receipts, which are extended by totals 
 into the second column, when deposits are made; the 
 amounts extended should agree with the deposit tickets. 
 It is usually possible to deposit all cash receipts, and this 
 should be done as a rule. 
 
 Note. — At the end of the month, any cash left over after 
 banking hours, should be entered on a deposit ticket, and de- 
 posited separately from the receipts of the following day, thus 
 enabling the bookkeeper to extend all receipts of the month into 
 the second, or deposits, column. 
 
126 RULES 
 
 On the right, the payments, which are all by check, 
 are entered in the first column and extended into the 
 second column, from time to time, to compare with the 
 deposits. The difference between the second columns of 
 the two pages is the balance of cash in bank. 
 
 Entries in the cash book should show from whom 
 cash is received and to whom cash is paid. This is the 
 most natural thing to write when paying or receiving 
 cash, and definitely locates the persons dealt with. There 
 should also be a sufficient explanation to show the pur- 
 pose of the receipt or payment. After this explanation, 
 the ledger title to be credited from cash received, or 
 debited from cash paid, can be written or indicated in 
 the space before the postmark column, at the convenience 
 of the bookkeeper. Then the posting can be done. 
 
 Note. — Petty payments of coin or bills have no place in the 
 main cash book. If placed in it, they confuse the bank account. 
 Petty entries also require that time be spent unnecessarily in post- 
 ing. Although such payments cannot be avoided, they should be 
 provided for by the issuance of a check to the cashier (see entry 
 Nov. 1 ) for a Cashier's Fund to meet petty disbursements, which 
 he accounts for in the petty expense book. 
 
 Care should be taken, when the main cash book is 
 balanced, to rule up both sides on the same writing line. 
 Enter the balance in red, and carry it down in black ink. 
 Since the balance is in the bank, the amount is carried 
 down to the second column of the debit side. 
 
 74 D. The Check Stub contains a record of cash 
 payments by check, (further record on the stub being 
 unnecessary if made in a cash book) as explained in 
 Prin. 74 C. As a check is not likely to be issued out of 
 the check book without the stub being left, record for. 
 every payment is practically assured. In addition to 
 that record, the check, passing through the payee's 
 hands, with his endorsement, is returned to the maker 
 from the bank as a receipt. These advantages of paying 
 by check make it advisable that all disbursements, except 
 from the Cashier's Fund, be made in that way. The en- 
 tries on the credit side of the cash book are taken from 
 the stubs. 
 
THE CASH BOOK 127 
 
 Note— When a check book is carried about, instead of being 
 used in the office, it is generally advisable that the stub contain 
 the record of deposits as well as checks, so that the balance can 
 be forwarded on the stub for immediate reference. Forwarding 
 balances on the stubs involves extra work and often gives rise to 
 errors, unless very carefully attended to, so that the check book 
 used in the office often does not contain any other stub record than 
 that of the checks issued. 
 
 74 E. The Petty Expense Book, also called Petty 
 Cash Book, as commonly used in a business office, is a 
 two column scratch book containing a record in the 
 debit column of checks issued to the cashier for petty 
 payments, and in the credit column, entries of the pay- 
 ments made. The form is similar to Form 13 0. This 
 record shows the disposition of the money, which is all 
 that is desired. The account of the Cashier's Fund in 
 the ledger is charged for the expense checks as issued. 
 From time to time, as the Cashier's Fund runs low, the 
 cashier makes a voucher for the amount expended, and 
 receives a check which restores the petty expense fund 
 to the original amount. The entry in the general cash 
 book for this voucher is debited to Expense. 
 
 74 F. The Columnar Expense Book may be used to 
 great advantage where it is desired to classify expenses 
 under a number of special headings. Such a book ».on- 
 tains one general column at the left, to which are posted 
 from the cash book and from the journal, when the 
 journal contains expense entries, all debits that are 
 included in the general term expense. To the right of 
 this column, are placed a number o^ columns, each 
 headed to show a particular kind of expense. The en- 
 tries that were posted to the first general column of this 
 book, are, at the convenience of the bookkeeper or when 
 he secures the necessary information, distributed among 
 the several columns. The sums of the special columns 
 should equal the sum of 'the first general column. The 
 totals of the special columns may be posted in the special 
 expense accounts in the ledger, which correspond with 
 the headings of the columns, once a month or once a year. 
 When it is not thought necessary to post the sums of the 
 
128 RULES 
 
 expense columns at all, the total expense should be in- 
 cluded in the trial balance as one item, which is explained 
 in detail by the distribution shown in the separate col- 
 umns of the expense book. 
 
 Examples. — (1) In household bookkeeping, a check for $20 
 (see Form 12 W, check No. 6) may be issued to a member of the 
 family for family expenses. This amount would be posted from 
 the original entry to the general column in the columnar expense 
 book. Later on, the member of the family may return a ticket or 
 memorandum showing that the $20 had been disbursed : for cloth- 
 ing, $10.80 : for groceries, $6.59 ; for car fare, 25 cts. ; for literature, 
 $1.10 ; for a frying pan, 25 cts. ; unaccounted for, or personal ex- 
 penditure, $1.01 (see Form 12 X). These amounts can be distrib- 
 uted from the report to the various columns headed to correspond 
 with the various classes of expense mentioned in the memo- 
 randum. The totals of these special columns in the expense book 
 should equal the total of the general column. Any ordinary busi- 
 ness house may distribute the expenses in a similar book. 
 
 (2) In a department store, it is advantageous to distribute 
 the expenses to the departments by a columnar expense book, or 
 detail sheet. In the model (Form 18 N, third illustration) a pay- 
 ment of $25 for advertising is distributed to departments 1, 2 and 
 5 in the proper proportions. Rent, light, and heat are distributed 
 according to floor-space occupied ; advertising according to news- 
 paper space — all expenses according to the department benefited 
 thereby. 
 
 74 G. All cash receipts, large and small, should be 
 entered in the cash book on the day of their receipt. 
 However, some discrimination must be used in deciding 
 whether to enter them directly into the cash book when 
 the cash is taken in, or to make some special record 
 first. Retail stores usually record small cash sales in 
 cash registers, and transfer the totals to the cash book 
 at the close of the day. If a cash register is not used, a 
 cash sales sheet will effect the same result. The device 
 to record the cash sales depends on their number and 
 the precautions thought necessary to insure a complete 
 record. 
 
 74 H. The Columnar Cash Book, also called Special 
 Column Cash Book, is a cash book containing special col- 
 umns, in addition to the columns for the cash account. 
 
 A special column is used to segregate frequently 
 repeated items that are to be posted to the same 
 ledger account. Such items, standing alone, can be 
 
THE CASH BOOK 129 
 
 added and their sum posted with less labor than would 
 be required to post the items separately from a .miscel- 
 laneous column. Thus, if there were a hundred entries 
 on the credit side of the cash book, all charging Pur- 
 chases account, the bookkeeper would be obliged to 
 post them one at a time from a miscellaneous column, 
 making one hundred operations. But if the amounts 
 were carried to a special column for Purchases account, 
 the total of that column could be posted in one operation. 
 
 A special column on the receiving side of cash is 
 frequently advisable for Sales. Columns for accounts re- 
 ceivable, accounts payable, discounts, and expenses are 
 often advisable. 
 
 When the complete ledger is divided into one 
 general and one or more subsidiary ledgers, special 
 columns are necessary for the items that are to be posted 
 to the subsidiary ledgers. The items in such special 
 columns are posted separately to the several accounts in 
 the subsidiary ledger, and their total to the controlling 
 account of that ledger, in the general ledger. 
 
 Thus, when the sales ledger is a subsidiary book, a 
 column headed Accounts Receivable in the cash book 
 (receiving side) will contain the amounts of all cash 
 receipts, on book account, from customers. These en- 
 tries are to be posted severally to the sales ledger, and 
 tbeir total to Accounts Receivable, (the controlling ac- 
 count) in the general ledger. 
 
 Likewise, when the purchases accounts are kept in a 
 subsidiary purchases ledger, a similarly used special .col- 
 umn in the cash book (paying side) would be headed 
 Accounts Payable. 
 
 Tn the commission business, a similar column headed 
 Consignors,, segregates the payments chargeable to ac- 
 counts in a subsidiary consignors' ledger. 
 
 Whatever special columns are included in a col- 
 umnar cash book, there must be a general and a net 
 cash column on the receiving side and a general and a 
 net cash column on the paying side, in order to make 
 the book easy to handle and examine: (a) the 
 
130 RULES 
 
 receiving and the paying sides should have a general 
 column in each, to show all amounts to be posted to the 
 general ledger. Such general columns are headed, "gen- 
 eral," " sundries, ' ' " general ledger," or "main ledger" 
 by different bookkeepers, all meaning the same thing; 
 (b) net cash columns are necessary in order promptly to 
 determine the cash balance at any time. The net cash 
 column on the debit side is headed, "net cash," "re- 
 ceipts," or "net receipts;" on the credit side the headings 
 may be "net cash," "checks," or "net payments," etc. 
 Different bookkeepers use different headings. Both the 
 net receipt and the net payment columns are footed in 
 pencil or red ink from time to time, when it is desired 
 to determine the cash balance without balancing the cash 
 book. 
 
 Other columns may be placed between the general 
 and the net columns of either side, the number of special 
 columns depending on the number of kinds of items the 
 bookkeeper wishes to segregate from the general posting 
 column for the purpose of posting by totals. For a 
 fuller description and illustration of a columnar cash 
 book, study the following paragraphs: 
 
 Form 18 C. The form given illustrates a columnar cash book 
 adaptable to a wholesale or a wholesale and retail business, either 
 departmentalized or not. A change in one or two headings will 
 adapt it to a voucher system, to manufacturing, or to a commis- 
 sion business. 
 
 i 
 
 On the Receiving Side, beginning with column No. 1, is the 
 date. Column No. 2 contains the name of the person from whom 
 cash is received and any other explanatory matter. Column No. 3 
 shows the titles of such accounts as are posted to the general 
 ledger, direct from the entry. Column No. 4 contains the post- 
 marks. Column No. 5 shows the amounts to be posted direct to 
 the general ledger. These items consist of a number of first 
 entries, and, at the close of the month, the totals from columns 
 6, 7. and 8 which are transferred to it. Columns Nos. 6 and 7 are 
 considered together; No. 6 shows the credits to customers who 
 have remitted on book account. No. 7, the amounts of cash dis- 
 count allowed them. For example, on Nov. 4, E. C. Horton re- 
 ceives credit. $86.72. for payment of his invoice of Nov. 2, (11-2). 
 He was allowed $1.73. cash discount, having actually paid $84.99 
 in settlement of that item', as shown in the net cash column, No. 9. 
 Column No. 8 shows the total of the miscellaneous cash sales, made 
 during the day. This total may be taken from cash registers, a 
 
THE CASH BOOK 131 
 
 list of cash sales tickets on sales sheets, or otherwise totaled on 
 first records before transfer to the cash book. Column No. 9 shows 
 cash actually received, which has previously been entered for post- 
 ing in one or several of the columns Nos. 5, 6, 7 and 8. Column 
 No. 10 shows the extensions from column No. 9, agreeing with the 
 deposits as made. On the last day of the month, any cash re- 
 ceived after banking hours is entered on a deposit ticket, and de- 
 posited the next day separately from the receipts of the next day. 
 By this means, the entire receipts of the month may be extended 
 to the deposit column. The footing of the deposits column is the 
 total cash debit. 
 
 When the cash book is balanced, the entries of the receiving 
 side are proved correct by comparing the total of columns Nos. 
 5, 6, and 8 diminished by the total of column No. 7, with the total 
 of the net cash column. When found correct, the totals of col- 
 umns Nos. 6 and 8 are carried down to the general column, to be 
 posted as credits in the general ledger, and the total of column 
 No. 7 is carried to the general column to be posted as a debit in 
 the general ledger. 
 
 On the Paying Side, columns Nos. 11, 13, 14, 15, and 16 are 
 used for cash credits like the columns Nos. 1, 2, 3, 4 and 5 for cash 
 debits. Columns Nos. 17 and 18 show debits to creditors on book 
 account, and cash discounts allowed, the net remittances being 
 entered in column No. 21. All payments are niade by check, so 
 that the column headed Checks is the net cash column. Items too 
 small for a check are paid by the cashier out of a fund which is 
 charged to an account in the ledger — see check No. 2. When ttie 
 cashier needs more money for small payments, he turns in the 
 voucher for the currency payments he has made, and takes a 
 check for their amount, which leaves him with the original ex- 
 pense fund of $50 — see check No. 13. Column No. 19 shows pay- 
 ments which will be added, and charged to Purchases at the end 
 of the month. Column No. 20 shows all items chargeable to Ex- 
 pense. In a business sufficiently well organized to use this form 
 of cash book, there would unquestionably be several subdivisions 
 of the Expense account. It is impracticable to insert, in a com- 
 pact cash book, columns for such subdivisions. To distribute the 
 items in this column, post them to the expense book, where they 
 can be distributed to the extent desired. 
 
 Before balancing the cash book, the disbursements are proved 
 by adding the sums of columns Nos. 16, 17, 19, 20 and subtracting 
 from the total the sum of column No. 18. The result should equal 
 the sum of column No. 21. Columns Nos. 17 to 20 are carried to 
 the general column for posting, as on the side of the cash book for 
 receipts. The balance is then entered in the column No. 21, and 
 after ruling and balancing, is carried below the ruling to column 
 No. 10. 
 
. CHAPTEE XV 
 
 THE SALES BOOK 
 
 75. A large share of the bookkeeping work in most 
 concerns is given to sales records. Hence, any means 
 of arranging and abbreviating selling records so as 
 to reduce the clerical labor involved, results in an 
 appreciable saving of labor. The matter of saving time 
 and labor in connection with sales records is deemed so 
 important, that a number of distinct systems have been 
 devised. A suitable one for a given business may be 
 selected from these. A system suitable for recording the 
 sales of a retail grocery, or meat market, would be en- 
 tirely inadequate for recording the sales of a retail 
 lumber yard. Neither of these would be suitable for a 
 wholesale grocery, dry goods or drug house. In this chap- 
 ter, systems of sales records for typical conditions are 
 discussed. 
 
 75 B. The ordinary record for merchandise sold 
 (see Form 13 C), commonly called, in the office, the Sales 
 Book or Order Book, is ruled much like a journal. 
 Journal ruling will do very well for the purpose, although 
 some of the vertical lines of the journal are not needed 
 to record the sales. In the form, the date of the sale is at 
 the left; the name of the buyer and the terms follow on 
 the^same line. Below, in the explanatory space, are the 
 items extended into the first money column. The total 
 is carried to the second column. Discounts allowed at 
 time of sale should be deducted, before carrying the 
 charge to the second column. If the sale is for cash, the 
 amount is charged to the Cash account (see cash sale 
 Nov. 2 or Nov. 24, charged to Cash on Form 13 B). If 
 the sale is made on book account, the amount is posted 
 to the debit of the customer's ledger account. (See charge 
 sale Nov. 7 posted to 131.) If the merchandise is -sold 
 for a note, the amount is charged to Notes Receivable ac- 
 
 132 
 
THE SALES BOOK 133 
 
 count, in the same manner as a charge sale is to an indi- 
 vidual account. 
 
 The sales book is footed and the total, at the end of 
 the month, is posted to the credit of Sales account. (See 
 total, Nov. 30, posted to Form 13 F.) Thus, if the sales 
 book has the correct total before final posting, there will 
 be entered in the cash book and posted to the ledger an 
 aggregate of charges equal to the credit posted to Sales. 
 
 75 C. The Duplicate Sales Book contains blank bill 
 forms, one or several to the page, perforated at the mar- 
 gins, so that the bills may be removed and delivered to 
 the customers. The sheet under the bill to be delivered, 
 is a duplicate, to be retained and posted from, as from 
 an ordinary sales book. The copy of the bill delivered is 
 made on the duplicate sheet by means of carbon paper in- 
 serted between the sheets. This enables the billing clerk 
 to make the bill and the office record at one writing. The' 
 duplicate sheet is often on paper of a different tint from 
 the bill sheet, so that they may be distinguished readily. 
 
 This system is good in any bulk merchandising or 
 service business, where the items billed are comparatively 
 uniform in number. Other systems of duplicate billing 
 are described later. 
 
 75 D. Shopkeepers' Bill and Charge System. Gro- 
 cers, butchers, and other shopkeepers frequently have 
 regular customers to whom they sell daily on account. 
 In order to avoid the labor of posting the daily charges 
 to customers' accounts, it is quite common to keep a 
 separate bill and charge book for each customer. Such 
 a book contains a number of sales slips alternating 
 with record slips for carbon duplication. When an 
 order is filled the sale slip shows the items, and these, 
 as entered, are copied on the duplicate by means of a 
 carbon paper device. At the top of the money column 
 of a charge slip and duplicate, the. balance due has 
 been carried from the v previous slip. This amount is 
 added in with the extensions of the present slip, and 
 the total carried forward to the following slip and 
 duplicate. Thus the amount owed by the customer is 
 
134 RULES 
 
 always apparent both on the bill and the duplicate, when- 
 ever an order is filled. If the customer makes a payment 
 on account, the amount is entered on the following slip 
 and subtracted from the balance carried forward. (See 
 Forms 1.7 F and 17 G.) 
 
 The bill and charge books for the several customers 
 are arranged in a case in the order of the customers' 
 names taken alphabetically. 
 
 The total of accounts receivable may be found at any 
 time by adding the balances shown in these books. 
 
 75 E. In the wholesale business, where orders are 
 taken largely by traveling salesmen, or from the mail, 
 and where the great volume of business demands close 
 daily attention to profits and expenses, the following 
 described system is in general use : 
 
 The orders for goods, whether coming from traveling 
 salesmen, from the mail, or by telephone, or from a 
 customer at the counter, are placed on uniform order 
 blanks, showing buyer, quantity of each item, prices, 
 routing, and terms. The order blanks also have mem- 
 oranda spaces to designate the salesman who took 
 the order, the credit man who passed it, the shipping 
 clerk who filled it, the bill clerk who billed it, the carrier 
 by which it was forwarded, and the department from 
 which the goods were taken, if the stock is in depart- 
 ments. These spaces are filled by the initials of the re- 
 sponsible persons through whose hands the order passes 
 while being disposed of. 
 
 After the order is approved by the credit man, it is 
 entered in an order register from which it receives its 
 number. This order register is kept as a check on the 
 person or department that fills the order. 
 
 When filled, the shipping clerk places his initial in 
 the blank space of the sheet provided for that purpose, 
 and returns it to the office where it is marked off the 
 order register. The order sheet is then passed to the 
 bill clerk who makes out the bill for it, which is mailed 
 to the customer. After the bill clerk has finished the bill- 
 
THE SALES BOOK 135 
 
 ing, the order sheet is passed to the bookkeeper, who 
 posts the charge to the debit of the customer's ledger ac- 
 count. After posting to customers' accounts the loose 
 order sheets are assembled, placed in numerical order, to 
 make sure that none are missing, and bound in a loose- 
 leaf binder. 
 
 At the close of the month, the sheets in the loose-leaf 
 binder are totaled, (an adding machine should be used 
 where possible) and the total posted to the credit of the 
 Sales account; or if the store is departmentized, the 
 credits would be divided among the various Department 
 Sales accounts, through sales detail sheets. The debit 
 amounts to balance these credits, have already been 
 posted to the customers' accounts in a complete ledger, 
 or, if the customers' accounts are kept in a subsidiary 
 ledger, the total sales would be posted to the debit of 
 Accounts Receivable (the controlling account) in the 
 general ledger. 
 
 Note. — Before placing these order sheets in a binder, if daily 
 profits are to be computed, the sheets will be passed to the profit 
 clerk, who, by comparison of cost and selling prices, will compute 
 the profit on each item sold, and show from their total, the daily 
 gross profit on sales. 
 
 When the orders are sent in by different salesmen, 
 the sales manager can satisfy himself as to the amount 
 of sales each salesman makes, by assorting the sales sheets 
 and entering the amounts in columns headed by sales- 
 men's names. 
 
CHAPTER XVI 
 
 THE PURCHASES BOOK 
 
 76. The records of merchandise bought are kept in 
 different ways, depending on the volume, terms of pur- 
 chase, and other circumstances, as well as on the require- 
 ments of the general accounts affected. For example, the 
 records of merchandise bought in a department store 
 must be kept in different form from those of a store not 
 departmentized. Some kinds of business require con- 
 stant ready reference to past itemized invoices, when 
 future orders are placed; some do not. Some require a 
 method for determining maturity dates of invoices, in 
 order to take discounts ; some do not. The following de- 
 scribed systems for records of trading purchases are suit- 
 able for most conditions : 
 
 76 B. The ordinary record for trading goods bought 
 (Form 13 D), called purchases book, bought book, or in- 
 voice book, contains the buying records entered in form 
 similar to the records in an ordinary sales book, showing 
 date, from whom bought, terms, amounts of items ex- 
 tended in the first column, and the total amount in second 
 column. 
 
 The amount of an invoice bought on account is 
 posted to the credit of the seller's account (see entry 
 Nov. 2, posted to Form 13 H) ; the amounts of merchan- 
 dise bought for cash are balanced by entries on the credit 
 side of the cash book (see entry Nov. 6, balanced by cash 
 payment in Form 13 B); the amounts of purchases for 
 notes or acceptances are posted to the credit of Notes 
 Payable. 
 
 The purchases book is footed at the end of the 
 month, and the total is charged to Purchases account, in - 
 the ledger. (See total Nov. 30, posted to Form 13 G.) 
 Thus, if the purchases book is footed correctly before 
 posting, there will be carried to the cash book and 
 
 136 
 
THE PURCHASES BOOK 137 
 
 ledger, credits that, in the aggregate, will equal the total 
 carried to the debit of Purchases account. 
 
 76 C. Buying Records Suitable for Extensive Busi- 
 ness. In most concerns, trading purchases are made on 
 account subject to discount for early payment. Points 
 in the record to keep in mind are (1) to give credit to the 
 firm from whom bought on account (if not on account, 
 credit Cash or Notes Payable) ; (2) to make a monthly 
 charge to the Purchases account for the total. 
 
 In order to insure payments without loss of discount 
 or credit, a record should also be kept of the maturities 
 and discount dates of the invoices payable. Also, the 
 invoices themselves should be kept where they are readily 
 accessible for reference. 
 
 "When the. invoice is received, the following steps are 
 taken for its disposal: 
 
 (1). Compare the items in the invoice with the 
 actual goods received, checking off the items that agree. 
 Place the pencil check marks before the items. The 
 check marks show that the goods were actually received 
 as billed, that there were no shortages or omissions. 
 
 (2). Verify the extensions, that is, see that the 
 multiplications and additions on the bill are correct. 
 Indicate these verifications by check marks also. 
 
 (3). See that the goods received agree with your 
 order as to terms, items, prices and samples. 
 
 (4). If any errors are found in the invoice, report 
 such errors at once to the seller, asking for a corrected 
 invoice, or other adjustment as the case may require. Do 
 not post any entry until the adjustment is completed. 
 
 (5). If the invoice is found correct, indicate its 
 verification by writing "0. K." or other words signi- 
 fying that it is ready for entry. 
 
 (6). The verified invoice should be given a one-line 
 entry in the purchases register, from which it is posted 
 to the creditor's account, if a credit purchase. 
 
 Note. — In department bookkeeping, it is customary for whole- 
 salers to enter the full amount of the invoice in the invoice ledger, 
 allowing the discount, when paid, to go to an account of Purchase 
 
138 RULES 
 
 Discounts. In a retail department store, the discounts are usually 
 deducted and the bills entered at the net amount. The reason for 
 this is, that the manager of each department (also called the 
 buyer) is considered entitled to show profits for his department, 
 based on the best price, including discount, that he is able to se- 
 cure on his purchases. In the latter case, if the management of 
 the store should fail to take advantage of discounts — an unusual 
 occurrence — this discount would be chargeable to Office Expense, 
 and not to the cost of purchases for the given department. 
 
 (7). After the invoice is entered and numbered, it 
 is placed in a file with other invoices from the same firm. 
 
 Note. — Invoices are sometimes pasted into invoice books, from 
 which they are posted to the accounts. This kind of invoice book 
 is going out of use, because it is necessarily bulky, inconvenient, 
 and difficult to post from; besides, the books that have been filled 
 occupy much storage space. 
 
 (8). When an invoice is paid, it is taken from the 
 file and sent to the creditor to be receipted and returned. 
 When a receipted bill is returned, it is again placed in 
 the file. Remittances may be made without sending the in- 
 voices with the remittance ; in that case, a receipt should 
 be returned, which is filed. 
 
 (9). At the close of the month, the footings of the 
 invoice register are charged to Purchases account (or to 
 department accounts if these are carried). The credits 
 have already been posted to the various accounts pay- 
 able. If the accounts payable ledger is subsidiary, the 
 total is posted to the proper controlling account in. the 
 general ledger. 
 
 76 D. The Voucher System for accounts payable, 
 as commonly used, provides a substitute for ledger ac- 
 counts with creditors by using voucher forms on which 
 the amounts payable are entered, each form describing 
 one invoice or payment. 
 
 When an invoice payable is allowed, a blank form 
 called a voucher form, or a voucher jacket, is filled in 
 with the written memoranda necessary to describe 
 the invoice, and to show the account or accounts to be 
 charged for the purchase. The form is given a one-line 
 record in a vouchers payable register. This is a col- 
 umnar special journal, having debit columns headed to 
 show the different ledger accounts debited for the several 
 purchases which may include merchandise, 'material for 
 
THE PURCHASES BOOK 139 
 
 manufacture, expense material, services or other items. 
 A credit column, headed Vouchers Payable, shows the 
 amounts of all vouchers. The lines in the voucher regis- 
 ter are numbered, and the numbers are transferred to 
 the vouchers, as the latter are recorded. After record* 
 the invoices are folded in the voucher jackets, and placed 
 in a clip or file, in the order of their maturity, those 
 maturing first being at the top. 
 
 When an invoice is to be paid, the voucher jacket 
 is taken out of the clip and sent, with the check or draft, 
 to the payee. The latter is expected to fill in a blank 
 receipt printed on the voucher jacket, and return it; 
 On the return of the voucher jacket, it is- placed in a 
 file in numerical order with the other receipted vouchers. 
 The invoice is placed in a separate file, that contains 
 all the invoices from the given firm. 
 
 By this means, the unpaid invoices are always before 
 the bookkeeper in the order of their maturity, and re- 
 ceipts for paid invoices can be referred to by number. 
 There is a separate file for each trade creditor, where 
 the inv ices themselves are kept, and where they are 
 easily accessible. 
 
 When the invoices are not numerous, the same prac- 
 tical result may be secured by stamping on the invoice 
 itself, the form for the voucher description required, 
 and handling the invoice in like manner as a voucher 
 jacket is handled. 
 
 The vouchers payable register is footed, ruled and 
 posted monthly. The several totaN of the charge col- 
 umns are posted to the debit of the ledger accounts, and 
 the credit column total to the credit of Vouchers Pay- 
 able. The Vouchers Payable account is equivalent to 
 Accounts Payable, as the latter is kept when the voucher 
 system is not used. When a voucher system is used, 
 the cash book requires a column on the paying side for 
 Vouchers Payable. Thus, in Form 18 0. the heading of, 
 column No. 17, Accounts Payable, would be changed to 
 Vouchers Payable. 
 
CHAPTER XVII 
 
 THE INVENTORIES BOOK 
 
 77. The Inventories Book presents a record of all 
 floating assets and liabilities under the dates when taken. 
 In a small business, inventories may be listed in the jour- 
 nal; but in an extensive business, a separate book is 
 necessary, because of the page space required to list a 
 large stock of goods, also because if kept in a 
 separate book, inventories for different accounting 
 periods are easily accessible for comparison. 
 
 In making the inventories, both assets (Prin. 77 B) 
 and liabilities (Prin. 77 C) are considered. 
 
 77 B. Among asset inventories, the most important 
 is that of trading goods in stock, which is entered, as 
 shown in Form 4 H, to show the quantity and value. 
 
 In a manufacturing business, a list of materials in 
 stock, to be used in manufacturing, is likewise entered 
 in the inventories book, to show quantity on hand, and 
 value. 
 
 It frequently happens that material or labor not 
 consumed, that has been bought and charged to expense, 
 is carried over from one accounting period to the next. 
 This, if of considerable value, should be entered as an 
 expense inventory. 
 
 Interest earned by the business, but not yet received, 
 should also be entered in the inventory book, to show 
 the amount accrued, which is a part of the earnings for 
 the period. 
 
 Any other accrued earnings of the business, which 
 have not been entered, but which have an asset value, 
 should be listed in the inventories book. 
 
 The total asset inventories are shown in a journal 
 entry (see Form 14 D) debiting Inventory account 
 with the entire amount, and crediting Trading account 
 for trading goods. Materials account for materials, 
 
 140 
 
THE INVENTORIES BOOK 141 
 
 Expense account for value remaining that had been 
 previously charged to expense, and Interest account for 
 interest earned and included in the inventory. 
 
 77 C. Liability Inventories consist of otherwise un- 
 recorded amounts payable at the close of the accounting 
 period. These should likewise be entered in the inven- 
 tory book. Among them, are interest accrued on bills 
 payable, and wages earned by employees but not paid. 
 The purpose of entering these in the liability inventory 
 is to keep an account of the losses assignable to the 
 given accounting period, even though they have not been 
 paid. 
 
