IC-NRLF 
 
 EfiD 
 
 i 
 

 THE LIBRARY 
 
 OF 
 
 THE UNIVERSITY 
 OF CALIFORNIA 
 
 HENRY RAND HATFIELD 
 MEMORIAL COLLECTION 
 
 PRESENTED BY 
 
 FRIENDS IN THE ACCOUNTING 
 PROFESSION 
 
Principles of Accountancy 
 
 American 
 Bookkeeping Series 
 
 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. 
 
 GOODYEAR-MARSHALL PUBLISHING Co. 
 CEDAR RAPIDS, IOWA 
 
COPYRIGHT, 1913, BY 
 
 GOODYEAR-MARSHALL PUBLISHING CO. 
 CEDAR RAPIDS, IOWA 
 
Preface 
 
 Several considerations prompted. in the publication 
 of this book. To begin with, it has long appeared that 
 the governing principles of accountancy which in most 
 bookkeeping texts are scattered about with other matter 
 in various parts of the books could be gathered in one 
 volume, and topically labeled and indexed, for the con- 
 venience both of the student and of the bookkeeper. To 
 thus arrange the essential principles within the limits of 
 a book of less than two hundred pages, has been a 
 lengthy and perplexing, but on the whole, a satisfactory 
 task. It is believed, with this book, that a student may 
 refer as readily to any governing principle of account- 
 ancy, as a bookkeeper may refer to a ledger account. 
 
 Again, the study of bookkeeping though of great 
 practical importance under any conditions can be made 
 much more direct in its application, by the selection of 
 practical sets, based upon the kinds of business or in- 
 dustry prevalent in the locality where the subject is 
 taught, or that may be of personal interest to the student. 
 
 Having placed the principles of accountancy in a 
 small separate volume, we are enabled to prepare, by the 
 unit plan, practice sets that severally afford a business 
 routine which will directly familiarize the student with 
 the commodities, processes, and trade conditions prevail- 
 ing in any one of the hundred or more classified lines of 
 business or organized interests. These units are graded, 
 and can be selected from "The American Bookkeeping 
 Series," for which this book is the reference in account- 
 ancy matters. 
 
 The division of bookkeeping sets into graded units, 
 based on the principles of accountancy, has another ad- 
 vantage. Under some local conditions, or at certain 
 stages of progress in the same class-room, problem work, 
 without business papers, is preferable. Under other con- 
 ditions or at other times, work with outgoing and in- 
 coming papers is better. Furthermore, there are few 
 
4 VREFACE 
 
 classes that should not have at least one unit of true busi- 
 ness practice. Units constructed to accord with these 
 needs can be selected from The American Bookkeeping 
 Series, in their proper sequence, and without waste of 
 time or material. 
 
 It is quite well established that students, especially 
 immature students, have often had to work at a great dis- 
 advantage, and have been subjected to injurious eye- 
 strain as well, by reason of certain mechanical defects in 
 the text books placed in their hands. Two improvements 
 in the make up of a bookkeeping text may be noted here : 
 
 (1) The reading line in a text book should, not be 
 over four and one-half inches in length. In a book for 
 close study, three and one-half inches is better. In this 
 book, which is to be studied closely, we adopted three and 
 five-eighths inches. In the accompanying series of book- 
 keeping units, we adopted four and one-half inches. 
 
 (2) It seems that the illustrated forms of books of 
 entry and account are examined and studied to much 
 greater advantage, if the forms themselves are of full 
 commercial size, making apparent all details in their 
 proper surroundings. In many bookkeeping texts, the 
 attempt to make a short reading line, together with illus- 
 trated forms of reasonable size, printed in the same book, 
 has resulted in an unhappy compromise the reading line 
 being altogether too long, and the illustrations uncom- 
 fortably cramped and inadequate. In this book of prin- 
 ciples, no illustrated forms are given; but there are con- 
 stant references to a "Book of Forms, " which supplies, 
 under separate cover, a classified series of all forms under 
 consideration. 
 
 We call attention to the "Index-Commentary," 
 which provides, in a single alphabetical list, an index to 
 