 The total liability inventories are shown by a jour- 
 nal entry charging Interest, Expense, or whatever titles 
 would be charged had the items owed been paid, and 
 crediting Liability Inventories account, by items. (See 
 Form 14 N, transferred to 14 D.) 
 
 77 D. Depreciation is taken into account at the 
 time the inventories are entered. A record of the amount 
 and percentage of depreciation may appear with the 
 other items, in the inventories book. 
 
 The amounts of depreciation are shown by a journal 
 entry debiting the proper operative account, and credit- 
 ing Reserve for Depreciation. (See Form 14 N trans- 
 ferred to 14 D.) 
 
CHAPTER XVin 
 
 SPECIAL BOOKS 
 
 78. When several persons are doing the bookkeep- 
 ing work in a single office, it is generally necessary to 
 divide the work of making first entries among assistants, 
 each one recording a certain variety of transactions be- 
 longing to his division of the work. These divisional 
 records are made in special books, so arranged that the 
 aggregate results of the transactions recorded in any one 
 book may be summarized on tickets for the head book- 
 keeper, who transfers the entries from the tickets to the 
 posting books. 
 
 Special books are, to a large extent, ruled and 
 printed to suit the business where used, new forms being 
 made as needed. They are necessary in every large office. 
 In a bank, the following special books are needed: 
 (1). Individual ledger, in which the individual book- 
 keeper enters the deposits and checks and extends cus- 
 tomers' totals. At the close of the day he passes to the 
 head bookkeeper tickets crediting Deposits for the total 
 of the day's deposit slips, and charging Deposits for 
 the total of the day's checks. (2). Loan and discount 
 register, in which the discount clerk records all paper 
 discounted by the bank. At the close of the day, he 
 passes to the head bookkeeper, tickets charging Loans, 
 Discounts, and Accrued Interest, and crediting Discount. 
 (3). Draft register, in which the draft clerk enters the 
 record of drafts sold. Tickets are made crediting the 
 drawee banks for the totals of drafts sold and Exchange 
 for the total of exchange collected from sale of drafts. 
 (4). Remittance register, in which the remittance clerk 
 enters all drafts and cheeks cashed during the day, 
 which are sent to correspondent banks for credit. He 
 passes to the head bookkeeper tickets charging the banks 
 to which remittance is made. (5). Collection register, 
 
 142 
 
SPECIAL BOOKS 143 
 
 in which the collection clerk enters the paper left for 
 the bank to collect. As he collects the items, he makes 
 separate tickets crediting the persons for whom col- 
 lected, (if a depositor, through the individual ledger; if 
 an out-of-town person, through the draft register) also a 
 ticket crediting Collection. 
 
 A local agent of a railroad company makes the rec- 
 ords pertaining to his office in special books and forms: 
 among them, the local cash book, freight forwarded book, 
 freight received book, ticket summary book, etc. Re- 
 ports or abstracts from these books are forwarded to 
 the general offices of the company, and from these the 
 general books are compiled. 
 
 In the manufacturing business, the various elements 
 of cost entering into the product as a whole, or by the 
 piece, are collected on various special forms and books 
 as the work progresses. The final results or general 
 totals of these daily records are to be transferred td 
 and debited in the posting books. 
 
 In a retail store, the cash sales are first recorded in 
 cash registers and sales sheets, from which the aggre- 
 gates are carried to the cash book. 
 
 A traveling salesman makes first records of his 
 expenses in a pocket expense book, from the total of 
 which a ticket is made for entry in the office cash book 
 or journal. 
 
 From the above examples, it is readily seen that all 
 special books should be preserved as a part of the records 
 of the office. 
 
CHAPTER XIX 
 
 AUXILIARY BOOKS 
 
 79. Auxiliary books are books containing records 
 and reminders to aid in the conduct of the business, but 
 nothing that is to be posted. They have no articu- 
 lation with the posting books, and can be added to or 
 dropped from an office system when desired. Some 
 common auxiliary books are mentioned here : 
 
 The notes or bills receivable book is arranged for re- 
 cording notes and accepted time drafts receivable. Each 
 item is described on one writing line divided into spaces 
 to show the note number, maker's or payer's name, to 
 whom given, date of paper, term, maturity, rate of inter- 
 est, and other description, if any. 
 
 The number in the record is written on the note, and 
 the note is thereafter referred to by number. This 
 book exhibits, in compact form, the information about 
 all notes held by the concern. Where notes are re- 
 ceived only at intervals, there is no very good reason 
 for connecting this book with the posting books, as the 
 posting entries can be made direct from the transactions. 
 But when notes are received actively, it is better to make 
 this a posting rather than an auxiliary book and transfer 
 the debit to Notes Receivable from it by daily totals, as is 
 done in banks. (See Prin. 78.) When the collections 
 from payment of notes are very active, the credits of 
 Notes Receivable may be posted to the bill book from the 
 cash book, thus making the notes receivable book a sub- 
 sidiary ledger, called the note ledger. 
 
 The notes payable book is similar to the notes re- 
 ceivable book and is governed by the same considera- 
 tions. 
 
 A tickler is a book subdivided into spaces, each space 
 to contain memoranda of the maturities payable or re- 
 ceivable on a given date. The spaces are dated, begin- 
 
 144 
 
AUXILIARY BOOKS 145 
 
 ning with January 1, January 2, etc., and extend through 
 the entire year. A memorandum of a note or other 
 obligation due on a future date, is placed in the space 
 reserved for that date. Maturities receivable may be 
 written in black ink and maturities payable in red ink, 
 to distinguish them. This book is merely a reminder 
 kept for daily reference in order that no collection or 
 payment may be overlooked. When the items are at- 
 tended to, they may be checked off. 
 
 A very practical form of tickler for use when the items of 
 any one day are not very numerous, consists of a chart, ruled in 
 twelve vertical columns, and thirty-one horizontal lines. The ver- 
 tical columns should be headed by the months beginning with 
 January, ending with December. The lines should be numbered 
 1, 2, 3, etc., to 31, to allow one line on the page for each day of 
 the month. Reminders for given dates during the year can be 
 written in at the intersection of the lines and the vertical col- 
 umns; thus a reminder for April 10, would be written where the 
 fourth vertical column crosses the tenth horizontal line. 
 
 The advertising list is a book containing addresses 
 or information about prospective or regular customers to 
 whom advertising matter is sent. The addresses are ar- 
 ranged on the scheme of classification, either by surnames 
 or towns, alphabetically arranged throughout the entire 
 list, or arranged by states, or by other geographical sec- 
 tions. Such lists must be constantly revised, by adding 
 new addresses, and by dropping off addresses of un- 
 desirable firms. Care in keeping this list correct and 
 reliable is usually appreciated by any business manager. 
 
 Any list that is being constantly revised, by adding 
 or dropping names, is most advantageously kept on cards, 
 one card for each name. 
 
 The customers' liability ledger is an auxiliary book 
 in which a credit man enters such information as he 
 gathers concerning the debits already contracted by cus- 
 tomers. The facts therein recorded are of value to him 
 in determining the amount of credit to be allowed in 
 future dealings. 
 
 There are many kinds of auxiliary books. Their 
 scope and general purpose may be gathered from the 
 foregoing examples. 
 
CHAPTER XX 
 
 THE LEDGER 
 
 80. In this division we discuss the ledger with ref- 
 erence to its use by the bookkeeper. The ledger plan of 
 accounts has been discussed in Prin. 21-21 C. 
 
 The ledger may contain all of the accounts of the 
 business in one cover, or it may be divided into several 
 books each containing a certain section of the accounts. 
 (Prin. 80B-C.) 
 
 The ledger may consist of a bound book, a loose-leaf 
 book, or a case of cards. Each of these forms have ad- 
 vantages depending upon conditions. (Prin. 80F-G-H.) 
 
 Whatever the form, a bookkeeper should carefully 
 consider the makeup of his ledger in order to provide for 
 (1) A convenient arrangement of accounts for posting, 
 making trial balances, and statements (Prin. 80 B) ; (2) 
 sufficient space for all entries likely to be made (Prin. 
 80 1) ; (3) indexing of accounts for prompt reference 
 (Prin. 80 E) ; (4) size and binding to suit the kind and 
 number of accounts. 
 
 80 B. The Complete Ledger contains all of the ac- 
 counts in one book, with the exception of the cash account 
 when the latter is kept in a cash book. 
 
 In the ordinary arrangement, real accounts come 
 first and the nominal accounts follow. 
 
 The part containing the real accounts comprises the 
 section of assets and liabilities with their summaries in 
 proprietorship accounts, and the part containing the 
 nominal accounts, the section of incomes and expenses 
 with their summaries in the Profit and Loss account. 
 These two parts belong in one book, although occasions 
 arise where they are kept under separate book covers. 
 
 In the first section, the asset accounts are placed 
 first, these being followed by the liability accounts. Of 
 the asset accounts, the quick assets are given first place, 
 
 146 
 
THE LEDGER 147 
 
 followed, in order, by the assets less easily convertible 
 into cash; then come those most remotely convertible, 
 and finally those that are not convertible at all. Follow- 
 ing these are liability accounts, in like order, followed 
 by proprietorship accounts. 
 
 In the second section, the order of accounts is not 
 so easily outlined, owing to the great diversity in kinds 
 of income and expense. The following order is good in a 
 trading or manufacturing ledger: (1) Sales, together 
 with any accounts that close into sales, such as Return 
 Goods, Allowances, Sales Discount; (2) Purchases, Manu- 
 factures, or other accounts showing cost of sales; (3) 
 Trading, in which Nos. 1 and 2 are combined to show 
 gross profit; (4) Business Expenses; (5) Secondary In- 
 comes and Expenses; (6) Profit and Loss. 
 
 Note. — In a complete ledger, it is not easy to reserve space 
 for the accounts payable and receivable in the order given above, 
 although that is the order occupied by them in a financial state- 
 ment, or by their controlling accounts in a general ledger (Prin. 
 80 C). For this reason, accounts payable and receivable are given 
 the remainder of the ledger, following the Profit and Loss account, 
 the accounts payable being given a number of pages that can ordi- 
 narily be determined, and the accounts receivable all of the 
 remainder. 
 
 80 C. General and Subsidiary Ledgers. As a busi- 
 ness increases in volume, it becomes more satisfactory to 
 divide the complete ledger into one general ledger and 
 one or more subsidiary ledgers. 
 
 A subsidiary ledger contains any group of accounts 
 of the same class, when the accounts are too numerous 
 to find place in a complete ledger. Thus, all the ac- 
 counts receivable may be placed in a subsidiary ledger; 
 likewise, the accounts payable, the accounts of notes re- 
 ceivable, of notes payable, of shipments, of consignments, 
 of mortgage loans, and other kinds of accounts, as they 
 become numerous, may be taken from the complete led- 
 ger and placed in separate subsidiary ledgers. 
 
 When a subsidiary ledger is kept, this ledger is 
 represented in the general ledger by a controlling ac- 
 count. This is an account that shows the aggregate of 
 debits and credits posted to a subsidiary ledger. The 
 
148 RULES 
 
 aggregates of postings to subsidiary ledgers are usually 
 computed and posted to the controlling accounts monthly. 
 By including these aggregates found in the controlling 
 accounts, a trial balance of the general ledger may be 
 taken without reference to the subsidiary ledgers. 
 
 A separate list of the accounts open in any subsid- 
 iary ledger is verified by comparing the total balances of 
 accounts, with the balance of the subsidiary ledger's 
 controlling account in the general ledger, and should 
 equal it. The following paragraphs explain in detail 
 the kinds of accounts that would be taken out of the 
 complete ledger and placed in subsidiary ledgers or other 
 books having the same relation as subsidiary ledgers. 
 These accounts are considered in about the order that 
 would probably be followed in taking them out of the 
 complete ledger because of expanding business. 
 
 80 D. Cash entries are ordinarily entered in a cash 
 book, instead of in the cash account of a ledger. Fre 
 quently a controlling account, entitled Cash, is kept in 
 the general ledger. To this controlling account, the 
 bookkeeper posts monthly, charging the total cash re- 
 ceipts and crediting the total payments. In taking a 
 trial balance, the balance of the controlling account can 
 conveniently be used, instead of referring to the cash 
 book itself. 
 
 It is usual, however, to regard the cash book as 
 an account, under separate cover, yet belonging to the 
 general ledger and requiring no controlling account. 
 When thus kept, a trial balance would require that the 
 balance be taken from the cash book, along with the bal- 
 ances of the accounts found in the ledger. 
 
 Accounts receivable may be kept in a subsidiary 
 ledger called "Accounts Receivable Ledger,' ' "Custom- 
 ers' Ledger," "Sales Ledger," or some similiar name, 
 and the controlling account may be entitled, Accounts 
 Receivable, Trade Debtors, or the tijtle may be the name 
 of the ledger itself. 
 
 The customers' debits are posted to the customers' 
 
THE LEDGER 149 
 
 accounts in the subsidiary ledger, and the monthly totals 
 of these debits are posted to the debit of the controlling- 
 account in the general ledger. The customers ' credits 
 for the month are posted to the customers' accounts in 
 the subsidiary ledger, and the monthly totals of the 
 credits are posted to the credit of the controlling account 
 in the general ledger. 
 
 Accounts Payable, Notes Receivable, Notes Payable, 
 Capital Stock, Consignments, Shipments, Agents' Ac- 
 counts, Branch Store, are some of the controlling ac- 
 counts that may be kept in general ledgers to represent 
 the named classes of accounts kept in subsidiary ledgers, 
 as explained' in detail in foregoing paragraphs. 
 
 80 E. The Index. The page of a ledger account is 
 promptly located by means of an index. The index may 
 be one or more sheets bound in the ledger, on which the 
 account titles, followed by the ledger page, are written 
 in alphabetical order (Form 12 B) ; or it may be a whole 
 book in itself with capacity for as many as 100,000 
 names. In large books the names are arranged accord- 
 ing to the first two or three letters of the surname, as 
 are the words in a dictionary. 
 
 The bookkeeper should make it a rule to index each 
 account when it is opened. 
 
 Loose-leaf and card ledgers often do not require any 
 index, because the sheets or cards can be arranged in 
 alphabetical order, enabling one to locate an account 
 from its place in the ledger without need of a special 
 index. 
 
 80 F. Bound Ledger. The bound ledger, under 
 certain conditions, has advantages over the loose-leaf or 
 card ledger. ' It is especially good as a general ledger, for 
 this book contains, in the main, monthly summaries, 
 which do not require much space, but which are used for 
 reference long after their date. A bound general ledger 
 can be arranged to last through the entire history of a 
 business. If all the leaves remain in a bound book, we 
 can easily assume that the records are intact. 
 
150 RULES 
 
 A bound complete ledger of a small business is often 
 better than the loose-leaf form, because it costs less, does 
 not require any transfer apparatus, and can be kept in 
 one cover. This is worth considering, especially in an 
 office not well provided with conveniences for the safe- 
 keeping of office books and papers. 
 
 80 G. The Loose-Leaf Ledger consists of a binder, 
 and the sheets, the latter being securely fastened in, 
 although removable at pleasure. Since the leaves can be 
 rearranged so as to keep them in any desired order, the 
 loose leaf ledger has replaced the bound ledgers wherever 
 a given order of accounts is to be adhered to in either 
 general or subsidiary ledgers. Subsidiary ledgers 
 especially contain many accounts which may either ex- 
 tend unexpectedly over several pages of space, or else 
 may be closed at any time. A bookkeeper would not find 
 it convenient to have a great many closed accounts* filling 
 the working ledger, nor can he, in the case of an account 
 that has overrun the space provided for it, conveniently 
 forward it to any odd page where he might happen to 
 find room, as was done before loose-leaf ledgers were 
 used. Also, it adds considerably to a bookkeeper's work 
 to index numerous accounts and afterward have to locate 
 them through the index. With a loose-leaf ledger, the 
 bookkeeper can remove closed accounts entirely, thus 
 keeping the whole ledger for active accounts. If an ac- 
 count runs over the leaf provided for it, another leaf can 
 be inserted and the account continued. The bookkeeper 
 can file all removed leaves in Transfer Binders. This is 
 considered care sufficient for settled accounts that are 
 kept merely for reference in the matter of future credit 
 information. As the transferred accounts can be inserted 
 where desired, they may be in alphabetical order by sur- 
 names ,or towns, or in any other order that may be more 
 convenient for self-indexing. 
 
 80 H. The Card Ledger consists of ledger accounts 
 kept on cards of suitable size and arranged in drawers. 
 The cards can be arranged on any plan possible with a 
 loose-leaf system, and are more easily sorted from one 
 
THE LEDGER 151 
 
 division to another. When there are a great many ac- 
 counts, and it is desired to make statements, or otherwise 
 go over them in a very short time, the cards can be di- 
 vided among many clerks, who can each do his share of 
 the work, and thus complete the whole quickly. The 
 card ledger is convenient for transient accounts, which 
 are to be referred to by a number of persons at the same 
 time, during the day's transactions. It is also convenient 
 for accounts with customers who are moving about in 
 territories for which separate sales ledgers are kept. 
 
 80 1. Space for Ledger Accounts. If a bound ledger 
 is to be opened, consider the number of pages in the entire 
 ledger and divide that space among the accounts, giving 
 each account the number of pages you think it will need 
 by the time the entire ledger is filled. If you have a 
 former ledger to guide you, allow space as seems justi- 
 fied by past experience. In assigning account space in 
 a general ledger, remember that controlling accounts, as 
 a rule, are posted but once a month, so that from one to 
 three lines per month will suffice. On a basis of three 
 lines per month, 36 lines would be enough for a year, or 
 360 lines for 10 years. This can easily be reduced to 
 pages. Other accounts may require more or less 
 guessing. 
 
 If loose-leaf or card ledgers are used, allow, as a rule, 
 one account for each leaf or card, inserting additional 
 leaves or cards as needed. 
 
 80 J. Posting to Ledgers. Posting comprises a 
 large part of the bookkeeper's work. Any plans that 
 promise increased accuracy or certainty are worth con- 
 sidering, because they may save time. Bad methods of 
 posting, or the absence of a method, may become a habit 
 with a bookkeeper, causing the loss of hundreds of hours 
 of his time in the course of a year, and greatly diminish- 
 ing his earning power. 
 
 When a bookkeeper does not know, from location 
 or from memory, the pages of his ledger accounts, the 
 following method will save time and mental effort. Be- 
 
152 RULES 
 
 fore beginning to post, write, from the index, the account 
 pages in the postmark columns of the posting books, 
 opposite all amounts to be posted. Then post all debits, 
 beginning with the first pages of the ledger and progres- 
 sing to the last, so far as this can be done on a single 
 page of the posting book. Indicate posting by a check 
 mark. It is not a very good plan to write page figures 
 in the posting books during the process of posting, be- 
 cause the page figures (relatively unimportant) would 
 receive attention when the mind should be highly con- 
 centrated upon the smallest possible area of effort. Try 
 to carry as little as possible in mind, except what you are 
 actually writing in the ledger, and where you are writ- 
 ing it. The figures must be absolutely correct and placed 
 in the right accounts. After you have posted all debits, 
 glance back over all pages of the posting book, to see 
 that no entry has been overlooked. If you always make 
 the check mark immediately after posting the entry, 
 you c know that the omission of a check mark means 
 a failure to post the item not checked. 
 
 Post the credits in the same way. Remember that 
 in posting, the habit of doing the same process in the 
 same way is your best protection against errors. If you 
 are not methodical, you may make a slip in posting, in a 
 second, that will cause you hours to discover. 
 
 If you know the pages of the ledger accounts, or if 
 you use a self-indexing ledger, it is a waste of time to 
 place the ledger pages in the post mark column of the 
 posting book. A check mark is sufficient. 
 
 80 K. Verifying the Posting. After all debits 
 and credits are posted to the accounts in a double entry 
 ledger, it is customary to verify the work monthly, or 
 oftener if thought advisable. Since the sum of all 
 debits is equal to the sum of all credits in the posting 
 book, it follows that after the posting is completed, you 
 must have posted an equal aggregate of debits and 
 credits into the ledger accounts; that is, that you have 
 not disturbed the equality of the total ledger debits and 
 
THE LEDGER 153 
 
 credits. The ordinary proofs of posting are given in 
 Prin. .80 L-M. 
 
 80 L. A Proof Sheet is the easiest means of assur- 
 ance that the ledger is in balance. This consists of 
 a list of all the debit and credit account footings ar- 
 ranged in two columns. The equal totals of debit 
 and credit columns tend to show that there was no over- 
 sight in posting the entries. (See Form 12 1.) The 
 proof sheet is quickly taken on two-column paper, or, if 
 an adding machine is at hand, by listing the debits first, 
 then the credits. » ' 
 
 80 M. The Trial Balance is a list of the open ac- 
 count titles, with the balance of each account placed in 
 either the left or the right column accordingly as it is 
 a debit or a credit balance. To make a trial balance 
 requires more time than to make a proof sheet because 
 it is necessary to compute the balances of the accounts, 
 whereas, in the proof sheet only the totals are used. The 
 equality of debit and credit totals in the trial balance, 
 shows the ledger to be in balance. 
 
 Some account totals of a statistical nature, as well 
 as such account balances, may be of interest to the one 
 who examines a trial balance. Such totals may be placed 
 in the explanatory space before the money columns, as 
 illustrated in Form 12 J. 
 
 Note. — A great many accountants call a list of account titles 
 with the debit and credit totals (instead of the debit or credit 
 balances) a trial balance. As a matter of convenience in the dis- 
 cussions arising in this book, the term "trial balance" should be 
 taken to mean a trial balance of account balances, otherwise the 
 term "proof sheet" or "trial balance of totals" is used. 
 
 80 N. When the Trial Balance Does Not Foot 
 Equally. (See Prin. 83 C.) 
 
 80 O. Closing the Ledger involves three important 
 steps: (1) the re-adjustment of the real accounts so as 
 to exhibit the assets and liabilities of the business at their 
 revised valuation at the close of the period; (2) the trans- 
 fer of the balances of the nominal accounts into Profit 
 and Loss, which shows as a result a net profit or a net 
 
154 RULES 
 
 loss; (3) the distribution of the net profit or loss into 
 such accounts as may be determined by the owners. 
 
 The various steps of ledger closing are given in Prin. 
 72 P-72 R. 
 
 80 P. Readjustment of Accounts. "When closing the 
 ledger, the following readjustments should be made as far 
 as applicable: 
 
 The debit balance standing in Inventory account 
 from the beginning of the period should be carried to 
 operating accounts as illustrated in Prin. 72 G, Ex- 
 ample 31. 
 
 The inventories taken at time of closing should be 
 debited in Inventory account and credited in operating 
 accounts as illustrated in Prin. 72 G, Example 32. 
 
 The credit balance standing in the Liability Inven- 
 tory account should be carried to operating accounts, as 
 illustrated in Prin. 72 G, Example 33. 
 
 The liability inventories taken at time of closing 
 should be debited in operating accounts and credited in 
 Liability Inventory account, as illustrated in Prin. 72 G, 
 Example 34. 
 
 The depreciation for the period should be debited in 
 operating accounts and credited in reserve or property 
 accounts, as illustrated in Prin. 72 G, Example 35. 
 
 80 Q. Closing Nominal Accounts. After readjust 
 ment, all nominal account balances should be carried, 
 either indirectly as when Inventory, Purchases and Sales 
 are closed into Trading, which in turn is closed into Profit 
 and Loss, or directly into Profit and Loss. 
 
 Profit and Loss should be closed into an account or 
 accounts of proprietorship. 
 
 After closing, all nominal accounts should be ruled. 
 
 80 R. Balancing Real Accounts. The closing of the 
 ledger does not necessitate balancing the real accounts, 
 but it is advisable to balance cash, accounts of proprietor- 
 ship, and all controlling accounts. 
 
 Accounts in which property is listed should not be 
 balanced, but remain open until the property is dis- 
 posed of. 
 
CHAPTER XXI 
 
 AUDITING 
 
 81. Auditing involves a review of books and rec- 
 ords with attention to their supporting vouchers, or 
 other evidences of their correctness, accuracy or ade- 
 quacy for the purpose intended. 
 
 The special purposes of an audit may be either one 
 or more of the following: 
 
 (1). To prove the mechanical and mathematical >ac- 
 curacy of a set of books. (Prin. 83.) 
 
 (2). * To show that the entries and accounts are true 
 records of actual transactions and existing values. 
 (Prin. 84.) 
 
 (3). To show fraud, or absence of fraud, on the part 
 of officers or other employes of the business. (Prin. 85.) 
 
 (4). To show that books and records kept are suit- 
 able, economical and complete. (Prin. 86.) 
 
 (5). To show, or to verify, an exhibit of the worth 
 of the business and its earning power, for the benefit of 
 the owners or of prospective investors. (Prin. 87.) 
 
 81 B. A general auditor should be a bookkeeper, ac- 
 countant and business man, well informed in commercial 
 law and business mathematics ; and withal, have a faculty 
 of applying sound business principles to . existing con- 
 ditions. 
 
 A special auditor should be familiar with the business, 
 books and conditions of the particular concern which 
 he is to audit. 
 
 In making an audit, there is a certain order of pro- 
 cedure to be followed, as in all other matters pertaining 
 to business records. To follow this order may be all that 
 is necessary, or it may be only the beginning for addi- 
 tional investigations, which may be found necessary be- 
 cause of the insufficiency of the records at hand. 
 
 A bookkeeper may keep a set of books in such a way 
 
 155 
 
156 RULES 
 
 that an audit is merely a formality, or they may be kept 
 in such a way that an auditor will be obliged to rewrite 
 the records from the start. Good bookkeeping is the fore- 
 runner of inexpensive auditing. 
 
 82. General Conditions. Before undertaking an 
 audit, the auditor should determine whether his examina- 
 tion is to cover the entire period from the beginning of 
 a business; or from a given date. If an audit between 
 given dates is undertaken, the prior records are the sub- 
 ject of inquiry only as they affect the audit period. 
 
 82 B. The auditor should first determine the pur- 
 pose of the audit, which may be one or more of the five 
 purposes specified in Prin. 81. His preparation should 
 be in accordance with the purpose. 
 
 82 Q. The auditor should study the conditions of the 
 business and estimate the volume and kind of its business 
 operations, consider the ordinary terms of purchase and 
 sale, investigate manufacturing processes, if any, and the 
 conditions under which the business is operated. He 
 should then make an outline of a system of accounts and 
 books suitable for the business. Having in mind what 
 the books should be, and what they should show, he 
 should make a complete list of the books that actually 
 are kept, separating the principal books from the aux- 
 iliary books. 
 
 82 D. An auditor should prepare a record, setting 
 forth his agreement as to the general conditions of the 
 audit, and covering the important matters connected 
 therewith. 
 
 An auditor's record may contain abstracts from the 
 books; totals, proofs, and computations to verify the 
 books; or it may extend to an entire re-writing of the 
 books , in skeleton form, from the original data. It 
 should be so arranged as to exhibit any vital points that 
 are not brought out in the bookkeeper's records. 
 
 82 E. The amount and kind of work demanded of an 
 auditor depends on the amount and kind of work pre- 
 viously done by the bookkeeper. His researches may in- 
 clude the following: (1) A rearrangement of vouchers 
 
AUDITING 157 
 
 and substitution of missing vouchers; (2) a comparison 
 of the cash account with the bank account; (3) a com- 
 parison of the accounts of customers and creditors with 
 the book records of the persons with whom the accounts 
 are kept; (4) a comparison of the account of invoices 
 with the goods actually received; (5) the substitution of 
 a correct account analysis for a faulty one. 
 
 83. The Audit for Mechanical and Mathematical 
 Accuracy is to show that transactions have been properly 
 entered; that the proper accounts have been correctly 
 debited and credited ; and that the resultant trial balance 
 is correct. Proceed as directed in 83 B to 83 D. 
 
 83 B. Compare the vouchers with the entries. The 
 vouchers consist of invoices, receipts, legal papers, charge 
 and credit tickets made in the office, or any other support- 
 ing records. A note should be made of any entries for 
 which no vouchers are found. They should be supplied, 
 if practicable, or attention to their absence should be 
 called in the auditor's record. 
 
 83 0. When the proof sheet or the trial balance does 
 not foot equally, there is an error in the ledger or in the 
 proof sheet, or there may be several errors to be discov- 
 ered. If the bookkeeper has been careful and accurate, 
 and has reviewed all footings and transfers to the trial 
 balance, and if the audit period is short, one may proceed 
 on the assumption that the discrepancy is in one item, or 
 at the outside, very few items. To locate these, proceed 
 as follows: 
 
 (1). Find which side of the ledger is short and thr* 
 amount of the discrepancy. 
 
 (2). If the error is a number like 1, 10, 100, 1000, 
 or contains a single figure with or without ciphers, revieyv 
 the additions. 
 
 (3). Review post marks on the short side, to dis- 
 cover any omissions in posting. 
 
 (4). Look for the exact amount of the discrepancy 
 on the short side of any posting books. An entry may 
 have been overlooked in posting. 
 
158 RULES 
 
 (5). Look on the short side of the posting books for 
 one-half of the discrepancy (if any even number) which 
 may have been posted, by mistake, to the long side. 
 
 (6). If the discrepancy is divisible by 9, any of sev- 
 eral transpositions may be suspected; thus, 29 for 92, 
 discrepancy 63; $51.60 for $60.51, discrepancy $8.91; 
 $29.64 for $24.69, discrepancy $4.95 ; 10 cts. for $10, dis- 
 crepancy $9.90, etc. In looking for a discrepancy in the 
 cents column, give no attention to figures in the dollars 
 column. 
 
 (7). See if the ledger was out of balance at the 
 beginning of the audit period. This can be found by 
 comparing the accounts, as they formerly stood, with the 
 last previous trial balance, if there was one. It has hap- 
 pened many times that an error in a previous trial balance 
 was discovered,' corrected in the trial balance, but not in 
 the ledger account, with the result that the next subse- 
 quent trial balance was wrong. 
 
 (8). See if the posting-books are in balance for the 
 audit period. A journal, sales book, cash book, voucher 
 register, or other posting-book (especially if it has many 
 columns) may not be in balance as to debits and 
 credits, with the result that the ledger, after posting, 
 could not possibly balance. 
 
 (9). Check back the entries. This means to review 
 every item posted during the period. Although checking 
 back probably involves more labor than all of the above 
 methods, it may often be advisable to do this first, 
 especially if the bookkeeper's work is evidently lax or 
 careless. Note that it is unnecessary to check back the 
 work if the method in Prin. 83 D is followed. 
 
 To check back, arrange all posting books in a given 
 order, and, as a rule, check first, through all the posting 
 books, the entries that have been posted to the short 
 side. Place a check-mark before each amount in both 
 posting book and ledger, using a mark that is different 
 in kind or* color from any used before. 
 
 If no errors are found in the short side, check back 
 the long side. 
 
AUDITING 159 
 
 If an error is found at any time, subtract it from or 
 add it to the amount of the first discrepancy, so that the 
 figures of the amount sought are always in mind. 
 
 If the discrepancy is not found by checking, review 
 the ledger to see if there are any amounts, within the 
 audit period, which have not been checked. 
 
 This procedure should result in a balance. 
 
 83 D. Though a trial balance may be taken, there 
 remains a question whether all items were posted into 
 the right accounts. A trial balance or proof sheet will 
 not determine this question, as the auditor while doing 
 the checking is occupied with pages )and amounts, and 
 is likely to overlook titles. If the accounts are to be 
 proved, it will not be necessary to check back, but to go 
 directly to the abstract of the accounts. This is written 
 on analysis sheets, or paper ruled with pairs of columns 
 (debit and credit), as many as the page will hold, in 
 which the amounts from the posting books are carried. 
 
 Transfer the account-titles from the ledger to the 
 columns in the abstract of accounts, leaving as much 
 space below each title as the entries under this title will 
 require when written in closely. To aid in locating per- 
 sonal accounts, which may be numerous, place them in 
 alphabetical order, since the comparison is to be by titles, 
 not by pages. 
 
 The general accounts will be easily located without 
 re-arrangement if they are in proper order; if not, re- 
 arrange them. (See Prin. 21.) 
 
 Carry all amounts from the trial balance at the be- 
 ginning of the audit period, and all amounts during the 
 period from the posting books to the abstract. 
 
 The results should balance when the posting is fin- 
 ished, and each item in the abstract of accounts should 
 agree with the ledger. 
 
 84. An Audit to Show True Record goes into the 
 matter of the first entries to determine whether they 
 are the records of actual transfers of value to the person 
 or department charged. This is not entered into with a 
 view to discovering fraudulent intentions, but to de- 
 
160 RULES 
 
 termine whether there is any business laxity or 
 failure to exact full value for any of the obliga- 
 tions or payments. The following are examples of 
 this kind of items: (1) entries for invoices before 
 receipt of the goods billed, or before the amounts of the 
 invoice are verified, or before any allowances against the 
 bill are noted; (2) the charge of an invoice to the wrong 
 department; (3) cash payments for something that was 
 not received; (4) donations of the firm's funds to char- 
 itable ends, by individuals in the firm, or the taking of 
 firm goods for personal use by partners; akin to this, 
 is the action of the bank teller who, on days when cash 
 was "over," placed the surplus in a box, to be returned 
 to the till, on days when cash was "short;" (5) laxity 
 in collections, allowing claims to become outlawed or 
 otherwise uncollectible. Serious irregularities along this 
 line may be the entry of assets which do not exist, or 
 which have not the value shown on the ledger. There 
 might be entries of real property of great value, to which 
 the firm has no recorded title, or against which there are 
 liabilities not shown on the books. Obsolete patterns, 
 models and machinery, may be carried on the books at a 
 t nominal value, after they are worthless. Any injury to 
 property by fire or accident must also be charged off. 
 
 Ordinary depreciation in property should be repre- 
 sented in sufficient reserves. 
 
 The false record that probably has caused most 
 havoc among business men is the inflated inventory. 
 Every dollar of inflation in an inventory is that much 
 deception as to profits. The inventory may contain items 
 not really in stock, or may be priced too high, or may 
 contain old and worthless stock at the purchase price, 
 which amounts to the same thing. The auditor must 
 ascertain, if possible, what the goods are really worth. 
 
 The ledger may show intangible assets, which are 
 not only intangible, but do not exist. Good-will account 
 is sometimes in this condition; Patent-right and Copy- 
 right accounts often are. 
 
 The liability accounts also demand inspection. Are 
 
AUDITING 161 
 
 all accounts payable and notes payable entered at their 
 full amount? Have notes receivable, when discontinued, 
 been entered as contingent liabilities? Is the firm liable 
 on accommodation paper? 
 
 Records which show either 'an inflation in assets 
 or a false diminution in liabilities, require adjustment. 
 
 A firm 's books may show a condition contrary to. 
 the foregoing, that is, assets may be entered too low, or 
 liabilities too high, resulting in a showing of less worth 
 or capital than the business really posseses. Such a con- 
 dition, called a secret reserve, may work hardship on 
 the shareholders of a corporation, who may be entitled 
 to dividends which do not show on the books, or who 
 may be induced to sell their stock while believing it to 
 be worth less than it really is. 
 
 The capital stock account may need auditing. There 
 are many ways in which this account may be misleading. 
 It would be difficult to estimate the number of corpora- 
 tions thai have been at fault in issuing shares of stock to 
 individuals in exchange for promissory notes, or for con- 
 siderations other than cash, the value of which is less 
 than the par value of the stock. 
 
 The cash account should be examined for uninten- 
 tional regularities. Is the balance in the cash book all 
 current money ? A cash balance running into four figures 
 has been known to represent a few coins, a few bills and 
 a large quantity of expense tickets, due bills, protested 
 paper and other items carried in the hope of a future 
 conversion into money. 
 
 Is the bank account correct? Tl.is can best be as- 
 certained by a reconciliation of the bank statement with 
 the depositor's record discussed in detail in Prin. 84 B. 
 
 84 B. Reconciliation of Bank Statement. A bank 
 usually delivers a statement of the checking account to 
 the depositor on the first of the month. This statement 
 is accompanied with the depositor's paid and cancelled 
 checks, which should agree with the debits in the state- 
 ment. The deposits, as credited in the statement, should 
 agree with the amounts entered in the depositor's bank 
 
162 RULES 
 
 book or his cash account. The difference between total 
 deposits and total checks, as appearing on the statement, 
 is entered by the bank as a balance due the depositor. 
 
 If the balance on the statement agrees with the bal- 
 ance in the depositor's books, the statement is assumed 
 to be correct without further attention, except that the 
 checks should be compared with the depositor's entries 
 in order to make sure that all canceled checks have been 
 returned. This comparison is indicated by check-marks 
 in the depositor's cash book. 
 
 For several reasons, the bank balance does not often 
 agree with the depositor's balance on a given day; among 
 these reasons are: (1) certain checks issued by the de- 
 positor may be in transit; (2) deposits charged to the 
 bank on the depositor's books at the end of the month 
 may not have been credited by the bank during the 
 month covered by the statement; (3) the bank, may have 
 made charges for collections or other items which have 
 not been credited in the depositor's books; (4) the bank 
 may have credited collections made for the depositor, 
 which the latter has not entered; (5) there may be mis- 
 takes in the bank's statement or in the depositor's books. 
 
 To reconcile, make additions to and deductions from 
 the' balance reported in the bank's statement, as follows: 
 
 (1). Compare your record of checks issued with the 
 charged and cancelled checks returned; if any checks 
 are found to be in transit, subtract their sum from the 
 balance shown on the bank's statement. 
 
 (2). Compare your record of deposits with the de- 
 posits entered in the statement ; if any deposits are mis- 
 sing from the statement, add their sum to the bank's 
 balance. 
 
 (3). Compare the bank's statement to discover any 
 petty charges made by the bank that have not been re- 
 ported, or have not been credited. If any are found, add 
 their sum to the bank's balance. Also make the proper 
 adjustment entry in the cash book. 
 
 (4). Look for any credit given in the bank's state- 
 ment for collections or other items that have not been 
 
AUDITING 163 
 
 entered; if any are found, subtract their sum from the 
 bank's balance as shown on the statement. Also make 
 the adjustment entry in the cash book. 
 
 (5). If there are errors either in the bank's state- 
 ment or in your books, correct the one that is wrong, and 
 report to the bank, if the banker's account is in error. 
 
 Pin to the bank statement the sheet on which the 
 foregoing computations have been made, in order to 
 show the reconciliation of the two accounts, and file them 
 for reference when the next following statement is to be 
 reconciled. 
 
 85. .An Audit to Show Fraud or Its Absence in- 
 volves tests to show whether or not defalcation, embezzle- 
 ment, or misrepresentation has occurred. These may take 
 several forms; among them, are, (1) defalcation of cash 
 or other agents of the concern. The direct question to 
 be answered is, Has there been misappropriation of cash 
 ranted financial risks? 
 
 85 B. Such an audit goes into the matter of the 
 discharge of trust delegated to officers and employees, 
 or other agents, of the concern. The direct question to 
 be answered is, Has there been misappropriation of cash 
 or property, or any showing made in the books that 
 would cause either investors or creditors to take unwar- 
 ranted financial risks? 
 
 "Where deliberate fraud is practiced, the conceal- 
 ment may be more or less ingenious, depending upon the 
 skill of the offender; yet in the great majority of cases 
 when a fraudulent entry is discovered, that entry affords 
 the key to the entire defalcation, for embezzlers rarely 
 take the risk of confusing themselves by the use of a 
 variety of methods. 
 
 In looking for fraud, the auditor should first de- 
 termine how far the bookkeeping system in use affords 
 a check, and how faithfully this check has been carried 
 out; then he must devise and put into execution such 
 further tests as may be needed to reduce the matter to 
 a reasonable degree of certainty. Among these tests are 
 the following: 
 
164 RULES 
 
 85 C. Defalcation of Cash or Securities. The audi- 
 tor's first step is to count the cash actually on hand. 
 This means to make list of the money, checks, or what- 
 ever passes as cash, whether in the till or cash drawer, 
 or in the safe or vault — all cash, and the bank balance, 
 if this is included in the cash account. This should 
 agree with the cash account balance taken at the time 
 the cash is counted. 
 
 Many tricks may be practiced on the cash drawer by 
 which the cashier is enabled to abstract money without 
 . making any permanent record. Such practice is foolish 
 as well as dishonest, but both foolish and dishonest peo- 
 ple continue to follow the steps of those already in jail. 
 Among the devices of the tricky cashier are the follow- 
 ing: 
 
 (1). The cashier may simply take an amount out of 
 the drawer, and leave in its stead a cash ticket which is 
 counted as so much money. This looks like a harmless 
 practice because there are times when one must take 
 cash for a purchase or a payment of some amount not 
 yet determined, the intention being to return the unused 
 cash, make a charge for the amount spent, and destroy 
 the memorandum ticket. Such tickets should be ex- 
 amined closely, for a ticket of that kind should not be 
 allowed to remain day after day. 
 
 (2). A cashier may take a perpetual loan out of the 
 cash drawer in this wise : A customer may pay an 
 amount, say $100, for which the cashier makes a credit 
 ticket dated one day later. He makes no entry of the 
 ticket on the day received, but "borrows" the cash for 
 his own use. The following day he credits the ticket 
 regularly, except one day late, and holds out another 
 payment, or payments totaling the $100, which is held 
 up from entry until the next day, and so on, 
 indefinitely. As the larger collections are usually checks, 
 the dishonest cashier must pay into, or take out of, the 
 drawer the difference between the original $100, and the 
 nearest approach he can make to the required amount, 
 or else increase or diminish his "loan." An auditor 
 
AUDITING 165 
 
 should compare the dates of all checks and drafts in the 
 drawer with the dates of entry in the books, and the date 
 of the receipt if possible. Where remittances are re- 
 ceived through the mail, the date of receipt, even to the 
 hour, if necessary, should be stamped on the letters. 
 
 (3). There may be dummy checks in the drawer, 
 that is, imitations of checks left there to be counted as 
 cash. 
 
 Having satisfactorily shown that the cash on hand 
 agrees with the cash balance, the next step is to follow 
 the receipts and payments of cash during the audit 
 period. 
 
 (4). A cash balance may have been forced, that is, 
 a smaller amount than the real balance may have been 
 entered in the books, and footings made to balance, when 
 they really would not be equal if properly added. Such 
 a forced balance necessitates a like change in some 
 amount posted to the ledger; in order words, an amount 
 from the cash book must be omitted in the ledger, or 
 else posted at a wrong amount to equalize the dis- 
 crepancy in cash. Thus, cash might be forced, $9.90 and 
 an item of $10 posted as 10 cents to satisfy the trial 
 balance. 
 
 The way to detect a forced cash book, is to review 
 the footings. Although the cash book may have been 
 balanced many times- during the audit period, the 
 debits and credits of- the entire period can be footed 
 separately on two lists. Whatever the number of col- 
 umns in a cash book, there should be one column for all 
 net cash receipts, and one for all net cash payments. In 
 some cash books, this may not be the case. Then the 
 items must be picked out of various columns. 
 
 (5). After the cash book is found to be mechan- 
 ically correct, the cash payments demand attention. 
 Cash may have been taken out and wrongfully 
 charged to some nominal account. The accounts of 
 Expense, Purchases and unclassified losses should be 
 examined to discover unreasonable or unnatural 
 charges. Also, the vouchers should be scrutinized, and 
 
166 RULES 
 
 all paj'mente should be reviewed with care. Payments 
 to persons, if in the correct amounts, are assumed to be 
 correct, otherwise there would be complaint from the 
 persons paid. 
 
 (6). The cash receipts demand attention. Were 
 the amounts entered on the debit or receiving side of the 
 cash book the amounts actually received? Were the dis- 
 counts deducted from customers ' invoices actually al- 
 lowed? Allowances may be recorded as deducted from 
 bills, although neither valid nor allowed. For example, 
 a remittance of $100 on account might be entered as only 
 $80, and an entry made crediting the customer for $20 
 allowed for damaged goods or other causes. For this and 
 similar reasons, rebates and allowances need attention. 
 
 If in doubt as to the correctness of the entries of 
 checks and drafts received, secure the deposit tickets 
 for the period, from the bank, and compare the items 
 thereon with the entries in the cash book. The bank 
 balance itself may be carried on the books at a greater 
 amount than the real balance. Reconcile the bank state- 
 ment. (Prin. 84 B.) 
 
 (7). Securities (stocks, bonds and notes) must be 
 checked to see that they are held by the concern, are 
 genuine, and that they agreed with the records. The 
 matter of dates and signatures of notes is important. A 
 spurious note might represent the loss of a great deal of 
 money. / 
 
 The foregoing suggestions afford a beginning from 
 which the auditor may extend research as occasion 
 demands. 
 
 85 D. An Audit to Show Misappropriation of Prop- 
 erty refers to the kind of property, how it is held, and 
 the system of records already pertaining to it. 
 
 Commodities in store room, warehouse or with agents, 
 or wherever kept, are easily abstracted unless properly 
 guarded. 
 
 If charges are made for purchases when it is 
 suspected that the goods were not received, an 
 auditor should first eliminate the invoices from reputable 
 
AUDITING 167 
 
 houses whose statements show agreeing entries. Having 
 found such to be correct, there may remain miscellaneous 
 purchases of a more or less irregular nature. These may 
 be traced in various ways. If there is no invoice from 
 the seller, there is likely to be at least a memorandum of 
 what was bought. Anything bought would ordinarily 
 be either sold, used, destroyed or still in stock. If none 
 of the last three dispositions can be shown to account 
 for purchased goods, a record of sale should exist. Cer- 
 tain items that seem to require especial attention may be 
 checked through the sales records to show disposition. A 
 sufficient number of such items, thus verified, should es- 
 tablish a fair presumption that all are correct. 
 
 Managers of branch stores and other agents having 
 goods in stock belonging to the principal, should render 
 periodic inventories of stock on hand. The correctness 
 of the inventories must be verified by checking the in- 
 ventory with the goods. 
 
 A rough way of determining whether there is any 
 great loss in stock, is to compare, from previous periods, 
 the average per cent profit on sales. By deduct- 
 ing this percentage from the total sales of an 
 audit period, a remainder would be left which should 
 approximate the cost of the merchandise sold for the 
 period. The auditor must use his judgment as to apply- 
 ing this plan, as conditions differ. 
 
 Goods may be removed from stock and charged 
 to fictitious persons. An examination of the accounts 
 receivable would probably disclose any such. This ex- 
 amination should extend especially to overdue accounts, 
 or accounts containing irregular entries. 
 
 A shortage in the inventory may be fraudulently 
 covered by raising the prices in a subsequent inventory 
 over what they were in a previous inventory. A compari- 
 son of prices should be made. 
 
 85 E. A Misrepresentation of the Business may be 
 made to accomplish fraud upon investors or creditors. 
 An insolvent bank may be represented as solvent, in 
 order to attract deposits that it will be unable to repay. 
 
16S RULES 
 
 A merchant may represent himself as being worth more 
 than he is, in order to secure larger credit in goods or 
 money than he is entitled to. A business manag'er may 
 overtstate the profits of a given period, in order to secure 
 the approval of stockholders and a continuance of man- 
 agement. Directors of a company may declare and pay 
 dividends on stock, by borrowing money for this pur- 
 pose, or by taking the so-called dividends out of the capi- 
 tal, thus making the stock appear more valuable than it 
 is and thereby attracting other investors. On the other 
 hand, the profits of a business may be concealed, although 
 great enough to entitle stockholders to dividends which 
 are not declared. Under such impressions, dissatisfied 
 stockholders might be induced to sell their stock for less 
 than it is worth. 
 
 Many kinds of misrepresentation have been used to 
 make the business appear either better or worse than it 
 really is. The auditor should proceed under such con- 
 ditions as outlined in Prin. 84. 
 
 86. An Audit to Show Suitable Books requires a 
 knowledge of the business under consideration, so far as 
 its needs of record are concerned, and a knowledge of the 
 most suitable books and records for the transactions and 
 operations. The auditor should begin with an outline of 
 books, rulings, records, etc., theoretically suited to the 
 conditions. 
 
 "When revising an old system, he should compare the 
 books under examination, step by step, with the system 
 he has in mind, and should look for, and note, the specific 
 deficiencies of the former, and make a note of the econ- 
 omies or advantages possible. 
 
 Recommended changes should be definite, and should 
 compute time saved by the proposed method, on the basis 
 of a year ; the specific economies to. be effected should be 
 reduced to dollars and cents. Safeguards suggested 
 should be suited to the conditions under which the em- 
 ployees are working. 
 
 Proposed changes should be with a view to retaining 
 all of the old features that can be made to work in with 
 
AUDITING 169 
 
 the new plan. To change a bookkeeper's long established 
 habits, is to take away from him facility of action which 
 it has taken time to acquire. For example, a bookkeeper 
 who has posted from right to left for many years, would 
 probably make many mistakes and go through much 
 hardship before learning to post from left to right with 
 anything like equal ease. To change even the position of 
 a light might disturb a habit, and give rise to numerous 
 errors. The auditor must consider the working force as 
 well as the system. 
 
 Again, it is practically useless to recommend a sys- 
 tem, that will show results so finely analyzed that the 
 manager himself cannot understand it, or will not use it. 
 This great mistake has been made by many well-inten- 
 tioned systematizers, who gauged the manager's power 
 to grasp and utilize information derived from books, by 
 their own facility in this direction. The constructive 
 auditor should recommend office changes with a careful 
 regard to the ability of those who are to utilize the sys- 
 tem, as well as to the ideal advantages of the system 
 itself. He should not feel that his labor is wasted merely 
 because he cannot secure the installment of as fine a 
 bookkeeping system as he would like. He has done his 
 part when he has provided the best that his employer 
 can use. 
 
 87. An Audit to Show Worth and Earning Power 
 involves the verification of existing records, and the 
 preparation of such additional data as is needed to 
 answer the questions: What is the physical worth of 
 the property? What does it earn per year? 
 
 The exhibit from the books may be complete, correct, 
 and satisfactory, or it may be only partial, but good so 
 far as it goes. Where the system falls short, constructive 
 auditing begins. 
 
 87 B. .The worth of the business is exhibited in the 
 real accounts. These consist of, (1) cash and cash collect- 
 ible; (2) floating property ; (3) fixed property ; (4) specu- 
 lative property; (5) intangible property; (6) liability to 
 creditors. 
 
170 RULES 
 
 Cash, accounts, notes, and other claims, should be 
 verified as to amounts and collectibility; floating prop- 
 erty should be verified from inventories, as should also 
 unrecorded amounts of money due (for example, ac- 
 crued interest, rent or insurance prepaid). Fixed prop- 
 erty should appear itemized in the ledger at cost ; and de- 
 preciation should be represented in reserve accounts. 
 Speculative property should be viewed particularly as to 
 its present worth, and a sufficient amount should be writ- 
 ten off to make good any fall in value. Intangible prop- 
 erty should be examined with a view to the expiration 
 of its value, and the required amount to be written off. 
 
 The liabilities should be carefully gone over to see 
 that all are included. Often a search for contingent 
 liabilities will disclose matters that should be recorded. 
 The owners' credits consist of reserves, surplus, undi- 
 vided profits, and capital. The reserves must be looked 
 into to see what portion, if any, should be allotted to 
 depreciation, bad debts or other shrinkage in assets. 
 
 Having reduced all of the above to their correct 
 value as assets and liabilities, the net worth of the busi- 
 ness may be found from their assemblage in a statement. 
 
 87 C. Having determined the net worth of the busi- 
 ness, the profits for the year are found by comparison of 
 the present net worth with the net worth at the begin- 
 ning of the year. The profits may be found analyzed 
 in more or less detail in the nominal accounts, if such 
 have been kept. 
 
 The net profit of the current year should undergo 
 comparison with the net profits of preceding years, to 
 determine, (1) the average profit, year after year; (2) 
 whether the annual profits have been variable, some 
 years much more than others, and the reasons for any 
 such variations should be clearly established. 
 
 Furthermore, it is essential that an apparent net 
 profit be analyzed, to see whether it is profit resulting 
 from the incomes, or from capital and fluctuation. 
 Thus, the fortunate sale of real estate owned by a fac- 
 tory, might swell the gains of a certain year to double 
 
AUDITING 171 
 
 their ordinary amount, while the business profits might 
 be the same as before. A stock of goods purchased 
 before a war or other great disturber of values, might 
 be sold for double or treble its former value. Profits 
 under such circumstances as these, are not a criterion 
 as to the earning power of the business. 
 
 88. Legal Aspects: 
 
 The exchanges between persons as recorded in book- 
 keeping, are assumed to be in accordance with contracts, 
 but, in ordinary selling, the details of these contracts 
 are not often referred to, it being understood that 
 they are determined by custom. This may sometimes 
 give rise to misapprehensions that have a decided bear- 
 ing on the condition of the business, or of the individual 
 investors, and an auditor should not overlook them. 
 Persons frequently enter into business relations without 
 clearly understanding the risks involved, and may not 
 properly safeguard their own interests. Also, they may 
 have overlooked rights which would materially advance 
 their interests if enforced. A number of matters relating 
 to the legal aspects of business are referred to under this 
 number. 
 
 88 B. Sale of Goods. To sell, is to transfer owner- 
 ship in the thing sold for a money consideration. The 
 seller of commodities is chiefly interested in knowing 
 whether a supposed sale of merchandise is really a sale 
 when the transfer takes place, and who is to. bear the 
 legal risks of losses in connection with the sale. 
 
 A sale is the execution of a contract. This consists 
 of an offer on the part of the seller and its acceptance 
 on the part of the buyer, or the reverse, which is suffi- 
 ciently definite to be enforced by legal action. 
 
 Having transferred goods, the important question 
 arises as to whether a sale has been so made that the 
 buyer cannot legally avoid payment. 
 
 Sales of goods on credit are made either on a verbal 
 or a written order, which is delivered to the seller or to 
 his authorized agent. 
 
172 RULES 
 
 (1). If on verbal order without restrictions, the 
 acceptance of the commodity by the buyer is evidence 
 of his agreement to pay for it. If no price is specified, 
 the regular published price, or the regular market price 
 of the goods on the day named is collectible. To avoid 
 paying for goods, the buyer must refuse to accept them 
 when they are offered, or must show that they were not 
 as represented. 
 
 (2). When goods are sold on unqualified written 
 order by mail, wire, or messenger, the transfer of tho 
 property from the seller to buyer ordinarily takes placo 
 when the seller delivers the goods to the railroad or 
 other carrier designated or implied in the order. In 
 this case any loss or injury to the property while in 
 transit, or any risk incurred in connection with it is 
 borne by the buyer, who looks to the carrier for damages. 
 
 (3). Either the offer to sell or the order for the 
 goods may specify certain conditions of time or place 
 that would place the risk upon the seller. Thus when 
 sale is made "on approval, " the goods may be received 
 by the buyer, examined and refused. In that case the 
 seller is under obligation to see to their return. But if 
 the buyer holds the goods without refusal, beyond the 
 time set, or beyond a reasonable time if no time is set, 
 his acceptance is implied, and the account would prob- 
 ably be collectible. 
 
 (4). Manufacturers and others desiring to promote 
 the sale of goods, sometimes ship them out "on sale," 
 that is, to be paid for when the buyer sells them. In 
 such case, the buyer is accountable in cash for the part 
 that he has sold. When goods are regularly kept on 
 sale, it is customary for the selling agent to render 
 statements and remit proceeds of sales monthly, quar- 
 terly, or annually. The conditions should be specified in 
 a written contract. 
 
 (5). The sale of goods C. 0. D., gives rise to a 
 variety of legal opinions as to whether the title to the 
 goods passes at the time of sending the goods out of the 
 sales room, or at the time they are received by the 
 
AUDITING 173 
 
 buyer. Since the terms signify that the buyer is not 
 entitled to possession until he pays for them, the practi- 
 cal result is that regardless of any legal rights, the 
 seller generally pays the expense of their transportation 
 both out and in, if they are refused. 
 
 (6). In some instances, the title passes without the 
 property being handled at all, as when grain is trans- 
 ferred by the delivery of warehouse receipts, or where 
 title to property is transferred by delivery of a bill of 
 sale. 
 
 88 C. Collection of Accounts and Notes. After a 
 sale on account is made, provision must be made for col- 
 lection. Usually, the first step is to send the customer a 
 statement of the amount owed on the first of the month 
 following the sale. This statement is not a reminder 
 to pay, if the account is not due; it merely affords the 
 customer an opportunity to compare accounts and note 
 discrepancies. Where the account is due, the statement 
 is regarded as a notice that payment is expected. 
 
 (1). Wholesalers usually allow customers a certain 
 term of credit, but offer a discount from the bill for 
 immediate or early cash payment. As a cash discount is 
 usually considerably more than the current rate of in- 
 terest on the amount for the given time, the seller has a 
 right to assume that a customer who will not take a 
 cash discount is either unable to borrow money of his 
 banker to meet bills, or is negligent of the profit he could 
 make by discounting. In either case, the customer's 
 credit is affected and his account is to be more closely 
 watched. 
 
 (2). When the unpaid account becomes due, a 
 letter of reminder is usually sent. This bringing no re- 
 sponse, a notice of sight draft may follow, and a sight 
 draft on the customer for the amount may be sent to a 
 bank for collection. If still unpaid, correspondence 
 should disclose the reason for non-payment. It may 
 be that more time is desired. This is frequently granted 
 by taking the customer's note to settle the account. 
 This resolves the debt into a form more easily handled, 
 
174 RULES 
 
 besides making it draw a specified rate of interest, and 
 extending the period beyond which it would be outlawed. 
 
 Doubt as to the customer's ultimate ability to pay 
 might justify the taking of a mortgage on his real or 
 personal property to secure the debt. 
 
 In extreme cases, a mortgage received would be fol- 
 lowed by foreclosure and the sale of the mortgaged prop- 
 erty with a view to applying the proceeds on the debt. 
 
 (3). If other means fail, the debtor may be sued 
 for the account or note, and if the claim be proved cor- 
 rect, a judgment will be entered against the debtor. 
 This would be followed by a forced sale through 'a court 
 officer of any of the debtor's property which is not ex- 
 empt from execution. The legal expenses of securing 
 judgment are paid by the creditor, and, with the excep- 
 tion of lawyers' fees, are added to the claim against the 
 debtor. 
 
 (4). An account, note, or judgment may remain 
 unpaid for so long a time that the debtor can refuse 
 payment under the statute of limitations. There is much 
 variation in the different states as to the time when this 
 statute applies. It may be from two to eight years, on 
 accounts; from three to fifteen years on notes; and from 
 five to twenty years on judgments. (See Index Com- 
 mentary.) When this time has expired, the debtor may 
 plead the statute of limitations and thus avoid payment. 
 
 88 D. The Purchase of Land is a more formal mat- 
 ter than the purchase of goods, and must be evidenced 
 by a written contract, called a deed, which is given by 
 the seller to the buyer. Land is perpetual, and title to it 
 is a matter that, in the course of time, by passing through 
 many hands, would be hopelessly confused if a public 
 record of all transfers, liens, or encumbrances were not 
 required. An officer variously called a county recorder, 
 recorder of deeds, register of deeds, or recording clerk, 
 whose duty it is to make permanent public record of the 
 documents affecting the title of land, is regularly elected 
 or appointed in each county. It is assumed that any 
 
AUDITING 175 
 
 prospective purchaser of land will satisfy himself as to 
 the title of the land, by referring to the public records, 
 where conflicting claims upon the property, if there are 
 any such, should be recorded. Purchasers of land do 
 not often examine the records personally, but secure an 
 abstract of title, which is a carefully prepared explana- 
 tion or digest of all documents that affect the title of the 
 given property. This abstract is based on the county rec- 
 ords. Any doubtful question about title to property 
 should be submitted to a real estate lawyer. 
 
 The purchaser, on receiving a deed to the property, 
 should send the deed to the county recording office for 
 record at once. To do so, is highly important » since 
 this record alone conveys notice to the public of the 
 pui chaser's title. He will thus have priority of record 
 as protection against other claimants who might, through 
 errors or double dealing on the part of the vendor, 
 have mortgages, or other liens of which the purchaser 
 had no notice, and which might be recorded by these 
 claimants. 
 
 Some of the liens which should be looked f6r are the 
 following: mortgages; rights of heirs of a deceased for- 
 mer owner; rights of spouse or others through imper- 
 fect previous conveyance or disability of the conveyor; 
 unpaid taxes; mechanics ' liens for unpaid labor or ma- 
 terial in the property; judgments against a former 
 owner ; a lease of the property to a tenant. 
 
 On the other hand, persons interested in any of the 
 above mentioned or other liens against property, should 
 have the same recorded, in accordance with the state laws, 
 in order to secure their priority of record, which is a 
 notice to subsequent parties of their interest in the 
 property. 
 
 After being recorded, the deed should be preserved 
 by the owner of the land. 
 
 88 E. Commercial Papers consist of drafts and 
 checks, acceptances, promissory notes, and bonds. They 
 are demands upon a person (the drawee) or promises 
 
176 RULES 
 
 made by a person (the. maker) to pay to the order of 
 another person, a sum of money at a given time. 
 
 (1). Negotiability is the distinguishing mark of 
 commercial paper. By this is meant that the given paper 
 can be passed in the course of business from one holder 
 to another, and that any bona fide holder or authorized 
 payee, has the legal right to collect the paper in his own 
 name, regardless of equities existing between the original 
 parties to the instrument. Negotiable paper passes cur- 
 rent as money in the great majority of business settle- 
 ments. 
 
 (2). The draft is a written form, used by a first per- 
 son (the drawer), in directing a second person (the 
 drawee), to pay a given sum of money to a third person 
 (the payee), or to some one (the endorsee), whom the 
 payee* designates. Foreign drafts are called bills of 
 exchange. 
 
 Suppose that two men named, respectively, Mr. Give 
 and Mr. Take, live in your home city ; and that Mr. Owe, 
 who is indebted to Mr. Give, lives in New York City. 
 Also, Mr. Give owes Mr. Take, and the latter, who is 
 about to go to New York City, accepts from Mr. Give a 
 letter directing Mr. Owe to pay Mr. Take a sum of 
 money. On arrival, Mr. Take hands the letter to Mr. Owe 
 and receives the money. Such a letter would be called an 
 order. But if the letter were changed so as uncondition- 
 ally to direct Mr. Owe to pay the money ""to the order of" 
 Mr. Take, then Mr. Take would not need to present it 
 personally to Mr. Owe, but, by endorsement, could pass 
 the paper to any other person, whom we call Mr. Collect. 
 Mr. Collect could take the paper to Mr. Owe and secure 
 the money as well as Mr. Take could. Mr. Collect, if he 
 chose, could endorse the paper to another person, and this 
 person to still another, until finally the last endorsee 
 could present it to Mr. Owe for payment. Papers in 
 form to be handled in this way are called drafts. 
 
 (3) All banks have money on deposit in other 
 banks, located at a distance in trade centers, upon whom 
 they draw bank drafts for sale to customers who wish to 
 
AUDITING 177 
 
 transmit money safely through the mail. A properly en- 
 dorsed draft is collectible by only one person, the payee, 
 or by an endorsee. A lost or stolen bank draft is worth- 
 less to the finder or thief, unless he successfully forges the 
 payee's endorsement. 
 
 (4) Merchants draw drafts, which they call bills of 
 exchange, on distant merchants in settlement of the bal- 
 ances due between them. Such drafts when payable a 
 certain time after presentation, are called time paper. 
 
 . The drawee of a time bill of exchange, by his ac- 
 ceptance promises to pay it at the expiration of the 
 specified time. An acceptance usually consists in the 
 drawee's writing across the face the word "Accepted," 
 "0. K.," or some similar form of assent, followed by his 
 signature. An accepted bill of exchange, or draft pay- 
 able, is equivalent to a note payable, and is entered, in the 
 books, in the account of Notes Payable. 
 
 (5) Slow customers are reminded of their indebted- 
 ness by collection drafts sent through banks for presenta- 
 tion to the drawees. Collection drafts are little more 
 than duns, and are of no value until paid. 
 
 (6) A bank check is essentially a draft drawn by a 
 depositor on the bank that holds his deposit. Checks as 
 ordinarily made are negotiable. Payment by check is the 
 safest way to disburse money, as the payer thus has a rec- 
 ord of each payment on his check stub. Also, the en- 
 dorsement on the back of the check operates as a receipt 
 from the payee. Banks discourage the circulation of 
 checks beyond the locality where issued. 
 
 Checks may be presented to the drawee bank for 
 certification, which is a writing across the face obligat- 
 ing the bank to pay the check when presented. The 
 word ' ' certified, ' ' with the signature of a bank officer 
 is sufficient. A certified check is an obligation of the 
 bank in all legal essentials like an accepted bill of ex- 
 change. 
 
 (7). Bonds issued by corporations, municipalities, 
 and individuals, are usually drawn in negotiable form, 
 like notes, and can be transferred by endorsement. 
 
178 RULES 
 
 All commercial paper received as cash, should be 
 collected or deposited, within a day after receipt, as there 
 are contingencies that might stop payment. 
 
 88 F. Agents are persons authorized to act and who 
 do act for others. General agents represent the princi- 
 pals in all business actions of the agency; special agents 
 have authority extending to special acts only. An agent 
 may receive "power of attorney" from his principal, 
 thus authorizing him to attach his principal's name and 
 seal to contracts. Agents intrusted by a principal with 
 merchandise, ordinarily have a lien against the goods in 
 their hands, to secure payment for services. 
 
 Salesmen, collectors, commission merchants, auc- 
 tioneers, attorneys-at-law, officers of corporations, mem : 
 bers of firms, and many other agents, have their duties 
 and obligations pretty clearly defined by law and custom. 
 However, it is possible for almost any agent to exceed 
 his authority, and to involve his principal in obligations 
 not intended by either of them. In such cases the prin- 
 cipal might, to his damage, be bound to third parties and 
 possibly be unable to recover from the agent who had ex- 
 ceeded his authority. 
 
 "When an agent is appointed for a special purpose, 
 the contract should be in writing, and should clearly ex- 
 plain the agent's duties. 
 
 88 G. Partnership is a relation between two or more 
 persons who unite capital, labor and management for 
 joint profit. 
 
 The relations of the partners should be written in 
 an agreement, clearly stating, (1) the names of the part- 
 ners and of the firm; (2) the nature of the business; (3) 
 the period of the partnership ; (4) the investments of the 
 partners; (5) the salary allowed partners for services; 
 
 (6) the interest allowed partners for capital invested; 
 
 (7) the proportion of net profit or loss assigned to each 
 partner; (8) a limitation preventing any partner from 
 involving the firm in unnecessary obligations; (9) a pro- 
 vision for the continuation or the dissolution of the 
 partnership. 
 
AUDITING 179 
 
 Ordinarily each partner, as agent of the firm, has 
 power to bind the others by the firm contracts. Each is 
 personally liable for the entire indebtedness. A close 
 relation of trust exists between partners, so that it 
 is unwise for anyone to join business interests with per- 
 sons in whom he has not entire confidence, or who are 
 not financially responsible. Every partnership should 
 be qualified in a definite written agreement. 
 
 A partnership may be dissolved at any time by con- 
 sent of the partners, or by expiration of the time named 
 in the agreement. One partner may withdraw without 
 consent of others, before the time set in the contract, 
 and this will effect a dissolution of the partnership; but 
 the partner who does this, becomes liable for damage to 
 the other partners for doing so. The death or bank- 
 ruptcy of a partner dissolves the firm. A partner cannot, 
 by withdrawal, escape liability for existing debts of the 
 firm to third parties, even though these may be assumed 
 by the remaining members of the firm. The estate of a 
 deceased partner is also liable for the firm debts at the 
 time of his death. 
 
 Owing to laxity in account keeping, one partner fre- 
 quently has unfair advantages over another which are dif- 
 ficult to adjust. In a retail store, it not infrequently occurs 
 that one partner takes out for his own use, goods greatly 
 in excess of the other's drawings. He may also un- 
 wisely create debts which the firm must pay, and, in 
 other improper ways, involve his partner's capital. An 
 honest, capable person is frequently at the mercy of a 
 dishonest partner, and cannot escape loss so long as the 
 partnership continues. Some of the heaviest business 
 losses are traceable to an unwise choice of partners. 
 
 88 H. A Corporation enables several persons to com- 
 bine their capital and services under one management, 
 while avoiding some of the disadvantages of the partner- 
 ship relation. 
 
 The ordinary private corporation is formed by virtue 
 of general acts of legislation, which specify the steps to 
 be taken by persons intending to incorporate, and which 
 authorize the issuance, to the incorporators, of a certifi- 
 
180 RULES 
 
 cate, or license, which evidences their compliance with 
 the law. Their compliance with the legal provisions en- 
 ables the incorporators to act through the corporation in 
 the following ways: (1) the capital stock (divided into 
 shares) may be owned by stockholders, who can dispose 
 of their interests in the company to other persons, and 
 withdraw entirely from it, without affecting the contin- 
 uance of the corporate organization; (2) the corporation 
 may appoint, or remove officers or agents who conduct its 
 business and make contracts; (3) the corporation may 
 use a corporate seal and may acquire and dispose of real 
 property in its own name ; (4) the corporation may incur 
 debts for which the stockholders are not individually 
 liable beyond the amount of their stock in the company, 
 or such additional amounts as may be specified by the 
 laws relating to specified kinds of corporations; (5) a 
 corporation may perform all the ordinary business trans- 
 actions that an individual can, provided they are within 
 the purposes for which the corporation was formed. 
 
 Specific information about the powers, rights, and 
 obligations, must be loured for in the laws of the state 
 where incorporated. 
 
 When the authorized number of persons desire to 
 incorporate, they draw up articles of incorporation or a 
 certificate of incorporation. A blank incorporation form, 
 to be filled out by the incorporators, can usually be 
 secured from the Secretary of State in the state in which 
 the corporation is formed. These articles give the 
 name of the corporation, purposes, amount of capital 
 stock, number of shares, principal place of business, dura- 
 tion of corporation, number, names and addresses of the 
 incorporating stockholders, the number of shares held by 
 each, and other provisions. 
 
 A subscription list is signed by persons who organize 
 the corporation, each agreeing to take the number of 
 shares specified. This list is a contract upon which pay : 
 ment may be legally enforced, should any subscriber 
 refuse to pay his pro rata. The payments made by the 
 subscribers constitute the capital of the corporation. 
 
 "When the stock is paid for, the officers issue stock 
 
AUDITING 181 
 
 certificates to the subscribers, who then become stock- 
 holders. 
 
 The incorporating stockholders elect from their num- 
 ber certain members to be directors. The directors in 
 turn elect the officers. The officers usually include presi- 
 dent, vice-president, secretary and treasurer. The 
 treasurer usually has in charge the bookkeeping records 
 of the business. 
 
 88 1. Bankruptcy is the legal condition of an in- 
 solvent person whose property has been ordered by court 
 decree. to be placed in the hands of a receiver for the 
 winding up of his affairs. The court order may be made 
 on petition of creditors who are aware of the firm's 
 insolvency, or believe that deception is being practiced 
 upon them, or have reason to think other creditors have 
 undue preference; and who bring the action in bank- 
 ruptcy as a means of securing their share of the assets 
 rather than risk further delay. It may be made on peti- 
 tion of the owner himself, who goes into bankruptcy in 
 the desire to turn over his property to creditors, and, in 
 so doing, to escape further liability through the pro- 
 visions of the law. 
 
 One federal bankruptcy law provides relief in this 
 matter, and specifies that any person, except municipal, 
 railroad, insurance, or banking corporations, may secure 
 the benefits of this act by becoming a voluntary bank' 
 nipt. 
 
 The bankrupt is entitled to the benefit of state ex- 
 tmpfcion laws, which permit him to retain certain prop- 
 erty for his personal use — the amounts he may retain 
 varying in different states. 
 
 88 J. Executors and Administrators are officers ap- 
 pointed by a court to close up the estates of deceased 
 persons. The person appointed is called an executor 
 when he is named by the deceased in his will, and he re- 
 ceives his court appointment because so named. When no 
 executor is named by the deceased, the officer appointed 
 is called an administrator. Among the duties of an ex- 
 ecutor or administrator are to inventory and secure ap- 
 
182 RULES 
 
 praisal of the personal assets belonging to the estate, to 
 pay the debts of the estate out of the assets, to distribute 
 the estate, and make an accounting to the court. The 
 executor or administrator usually performs these duties 
 under legal advice. The administrator should open a 
 separate set of books for the estate, and a bank account 
 of the moneys should be kept as a separate fund. The 
 compensation of executors and administrators for their 
 services is usually fixed by a statute in the several states, 
 and is a preferred expense. 
 
 88 K. Income Tax. Federal income taxes are levied 
 under provisions of two laws enacted by Congress in 1916 
 and 1917. Under these laws, two separate taxations of 
 two per cent each, called the normal tax, are applicable 
 to net annual incomes exceeding the specific exemptions 
 given below. 
 
 SPECIFIC EXEMPTIONS 
 
 1916 Law 1917 Law 
 
 Unmarried persons $3000.00 $1000.00 
 
 Married persons or heads of families 4000.00 2000.00 
 
 Additional for each dependent child 200.00 200.00 
 
 Over and above the normal tax, an additional tax, or 
 
 surtax, is levied on incomes of individuals exceeding the 
 
 amounts on the following table wherein the rates of sur- 
 tax are given : 
 
 Amounts subject to surtax 1916 Law 1917 Law Total 
 
 From $5000 to $7500 None 1% 1% 
 
 7500 " 10000 " 2% 2% 
 
 10000 " 12500 " 3% 3% 
 
 12500 " 15000 " 4% 4% 
 
 15000 " 20000 " 5% 5% 
 
 20000 " 40000 1% 7% 8% 
 
 40000 " 60000 2% 10% 12% 
 
 60000 " 80000 .3% 14% 17% 
 
 80000 " 100000 4% 18% 22% 
 
 100000 " 150000 5% 22% 27% 
 
 150000 " 200000 6% 25% 31% 
 
 200000 " 250000 7% 30% 37% 
 
 250000 " 300000 8% 34% 42% 
 
 300000 " 500000 9% 37% 46% 
 
 500000 " 750000 10% 40% 50% 
 
 750000 " 1000000 10% 45% 55% 
 
 1000000 " 1500000 11% 50% 61% 
 
 1500000 " 2000000 12% 50% ' 62% 
 
 2000000 up 13% 50% 63% 
 
AUDITING 183 
 
 Partnerships, as such, are not recognized, but the in- 
 come tax is levied on the partners' individual shares of 
 the profits. 
 
 Taxable Income is net profit derived from invest- 
 ments and business operations, or it may be derived from 
 personal or professional service, business, trade, com- 
 merce, dealings or lawful transactions, interest, rents, 
 dividends, and other receipts not brought about by the 
 conversion of other kinds of capital into money. The 
 gross incomes, revenues, or earnings of an individual are 
 subject, besides specific exemption, to the following 
 named deductions before arriving at the amount return- 
 able for normal income tax: 
 
 1. Necessary business expenses (living expenses not 
 included). 
 
 2. Interest accrued and paid within the year on in- 
 debtedness. 
 
 3. Taxes, (except those assessed for local benefits 
 and income tax). 
 
 4. Losses in business (by fire, storm or shipwreck 
 not compensated by insurance). 
 
 5. Bad debts charged off. 
 
 6. Depreciation charged off in reasonable amount. 
 
 7. Interest on obligations of the United States or 
 any political subdivisions thereof. 
 
 8. Dividends from companies that have already 
 been taxed for income. 
 
 9. Other income that has been taxed at the source. 
 (Nos. 8 and 9 would be included for additional tax). 
 An individual is subject to normal income tax on his 
 
 profits, after deduction of the specific exemption, and the 
 above nine deductions, or. to additional tax on the same in 
 excess of $5000, except that Nos. 8 and 9 are not de- 
 ducted in finding the additional tax. 
 
 Corporations, joint-stock companies, associations, and 
 insurance companies are subject to annual normal income 
 tax of two per cent on all net income under the law of 
 1916. Under the law of 1917, a tax of four per cent is 
 levied. This makes a total of six per cent annual income 
 tax on corporations. 
 
184 RULES 
 
 Returns. Every citizen or resident of the United 
 States whose net income for the year 1917 or thereafter 
 equals or exceeds $2000 if married, or $1000 if not mar- 
 ried, is obliged by law to make returns to the collector of 
 internal revenue for his district, on or before March 1, 
 annually. 
 
 The blank form for this return is furnished by the 
 collector of internal revenue to whom the citizen must 
 
 apply. 
 
 Payment of the income tax must be made by cash, 
 check or money order on or before June 15 following, to 
 the collector to whom the return is sent. 
 
 Accounts. Books of account should be kept in order 
 to make accurate returns, and the government is encour- 
 aging bookkeeping among professional men, farmers and 
 individuals. In the government return form No. 1040-A, 
 suitable for incomes of $3000 or under, separate accounts 
 are required of: 
 
 Income from salaries, wages, commissions, bonuses 
 and pensions. 
 
 Income from business, farm or profession. From such 
 income deduction may be made for business expenses and 
 losses, classified under labor; materials and supplies; 
 rent, merchandise or live stock bought for sale ; wear, 
 tear and repairs ; losses by fire, storm, other casualties, or 
 theft; other business expenses. 
 
 Income from sale of land, buildings and other prop- 
 erty, real or personal. 
 
 Income from rents and royalties. 
 
 Dividends received, including stock dividends. 
 
 Other income. 
 
 General deductions allowed from total income in- 
 clude interest, taxes and contributions for religious, 
 charitable, scientific, or educational purposes. All of 
 these deductions are subject to exclusions fully explained 
 in the government return forms before mentioned. 
 
 89. Single Entry Bookkeeping is any system of 
 bookkeeping which lacks the completeness of double 
 entry in the matter of equal debits and credits. It is 
 
AUDITING 185 
 
 assumed that a single entry bookkeeper makes some 
 records for all important transactions, and that these 
 records are so kept as to show, in a general way, all 
 cash receipts and payments, and the amount of the cash 
 balance. The records must necessarily extend, also, to 
 accounts showing collections to be made from customers, 
 and accounts showing amounts owed to creditors. To 
 keep accounts of cash on hand, cash to be collected, and 
 cash to be paid, is all that is usually attempted in single 
 entry bookkeeping. 
 
 It is easier to keep such single entry books than to 
 keep books by double entry, because no posting is re- 
 quired for any cash receipts or payments, except those 
 that pertain to customers' or creditors' accounts. Ac- 
 counts of property and nominal accounts are ignored. 
 There is no time spent in locating errors outside of the 
 cash balance, because there is nothing in the system to 
 disclose the presence of errors; no time is spent over a 
 trial balance, because, as there is no attempt at equality 
 of debits and credits, there can be no trial balance. 
 
 There are single entry sets of books, however, in 
 which accounts of property, sales, and various expenses 
 are kept. Some large mercantile concerns keep by 
 single entry, approximately all the accounts found in 
 some double entry sets of books. Various auditing proofs 
 may give the same sense of accuracy in single entry 
 books that a trial balance does in double entry. But 
 when single entry books are so highly developed as to 
 furnish proof of accuracy, or keep accounts of property 
 and classified expenses, they entail more labor, with less 
 complete adjustment of accounts, than would a double 
 entry system developed to the same extent. 
 
 It is plain, however, that the original entries in 
 single entry books can be posted to whatever accounts 
 the bookkeeper desires, until a complete double entry 
 classification is reached. 
 
 89 B. The books ordinarily referred to as compris- 
 ing a single entry system, consist of, (1) a day book, for 
 charge or credit entries; (2) a cash book for cash re- 
 
1S6 RULES 
 
 eeipts and payments; (3) a ledger containing personal 
 accounts. Such entries as are not posted to the personal 
 accounts, remain in the original books as memoranda. 
 Any auxiliary book may be added. 
 
 89 C. A common form of single entry used by shop- 
 keepers, consists of a summary book, into which are 
 transferred, daily, the total receipts and payments of 
 cash, the total charge sales, and the payments thereon, 
 and sundry payments, all taken from the record made 
 in a cash register. These are recorded in the cash regis- 
 ter automatically, in columns showing receipts from 
 cash sales separate from receipts from customers on 
 account; and payments from cash purchases, separate 
 from payments on account. A fifth column shows the 
 amount of sales on account. A separate bill and charge 
 book is kept for each credit customer. This is a book 
 containing a number of duplicate sale slips, for the 
 items sold. An original slip is passed to the customer at 
 each sale, and the duplicate retained in the book. The 
 total of the customer's account is forwarded on the 
 duplicates from page to page. 
 
 The bills owed by the shopkeeper are kept in a 
 drawer, and taken out as paid. 
 
 Such a system answers the purpose of keeping a 
 watch on cash and customers' accounts. The errors in 
 the customers' accounts, however, which are likely to be 
 numerous, are undiscovered unless reported by the cus- 
 tomer. 
 
 89 D. "When a single entry set of books is used, the 
 net profit or loss for an accounting period is usually 
 found by comparison of the net worth at the beginning 
 with that at the close of the period, as exhibited in finan 
 cial statements. 
 
 It must be remembered, however, that there are ordi- 
 narily no accounts from which the financial statement 
 is to be derived, except the cash and personal accounts; 
 all other items are to be entered in the statement from 
 inventory, or from such papers and documents as may 
 
AUDITING 187 
 
 be found. Such statements as Nos. 1 and 2 (Book of 
 Forms) may be used. 
 
 89 E. Single entry bookkeeping always has been, and 
 probably always will be, used by small concerns. It is 
 defective in the kind of account analysis that enables a 
 proprietor to know the operation and results of the busi- 
 ness in detail, and judge the future by the record of the 
 past. It is useful to those who require only partial rec- 
 ords of some phases of their business, and wish to keep 
 these records without any well defined proofs of 
 accuracy. 
 
 89 F. To Change Single Entry to Double Entry, is 
 a simple process. After making a statement of assets and 
 liabilities, journalize it. (Form No. 13 A affords a good 
 model.) If it is desired to retain the'old ledger, check such 
 accounts in the journal entry as already appear in the 
 ledger, open new ledger accounts for the remainder, and 
 post them. After the opening entry is posted, a trial 
 balance should be taken. 
 
 The books of original entry may be modified to suit 
 the business. 
 
 90. The Auditor's Report. Large business houses 
 regularly employ auditors to work continuously in veri- 
 fying the accounts of the different departments of branch 
 houses, of agencies, and of the officials. The reports of 
 such auditors are made on suitable printed blanks, and 
 are made with a view to affording a collateral check on 
 the books. The form of the reports is the outcome of the 
 skill and insight of the one who devised it, and its value 
 depends on its applicability to the business in which it 
 is used. 
 
 Auditors are also regularly retained by business 
 houses to review their books annually, or oftener at 
 regular intervals. When the books are regularly audited, 
 the auditor's first report covers the entire matters under 
 consideration much more exhaustively and minutely than 
 subsequent reports. The latter are, in a measure, based 
 upon the first. 
 
188 RULES 
 
 The report of a complete audit includes the financial 
 and operative statements, divided with such minuteness 
 as the case demands. The items in these statements are 
 further explained by schedules and analysis sheets, at- 
 tached to the statements. The report also includes the 
 auditor's letter, which reviews the main points of in- 
 quiry, and specifies particularly any entries in the books 
 not supported by vouchers, any irregularities in the books, 
 any defects in title to the property, or negligence in the 
 care of property or claims, and any specific recommenda- 
 tions tending to improve the methods of the business or 
 the bookkeeping system. 
 
PART THREE-DEFINITIONS 
 
 INDEX-COMMENTARY (Revised 1918) 
 
 1. A vocabulary of business words and terms. The present 
 edition is greatly enriched through the courtesy of Mr. A. P. Rich- 
 ardson, Secretary of The American Association of Public Account- 
 ants, by whose co-operation we are enabled to include findings of 
 the various annual committees on terminology of that Association. 
 
 Definitions taken from these sources are indicated by the 
 mark (f ) before the definitions. 
 
 2. An index to topics in the text. 
 
 3. An index to models of books and blanks in the Form Book. 
 
 4. Standard abbreviations and signs commonly used. 
 
 5.. The rules for computing Interest, Discount, Fractional Re- 
 mainders, etc., as used in the laboratory units of the American 
 Bookkeeping Series. 
 
 Abatement. An amount deducted for overcharge, damage, or 
 discount, from a sum payable. 
 
 Abstract of Accounts. Prin. 83 D. 
 
 Abstract of Postings, f A list of ledger postings such as one 
 drawn off for the purpose of proving the postings in the ledger 
 with the books of original entry or for special information. 
 
 Abstract of Title. Prin. 88 D. 
 
 Acceptance. (1) The act of promising payment of a draft 
 by the payee, usually effected by his writing the word "Accepted," 
 followed by his signature, across the face of the draft. (2) The 
 name given to an accepted paper. Prin. 65; Form 15 T. 
 
 Accommodation Paper, flnstruments which the maker, 
 drawer, acceptor, or indorser signs merely as an accommodation 
 to another, reaping no financial benefit for so doing, unless paid a 
 commission for the act, as is sometimes the case. See Prin. 34 B. 
 
 Account. (Acct. or a/c). fAs used in bookkeeping means 
 (1) A single entry or group of entries either debits or credits or 
 both together under a specific heading to indicate an accounting 
 condition. (2) The balance or result of a group of such entries. 
 
 Accounts. Prin. 21-21 C. 
 
 Accountant. fOne who by virtue of experience and training 
 in accounting is qualified to review the work of accountants and 
 bookkeepers. 
 
 Accountancy, f Accountancy is a profession, the members of 
 which, by virtue of their general education and professional train- 
 ing, offer to the community their services in all matters having to 
 do with the recording, verification and presentation of facts in- 
 volving the acquisition, production, conservation and transfer of 
 values. 
 
 Account Current, f A running record of current financial 
 transactions between two parties who may, through the growth of 
 their account, become debtor or creditor alternately. 
 
 Accounting. t Accounting is the science which treats of the 
 systematic record, compilation, and presentation in a comprehen- 
 
 189 
 
190 DEFINITIONS 
 
 sive manner for administrative purposes of the financial oper- 
 ations of a business organization. See Prin. I. 
 
 Accounting Cost System, f A system whereby, through an 
 adequate and comprehensive classification of accounts in the gen- 
 eral ledger and the application thereto of the units of goods sold, 
 an average unit cost is obtained. 
 
 Accounting Period. The time between opening and closing a 
 set of books. 
 
 Account Purchase. A detailed record of the cost of pur- 
 chases made by a purchasing agent. 
 
 Account Sales. An itemized statement issued by a commis- 
 sion firm to a consignor, showing the amounts realized from sales, 
 the expenses and the proceeds. Form 15 Q. 
 
 Account Sales Abstract Book, f Book used for the purpose of 
 distributing debits and credits of accounts of sale so that per- 
 sonal accounts may receive their postings daily and the impersonal 
 accounts at fixed periods, usually at the end of month. 
 
 Account Sales Register. Form 25 C. 
 
 Accounts Payable, f All accounts payable to creditors. 
 Prin. 32. 
 
 Accounts Receivable, t (1) Accounts due from debtors. (2) 
 The aggregate of outstanding accounts receivable open on the 
 books at any time. Whilst this account should be confined strictly 
 to what its name implies, it often covers such things as advances 
 to employees on account of salary, expenses in travelers' hands un- 
 accounted for, and other debit accounts not strictly accounts re- 
 ceivable. Prin. 23 D; Form 18 B. 
 
 Accretion. fThat which has grown or accumulated, a term 
 used mainly as applying to the growth or accumulation of income 
 under certain conditions. 
 
 Accrued. Added by gradual increase, as the interest on a 
 note. 
 
 Accrued Dividend. fThis has the same relation to a stock as 
 "accrued interest" has to bond. Not many stocks are sold with 
 "accrued dividend" or "with dividend," and then only in case of 
 "guaranteed stocks" or stocks where the dividend is certain and 
 fixed. 
 
 Active Account, f Bank deposits against which many cheques 
 are drawn, and at frequent intervals ; accounts which show run- 
 ning transactions. 
 
 Active Partner. fOne actively engaged in the business, and 
 who incurs full liability, as distinguished from "silent partner" 
 and "special partner." 
 
 Acknowledgment. An officially certified statement made to a 
 notary public or other public officer with seal, affirming the volun- 
 tary nature of some act by the acknowledger, which act is speci- 
 fied in the instrument. 
 
 Adjustment Account. An English equivalent of the American 
 term, "controlling account." 
 
 Administration Expenses. fExpenses incurred in connection 
 with the administration of a business, usually the salary and ex- 
 penses of the executives and other expenses not directly charge- 
 able to specific operating or selling expenses. 
 
INDEX-COMMENTARY 191 
 
 Administrator, f A person named by the probate court, or 
 other proper authority, to take charge of the goods and estate of 
 one dying without a will. 
 
 Advance Bill. fThis is a regular "commercial bill" of ex- 
 change, only drawn against goods to be afterwards shipped in- 
 stead of against a shipment already made. 
 
 Adventure Account, f Adventure Account, or "Venture Ac- 
 count," is a title frequently applied to specific shipments on con- 
 signment when made the subject of separate accounts. If at the 
 risk and on behalf of the shipper as co-partner with others, the 
 account is called a "Joint Venture" and is a form of joint account. 
 
 Advice Sheet. fPeriodical written report of business trans- 
 actions from branch office to head office, made daily, weekly, or 
 monthly. 
 
 Affidavit. A written statement under oath and acknowledged 
 before a proper officer. (See Acknowledgment.) 
 
 Affiliated Company, f A company which is related to another 
 company through stock or bond ownership, operation agreement or 
 other mutuality of interest. 
 
 Agent (Agt.) fA person duly authorized to act on behalf of 
 another, or one whose unauthorized act has been duly ratified. 
 Prin. 88 F. 
 
 Agreement of Co-partnership. Prin. 68 ; Form 16 H. 
 
 Agreement of Incorporation. Prin. 68; Form 16 R. 
 
 Allocate. fTo place; to set apart. 
 
 Allonge, f A slip of paper attached to a negotiable instrument 
 to receive endorsement for which there is no space on the instru- 
 ment itself. 
 
 Allowance. A deduction from a debt allowed to a debtor for 
 some reason not considered when the debt was made; an 
 abatement. 
 
 Allowance Reserve. fAn account to which should be credited 
 a sufficient amount to cover allowances, price differences, returns 
 (other than trade discounts) that is sufficient to cover this par- 
 ticular kind of loss on outstanding accounts receivable. 
 
 Amount (Amt.) The sum total of several items. 
 
 Amortization. tThe gradual extinguishment of the amount 
 of an asset, liability, profit or loss by pro-rating it over the period 
 during which it will exist or during which its benefit will be real- 
 ized. Specifically, (1) The gradual extinction of a debt, as, for 
 instance, by means of a sinking fund. (2) The gradual reduction 
 in the valuation of an asset, thus anticipating the time when it 
 shall eventually become worthless ; as distinguished from provision 
 for depreciation or replacements because of physical loss or dam- 
 age. (3) The absorption in the income or profit and loss ac- 
 counts, during the pendency of the debt, of a discount incurred 
 or of a premium realized in the sale of an obligation, which dis- 
 count or premium may be carried in the meantime in a debit or 
 in a credit suspense account. 
 
 Annuity. A sum of money payable yearly for a given num- 
 ber of years, or during life. 
 
 Appraisal. fThe result of a valuation of property or assets, 
 used mostly in connection with the valuation of fixed assets of a 
 company or corporation. 
 
192 DEFINITIONS 
 
 Appreciation. Prin. 24. 
 
 Appurtenance. Any minor property or other thing of value, 
 pertaining to or dependent upon a property or a business, as the 
 small buildings or other improvements belonging to a lot or farm. 
 
 Arbitration. fThe determination of a matter or matters in 
 dispute by the decision of one or more persons called arbitrators, 
 who, in case they disagree, may call in an umpire to make a final 
 decision. 
 
 Article. (Art.) 
 
 Articles of Co-Partnership. The written agreement, or con- 
 tract, governing the relations and mutual obligations of partners. 
 Form 16 H. 
 
 Articles of Incorporation. Prin. 68 ; Form 16 T. 
 
 Assessment, f An apportionment of or call for definite con- 
 tributions or payments. 
 
 Assessment Account. An account to which are carried from 
 Profit and Loss as debits, the amounts assessed against the dif- 
 ferent stock holders. 
 
 Assets. fProperty fixed or liquid, resources of any kind 
 capable of being converted into money or value. The term is 
 used sometimes as applying to goodwill, concessions, franchises, 
 deferred charges, and in English accounting even to preliminary 
 expenses incurred in the formation of a company. See Prin. 13 
 and Prin. 21-30. 
 
 The following distinctions may be noted : 
 
 (1) Fixed Assets. fSuch assets as are stationary and may 
 be regarded to a certain extent as permanent, such as real estate, 
 buildings, plant, machinery, etc. 
 
 (2) Liquid Assets. fSuch assets as are not fixed or perma- 
 nent, but are subject to conversion into cash, such as raw and 
 finished material, book debts, securities, etc. 
 
 (3) Floating Assets. fSame as liquid, sometimes called 
 "circulating assets." 
 
 (4) Wasting Assets. fSuch fixed assets as in the process of 
 working are gradually disappearing or wasting away, such as 
 mines, timber lands, quarries, and other such properties. 
 
 Assignment. A term commercially applied to a transfer of 
 property in writing. Bank accounts, mortgage loans, and claims 
 of various kinds, accruing, as, salary, growing crops, etc., are as- 
 signable, and if assigned for value, the assignee may collect or 
 possess them for his own benefit. 
 
 Assignment in Bankruptcy. The transfer of property of a 
 bankrupt assignor to the assignee, or person in whom it is vested, 
 for the benefit of creditors. 
 
 Assistant. (Asst.) 
 
 Association, f A business organization composed of persons 
 whose interests therein are mutual. 
 
 At. (@). 
 
 Attachment. A legal seizure of property to satisfy debt 
 
 Attorney in Fact. fOne who acts under the authority con- 
 ferred by power of attorney. 
 
 Audit. An examination of records of account with a view to 
 ascertaining their correctness. Prin. 81-90. 
 
INDEX-COMMENTARY 193 
 
 Audited Voucher Register. A columnar-ruled book designed 
 to supplant both the purchase journal and creditors' ledger by 
 showing in combined form not only the liability in favor of indi- 
 vidual creditors, but the distribution of cost and expense. It is 
 supported by vouchers which gather together a number of invoices 
 and eliminate much detail work. 
 
 Audit for Accuracy. Prin. 83-83 D. 
 
 Audit for Fraud. Prin. 85. 
 
 Audit for Misappropriation. Prin. 85 D. 
 
 Audit for Suitable Books. Prin. 86. 
 
 Audit for True Record. Prin. 84. 
 
 Audit for Worth and Earning Power. Prin. 87. 
 
 Auditing. Prin. 81. 
 
 Auditing, some legal aspects of. Prin. 68. 
 
 Auditor. A person appointed to examine and verify records 
 and accounts. Prin. 81 B. 
 
 Auditors' Records and Reports. Prin. 82 D and 90. 
 
 Auxiliary Books. Books containing records additional to 
 those made in the posting books. Prin. 79. 
 
 Available Assets. fThose assets which are available for the 
 payment of debts (includes goods unsold which do not come under 
 "quick assets," also may include "supplies for operation"). 
 
 Bad Debt-Reserve, f An account to which should be credited 
 a sum sufficient to cover bad debts on outstanding accounts (but 
 not trade discounts or allowances). 
 
 Balance. (Bal.) The excess of one side of an account over 
 the other. 
 
 Balance Sheet, f A statement showing the financial position 
 of a business, its assets and liabilities, the capital employed 
 therein, as well as any reserves, surplus or deficiency there may 
 be at a specific date. 
 
 Some accountants call any statement of assets, liabilities and 
 net worth a "balance sheet;" others limit the term balance sheet 
 to such a statement when derived from the ledger accounts, show- 
 ing the ledger to be in balance. The author leans to the latter 
 view in the discussions in the text. 
 
 Balancing an Account. An account is balanced by entering 
 the difference on the lesser side, ruling and footing the two col- 
 umns, and carrying the difference below the ruling to the side 
 which is greater. 
 
 Balance of Trade. The difference between the value of ex- 
 ports and imports for a given country and period. 
 
 Bales, (bl.) 
 
 Bank, (bk.) A financial business that offers the following 
 principal services to the public: (1) Safe keeping of money; (2) 
 Checking accounts ; (3) Loans; (4) Collections; (5) Exchange or 
 the transmission of funds. 
 
 Bank Book. The book carried by a depositor to contain the 
 banker's entries of deposits when made, and of the depositor's 
 checks paid, when such book is balanced periodically. Form 15 C. 
 
 Bank Check. Prin. 62 ; Form 15 E. 
 
 Bank Discount. A certain per cent deducted from the 
 amount of future due paper by a bank, for carrying the paper 
 to maturity. 
 
194 DEFINITIONS 
 
 In the laboratory units of the American Bookkeeping Series, 
 the bank discount is computed on the amount at the given rate, 
 for the exact days from date of discount to maturity, and each 
 day computed as 1/360 of a year. 
 
 Bank Draft. Prin. 62 ; Form 15 H. 
 
 Banking Forms. Prin. 62; Forms 15A-15L. 
 
 Bankruptcy. Prin. 88 1. 
 
 Bank Statement. Form 20 K. 
 
 Barrels, (brl.) 
 
 Barter. To traffic or trade one commodity for another with- 
 out using money. This is a crude method of exchange which is 
 now seldom practiced by civilized people. 
 
 Betterment, f Any addition to or improvement of a property, 
 any expenditure which makes a property better or more valuable. 
 In railroad accounting betterments include the "enlargement or 
 improvement of existing structures, facilities, or equipment,, of an 
 improved or higher class taking the place of others previously 
 existing." (Interstate Commerce Commission.) 
 
 Bill, f A bill is a promise to pay a fixed amount to a stated 
 person at a specified time. 
 
 Bill-Book, f An account book in which is kept a record of 
 notes receivable or payable with the particulars thereof, the dates 
 of maturity, etc. See Form 13 M. 
 
 Bill of Exchange, f A bill of exchange is an unconditional 
 order in writing addressed by one person to another, signed by the 
 person giving it, requiring the person to whom it is addressed to 
 pay on demand or at a fixed or determinable future time a certain 
 sum in money to order or to bearer. Prin. 88 E. 
 
 Bill of Goods or Services. An itemized statement of goods 
 sold or services rendered, showing the amount payable for same. 
 
 Bill of Lading. (B. L.) An itemized acknowledgment, by a 
 transportation company, showing list of goods to be transported, 
 with shipping directions, transportation charges, and other agree- 
 ments as to shipment and delivery. Prin. 64; Form 15 V. 
 
 Bill of Sale. A document formally transferring ownership 
 in personal property from one person to another. Form 16 I). 
 
 Bills Discounted, trills of exchange or time paper that have 
 been discounted. 
 
 Bills Payable. All notes, bills of exchange or acceptances 
 payable are termed bills payable, and may be kept in one account 
 with this heading. See Notes Payable. 
 
 Bills Receivable. All promissory notes, time notes, bills of 
 exchange, or acceptances receivable may be under the general 
 term of bills receivable. See Notes Receivable. 
 
 Bills Receivable Register. Form 13 M. 
 
 Blotter. fCommonly called a book of original entry. A book 
 in which a first and temporary record of transactions is made, 
 later to be transferred, "posted," into books of more permanent 
 record. 
 
 Board of Trade. An organization of business men for the 
 advancement of commerce. 
 
 Bona Fide. In good faith ; without deceit or fraud. 
 
 Bond. A document or agreement under seal. The ordinary 
 
INDEX-COMMENTARY 195 
 
 commercial bonds are issued by the Government, the State, a 
 private corporation or an individual. All promise the payment 
 of money, together with Interest payments on the same. A coupon 
 bond has interest coupons attached which are cut off and col- 
 lected as they mature. Prin. 25 D. 
 
 Bond and Mortgage, f An instrument whereby money at in- 
 terest is borrowed on a promissory note (bond) secured by an 
 indenture or mortgage giving to the holder the right to foreclose 
 and take possession by due process of law in case of failure to 
 pay either principal or interest at the appointed time. 
 
 Bonded Debt. fThe fixed indebtedness of a municipality or 
 incorporated company in the form of bonds. 
 
 Bonded Goods. Merchandise stored in a bonded warehouse, 
 or in bonded cars, the owner having given bonds securing the 
 payment of import duties or of internal revenues, upon their re- 
 moval or their arrival at some inland city of entry, and before a 
 specified time. 
 
 Bond of Indemnity, fin investment matters the common use 
 of the "bond of indemnity" is in case of a lost security. It is a 
 form of guaranty protecting a corporation (firm or individual) in 
 event of presentation at some future time of a security which had 
 been lost by the owner and the corporation issuing the same had 
 issued a new security in its stead. 
 
 Bonds Account. Prin. 25 D. 
 
 Bonus. A gift or extra allowance for a business favor or 
 service, as the placing of a loan, the making of an investment 
 Cities and Chambers of Commerce often grant bonuses to those 
 who establish new industries in a city. 
 
 Bonus Stock, or Capital Stock for Promotion. tBonus stock 
 or capital stock for promotion are terms used interchangeably for 
 shares of capital stock set aside as remuneration to the promoter 
 for the organization of the business. 
 
 Book Account. The account kept in the ledger with a person 
 to whom credit sales, or from whom credit purchases, are made. 
 
 Bookkeeping. tBookkeeping is the art of recording pecuniary 
 transactions in a regular and systematic manner. Prin. 1, 4, and 5. 
 
 Book Profits. fProfits as shown by tlje books, not necessarily 
 actual or real, but as shown by book entries. 
 
 Books Close, fin order that corporations, especially the 
 larger ones, may pay a dividend, it is necessary to fix an interval 
 of one or more (lavs' duration, during which it is possible to make 
 a correct list of the stockholders as shown by the transfer books, 
 so that the dividends may be sent to the stockholders as of record 
 the date provided for in the vote passed declaring the dividend. 
 It is desirable that no stock shall be transferred during this 
 process, and it is. therefore, customary for most corporations to 
 "close their books." that is, their transfer books, during such an 
 interval. This period generally precedes shortly the actual pay- 
 ment of dividend. 
 
 Books of Account. tAll books or written records of any 
 undertaking in which there are entries concerning its finances, 
 wealth or obligations or merchandise movements; including also 
 records of capital stock issues and transfers and minutes of direct- 
 ors' or stockholders' meetings. 
 
196 DEFINITIONS 
 
 Book Value. fThe value of an asset as carried upon the 
 books, as distinguished from the actual or market value of such 
 asset. 
 
 Books of Original Entry. Such books as contain the first 
 entries of transactions, as opposed to ledgers which contain the 
 posted entries. Prin. 14. 
 
 Bound Ledger. Prin. 80 F. 
 
 Bound Ledger. Prin. 72 F. 
 
 Boxes. (Bx.) 
 
 Broker. One whose business is to act as agent in buying and 
 selling financial paper, stocks or other property for others. His 
 charge for the service is called brokerage. 
 
 Budget, f A budget is a statement of the estimated revenues 
 and expenditures for a given period. 
 
 Bundles, (bdl.) 
 
 Burden Estimate. An estimate of the amount of the several 
 items of manufacturing expense, covering a future period of one 
 month, one year, or other time, for the purpose of distributing 
 such estimated expenses proportionately to the various jobs as the 
 latter are completed. 
 
 Burden, or Overhead (Cost Accounting). Elements of cost, 
 which although they cannot be definitely assigned to any particu- 
 lar job, or even series of jobs, are a necessary part of the ex- 
 pense of manufacture, and must be taken into account in calculat- 
 ing costs. 
 
 Burden Rate. The manufacturing burden is to be distributed 
 to the several jobs in proportion to the amount consumed by each 
 job. Thus, the entire burden of a month is sometimes divided by 
 the number of hours in the month, making a burden rate per hour, 
 or by the value of the material manufactured, making a burden 
 rate per dollar's worth of material, or by the wages paid for labor, 
 making a burden rate per dollar in labor. 
 
 Bushels, (bu.) 
 
 Business. Prin. 2. 
 
 Business Forms. Prin. 62-69. 
 
 Business Ledger. The part of a complete ledger containing 
 the nominal, or profit and loss, accounts. 
 
 Business Organization. A business organization is a com- 
 bination of directing intelligence, labor, capital and equipment, 
 working together to produce some utility, and to sell it. 
 
 Business Statement. A list of the profits and losses covering 
 an accounting period, entered with more or less detail as the case 
 demands. Also called a profit and loss statement. Forms 6, 7, 
 7 D, 8, 9, 12 N. 
 
 Buyer. (1) The one who makes the purchases for a concern. 
 (2) The manager of a department in a department store, who is 
 responsible for the purchases and sales in his department. 
 
 Call-Loans, f Short- time investments often made upon the 
 security or pledge of bonds, stocks, goods or other personal prop- 
 erty valued at more than the amount of the loan. Frequently 
 these are payable on demand. 
 
 Capital. tThis term as used in accounting is employed to ex- 
 press (1) The sum of the net assets of a business or undertaking, 
 or that sum which remains after deducting the liabilities from 
 
INDEX-COMMENTARY 197 
 
 the assets of a business or undertaking. (2) Any principal sum 
 (usually in cash, sometimes in property) contributed to an under- 
 taking by a partner or individual for supplying the means to 
 operate such undertaking. (3) The value or amount of interest 
 any individual has invested in an undertaking, and (4) Any prin- 
 cipal sum which is used or retained to produce income or profit. 
 
 Capital Account, f (1) An account opened and kept to indi- 
 cate the amount of capital a partner has in a business, or an ac- 
 count showing the total capital invested in a business. (2) The 
 term capital account or capital accounts is used in connection with 
 sums invested in permanent assets, such as real estate, plant, ma- 
 chinery, etc., these being styled capital accounts because their 
 province is to produce income or profit. See Prin. 37-39 D ; Forms 
 10E-F, 12 P, 13 P. 
 
 Capital Assets. Includes real estate, buildings and other 
 structures, equipment and other personal property of a more or 
 less permanent character, and cash on hand specifically applicable 
 for these purposes. 
 
 Capital Expenditures, f All sums expended for additions to 
 or improvements of properties. 
 
 Capital Expense. Prin. 43 A. 
 
 Capital, Fixed. fThat portion of the capital of an undertak- 
 ing which has been sunk in fixed assets, such as real estate, build- 
 ings, machinery, plant, etc., which are not intended to be sold but 
 used to produce revenue and profit. 
 
 Capitalization of Earnings. fThe issuing of securities based 
 upon a corporation's earning ability ; the issuing of securities 
 upon which reasonable rates of interest or dividends can probably 
 be paid from earnings, rather than making such issues equal in 
 face value to the actual value of the property. 
 
 Capital, Nominal. fThe full amount of capital stock which 
 a company or corporation is authorized to issue. 
 
 Capital, Paid Up. fThat portion of the capital which has 
 been authorized issued and paid up by the stockholders or pro- 
 prietors. 
 
 Capital Stock. fThe amount of share capital issued or au- 
 thorized by a company or corporation. 
 
 Capital, Uncalled. fThat portion of the capital representing 
 the difference between the amount of capital actually paid up and 
 the amount of the face value of the shares. 
 
 Capital, Working. fThat portion of the net capital of an 
 undertaking which is used or is available for the working of such 
 undertaking, properly speaking, the liquid assets of such under- 
 taking. 
 
 Card Ledger. Prin. 80 H. 
 
 Care of. (c/o) 
 
 Carrying Charges. fThe interest charged by brokers for the 
 amount of money advanced by them to customers in marginal 
 transactions. Also a Chicago Board of Trade term indicating 
 storage rates, interest, and insurance on grain or provisions. , 
 
 Cartage. ( ctg. ) 
 
 Cases, (cs.) 
 
 Cash . f Lawful money. Usually understood to include 
 cheques or such other instruments as are received by banks for 
 deposit. 
 
198 DEFINITIONS 
 
 \ * 
 
 Cash Account. Prin. 23 D. 
 
 Cash and Charge Record Book. Form 17 L. 
 
 Cash Book. (C. B.) Prin. 84 to 84 H; Forms 10 A, 10 B, 
 11 A, 13 B, 13 L, 13 Q, 17 B, 18 C, 23 E- J, 27 J-K. 
 
 Cash Discount. The allowance from the amount of a sale for 
 immediate cash payment. Prin. 59 B. 
 
 Cashier. (1) One who has charge of money; (2) the exec- 
 utive officer of a bank. 
 
 Cashier's Account. (C. A.) 
 
 Cashier's Check, f A check drawn by a bank against itself, 
 and usually signed by its cashier. 
 
 Cashier's Fund. An amount set aside from the general cash 
 ordinarily for current expenditures in money. 
 
 Cash Journal. Prin. 73 G ; Forms 12 W, 17 M, 22 D, 23 I. 
 
 Cents, (cts. or ^.) ' 
 
 Certificate. A written voucher attesting to some fact; as a 
 certificate of deposit, (which is a voucher that money has been 
 deposited in a bank) ; a certificate of stock, vouching the owner- 
 ship of stock in a company. Forms 15 J, 15 W, 18 1. 
 
 Certificate of Deposit. Form 15 J. 
 
 Certificate of Deposit Register. Form 20 B. 
 
 Certificate of Incorporation. fWhen it is desired to form an 
 incorporated company, a paper called a "certificate of incorpora- 
 tion," or one having a similar title, must be filed with the Secre- 
 tary of State under which it is desired to incorporate. Prin. 68, 
 Form 16 S. 
 
 Certificate of Installment. Form 18 H. 
 
 Certificate of Protest. Form 16 M. 
 
 Certificate of Stock. Prin. 68, Form 15 W. 
 
 Certified Check. A check that has been certified, or accepted, 
 by the bank on which it is drawn, making the bank responsible 
 for its payment. Form 15 K. 
 
 Certified Check Register. Form 20 C. 
 
 Changing Single to Double Entry. Prin. 89 F; Forms 17 A- 
 17 L. . 
 
 Charge. To charge an account means to make an entry to 
 be posted as a debit. 
 
 Charges Against Operations. Prin. 54. 
 
 Charter. (1) A document issued by authority of the nation 
 or a state defining the rights and privileges of corporations. (2) 
 To hire or let a conveyance of transportation; as a ship, a rail- 
 way car. 
 
 Chattel. Any kind of property except real estate. Ex- 
 amples: merchandise, notes and accounts, animals, leases of real 
 estate, etc. 
 
 Chattel Mortgage. Prin. 67; Form 16 G. 
 
 Check or Cheque, f A written order to banker to pay a cer- 
 tain sum of money to the party named, on demand, on or after 
 the date specified thereon. Prin. 62; Form 15 E. 
 
 Check Book. Prin. 62 ; Form 15 E. 
 
 Checking-Account. The account of money deposited in a 
 bank subject to check. 
 
 Check Mark. ( V ) A mark placed opposite amounts to show 
 
INDEX-COMMENTARY 199 
 
 that they have been verified or posted. Frequently the same 
 amounts are checked over more than once. Different colored inks 
 should be used in subsequent checkings. 
 
 Check Register. Form 23 G. 
 
 Check Sheet for Teller. Form 20 E. 
 
 Check Stub. Prin. 74 D ; Form 15 D, 15 E. 
 
 Chose (pronounced shoz). A thing recoverable by an action 
 at law. A "chose-in-action," is something to which one has the 
 right but not the possession. Examples: A right to damages for 
 breach of contract or for injury. Notes, bonds and other promises 
 not negotiable, are commonly called choses in action, as they evi- 
 dence the right to collect. 
 
 Circulating Cash. Cash in hand that may be used to meet 
 the miscellaneous payments. 
 
 Classification of Accounts, fin a balance sheet, the stating 
 of assets in order relatively to the possibilities of quick realiza- 
 tion and of liabilities relatively to the urgency for settlement. 
 
 Clearing Account. fAn account used to collect various 
 amounts, the aggregate of which is to be pro-rated and distributed 
 to other accounts leaving no balance. 
 
 Clearing House. An association of banks in a city for the 
 purpose of daily adjustment of their claims against one another 
 to be effected at one time and place. 
 
 Close Corporation, f A stock company whose shares and man- 
 agement are in the hands of a few persons, and the stock of which 
 is seldom, if ever, publicly offered. 
 
 Closing an Account. An account is closed, by ruling closing 
 lines, when it ceases to represent an element in the business. 
 This may be when both debit and credit totals are equal, or when 
 the difference between debit and credit sides are carried to some 
 other account, as when an account is closed into Profit and Loss. 
 Forms 10 L to 10 O. 
 
 Closing Entries in Journal. Prin. 72 H; Forms 12 0, 12 W, 
 14 D-14 F. 
 
 Closing the Ledger. Prin. 80 O. 
 
 C. O. D. Account. Prin. 23 D ; Form 14 M. 
 
 Coin. Metal impressed with the government stamp, and used 
 as money. 
 
 Collateral Security. Papers owned by a debtor and passed 
 to a creditor as security for an obligation. 
 
 Collateral Loan. fThe obligation or promise to pay of an 
 individual, firm, or corporation, on demand or maturing in a year 
 or less time, and which individual, firm, or corporation has de- 
 posited with the holder of the note, stocks, bonds, or other securi- 
 ties which, in case of the note not being paid when due, may be 
 sold by the holder of the note and so much of the proceeds of the 
 same as may be necessary to satisfy the debt retained by the 
 lender, and the balance, if any, returned to the borrower. 
 
 Collateral Note. fA promissory note secured by stocks, bonds, 
 mortgages, or other securities. 
 
 Collection Charges. The charges made by a bank or cot- 
 lector for collecting claims. 
 
 In the sets of the American Bookkeeping Series bank collec- 
 
200 DEFINITIONS 
 
 tion charges are computed at 15<£ per $100, or part thereof, unless 
 otherwise specified in the transactions. 
 
 Collection of Accounts and Notes. Prin. 88 C. 
 
 Collection Register. Form 20 H. 
 
 Columnar Cash Book. Prin. 74 H ; FVms 18 C, 24 F, 25 B. 
 
 Columnar Expense Book. Prin. 74 F ; Form 12 X. 
 
 Columnar Journal. Prin. 73 F ; Forms 17 M, 18 A, 22 D, 25 1. 
 
 Commercial Bill, f A draft, accompanied by a "bill of lading" 
 and a certificate of marine insurance, drawn by a seller in one 
 country against a buyer in another, on account of goods sold to 
 latter. 
 
 Commercial Discounts. fNotes given by those engaged in 
 commercial enterprises — dry goods, hardware, etc. — upon which 
 the interest is paid in advance — "discounted." Sometimes the rate 
 of "discount" is meant by the term "commercial discount." 
 
 Commercial Expense. tThis term is applied generally to 
 cover all expenses of doing business that are not applicable to 
 the cost of a material or article manufactured. 
 
 Commercial Paper. Bills of exchange, drafts and notes given 
 in the course of trade. Prin. 88 E. 
 
 Commission. (Com.) A percentage given for the sale or 
 purchase of goods, or the transaction of other business by an agent 
 
 Commissioner of Accounts, f A commissioner of accounts is 
 an officer practically to superintend the financial operations as to 
 receipts and disbursements of the city or town by which he is 
 appointed. 
 
 Commodity. A term relating to everything movable that is 
 bought and sold. Examples : goods, wares, merchandise, the proo\ 
 acts of lands and manufactures. 
 
 Common Carrier. One who, for pay, engages to transport 
 goods or persons for anyone who chooses to employ him. 
 
 Common Law. Law based upon the precedent of usage, 
 rather than that contained in the statutes enacted by legislative 
 bodies. 
 
 Common Stock. fThat part of the capitalization of a com- 
 pany upon which dividends may be paid only after satisfying the 
 requirements of the floating debt, bonds and "preferred stock," if 
 any. 
 
 Compact. An agreement or contract between parties. 
 
 Company. (DA corporation or an association. (2) A term 
 used in a firm name to designate other partners whose names are 
 not given. 
 
 Compound Entry. An entry consisting of more than one debit 
 or credit. Form 13 A. 
 
 Complete Expense Account. Prin. 53. 
 
 Complete Journal. Prin. 73 C ; Form 12 A. 
 
 Complete Ledger. Prin. 80 B. 
 
 Compromise. An agreement to settle a claim by paying or 
 receiving only a part of the amount To adjust any kind of busi- 
 ness differences by an agreement based upon mutual concessions. 
 
 Concern. A general term referring to a business and its own- 
 ers, in the sense of an organization to accomplish some under- 
 taking. 
 
INDEX-COMMENTARY 201 
 
 Condition of Business. The result shown by a financial state- 
 ment. The condition depends on the amounts and kinds of as- 
 sets and liabilities. 
 
 Consideration. The material cause of a contract. The thing 
 promised, or the reason for the promise. 
 
 Consignee. One to whom goods are sent. 
 
 Consignment. (Const.) Goods consigned to an agent to be 
 sold. 
 
 Consignment Charges Account. An account charged by a 
 commission house for cash paid on consignments received, such 
 payments to be later deducted from proceeds of sales. 
 
 Consignment Sales Account. An account credited by a com- 
 mission house for sales of consignment goods, and charged when 
 such sates are accounted for to the consignors. Form 15 Q. 
 
 Consignor. One who sends or consigns goods. 
 
 Consolidated Balance Sheet, f A balance sheet which exhibits 
 the combined financial condition of a number of business organiza- 
 tions. 
 
 Consumer. The person that uses up, appropriates to himself, 
 or changes the character of a utility received. 
 
 Construction Account. tAn account employed to show the 
 cost of construction of a piece of property. It is usually made to 
 contain all items (such as material, labor, expense), entering into 
 the work and in some cases interest on borrowed money is charged 
 against this account, and even the discount on the sale of bonds 
 issued for the work. 
 
 Contingent. Not certain. Contingent assets, Prin. 28 G ; con- 
 tingent liabilities, Prin. 34 ; contingent fund, Prin. 23 C. 
 
 Contract, f A contract is an agreement, based upon a cause 
 or consideration between two or more persons, to do, or to abstain 
 from doing, some particular act or thing. 
 
 Controlling Account, f An account usually kept in the general 
 ledger of a business and is supposed to control a number of sep- 
 arate or detail accounts kept in another book or ledger. It is 
 properly an account kept to contain the totals of the debits and 
 credits of a number of accounts in order to show at any time the 
 balance of the aggregate of these accounts. It is used mainly in 
 connection with accounts receivable and accounts payable. Prin. 
 21 C; Form 18 B. 
 
 Controlling Interest. fWhen one person, or a number to- 
 gether for their mutual benefit, obtain, by ownership or by proxies, 
 their right to cast the votes for a majority of the shares of stock 
 in any corporation, such person or persons are said to have a "con- 
 trolling interest." 
 
 Convertible. Capable of being turned into money, or other 
 equivalent, as a convertible bond or other security. 
 
 Co-Partnership. The condition effected through the joining 
 of two or more persons into one firm for the purpose of carrying 
 on any enterprise ; a partnership. See Form 16 H. 
 
 Copyrights Account. Prin. 28 B. 
 
 Corporation, f A corporation is an artificial body created by 
 law deriving all its powers from the law which granted the char- 
 ter by which the corporation is privileged to carry on business, 
 as set forth in its articles of incorporation. Prin. 88 H. 
 
202 DEFINITIONS 
 
 Correspondence. An interchange of letters. 
 
 Correspondents. (1) Banking firms and collection agencies 
 with whom a bank has accounts are called its correspondents. (2) 
 Any one with whom business is carried on by means of letters. 
 
 Cost Accounting. The branch of accounting that has to do 
 with gathering the items of expenditure applied to a single piece 
 of work, or a single job, or some unit manufactured. General 
 accounting includes the records of the cost of conducting the busi- 
 ness as a whole, while cost accounting includes the records of the 
 cost of producing or maintaining certain units separately 
 considered. 
 
 Cost of Merchandise. Prin. 23 G. 
 
 Cost Ledger. fThe books in which the individual "job ac- 
 counts" showing the various elements entering into the cost 
 thereof are kept. 
 
 Cost of Sales. fThe cost of producing or manufacturing the 
 material or goods sold. 
 
 Coupon, f Interest coupons are small certificates attached to 
 that part of the bond representing the principal sum, each coupon 
 representing the interest upon the bond for a certain period, there 
 being attached to each bond a sufficient number of these coupons 
 to represent the interest for the entire length of time which the 
 bond may be outstanding before maturity. 
 
 Coupon Bonds. Bonds with interest coupons attached. 
 
 Covenant. A mutual agreement under seal. 
 
 Credentials. Testimonials giving authority. 
 
 Credit. (1) Trust given to a debtor. (2) Mercantile reputa- 
 tion entitling one to be trusted. (3) (Cr.) The side of an account 
 on which we enter all values yielded from the source represented 
 by the title. 
 
 Creditor. (Cr.) One giving credit; one whom we owe. 
 
 Creditors' Ledger. fThe creditors' ledger contains the indi- 
 vidual account of each trade creditor. 
 
 Cumulative. fThis, as a rule, has reference to "preferred" 
 shares of stock. Unpaid dividends upon such stocks accumulate 
 from year to year and must be paid before the common or other 
 stocks which come after can receive anything. A "cumulative" 
 issue often acts to the detriment of the common shares, as it nat- 
 urally lessens the chances of dividends upon them. 
 
 Currency. Paper money as distinguished from coin. In a 
 broader sense, the entire circulating medium of exchange. 
 
 Current Assets. Prin. 23-23 M. 
 
 Current Liabilities, f Amounts owed subject to constant 
 change, such as accounts payable, loans payable, bills payable, in- 
 terest and dividends accrued towards the next payments, pay- 
 rolls, etc. Floating indebtedness of all kinds comes under this 
 heading. Prin. 32. 
 
 Customers. The persons to whom the business regularly sells 
 its goods or services. 
 
 Customers' Ledger. fThe customers' ledger contains the in- 
 dividual accounts of each customer or trade debtor. 
 
 Custom House. The place where government duties are 
 collected. 
 
INDEX-COMMENTARY 203 
 
 Daily Balances. fTrust companies, as a rule, and sometimes 
 other banking institutions, allow interest to their depositors upon 
 "daily balances" of over a certain amount, say $300 or more. 
 
 Daily Statement Book for Bank. Form 20 K. 
 
 Daily Audit Sheet. Form 17 N. 
 
 Daily Balance Slip. Form 17 K. 
 
 Day Book (D. B.) fOne of the account books used in single- 
 entry bookkeeping, another name for which is "blotter." See Prin. 
 71 ; Form 17 A. 
 
 Days, (ds.) 
 
 Days of Grace. Three days allowed after the date fixed for 
 payment of notes and other negotiable instruments before the 
 paper is legally due. Days of grace have been abolished in all 
 but nine states. States still retaining days of grace may be found 
 by referring to "Interest Laws" in this Index-Commentary- 
 Dead Weight Expenses, fin cost accounting a term some- 
 times used to indicate certain expenses, such as rent, taxes, power, 
 insurance, heating, lighting, etc., because such expenses are pay- 
 able whether the volume of work done is small or large. 
 
 Debentures, f A long term unsecured promissory note so 
 designated in the instrument. The term debenture bond is a 
 misnomer. 
 
 Debenture Bonds, f Debenture bonds may be said to be bonds 
 issued in much the same manner as shares are issued to preferred 
 stockholders, and the holders thereof may be termed preferred 
 creditors. 
 
 Debit. An entry to indicate the receipt of cash, or the cost 
 to the business of some business utility other than cash. Debits 
 are entered in the left of the two money columns of an account. 
 
 Debit and Credit. Prin. 72-72 I. 
 
 Debt. The amount owed by one to another. 
 
 Debtee. fOne to whom a debt is due; accreditor. 
 
 Debtor. (Dr.) The one who owes an amount. 
 
 Deed, f A document in writing (generally a printed form to 
 be filled out in writing is used) rendered authentic by the seal of 
 the party whose intention it is supposed to declare; in practice, a 
 document used for the purpose of transferring the title of real 
 property from one to another. In law a "deed" is any instru- 
 ment bearing a seal. See Form 16 A. 
 
 Defalcation. (1) An abatement or discount; (2) also, an 
 embezzlement. Prin. 85 C. 
 
 Defaulter. A person who fails to account for money or prop- 
 erty intrusted to him, usually applied to custodians of public 
 funds. 
 
 Deferred Annuity. fA fixed sum of money payable yearly, 
 but the payment of which does not begin until the expiration of 
 a certain time or after the happening of some event, as the death 
 of a person. 
 
 Deferred Assets, f Assets that have no tangible or permanent 
 value, but which represent expenditures for the benefit of a future 
 period, and for that reason are carried on the books and gradu- 
 ally absorbed. Prin. 28 D. 
 
 Deferred Charges. tThat part of operating expenditures paid 
 within a given period which is not properly a charge against the 
 
204 DEFINITIONS 
 
 income of that period and which, therefore, is deferred or post- 
 poned until a period following. 
 
 Deferred Credit to Income. fAn item containing an element 
 of profit, the benefit from which is deferred to a subsequent ac- 
 counting period. 
 
 Deferred Liability. tAn obligation accrued but not payable 
 until some future date. 
 
 Deferred Operation Credits, friability values representing 
 receipts for which value has not been rendered, as an advance 
 payment received for contract to perform certain work which has 
 not been performed, but on which, when performed, the payment 
 will apply. 
 
 Deferred Stock. fThe name given to a class of stock upon 
 which the payment of the interest or dividend is deferred until 
 some other prior securities have received theirs in full. 
 
 Deficiency. fThe term "deficiency" without further qualifica- 
 tions signifies the insufficiency of the assets or funds of a business 
 or estate to meet, discharge or satisfy its claims, liabilities or 
 obligations. 
 
 Deficit, f (1) An excess of expenditures over income. (2) 
 Any balance of liabilities over assets. 
 
 Del Credere, f A commission charged by a broker or factor 
 who guarantees the solvency of the customer for whom he tran- 
 sacts business. 
 
 Delivery. The transfer of money or property to another. 
 
 Demand.' A formal presentation of a claim. 
 
 Demand Loan. fA form of note or promise to pay, the bor- 
 rower having the right to pay off the loan at any time — pre- 
 sumably not the same day it is made — and likewise the lender 
 the right to demand payment, Sundays and legal holidays being 
 excepted in each case. 
 
 Demurrage. fWhen any vehicle of transportation, such as a 
 car or vessel, is detained beyond the time allowed either for load- 
 ing or unloading a per diem charge called "demurrage" is made. 
 
 Department. (Dept.) Dept. Expense, Prin. 54 F. 
 
 Departmental Accounts, f A system of accounts which relate 
 to the separate workings of the departments of any concern 
 usually in relation to the profit or loss shown by such departments. 
 
 Depletion. Prin. 58 D. 
 
 Deposit. (Dep.) The funds left in a bank for safe keeping, 
 or on checking account. 
 
 Deposit Ticket. Form 15 B. 
 
 Deposition. Testimony of a witness legally taken and com- 
 mitted to writing by a qualified official. 
 
 Depositor. tOne who places money in a bank ; that is, makes 
 a deposit, is the usual meaning in banking affairs ; but a depositor 
 may be one who commits securities, valuable papers, or anything 
 to the care of another, (a) 
 
 Depositor's Statement. Prin. 62; Form 15 G. 
 
 Deposit Slip. Form 15 B. 
 
 Depreciation. tAs understood and used in accounting the 
 measure of deterioration in value by reason of wear and tear, de- 
 cay, or other causes, of property,_ plant, machinery, and other 
 assets. Prin. 24. 
 
INDEX-COMMENTARY 205 
 
 i 
 
 Depreciation Account, f An account containing charges for 
 depreciation, the balance of which is transferred periodically to 
 Profit and Loss account. Prin. 54. 
 
 Depreciation Fund, f A fund set aside usually created out of 
 earnings, to provide for depreciation of plant, property, etc. 
 
 Depreciation Reserve, f An amount set aside out of earnings 
 and carried as a credit to offset any deterioration of assets which 
 has taken place or is likely to arise. 
 
 Deputy. A person appointed to act in the place of a public 
 official. 
 
 Detail Sheet. A columnar sheet used to divide the items 
 making up one account into several subdivisions. See Forms 18 M, 
 18 N, 25 D. 
 
 Detail Strip from Cash Register. Form 17 J. 
 
 Diminishment. Prin. 54. 
 
 Direction on Shipping Case. Form 18 J. 
 
 Direct Labor. fAlso called "productive labor." Labor that 
 can be charged directly to an article or group of articles. 
 
 Directors. The persons chosen to manage the affairs of a 
 company or corporation. The stockholders of banks, railroad 
 companies and other corporations are, as a rule, so numerous and 
 reside so remotely one from another, that it is physically as well 
 as legally necessary to select a small body of directors from their 
 number, to act together in the' general management. Directors 
 are usually elected annually. 
 
 Disbursements. fCash payments made during stated period, 
 regardless of the purpose of the payment. 
 
 Discount Account, fin bookkeeping practice, this account ap- 
 pears to be charged with the following: (1) The discount paid 
 or allowed to customers on the payment of their accounts. (2) 
 The amount paid to bankers or brokers for discounting bills re- 
 ceivable or accommodation paper. (3) Sometimes interest paid 
 on loans. The difference between the amount realized on the sale 
 of bonds or securities and their par value is called discount. This 
 is sometimes capitalized and carried as an asset, and sometimes 
 as a suspense item to be charged off gradually. 
 
 Discounting. Transferring to a bank or broker notes receiv- 
 able or other time paper, for an amount in cash less than the 
 amount collectible at maturity. The one disposing of the notes is 
 usually liable for their payment on failure of the maker to pay. 
 
 Discount on Bonds Account. The account chargeable for the 
 difference between face and amount realized from issue of bonds, 
 made by a company, and sold below par. 
 
 Discount Reserve, f An account to which should be credited 
 a sufficient amount to cover trade discounts on outstanding ac- 
 counts receivable. 
 
 Discount Ticket. Form 15 L. 
 
 Discretionary Pool. fFor all practical purposes the same 
 thing as a "blind pool;" at least, the one in control is allowed 
 entire freedom to do as he sees fit with the interests of all. 
 
 Dishonor. Refusal by a debtor to accept or to pay commer- 
 cial paper when it is presented. 
 
 Dissolution of Partnership. fDissolution of partnership is 
 the act of breaking up an association formed for the purpose of 
 
206 DEFINITIONS 
 
 trade, or the act of retiring from such association of one or more 
 of the parties concerned. 
 
 Distribution of Net Profit or loss. Sole proprietorship, 
 Prin. 60. 
 
 Distribution Register, f A columnar- ruled book of account in 
 which purchases, wages, expenses or other amounts may be re- 
 corded an<J divided into classifications or allotted to separate ac- 
 counts in the same process. (Not a voucher- register. ) 
 
 Dividend. (Div.) The share in profits passed to a stock- 
 holder. 
 
 Dividend Account. An account credited from Profit and Loss 
 or Surplus, when dividends are declared, and charged when such 
 dividends are paid to stockholders. 
 
 Dividend Book. fThe dividend book shows a record of every 
 dividend declared by the directors, the shares held by each stock- 
 holder, the amount of dividend to which each stockholder is en- 
 titled, together with each stockholder's signature, showing the re- 
 ceipt of the dividend. 
 
 Dividend in Liquidation. fWhen a business or industry of 
 any kind is being wound up, closed out, "liquidated," and money 
 paid from time to those to whom it is due, the creditors, stock- 
 holders, owners of the business, depositors (in case of a bank), 
 etc., these payments are called "dividends in (process of) liquida- 
 tion." 
 
 Dividend Reserve Account. fFor the purpose of equalizing 
 the payment of future dividends, i. e., to permit a company in a 
 bad year to pay its dividend upon shares at the same rate per 
 cent, as it had done in previous years. 
 
 Documentary Bill, f A "bill of exchange" accompanied by a 
 "bill of lading," insurance policy and invoice covering the ship- 
 ment of goods, which papers show the security which is behind 
 the bill of exchange. 
 
 Dollars. ($) 
 
 Donated Stock, f Capital stock of any given corporation 
 which once having been issued for value is presented to the com- 
 pany, usually for the purpose of being sold to raise working 
 capital. 
 
 Dormant Partner, f A dormant partner is one who invests 
 capital but takes no part in controlling or directing the affairs 
 of the firm. 
 
 Double Entry. (D. E.) A method of bookkeeping in which 
 the required debits and credits for all transactions are equal. 
 Prin. 70. 
 
 Dozen, (doz.) 
 
 Draft, (dft.) An order drawn by one party (the drawer), 
 directing a second party (the drawee), to pay a sum of money to 
 the order of a third party (the payee). Prin. 65; Form 15T-TJ. 
 
 Draft, Accepted. Form 15 U. 
 
 Draft Register. Form 20 D. 
 
 Drawee. The person on whom checks or drafts are drawn. 
 
 Drawer. The person issuing a check or draft. 
 
 Drawing Account, f An account to which current transac- 
 tions affecting a partner are debited or credited for the purpose 
 of keeping them apart from the capital account. An allowance 
 made to salesmen or other employees for salary or expenses. 
 
INDEX-COMMENTARY 207 
 
 Drayage. Charges made for transfer of goods by dray. 
 
 Due-Bill. A written acknowledgment of a sum owed. 
 
 Duplicate. A copy. Duplicate bills consist of one original 
 and one copy. 
 
 Duplicate Billing Systems. Prin. 75 C and 75 D. 
 
 Each, (ea.) 
 
 Earned Shop Cost. An added value placed on material In 
 process of manufacture, when taking inventory. 
 
 Earnest. An initial part payment or delivery to secure a 
 verbal contract of sale. 
 
 Economic Account^. fWhenever any increase or decrease of 
 wealth is_ realized or recognized it is recorded, according to its 
 nature, in one of these subordinate accounts, which we shall call, 
 as a whole, the economic accounts. 
 
 Eleemosynary Institution. One supported by charity, or pub- 
 lic funds, as a free hospital, or asylum. 
 
 Embezzlement. The act of a trustee or other agent, of un- 
 lawfully converting to his own use money or property in his pos- 
 session which belongs to another. 
 
 Encumbrance. A claim or lien against property which dimin- 
 ishes its asset value. 
 
 Endorsement. Any subsequent writing on the back or face 
 of commercial paper, which affects the terms or conditions of 
 payment. Form 15 F. 
 
 Entries. Original, Prin. 71-71 1 ; typical journal entries, 
 Prin. 72-72 H. 
 
 Entry Tickets. Forms 23 C, 23 F, 23 L. 
 
 Equipment Account. Prin. 24 E; Form 10 D. 
 
 Equity. f The common meaning in reference to investments is 
 the value in the property over and above its indebtedness ; for in- 
 stance, to the stockholders of a railroad belongs its "equity." In 
 case of a mortgage upon real estate, the value of the property 
 above the mortgage would be the "equity." The net value of a 
 thing after deducting any incumbrances, more particularly of real 
 estate. 
 
 Errors of Fraud. fErrors of fraud are those made with 
 fraudulent intent. 
 
 Errors of Omission. fErrors of omission are items left out 
 carelessly or maliciously. 
 
 Errors of Principle. fErrors of principle are those made by 
 persons not acquainted with accounts. 
 
 Escrow. A deed, bond, or other written engagement, deliv- 
 ered to a third person, to be held by him until some act is done 
 or some condition performed, and then by him to be delivered to 
 the grantee. 
 
 Establishment Expenses, fin cost accounting those expenses 
 which cannot be charged directly against the cost of an article 
 manufactured but are spread over "a volume of work, are some- 
 times called "establishment expenses." They include such items 
 as taxes, insurance, heating, lighting, indirect labor and miscel- 
 laneous expenses. 
 
 Estate Account, fin executorship accounting an estate ac- 
 count is opened to show the net value of the estate by crediting 
 thereto all the assets of the estate as well as any profits derived 
 from their realization, and charging thereto all liabilities as well 
 
208 DEFINITIONS 
 
 as funeral and administration expenses, and losses on realization 
 of assets. 
 
 Estimate Book for Lumber. Form 17 R. 
 
 Examination (or Bank Examination). fWhat is usually 
 understood in commercial accounting as a balance sheet audit, i. e., 
 a count and verification of the balances of asset and liability ac- 
 counts shown by the books as of the close of business on any given 
 date. This is the most common, one might almost say universal, 
 work that is done by accountants for banks. In only' a very few 
 instances can the work be termed an audit, as understood in com- 
 mercial accounting. 
 
 Exchange, Domestic. t(l) The cost of collecting out-of-town 
 checks in the United States and Canada, as distinct from foreign 
 exchange, which has to do with the purchase and sale of foreign 
 bills, etc. (2) Premium on bank drafts. 
 
 Note. — In the laboratory units of the American Bookkeeping 
 Series, exchange on bank drafts is computed at 10 cts. for every 
 hundred dollars and additional amount of $50. On a single 
 amount of less than -$50, 5 cts. bank exchange is allowed when 
 purchasing a draft; when the draft is for hundreds, no exchange 
 is charged on an additional amount less than $50. 
 
 Ex-Dividend. A term used to describe stock sold after the 
 transfer books are closed. The seller of the stock receives the 
 dividend, the buyer receives the stock without the dividend. 
 
 Execution. (1) The written authority given by a court to an 
 officer directing him to enforce a judgment. (2) The act of sign- 
 ing and sealing a legal instrument. 
 
 Executor. fAn executor is a testator's personal representa- 
 tive named in his last will and testament. 
 
 Expenditure. fThis term is often used by accountants to in- 
 dicate disbursements of money only. In other cases expenditure 
 is used to indicate not only that which has been disbursed but 
 incurred as well, and in this sense it is mostly used. 
 
 Expense Account. fExpense is either the title of an account 
 or a general term applied to a series of accounts for recording the 
 expenditures incidental to the management of a business or enter- 
 prise, for which no permanent, subsequently convertible, or sub- 
 stantial value is received, as, for instance, rent, insurance, clerk 
 hire, etc. Prin. 53-58 D. 
 
 Expense Book. Prin. 74 F ; Form 12 X, 18 N. 
 
 Expenses Divided. Prin. 43 A. 
 
 Extension. The results computed from a certain column or 
 columns of figures, and carried to another column. 
 
 Exterior Accounts, f Exterior accounts are those that alone 
 affect persons outside of the business. 
 
 Face. The principal sum of money written in a note, draft, 
 check or other commercial paper, as contrasted with the 
 "amount," which is the principal sum and interest added. 
 
 Factor. An agent or commission dealer. 
 
 Factory Account. fAn account kept in the general ledger of 
 a manufacturing business which serves as a controlling account 
 of the factory ledger. 
 
 Factory Cost. jThe material, labor and indirect expense 
 
INDEX-COMMENTARY 209 
 
 cost of any article; i. e., all expense necessary to manufacture an 
 article. 
 
 Factory Ledger. fThe factory ledger is that record in cost 
 accounting which arranges and classifies the information con- 
 tained in the original factory records. 
 
 Factory Overhead, fin cost accounting, overhead factory ex- 
 pense, or labor and expense not directly apportionable to specific 
 increments of production. Prin. 23 L. 
 
 Factory Supplies. fMiscellaneous supplies consumed in the 
 process of manufacture or maintenance of the factory. 
 
 Filing.. Prin. 69. 
 
 Finances. Funds or money. Financial operations are those 
 involving the receipt and payment of cash. 
 
 Finance Bills, f "Bills of exchange" (which must first be 
 understood) on foreign countries issued by American bankers 
 against credits or loans granted them by bankers in other coun- 
 tries, and not against shipments of goods. 
 
 Financial Records. Prin. 4. 
 
 Financial Statement. Prin. 10. 
 
 Finished Goods Ledger, f A subsidiary ledger controlled by 
 the finished goods account in the general ledger showing, with re- 
 gard to the stock of finished goods, the receipts, issue and balance 
 on hand according to classes, qualities, sizes, etc. 
 
 Fire Insurance. fFire insurance is a contract by which the 
 insurer undertakes, in consideration of the premium, to in- 
 demnify the insured against loss through fire to a specified extent 
 to the property which is the subject-matter of the insurance. 
 
 Firkin, (fir.) 
 
 Firm. A business organization owned by more than one 
 investor. 
 
 Fiscal Year, f Any yearly period, regardless of the calendar 
 year, at the end of which any firm, corporation or municipality 
 may close its books in order to determine its financial condition. 
 
 Fixed Capital, f Capital which exists in a fixed or perma- 
 nent shape. All fixed assets, such as real estate, buildings, 
 machinery, etc., may be referred to as fixed capital. 
 
 Fixed Charges. fThe charges upon a revenue or other ac- 
 count which do not vary, such as interest on bonds, debentures, 
 etc. 
 
 Fixed Property Accounts. Prin. 24. 
 
 Fixtures. The attachments to real property. in the nature of 
 furnishings, as shelves, counters, gas and electric apparatus, etc. 
 
 Flat. A term referring to a price of commercial paper that 
 does not take into account accrued dividends or interest, some- 
 times called a "lump price." 
 
 Floating Capital. fCapital which is not in a fixed or perma- 
 nent shape, but is available or convertible, such as raw material, 
 book debts, cash, etc. 
 
 Floating Charge. tAn expression meaning a lien or charge 
 on the general assets of a corporation, generally made in favor 
 of debenture holders. 
 
 Floating Debt. Miscellaneous obligations for the payment of 
 which no special provision or fund has been made. The floating 
 debts are to be paid out of the current incomes. 
 
210 DEFINITIONS 
 
 Floating Property. The commodities or material owned by 
 the business for consumption, manufacture or sale. The items 
 making up such property, since they are constantly undergoing 
 change, are not itemized in ledger accounts, but are ascertained 
 from time to time by inventory. Form 13 E. 
 
 Fluctuation. The rise and fall in values incident to the con- 
 ditions of commerce. Fluctuation downward is sometimes con- 
 fused with depreciation, which is a very different matter. 
 
 Folio, (fol.) A page in an account book; sometimes two 
 opposite pages having the same number. 
 
 Foot or Feet, (ft.) 
 
 Footing. The sum of a column of figures. See Form 12 R. 
 
 Foreclosure. The act of taking legal possession of property 
 under the terms of a mortgage. 
 
 Forgery. Any unauthorized alteration of a commercial paper 
 or document which affects its value or the interests of those who 
 hold it. 
 
 Forwarded. See Forms 10 J and 10 K. 
 
 Fractions of a Cent. In the sets of the American Bookkeep- 
 ing Series, when a final result of computations on bills, notes, etc., 
 involves a fraction of a cent, one-half or greater than one-half, 
 the fraction is counted as an additional cent. When discount in- 
 volves a similar fraction, it is counted an additional cent of dis- 
 count. Fractions less than one-half cent are disregarded in ex- 
 tended amounts and final results. 
 
 Franchise. A valuable privilege granted by municipal au- 
 thority to a person, firm or company, to be used in carrying on a 
 business. The right of street car, telephone, light, and other pub- 
 lic service corporation to use the streets for tracks, poles, wires, 
 etc., is secured by franchise granted by municipal or state 
 authority. 
 
 Franchise Account. Prin. 28 C. 
 
 Free on Board, (f. o. b.) Merchandise sold "f. o. b." is de- 
 livered to the transportation company at the point named in the 
 terms of sale, without expense to the buyer. 
 
 Free Surplus. fThe amount which is available for further 
 appropriation, as distinguished from the amount which must be 
 held available to meet unincumbered appropriations and con- 
 tingent liabilities. 
 
 Freight, (frt.) (1) The compensation to railroads or other 
 carriers for transportation of goods. (2) The goods transported 
 are termed freight. 
 
 Freight and Express Account. yA freight and express ac- 
 count is designed to show the amount paid for freight on goods 
 bought, called "freight in," and on goods shipped, called "freight 
 outward." The account is charged with all express and freight 
 charges, and is credited for any returns, rebates, or for any 
 freight paid for the customer in advance, which he has to pay for. 
 The account of "freight in" is closed at the end of the period into 
 the manufacturing account, and the "freight outward" is closed 
 into the trading account. 
 
 Freight Expense Bill. Form 24 C. 
 
 Freight Forwarded Book. Form 24 D. 
 
INDEX-COMMENTARY 211 
 
 Freight-In. fA freight and express account designed to show 
 the amount paid for freight on goods bought, called "freight-in." 
 
 Freight-Outward. fThe amount paid for gooc^s shipped is 
 called "freight outward." 
 
 Freight Received Book. Form 24 E. 
 
 Fuel Account. fThe fuel account is kept to show the amount 
 expended to produce power for the plants and machinery needful 
 in the production of goods. The account is charged for all money 
 so expended, and is finally closed into manufacturing account, 
 since it is a part of the cost of the manufacture of goods. 
 
 Funded Debt. fThat portion of a debt which is represented 
 by a bond issue and payable at a^ distant date. 
 
 Fund. (1) Money or capital set aside for a special purpose. 
 (2) The term "funds" often means ready money. Prin. 23 C and 
 25 A; Form IOC. 
 
 Furniture. The movable general equipment of a building for 
 the use of the persons occupying, e. g., chairs, desks, carpets, filing 
 cabinets, etc. 
 
 Furniture and Fixtures Account. Prin. 24 B. 
 
 Gallons, (gal.) 
 
 General Accounts. The accounts kept in the general ledger 
 together with the cash account. 
 
 General CasfrBook, or main cash book. The book containing 
 the important records of cash receipts and payments as opposed 
 to the petty cash book, in which the small or insignificant items 
 are entered. 
 
 General Expense. Account of, Prin. 43 A ; Form 12 T. 
 
 General Journal. Prin. 73 D; Form 12 A. 
 
 General Ledger. Prin. 72 C. 
 
 Goods. Merchandise or commodities. 
 
 Goods in Process, f A term used at dates of inventory in 
 large manufacturing plants and establishments showing the con- 
 dition (by technical or commercial terms) and the value of ma- 
 terials as ascertained at inventory. 
 
 Goods Returned. fAn account to which are charged any 
 sales returned by reason of the goods being damaged or unsatis- 
 fying for any other reason; the sum of the balances of this ac- 
 count and of the allowance account, plus discounts, being the de- 
 ductions from gross sales made in ascertaining net sales. 
 
 Good Will, f Whilst good will is a general term capable of wide 
 application it is generally used in accounting to represent the 
 balance between the value of property and assets acquired by a 
 corporation or concern, and the capital stock issued against such 
 net assets ; sometimes it is included in accounts as a distinct item 
 calculated on a specific basis, but more generally it is used in a 
 very indefinite way. , 
 
 Good Will Account. Prin. 30. 
 
 Gross, (gr.) The entire amount or bulk before deductions 
 are made. Gross earnings are earnings before expenses are taken 
 out. Gross weight is weight before the weight of case or con- 
 tainer is deducted. 
 
212 DEFINITIONS 
 
 Gross Profit, fin commercial bookkeeping the difference be- 
 tween the cost of goods bought or manufactured and the selling 
 price thereof. 
 
 Gross Trading Profit. Prin. 55. 
 
 Group Account, f An account corresponding to a section of 
 the statement of income and profit and loss into which the ac- 
 counts corresponding to the details thereunder are transferred in 
 closing the books. Examples: income from sales, cost of sales, 
 selling expense, administrative expense, deductions from income, 
 etc. 
 
 Guaranty, (guar.) (1) A surety for the performance of a 
 contract in case of failure by the contracting party. (2) A se- 
 curity against loss. 
 
 Guard Book, f A term used in English and Scotch bookkeep- 
 ing to indicate a book in which the original invoices of purchases, 
 etc., are kept or pasted. 
 
 Guardian, -f One legally intrusted with the care of the per- 
 son, and management of property, of a minor, imbecile, or other 
 person incapable of managing his affairs. Usually appointed by 
 the court, but may sometimes be appointed under a will. 
 
 Guests' Ledger. fThe ledger in which are kept the accounts 
 with the guests of a hotel. 
 
 Half, (hf.) 
 
 Handkerchief. ( hdkf . ) 
 
 Hogshead, (hhd.) 
 
 Holding Company. 'f A corporation owning the stocks of other 
 corporations from which it derives its principal income through 
 dividends. 
 
 Honor. To accept or to pay a written obligation according to 
 its terms. 
 
 Hundred. (C.) 
 
 Hundred Weight. (Cwt.) 
 
 Hypothecate. To subject securities to. legal liability for the 
 payment of a debt without delivery or transfer of title. See 
 Collateral. 
 
 Immaterial Assets, f A generic term for assets not material 
 in nature, as good will, rights under leases, patents, etc. 
 
 Impairment Account. fAn account which exhibits the net in- 
 solvency of a company, i. e., the excess of its liabilities, including 
 its paid up capital, over its assets. , 
 
 Impersonal Accounts. Accounts which represent conditions 
 and record the profits, losses, receipts, expenditures, assets and 
 liabilities, but do not represent relations with persons. 
 
 Imprest Fund, f A fund impressed or earmarked for a par- 
 ticular purpose, e. g., petty cash fund, which is periodically re- 
 imbursed for the exact amount expended so as to restore the fund 
 to its original amount. See Prin. 24 E. 
 
 Income. fThe account which sets forth the entire income for 
 a fixed period, whether actually received or not. 
 
 The gain which proceeds from property, labor or business. 
 
 The remuneration derived from skill or labor. 
 
 The proceeds of the property of an estate. 
 
 Income Accounts. Prin. 52. 
 
 Income Tax. Prin. 88 K. 
 
INDEX-COMMENTARY 213 
 
 Income and Expenditure Account. fAn income and expendi- 
 ture account (like a profit and loss account) states the entire in- 
 come for the period to which it relates without regard to whether 
 the same has been collected or received in cash ;. and also the total 
 expenses properly chargeable against said income without regard 
 to whether the same have been paid or are still owing, and there- 
 fore takes cognizance of outstanding assets or liabilities both at 
 the commencement and close of said period. 
 
 Income and Expense Account. Prin. 59 C. 
 
 Income from Property. Prin. 24. 
 
 Income and Profit. Prin. 43. 
 
 Indenture. A mutual agreement in writing. Form 16 A. 
 
 Index. Prin. 80 E; Form 12 B. 
 
 Index Ledger, f A ledger arranged alphabetically with index 
 sheets interspersed. 
 
 Indirect Labor, f Also called "unproductive labor." Labor 
 which- cannot be charged directly to any article or any special 
 classification thereof. 
 
 Individual Deposits. f( Banking). Individual deposits would 
 have reference to all deposits other than by banks and trust com- 
 panies, United States government, or from the banks' agents. It 
 would include deposits of firms, individuals, corporations in gen- 
 eral, private bankers, etc. 
 
 Individual Ledger. |A term used to designate a customer's 
 ledger. 
 
 Indorsee. fThe party indorsing a paper, by such an act, must 
 assign or transfer certain rights therein to another person called 
 the "indorsee ;" that is, the person to whom a cheque, note, etc., is 
 indorsed, or made payable by assignment. 
 
 Indorser. f A person who indorses a cheque, note, etc. ; that 
 is, writes his name across the back and by this act becomes liable 
 for its payment. 
 
 Industrial Processes. Extraction, transportation, transforma- 
 tion, trade, service. Wildman. 
 
 Industrial Securities, 'f Securities issued by manufacturing 
 companies. 
 
 Inheritance Tax. A state tax imposed upon property in- 
 herited, not a tax collectible from year to year like city taxes, but 
 collectible only once— at the time of the inheritance of the prop- 
 erty, and payable to the state only. 
 
 Insolvency. Inability to meet indebtedness. A business is in- 
 solvent when its liabilities exceed its assets. 
 
 Installment. One of the parts of a debt payable at intervals. 
 The installment system of selling property useful to families, such 
 as books, furniture, homes, etc., whereby payment, is made weekly 
 or monthly, is common. 
 
 Installment Book. fAn account book used for the record of 
 installments due and payable on stock or property. 
 
 Installment Certificate. Form 18 H. 
 
 Instant, (inst.) In the current or present month. 
 
 Insurance Account. fThe insurance account is designed to 
 show the amount paid to a company or companies, representing 
 a premium, or premiums, whereby sueh company or companies 
 hold themselves responsible for any pecuniary loss to the insured. 
 Prin. 28 E. 
 
214 DEFINITIONS 
 
 Insurance Policy. (Ins. Pol.) The certificate given by the 
 insurance company to the assured, obligating the company to re- 
 imburse either wholly or in part for any losses occasioned by 
 fire, water, storm, etc., as specified in the policy. Form 16 I. 
 
 Insurance Report. Form 16 K. 
 
 Intangible Asset Accounts. Prin. 28. 
 
 Interest. (Int.) A percentage allowance for the use of 
 money or its equivalent for a given time, usually one year. 
 
 In the laboratory units of the A. B. S., interest computations, 
 except bank discount, are made by the ordinary interest method ; 
 that is, the time is computed in months (1/12 of year) and days 
 (1/30 of month), found by subtracting the earlier from the later 
 date, unless otherwise specified in the transactions. 
 
 Interest and Discount Accounts. Prin. 59 A. 
 
 Interest Laws and Grace on Notes. (Revised 1918.) After 
 the states named ,there follow, first, the legal rate of interest in 
 the states; second, the highest rate allowed by contract; third, in 
 states where three days of grace are allowed, the word "grace" 
 follows : 
 
 Alabama, 8, 8; Alaska, 8, 12, grace; Arizona, 6, any; Arkan- 
 sas, 6, 10, grace ; California, 7, any ; Colorado, 8, any ; Connecti- 
 cut, 6, any ; Delaware, 6, 6 ; District of Columbia, 6, 6 ; Florida, 8, 
 10 ; Georgia, 7, 8 ; Idaho, 7, 18 ; Illinois, 5, 7 ; Indiana, 6, 8 ; Iowa, 
 6, 8; Kansas, 6, 10; Kentucky, 6, 6; Louisiana, 5, 8; Maine, 9, 
 any; Maryland, 6, 6; Massachusetts, 6, any; Michigan, 5, 7; Min- 
 nesota, 6, 10; Mississippi, 6, 10, grace; Missouri, 6, 8; Montana, 
 8, any; Nebraska, 7, 10; Nevada, 7, any; New Hampshire, 6, 6; 
 New Jersey, 6, 6 ; New Mexico, 6, 12, grace ; New York, 6. 6 ; North 
 Carolina, 6, 6, grace ; North Dakota, 7, 12 ; Ohio, 6, 8 ; Oklahoma, 
 6, 10, grace ; Oregon, 6, 10 ; Pennsylvania, 6, any ; Rhode Island, 
 6, special law; South Carolina, 7, 8, grace; South Dakota, 7, 12, 
 grace ; Tennessee, 6, 6 ; Texas, 6, 10, grace ; Utah, 8, 12 ; Vermont, 
 6, 6 ; Virginia, 6. 6 ; Washington, 6, 12 ; West Virginia, 6, 6 ; Wis- 
 consin, 6, 10; Wyoming, 8, 12, grace. 
 
 Interior Accounts. fProprietary and economic accounts are 
 interior accounts. 
 
 Intermediate Ledger, f A ledger used for the purpose of re- 
 cording those sales and purchases of a trader which are of almost 
 daily occurrence with the same person, the total of which are 
 posted at monthly or other periods. 
 
 Internal Accounts, f The accounts which represent the differ- 
 ent pieces of property and difference forces at work within the 
 business itself. 
 
 Internal Check. fA check to protect against error which may 
 arise where the record of accounts is such that the entries might 
 balance and still be incomplete. . 
 
 Intestate. Having died without leaving a will. 
 
 Inventory. fThe annual account of stock of a business. 
 
 A schedule of assets or property. 
 
 An itemized list of goods or valuables with prices attached. 
 
 Inventory Account. Prin. 23 F. 
 
 Inventories Book. Prin. 77. 
 
 Invested Funds. Prin. 25. 
 
 Investment. (1) The appropriation of money or capital for 
 
INDEX-COMMENTARY 215 
 
 carrying on business, with a view to profit and with a risk of 
 loss. (2) The purchase of securities with a view to profit from 
 their income. 
 
 Invoice. (Inv.) An itemized statement of goods sold show- 
 ing prices, terms and amounts. The invoice is delivered to the 
 buyer by the seller. Prin. 62 ; Form 15 O. 
 
 Invoice Book. (I. B. ) See Prin. 76 C ; Form 13 K. 
 
 Jobber. A merchant who buys goods from importers and 
 manufacturers, and sells in quantity to wholesale and retail 
 merchants. 
 
 Joint Account, f A record of the transactions of some particu- 
 lar undertaking where two or more parties combine in contribut- 
 ing the necessary capital and services and sharing the profits 1 or 
 losses resulting therefrom. 
 
 Joint Stock Company. A partnership with the capital divided 
 into shares held by the partners. The powers and privileges of a 
 joint stock company are defined by laws differing in detail in 
 various states. 
 
 Journal (J.) fA book used for recording such transactions as 
 cannot be passed through other records of original entry, and for 
 recording all transfers from one account to another. Prin. 8. 
 
 Journalizing. Prin. 71-71 G, inclusive. 
 
 Journal Voucher. tA properly approved instrument in writ- 
 ing authorizing an entry on a book 'of account. 
 
 Judgment. The decision of a court supporting a claim against 
 a debtor. 
 
 Judgment Note. A promissory note containing a special 
 agreement giving the payee power of attorney to confess judgment 
 in behalf of the maker. This dispenses with necessity of suit for 
 collection, and permits prompt attachment of property to satisfy 
 the note in case of its dishonor. 
 
 Junior. (Jr.) 
 
 Labor Account, or Wages. fThis account shows that amount 
 of money expended in manufacturing as remuneration to laborers 
 for converting raw material into salable commodities. Prin. 23 K. 
 
 Labor Hour, f A basis for the distribution of overhead. As a 
 unit it consists of the labor of one operative one hour. 
 
 Landlord. The owner of real estate which is leased to 
 tenants. 
 
 Land Buying. Prin. 88 D. 
 
 Lease. A contract, in writing, granting the occupancy of 
 property for a given period at a stated compensation. Form 16 C. 
 
 Ledger (L.) fThe principal book employed in the system of 
 bookkeeping by double entry, wherein all the transactions recorded 
 in the journal and subsidiary aids thereto are focused, classified 
 and arranged for the purpose of ready reference. Prin. 21 and 72. 
 
 Legal Aspects of Auditing. Prin. 88-88 K. 
 
 Legal Assets. fProperty which creditors might make avail- 
 able in a "Court of Law" for the payment of the debts of a de- 
 ceased person. 
 
 Legal Tender Money. Any money which, by law, a debtor 
 may require his creditor to receive in payment unless there is a 
 contrary stipulation in the contract or obligation itself. 
 
216 DEFINITIONS 
 
 The following classes of United States money are a legal ten- 
 der to the extent specified : 
 
 Gold coins for all debts public and private to any amount. 
 
 Standard silver dollars, for all debts public and private unless 
 otherwise stipulated in the contract. 
 
 Subsidiary silver coins (coins less than one dollar), for all 
 dues public or private in sums not exceeding ten dollars. 
 
 Minor coins (copper, bronze, or nickel), fer any amount not 
 exceeding twenty-five cents in one payment. 
 
 United States notes or "greenbacks," for all debts public and 
 private, except duties on imports (payable to the government) 
 and interest on the public debt (payable by the government). 
 
 Treasury notes of 1862 and of 1890 are also legal tender to 
 the same extent as greenbacks, and those of 1890 are receivable 
 for customs and other public dues. 
 
 Lessee. The one to whom a lease is given, or who takes pos- 
 session of property by lease. 
 
 Lessor. The one who gives a lease, or who gives possession 
 by lease. 
 
 Letter Book. (L. B.) 
 
 Letter of Credit. A letter issued to travelers by a bank, ad- 
 dressed to banks in foreign cities, directing payment of funds to 
 the holder. 
 
 Liabilities. fEmbrace all the debts or obligations due by a 
 firm to its creditors, or 
 
 The debts or obligations of a corporation, partnership or in- 
 dividual. Prin. 15. 
 
 Liability Accounts. Current, Prin. 32; long term, Prin. 33; 
 contingent. Prin. 34. 
 
 Liability Inventory Account. Prin. 32 F. 
 
 Lien. A preferred right in property allowed by law, 
 which right arises from some service in connection with the 
 property. A mechanic's lien is the right of a mechanic in the 
 building he has helped construct, for charges or expenses pertain- 
 ing to it. 
 
 Limited. A term appearing in the firm title indicating that 
 the liability of stockholders is, by agreement, limited to a certain 
 amount, usually the amount of their investment. 
 
 Liquid Assets. fCash and such assets as can instantly be 
 converted into cash. 
 
 Liquidation. The act of determining the persons and amounts 
 owed, and of applying assets to settlement. 
 
 Liquidation Account. tAn account opened when a concern is 
 being wound up and to which are credited all the profits made in 
 realizing the assets, and debited with the expenses of liquidation 
 and any liabilities which may have to be paid, but which are not 
 entered in the books. 
 
 List. Prin. 18 ; inventory lists, Prin. 18 B ; Forms 4 F to 4 H. 
 
 Loan and Discount Register. Form 20 F. 
 
 Loan Account, f An account representing money invested in 
 loans. 
 
 Loan Capital. fLoan capital is the capital borrowed upon 
 issues of bonds, secured by mortgages, usually on real estate, 
 which is to be paid at some future time. 
 
INDEX-COMMENTARY 217 
 
 Locating Errors. Prin. 83 CD. 
 
 Long-Term Indebtedness. Prin. 33. 
 
 Loose-Leaf Ledger. Prin. 80 G. 
 
 Loss and Gain Account. The same as Profit and Loss account, 
 and preferred by some for the reason that the words are placed 
 correspondingly with the entries in the account. 
 
 The contrary order, Profit and Loss, is generally regarded by 
 accountants as more logical, inasmuch as profit is the first con- 
 sideration, loss being treated as a deduction therefrom. Compare 
 with Sales less cost of sales, Income less expense, etc. 
 
 Losses. Prin .44. 
 
 Machine Hour. fA basis for the distribution of overhead. As 
 a unit it consists of the work of one machine one hour. 
 
 Machine or Process Cost, f A method of charging manufactur- 
 ing costs to the machine or process. 
 
 Machinery Account. Prin. 24 C. 
 
 Maintenance Account. tAn account or series of accounts rep- 
 resenting cost of repairs, renewals and replacements. 
 
 Maker of a Note. The one who signs it. 
 
 Manager. (Mgr.) 
 
 3Ian Hour, f A basis for the distribution of manufacturing 
 overhead. As a unit it consists of the work of one man one hour. 
 
 Manufactured Goods Account. Prin. 23 I, 55 C. 
 
 Manufacturing Account, f An account subsidiary to Profit 
 and Loss account for the purpose of showing the result of factory 
 operations separately from the trading. 
 
 Manufacturing Business. The business of changing raw ma- 
 terial into merchandise, or goods for sale. 
 
 Manufacturing Cost. The material, labor, and indirect ex- 
 pense cost of any article ; i. • e., all outlays necessary to manu- 
 facture an article. 
 
 Manufacturing Cost System, f A system subsidiary to but 
 controlled by the general books whereby items of cost and expense 
 are grouped around units of production and service which are 
 identified by groups for cost purposes. 
 
 Manufacturing Profit. fThe excess of sales over the prime 
 cost of producing the goods sold. See Prin. 43; Form 6. 
 
 Manufacturing Supplies. tMiscellaneous supplies to be con- 
 sumed in the process of manufacture which are either too small 
 or too inexpensive to warrant being charged to stock. 
 
 Material. An account charged with the cost of materials 
 purchased and held in stock for manufacturing purposes, and 
 credited with the cost of such material as is delivered from stock 
 to the factory and placed in process of manufacture. Often fur- 
 ther subdivided into "raw" material and "partly finished" material. 
 Prin. 23 I. 
 
 Material in Process, f Product in an uncompleted state, but 
 differentiated from raw material. 
 
 Material Requisition, f A form used for registering the ma- 
 terial taken out of stores. 
 
 An order for material to be placed in process. 
 
 Materials and Supplies Ledger, f A subsidiary ledger con- 
 trolled by the materials and supplies account in the general ledger, 
 showing, with regard to the receipts and issues of the various 
 
218 DEFINITIONS 
 
 kinds of materials and supplies, the date, number of units, cost 
 per unit and money value. 
 
 Maturity. The date on which a debt is legally collectible. 
 
 Memorandum. ( Mem. ) 
 
 Memorandum Accounts. Prin. 58 A. 
 
 Mercantile Agency. An organization to gather financial in- 
 formation about business houses or individuals, and sell reports 
 of information thus gathered to interested persons, as a basis for 
 credit. 
 
 Merchandise. (Mdse.) Goods or commodities in salable 
 condition. 
 
 Merchandise Account. Prin. 23 G-H. 
 
 Merchandise Inventory. A list of goods kept in stock for sale. 
 The list should show quantity, cost and total value. Prin. 18 B. 
 
 Merchandise Purchase Account. fThis account should be 
 opened to show the entire charges for all merchandise purchased, 
 and should be credited for all merchandise purchase returns. The 
 balance would then represent the net amount of the purchases for 
 the period, which amount should be carried to the trading ac- 
 count. See Prin. 55 and 55 B ; Form 12 R, 14 H. 
 
 Merchandise Sales Account. An account for merchandise 
 sales and adjustments of same. Prin. 55-55 A. 
 
 Merchandise Trading Account. Prin. 55 ; Form 12 S, 14 J. 
 
 Misrepresentation of Business. Prin. 85 E. 
 
 Minute Book. |A company minute book is for the purpose of 
 containing the minutes of the meetings of the shareholders and of 
 directors. 
 
 Mixed Accounts. Prin. 21. 
 
 Money. Money consists of (1) pieces of gold, silver, copper, 
 etc., coined and issued by governmental authority; (2) paper, so 
 issued, which may be legal tender instead of coin; (3) other 
 paper, lawfully employed in payment of business obligations. See 
 Legal Tender. 
 
 Mortgage. (Mtg.) A document of conditional transfer of the 
 title to real or personal property, as security for the payment of 
 a debt. The debtor is called the mortgagor; the creditor, the 
 mortgagee. Form 16 B, 16 G. 
 
 Mortgage Loans. Prin. 25 C. 
 
 Municipal Bond. tAny legally authorized bond issued by vil- 
 lage, township, city, or any territorial subdivision of the same, the- 
 payrnent of which must be accomplished through the collection of 
 taxes, assessed upon the property embraced in the division or sub- 
 division issuing the bond. 
 
 Negative Account. fAn account which reduces the value of 
 another account, e. g., returns is a negative to sales. 
 
 Negotiable Paper. A check, note, draft, or other paper trans- 
 ferable from one holder to another who may enforce payment 
 without reference to equities existing between the first parties. 
 See Prin. 88 E. 
 
 Net. Not subject to further deduction, as net price, net profit. 
 
 Net Capital. fThe surplus of actual assets over actual liabili- 
 ties . 
 
 Net Earnings. fThe earnings from the operation of a busi- 
 ness after deducting only the expenses incidental to the conduct 
 thereof. 
 
INDEX-COMMENTARY 219 
 
 Net Income, f After all costs of operating and fixed charges 
 of every kind have been deducted from the earnings of a corpora- 
 tion, the balance, which is the amount available for dividends, 
 may be called "net income." 
 
 Net Investment. fThe difference between the total sum in- 
 vested and the total withdrawals. 
 
 Net Invoice. The sum of the invoice after discounts are de- 
 ducted. 
 
 In the laboratory units of the A. B. S., one-half or major 
 fraction of a cent belonging to a discount is considered an addi- 
 tional cent discount. 
 
 Net Profits. fThe balance remaining after all expenses of dis- 
 tribution and establishment charges, discount, interest, etc., have 
 been deducted from profits. 
 
 The balance of the Profit and Loss account when the same is 
 a gain. 
 
 The surplus remaining over from /the employment of capital 
 after defraying all the necessary expenses and outlay incurred in 
 its employment, and after the capital has been replaced or pro- 
 vision made for its replacement. See Prin. 43 ; Form 7D, 8 E. 
 
 Net Trading Profit. Prin. 46. 
 
 Net Worth. The excess of assets over liabilities of a given 
 person or concern. Prin. 17. 
 
 Nominal Accounts, f Accounts which represent income or ex- 
 penditures. Accounts used for the purpose of classifying income 
 and expenditure under such heads as rent, taxes, discounts, sales, 
 purchases, etc., and form the material for the construction of the 
 Profit and Loss account. See Prin. 51-60. 
 
 Nominal Capital. fThe amount of capital for and in respect 
 of which a company, having its capital divided into shares, is 
 registered. 
 
 Nominal Ledger, f A ledger used for separately recording the 
 transactions in connection with the various nominal accounts. 
 
 Notary Public. (N. P.) A state officer, generally appointed 
 by the governor for a term of years, principally to take acknowl- 
 edgment of instruments, to make demand for payment of com- 
 mercial paper, and to protest for non-payment, and to administer 
 oaths. See Acknowledgment. 
 
 Note. Form 151, 15 S. > 
 
 Note Book. (N. B.) See Form 13 M and 17 Q. 
 
 Notes Payable. fAll written agreements in every form which 
 a person has entered into, and which are held by others, and 
 which bind such a person to pay sums of money at some future 
 time either on demand or a fixed date. 
 
 The account title, Notes Payable, is more frequently employed 
 at the present time than the title "Bills Payable," which was for- 
 merly in universal use. 
 
 Notes Receivable Account. Prin. 23 E ; Form 11 C. 
 
 Notes Receivable Discounted. Prin. 34. 
 
 Number. (No.), also (#), when placed before the figures. 
 
 One Page Cash Book. Form 10A-10B-11A. 
 
 Operating Departments. Divisions of a manufacturing busi- 
 ness, such as pattern rooms, foundry, machine shop, etc. Form 
 27 A. 
 
220 DEFINITIONS 
 
 Open Account. (1) The ledger account with a creditor or 
 debtor in which the current charges and credits are entered. (2) 
 Any account not periodically balanced. 
 
 Open Policy. A policy of insurance covering risks that are 
 undetermined at the time of issue, but that may be entered on 
 the policy later. 
 
 Order Book. Form 14 C. 
 
 Order of Accounts in a Ledger. Prln. 21. 
 
 Order Sheet. Form 14 B, 15 N. 
 
 Ordinary Interest Method. See Interest. 
 
 Organization. Different forces brought into corresponding re- 
 lation to accomplish a given end. A business organization is the 
 sum of its combined management and capital brought together to 
 effect a business purpose. 
 
 Organization Expenses. Prin. 28 G. 
 
 Original Entries. Prin. 71-71 H. 
 
 Outlawed Claim. A claim against a debtor who may avoid 
 it in law on account of the time it has remained uncollected. 
 "Statutes of Limitation" prescribe the time within which suit may 
 be begun. The time varies in different states. 
 
 Outstanding. Referring to liabilities unpaid. 
 
 Overhead Expense. Prin. 54 G. (See Burden.) 
 
 Packages, (pkg.) 
 
 Paid, (pd.) 
 
 Paid-Up Capital. The actual amount which has been paid up 
 or is legally considered as paid up, in respect of the capital. 
 
 Pails, (pi.) 
 
 Pair, (pr.) 
 
 Par. Equality between nominal and commercial value. 
 Stocks, bonds, drafts, etc., are above par when they sell at more 
 than face, and below par, when at less than face. 
 
 Part, (pt.) 
 
 Partnership. An association of persons who unite property 
 or services in business. Prin. 88 G. 
 
 Party. One of the participators in a transaction or exchange 
 of values. An individual, partnership or corporation may be a 
 "party" to a transaction. 
 
 Pass Book. A customer's book in which, on presentation, a 
 trader or banker enters current charges or credits. Form 15 G. 
 
 Patent. A document issued by the government, securing to 
 an inventor the exclusive right to manufacture and sell his in- 
 vention for a given period of time (fourteen years in the United 
 States). 
 
 Patent Rights Account. Prin. 28 A. 
 
 Pawn. To transfer possession of personal property as se- 
 curity for the re-payment of money, delivered to the owner by the 
 pawnbroker. 
 
 Pawnbroker. A money lender whose loans are secured by the 
 borrower pledging or "pawning" personal property as security, the 
 pledge being on condition of forfeiture of ownership in the prop- 
 erty if payment is not made according to the agreed terms. 
 
INDEX-COMMENTARY 221 
 
 Payee. The person named in commercial paper to receive 
 payment. 
 
 Per Centum. (%) 
 
 Permanent Assets, f Comprise such investments as are neces- 
 sary to conduct the business, and must be kept in a state of ef- 
 ficiency in order to carry on the business. 
 
 Person. This term is used in a business sense to include 
 either an individual, firm, association, or corporation. 
 
 Personal Account. Of customer, Form 12 H, 13 I ; of creditor, 
 Form 12 G, 13 H. 
 
 Personal Property. Chattels, merchandise, commodities and 
 material, as opposed to real property. 
 
 Personal Property. All movable property ; horses, tools, fur- 
 niture, "chattels" of all kinds (crops of annual planting, such as 
 potatoes, are usually treated as "personal property," but would 
 pass with the sale of the land if growing thereon), securities, etc., 
 as distinguished from "real property." 
 
 Petty Cash Book. Form 13 O. 
 
 Petty Expense Book. (P. E. B.) Prin. 74 E; Form 13 0. 
 
 Petty Ledger, f A ledger in which sundry accounts or ac- 
 counts with customers who are not expected to be regular pur 
 chasers are kept. 
 
 Pieces, (ps.) 
 
 Plain Bond. fA bond not secured by mortgage; practically 
 the same thing as a "debenture bond" or a "certificate of indebted- 
 ness." It would not be supposed to have a "sinking fund." 
 
 Planning of Accounts. fArranging the accounts in the gen- 
 eral ledger in the order in which it is expected they will appear 
 in the financial statements. 
 
 Plant, f A title used to designate permanent assets, such as 
 buildings, machinery, etc., required for purposes of manufacture. 
 
 Posting. The process of transferring charges and credits 
 from first entries to ledger accounts. Prin. 71 H. 
 
 Postponed Creditors, t Creditors who are disentitled to rank 
 against an estate or property until all other creditors for valuable 
 consideration in money or money's worth have been satisfied. 
 
 Pound, (lb.), also (#) when placed after the figures. 
 
 Power of Attorney. The power given by one person to an- 
 other, authorizing the latter to make specified contracts in the 
 name of the former. 
 
 Preferential Creditors. fCreditors whose debts are directed 
 to be paid in priority to the claims of others in the administra- 
 tion of the estates of (a) A debtor in bankruptcy, (b) A deceased 
 insolvent, (c) A company being wound up. 
 
 Preferred Stock. (Pref. Stock.) The stock of a corporation 
 which is entitled to dividends before, or regardless of, the common 
 stock. > 
 
 Preliminary Expenses. fThe expenditure in connection with 
 the promotion, formation, establishment and registration of a 
 company. 
 
 Premium. (1) The amount above par paid for commercial 
 paper. (2) The amount paid for insurance. 
 
 President. (Pres.) 
 
222 DEFINITIONS 
 
 Primary Income. fThat income which is derived from the 
 principal business in which the organization is engaged. Prin. 43. 
 
 Primary Records. Forms, such as receipt stubs, invoice dupli- 
 cates, and many others used to record transactions. Wildman. 
 
 Prime Cost, f The original or direct cost of an article as dis- 
 tinct from the "cost of production." The latter term includes all 
 expenditures incurred in manufacture, whether direct or indirect. 
 
 Principal. (1) The person employing an agent. (2) The sum 
 upon which interest is computed. 
 
 Principal Books. Books from which or to which accounts are 
 posted, or in which accounts are entered. 
 
 Private Ledger f A ledger reserved for the use and inspection 
 of the partners or other proprietors of a business, and usually con- 
 taining particulars as to the capital in the business, the profit and 
 loss account, and other private matters. (Note. — Successive bal- 
 ance sheets are almost invariably entered therein, in the form of a 
 memorandum. ) 
 
 Processes of Bookkeeping. Recapit, Prin. 1-10. 
 
 Producer. One who grows, buys, manufactures, or otherwise 
 prepares a utility for sale. Farmers, manufacturers, merchants, 
 bankers, and professional people are producers. 
 
 Production Equipment, t Equipment necessary to produce 
 some manufacture or utility, especially with public service cor- 
 porations for production of electricity, gas or power. 
 
 Production Order. fAn order to the factory to produce a cer- 
 tain quantity of goods. 
 
 Profit. fProfit consists of the surplus remaining over from 
 the employment of capital after defraying all the necessary ex- 
 penses and outlay incurred in its employment, and after the capi- 
 tal has been replaced or provision made for its replacement. 
 Prin. 41 B. 
 
 Profit and Loss Account. (P. &L.) Recapitulation, Prin. 
 51-60 ; Form 10 O, 12 Y, 14 L. 
 
 Profit and Loss Statement. Prin. 41 to 50. 
 
 Profits and Losses, Miscellaneous. Prin. 59 D. 
 
 Promissory Note. Prin. 65 ; Form 15 S. 
 
 Proof of Fire Loss. Form 16 J. 
 
 Proof Sheet. Prin. 72 L; Form 121. 
 
 Property. Things that a person may own or dispose of, 
 whether material or immaterial. 
 
 Property Accounts. Prin. 22-30; Form HE. 
 
 Proprietorship. f(l) The excess of assets over liabilities. 
 (2) That portion of the assets of a business organization which 
 is assigned to the proprietor as his equity. 
 
 Protest. A formal act of a notary public declaring certain 
 paper dishonored by the payers, and holding the parties to the 
 paper liable. Prin. 65 ; Form 16 L-N. 
 
 Proximo, (prox.) In the next following month. 
 
 Public Service Corporations. fCorporations existing to sup- 
 ply some service or utility indispensable to the general public, such 
 as transportation, gas, light, water power, etc. 
 
 Purchase of Land. Prin. 88 D. 
 
INDEX-COMMENTARY 223 
 
 Purchases Account. Prin. 55-55 B. 
 
 Purchases Book (P. B.), and Records. Prin. 76 to 76 C. 
 
 Quick, or Current, Assets, f Anything that can be readily con- 
 verted into cash without the necessity of taking a prohibitive loss. 
 See Prin. 13. 
 
 Quick Assets. f Anything that can be readily converted into 
 cash without the necessity of taking a prohibitive loss. See 
 Prin. 25. 
 
 Quotations. The published price of merchandise or commodi- 
 ties, freight or exchange rates, etc. 
 
 Railway. (Ry.) 
 
 Rating. The report of a commercial agency on the financial 
 standing and credit of a person or concern. 
 
 Reading Amounts. Prin. 71 1. 
 
 Real Estate Account. Prin. 24 A; Form HE. 
 
 Real Account, f Represents the values of actual assets, or the 
 amount of actual liabilities, such as real estate, machinery, loans 
 and mortgages. See Prin. 21 ; Form 11 B, 11 E. 
 
 Real Estate. Property in houses, lands, and attachments 
 legally pertaining thereto. 
 
 Real Estate Account. Prin. 24 A; Form 11 E. 
 
 Real Property. fLand and buildings, including everything, 
 such as minerals, etc., below the surface, and the air or space 
 above ; also all crops, as grass,, trees, etc., which are not consid- 
 ered as of annual planting. 
 
 Rebate. A deduction from an amount assumed to be due. 
 
 Recapitulation Statement. A statement presenting titles and 
 totals of other statements without the details contained in he 
 latter. 
 
 Receipt. (Rect.) A written acknowledgment of money or 
 value received from another. Form 15 R. 
 
 Receiver. One appointed by a court to hold in trust, or man- 
 age, disputed or unsettled property or claims. 
 
 Reconciliation of Bank Statement. Prin. 84 B. 
 
 Redemption Fund, f A sinking fund established for the pay- 
 ment of redeemable debentures, funded debt, or other obligation. 
 An amount set aside at regular intervals from profits which will 
 be sufficient to discharge an obligation at maturity. A reserve 
 fund. 
 
 A fund accumulated to redeem outstanding obligations at the 
 end of a certain time. 
 
 Refund. A repayment, as when a merchant returns money 
 to a customer whom he has overcharged. 
 
 Relation of Statement of Condition to Books. Prin. 19. 
 
 Relation of Statement of P. & L. to Books. Prin. 49. 
 
 Remittance Register. Form 20 G. 
 
 Rent. Money or goods transferable from tenant to landlord 
 in payment for use of property. 
 
 Repair and Renewal Account. A repair and renewal account 
 is an account kept to show the amount of expenditures made from 
 time to time for repairing and renewing plants and machinery to 
 keep them in a state of working capacity, and the balance at the 
 end of the period is closed into the profit and loss account. 
 
 Reserve Fund. An amount deducted from profits and re- 
 
224 DEFINITIONS 
 
 tained in the business to provide an offset against real or contem- 
 plated losses. This amount retained is an asset, although it may 
 be represented by no distinctive asset account, but may remain 
 undistinguished among the other assets of the business. It may 
 be actually withdrawn from the other assets and placed in a sep- 
 arate bank account, in which case a corresponding asset account 
 would be opened in the ledger. 
 
 Whether left undistinguished among other assets, or actually 
 set apart, the amount of the fund is credited in the ledger to a 
 Reserve account which balances the fund in like manner as the 
 Capital account balances the net sum of the other assets. 
 
 Reserve Accounts. Prin. 35 ; for depreciation, Prin. 24, 35 A ; 
 for doubtful accounts, Prin. 35 B. 
 
 Resources. Prin. 13. 
 
 Returned Purchases Account. An account subsidiary to 
 Trading, in which goods returned to the persons from whom pur- 
 chased, are credited. 
 
 Returned Sales Account. An account subsidiary to Trading, 
 in which goods received back from customers, are debited. 
 
 Revenue Account, f A term sometimes used to designate 
 Profit and Loss account. "Revenue accounts" are the accounts that 
 relate to profits and losses, income and expenditures, as distin- 
 guished from capital accounts which relate to assets and liabili- 
 ties. — Am. Enc. 
 
 Route. (1) The railroad or carrier to which shipments are 
 intrusted. (2) To route a shipment is to designate carriers and 
 the points where interline shipments are transferred from one 
 carrier to another. (3) To route a job through a factory is to 
 itemize, in their order, the various materials and operations from 
 start to finish. 
 
 Rule for Debit and Credit. Prin. 72-72 H. 
 
 Ruling. Prin. 71 H. 
 
 Sale Contract. Prin. 66; Form 16 D. 
 
 Sale of Goods. Prin. 88 B. 
 
 Sales Account. Prin. 55 A. 
 
 Sales Book (S. B.) and Sales Records. Prin. 75-78. 
 
 Sales Discount Account. An account charged for the cash 
 discounts allowed on invoices sold. 
 
 Sales Ledger. fThe sales ledger contains accounts with the 
 concern's debtors. 
 
 Sales Records. Prin. 75 to 75 E. 
 
 Savings Fund Account. Form 10 C. 
 
 Scale Ticket. Form 14 A. 
 
 Schedule. Prin. 18 ; Forms 4 F, 4 G, 4 H. 
 
 Seal. The impression or mark on a document made by the 
 signer, additional to his signature, as evidence of his deliberate 
 authorization of its terms. 
 
 Among the Saxons and other early people, who generally 
 could not write, legal instruments required a seal instead of sig- 
 nature. The requirement of a seal on certain instruments became 
 a matter of law, and so continued. The word "seal" or "L. S." in- 
 closed in a circle, or in brackets, is frequently used on documents, 
 and constitutes a seal. 
 
INDEX-COMMENTARY 225 
 
 Secondary Income. fThat income which is derived from oper- 
 ations not comprehended by the principal business in which the 
 organization is engaged. Prin. 43 and 59. 
 
 Secret Reserve. Prin. 84. 
 
 Securities. fAll forms of investments; stocks, bonds, mort- 
 gages, etc., of every kind ; the written or printed papers that rep- 
 sent the ownersliip of corporations, or the lender's evidence of the 
 borrower's indebtedness. 
 
 Selling Expense. Prin. 43 A. 
 
 Service Business. A business that sells principally services 
 rather than commodities; as a dray line, railroad, hotel, light, 
 heat and power company, etc. 
 
 Shares of Stock. Prin. 39 B ; Form 15 W. 
 
 Shipment. (Shipt.) The goods shipped. 
 
 Shop Account. A controlling account in the general ledger to 
 show the aggregate of material, labor, and expenses chargeable 
 to the product of the shop. 
 
 Shop Cost. fCost of manufactured article up to point of 
 leaving the shop. (This is not to be confused with "factory ex- 
 pense," "overhead" or "factory burden.") 
 
 Short Extend. To enter or carry an amount short of, or be- 
 fore, the money column. 
 
 Shrinkage. Prin. 58 A. 
 
 Sight Draft. (S. D.) 
 
 Signature. Prin. 62; Form 15 A. 
 
 Silent Partner. A business partner who is not actively en- 
 gaged in the business, but whose investment entitles him to share 
 in profits. 
 
 Sinking Fund. Money set apart, in savings or investment, to 
 meet a future maturing debt. Prin. 25 A. 
 
 Single Entry. A system of bookkeeping wherein entries of 
 transactions do not require equal charges and credits for every 
 exchange. Prin. 70; Forms 17A-L. 
 
 Single Entry Changed to Double Entry. Prin. 89 F; Form 
 17 M. 
 
 Sole Proprietorship. 1 f A business organization in which the 
 proprietorship is vested in an individual. 
 
 Solvency. Ability to meet obligations. A business is solvent 
 when it has assets sufficient to meet its liabilities. 
 
 Space for Ledger Accounts. Prin. 801. 
 
 Special Books. Prin. 78. 
 
 Special Column Cash Book. Prin. 74 H; Forms 18 C, 24 F, 
 25 B. 
 
 Special Journal. Prin. 73 E ; Forms 17 M, 22 D, 23 I. 
 
 Speculation. Purchase of land, goods or securities, with a 
 view to selling them at a rise in market price, as distinguished 
 from trading, wherein goods are bought to supply regular retail or 
 wholesale demands. * 
 
 Speculative Accounts. Prin. 27. 
 
 Standard Account System. Prin. 5. 
 
226 DEFINITIONS 
 
 Statement. (1) A written exhibit of the condition or statis- 
 tics of a business organization. Prin. 10. (2) A written exhibit 
 of the doings of an agent. (3) A written exhibit of the current 
 dealings between persons. 
 
 Statement of sales, Form 15 Q ; of account Form 15 P ; of 
 depositor, Form 15 G ; of financial condition, Forms 1, 2, 3, 4, 5, 
 
 12 M ; of profit and loss, Forms 6, 7, 7 D, 8, 9, 12 N ; trading, Form 
 
 13 J; departmental, Forms 18 M, 18 N, ISO. 
 
 Statement of Account. fA written or typewritten memoran- 
 dum, showing the balance due from debtor with items making up 
 same. Customarily mailed monthly to debtors. 
 
 Statement of Affairs, f A statement of affairs is an exhibit 
 of the assets and the liabilities of an insolvent debtor, so arranged 
 as to show on one side all the assets of the concern with the 
 amounts they are expected to real&e extended to another column, 
 and on the other side all the concern^ gross liabilities with the 
 amount expected to rank carried into a separate column. 
 
 Statement of Assets and Liabilities. Prin. 12. 
 
 Statement of Balances. A trial balance of ledger accounts 
 which is proved to be correct. 
 
 Statement of Income and Profit and Loss. fA statement 
 which sets forth the financial operations of a business organiza- 
 tion, for a given period, comprehensively grouped about the divi- 
 sions of organization and connecting the financial condition of the, 
 organization at the end of the period with that at the end of the 
 next preceding period. Prin. 41-42. 
 
 Statement of Realization and Liquidation, f A financial state- 
 ment which shows in parallel columns, respectively, concerning 
 the assets and liabilities arranged in report form, the amount per 
 the books ; the amounts unrealized ; the amounts to be accounted 
 for ; the loss and gain incident to* realization and liquidation ; the 
 assets realized; the liabilities liquidated; the cash resulting and 
 to be turned over. 
 
 Statement of Receipts and Disbursements, f A statement ar- 
 ranged in report form showing respectively with regard to cash, 
 the balance at the beginning of a period, the classified receipts 
 and disbursements during the period and the balance remaining at 
 the end of the period. 
 
 Statement of Receipts and Payments, f A statement of re- 
 ceipts and payments is a summarized cash account and states the 
 amounts of money actually received and disbursed during the 
 period to which it relates without regard to whether the same are 
 earnings or expenses exclusively appertaining to that period or 
 include items so appertaining to the period preceding. It starts 
 with the cash balance at the commencement of the period which 
 it covers, and concludes with the cash balance at the close thereof. 
 
 Statistical Account. tAn account kept for the purpose of ex- 
 hibiting certain statistical results pertaining to the financial trans- 
 actions of an organization, but not necessarily a part of the regu- 
 lar classification of accounts. 
 
INDEX-COMMENTARY 
 
 227 
 
 Statutes of Limitation (Revised to 1918). Accounts, notes, 
 
 contracts, and domestic judgments become outlawed by statute in 
 
 the several states at expiration of the time shown in the follow- 
 ing table : 
 
 Judgments 
 
 State Open Unsealed Sealed Courts not Courts 
 
 Accounts Notes Contracts Contracts of Record of Record 
 
 Ala 3 yrs. 6 yrs. 6 yrs. 10 yrs. 6 yrs. 20 yrs. 
 
 Ariz 3 " 4 " 4 " 4 " 5 " 5 " 
 
 Ark 3 " 5 " 3 " 5 " 10 " 10 " 
 
 Calif 4 " 2 " 2 " 5 " 5 " 5 " 
 
 Colo 6 " 6 " 6 " 6 " 6 " 20 " 
 
 Conn 6 " 6 " 16 " 17 " No limit No limit 
 
 Del 3 " 6 " 3 " 20 " 5 yrs. 10 yrs. 
 
 D. C 3 " 3 " 3 " 12 " 12 " 12 " 
 
 Fla 3 " 5 " 5 " 20 " 20 " 
 
 Ga 4 " 6 " 6 " 20 " 7 " 
 
 Idaho ...4 " 5 " 5 " 5 " 6 yrs. 6 yrs. 
 
 Ill 5 " 10 " 5 " 10 " 10 " 20 ** 
 
 Ind 6 " 10 " 6 " 10 " 20 " 
 
 Iowa ....5 " 10 " 5 " 10 " 10 yrs. 20 " 
 
 Kans. ...3 " 5 " 3 " 5 " 
 
 Ky 5 " 15 " 5 " 15 " 15 " 15 " 
 
 La 3 " 5 " 5 " 10 " 10 " 10 " 
 
 Maine ...6 " 6 " 6 " 20 " 6 " 20 " 
 
 Md 3 " 3 " 3 " 12 " 12 " 12 " 
 
 Mass 6 " 6 " 6 " 20 " 20 " 20." 
 
 Mich 6 " 6 " 6 " 10 " 6 " 10 " 
 
 Minn. ...6 " 6 " 6 " 6 " 10 " 10 " 
 
 Miss 3 " 6 " 6 " 6 " 7 " 7 " 
 
 Mo 5 " 10 " 5 " 10 " 10 " 10 " 
 
 Mont 5 " 8 " 8 " 8 " 5 " 10 " 
 
 Nebr 4 " 5 " 5 " 5 " 
 
 Nev 4 " 6 " 4 " 6 " 6 " 
 
 N. H 6 " 6 " 6 " 20 " 20 " 
 
 N. J 6 " 6 " 6 " 16 " 20 " 
 
 N. Mex...4 " 6 " 4 " 6 " 
 
 N. Y 6 " ' 6 " 6 " 20 " 6 " 20 " 
 
 N. Car. ..3 " 3 " 3 " 10 " 7 " 10 " 
 
 N. Dak... 6 " 6 " 6 " 10 " 10 " 10 " 
 
 Ohio .....6 " 15 " 6 " 15 " 
 
 Okla 3 " 5 " 3 " 5 " 
 
 Ore 6 " 6 " 6 " 10 " 10 " 
 
 Penn 6 " 6 " 6 " 20 " 20 " 
 
 R. 1 6 " 6 " 6 " 20 " 20 " 20 " 
 
 S. Car. ..6 " 6 " ' 6 " 20 " 20 " 20 " 
 
 S. Dak. ..6 " 6 " 6 " ' 20 " 20 " 20 " 
 
 Tenn 6 " 6 " 6 " 6 " 10 " 10 " 
 
 Tex 2 " 4 " 4 " 4 " 10 " 10 " 
 
 Utah ...A " 6 " 6 " 6 " 8 " 8 " 
 
 Vermont .6 " 6 " 6 " 8-15 6 " 8 " 
 
 Va 3 " 5 " 5 " 10 " 10 " 10 " 
 
 Wash. ...3 " 6 " 7 " 6 " 6 " 6 " 
 
 W. Va. ..5 " 10 " 10 " 10 " 10 " 10 " 
 
 Wis 6 " 6 " 6 " 10 " 6 " 20 " 
 
 Wyo 8 " 5 " 8 " 5 " 5 " 5 " 
 
228 DEFINITIONS 
 
 Stock Dividend. Profits of a business which have been added 
 to the capital, and distributed to stockholders in the form of ad- 
 ditional shares of stock, instead of in cash. 
 
 Stock Exchange. An association for the purchase and sale of 
 stocks and other securities. 
 
 Stockholder. One who owns shares of the capital stock of a 
 corporation or stock company. 
 
 Stockholder's Ledger. A subsidiary or memorandum ledger 
 having the stock accounts of all stockholders. The total credits 
 of this book equal the paid up capital stock outstanding. 
 
 Stoeks. The shares in the capital of a stock company or 
 corporation. 
 
 Stocks Account. Prin. 25 E; Form 11 D. 
 
 Stock-Taking, f Stock-taking is an examination of goods on 
 hand for the purpose of finding their value and incorporating the 
 same into a concern's accounts. 
 
 Storage. A charge made for keeping goods in a warehouse. 
 
 Stub. The memorandum portion of a check, receipt, note, 
 draft or other paper which remains after the paper is detached 
 and delivered. Form 15 D, 15 It, and 15 S. 
 
 Subscriber. One who signs his name to an agreement. The 
 subscriber to capital stock of a corporation agrees in writing to 
 invest a given amount toward the capital of the company. 
 
 Subsidiary Ledger. Prin. 80 C. 
 
 Subsidy. A grant or bonus by government or a municipality 
 to a person to assist him in the establishment of an enterprise 
 deemed advantageous to the public. 
 
 Summary Account. tAn account into which a number of de- 
 tail accounts are closed for the purpose of showing a general 
 result. 
 
 Sundry. (Sund.) More than one or two. Various. Very 
 frequently used in bookkeeping referring to a number of accounts 
 later enumerated as "Sundry Accounts ;" also referring to a num- 
 ber of items not necessary to enumerate as "Sundry Expenses." 
 Used as a heading for miscellaneous items, as a "Sundry Column." 
 
 Superintendent. ( Supt. ) 
 
 Surplus Account. Prin. 36. 
 
 Suspended Ledger. A ledger containing accounts separated 
 from the ordinary accounts receivable ledger, because they are 
 considered doubtful of collection. The total of the suspended 
 ledger accounts may be written off entirely, and carried merely 
 as a memoranda record of accounts worth keeping in mind, but 
 not worth carrying at any amount. 
 
 Suspense Account. An account in which items, whose final 
 disposition is doubtful, may be charged oiv credited while awaiting 
 final disposition. . 
 
INDEX-COMMENTARY 229 
 
 Syndicate, f A group of men, bankers, or any combination of 
 the same, who combine in their mutual interests for the purchase 
 or control of certain properties or securities. The members of the 
 syndicate are generally bound by what is called "syndicate agree- 
 ment ;" in other words, a written instrument to carry out the terms 
 of the agreement, signed by the parties. 
 
 Tangible Values. fThe direct and indirect cost of physical 
 property, as cost of purchase of equipment, labor and material 
 used to install, with all legal, office, rent and other expenses in- 
 curred incidental and necessary to installing. 
 
 Tare. A deduction of the weight of containers from the gross 
 weight. 
 
 Taxable Income. Prin. 88 K. 
 
 Taxes. Contributions enforced by law upon individuals for 
 the support of government. A tax is a lien on real and personal 
 property. It is designed to meet the budget of expenses annually 
 made for the support of the state, county, township, city, school 
 district, etc. In the case of taxes levied on property, each tax- 
 payer pays in proportion to the assessed value of the property 
 owned by him. Licenses, poll taxes, impost duties, etc., are other 
 forms of taxation. 
 
 Taxes Account. Prin. 28 F. 
 
 Telegram. Form 18 L. 
 
 Teller. (Tel.) A bank clerk who counts money paid to or 
 received from customers. 
 
 Tender. The offer of payment or satisfaction of a demand, 
 usually the offer of legal money, called a legal tender, for the pay- 
 ment of a debt. 
 
 Terms of Sale. The conditions governing the settlement for 
 property sold. The term "2/10, n/30" means subject to two per 
 cent discount if paid in 10 days, but net or without discount if 
 not paid before 30 days. 
 
 Tickler. A book arranged to show future due paper or other 
 important data in the order of the dates when attention should 
 be given to them. 
 
 Title. The heading of an account. "Expense" is the title of 
 Form 10 J ; "Charles Burton, Capital," of Form 10 H, etc. 
 Ton or Tons. (T.) 
 Tools Account. Prin. 24 D. 
 
 Trade Discount. A discount from list prices or invoice prices, 
 made by wholesalers to dealers. 
 
 The trade discount is often regarded as the dealer's trading 
 profit, especially on articles that are universally retailed at list 
 prices. Trade discount should be distinguished from "cash dis- 
 count." 
 
 Trade Mark. A device placed upon manufactured goods to 
 distinguish them from imitations. Trade marks are copyrighted 
 to insure their exclusive use by the owner. 
 
230 DEFINITIONS 
 
 Trading Account. A summary account in which the gross 
 trading or manufacturing profit of a given accounting period is 
 shown by the introduction of such subsidiary accounts as Sales, 
 Purchases, Manufactures, Inventory, Freight, Discounts, Returns, 
 Allowances and any other elements that affect profit from sales 
 prior to the deduction of selling, general administrative and capi- 
 tal expense. Prin. 55-55 D; Forms 12 £ and 14 J. 
 
 Trading Business. The business of buying and selling com- 
 modities. A mercantile business. 
 
 Trading Statement. See "Statement; Form 12 N, 13 J. 
 
 Transactions. Prin. 5 and 7. 
 
 Transfer Binders. Prin. 80 G. 
 
 Transit. Checks or drafts are said to be "in transit" when 
 they are held by parties between drawer and drawee. 
 
 Treasurer. (Treas.) 
 
 Treasury Stock. The stock of a corporation which is received, 
 bought or donated back after having once been issued. Such stock 
 is carried in a special account, entitled "Treasury Stock." Prin. 
 39 D. 
 
 Trial Balance, f Suggested definition: A trial balance is a 
 table of the balances shown on a ledger for the purpose of trying 
 their accuracy. When successfully compiled it ceases to be a trial 
 balance and becomes a statement of ledger balances. See Prin. 
 80 M ; Form 10 G, 10 P, 12 J, 12 K, 12 Z. 
 
 Trial Balance, locating errors in. Prin. 83 D. 
 
 Trust Company. A financial institution that takes charge of 
 the financial investments of persons or estates, and carries on a 
 banking business in greater or less degree, depending on state 
 laws. 
 
 Trustees. fTrustees are persons having charge of property 
 of some other person, usually appointed by a court and bound by 
 the terms of the trust over which they have been appointed. 
 
 Turnover, f A term used to designate the cost of goods sold. 
 (Illustration shows material and labor.) Am. Enc. 
 
 The cost of goods sold during a certain period. (Illustration 
 shows net purchases only.) Renn. 
 
 Prime cost of the goods sold. Rahill. 
 
 Two-Page Cash Book. Prin. 74 C; Form 13 B, 13 L, 17 P, 
 18 G, 
 
 Ultimo, (ult.) In the month just preceding the present 
 month. 
 
 Undistributed Expense. fExpenses chargeable to operation, 
 -but under captions not determined. 
 
 Undivided Profits, t Earnings or profits which have not been 
 divided among the partners in a firm or the stockholders in a cor- 
 poration. 
 
 Unsubscribed Stock Account. The account charged for the 
 portion of the capital stock account of a corporation which has 
 not been apportioned to any subscriber or stockholder. 
 
INDEX-COMMENT A R Y 231 
 
 Up-Keep. A term used in real estate accounts to show ex- 
 penses of keeping buildings in condition for renting; also applied 
 to expenses of keeping other property in condition for use. 
 
 Utility. A thing that may be sold, as, commodities, serv- 
 ices, uses, or conditions of time or place that may be given for a 
 price. The utility sold by a grocer is in the form of groceries; 
 that of a railroad, transportation; that of an electric light com- 
 pany, light or power; that of a teacher, instruction; that of a 
 lawyer, advice or service. 
 
 Valuation of Assets. Prin. 14. 
 
 Vendors. tPersons from whom purchases are made — usually, 
 the persons from whom a corporation takes over its original 
 assets. 
 
 Venture Account. fVenture account, or, as it is sometimes 
 termed, "adventure account," is a title frequently applied to spe- 
 cific shipments on consignment when made the subject of sep- 
 arate accounts. 
 
 Verifying the Posting. Prin. 80 K. 
 
 Voucher, f A document which certifies or verifies the correct- 
 ness of charges for values paid out or parted with, or of credits 
 for values received. Am. Enc. 
 
 Vouching consists of obtaining evidence (usually document- 
 ary) that the transactions recorded in the books are facts. Mont- 
 gomery-Dicksee. 
 
 Any memorandum which will establish the validity of the 
 transaction should be accepted as satisfactory. Renn. 
 
 Prin. 61. 
 
 Vouchers Payable. Prin. 31 D. 
 
 Voucher System. fThe voucher system is the treatment of 
 creditors' accounts in such a way as to obviate the necessity of 
 keeping the individual accounts, thus greatly curtailing the labor 
 of posting and yet at the same time greatly facilitating the anal- 
 ysis of expenditures under their classified headings. See Prin. 
 76 D. 
 
 Wage Hour, f A basis for the distribution of labor. As a unit 
 it constitutes the wage of one operative one hour. 
 
 Wages. f(l) Compensation allowed for manual labor. (2) 
 That share of production which is assigned to labor. 
 
 Waiting Assets. Prin. 26. 
 
 Watered Stock, f Stock which appears on the books as fully 
 paid up, but for which only partial or no value has been received, 
 and which, therefore, represents some inflated or fictitious value. 
 Am. Enc. 
 
 Capital stock issued for which no value has been received. 
 Tipson. 
 
 An increase of the capital stock of a corporation without a 
 corresponding increase in the assets of the company. Stock ac- 
 quired for less than an equivalent exchange of value. Rahill. 
 
 Stock issued above the authorized capital. Keister. 
 
232 ' DEFINITIONS 
 
 If all the original capital stock has been issued and the com 
 pany should issue stock to .pay dividends, it would be "watering." 
 Keister. 
 
 Way Bill. A form accompanying freight shipments to show 
 the routing and disposition. Form 24 A. 
 
 Wholesale. Sale in quantity suitable for division by retailers. 
 
 Working Account, f An account sometimes found in financial 
 reports of cotton mills in which the manufacturing, trading and 
 profit and loss accounts are combined. 
 
 Working Capital, f That portion of capital used in the active 
 operations of a business. It may consist of (1) capital stock sub- 
 scribed and paid; (2) capital stock sold to stockholders to raise 
 cash; (3) dividends or surplus undistributed; (4) part of pur- 
 chase money of business allowed to remain unpaid; (5) loans 
 from bank or otherwise; (6) proceeds of accommodation notes; 
 (7) proceeds of sale of bonds; (8) assessment on stockholders. 
 Am. Enc. 
 
 All assets available as cash for the carrying on of a business. 
 Tipson. 
 
 Works Ledger. fThe subsidiary book in which is recorded in 
 detail the cost of producing or manufacturing goods for sale. 
 
 Yards, (yd.) 
 
$ 
 
 54!!M6 
 
 
 4juc ^U- 
 
 UNIVERSITY OF CALIFORNIA LIBRARY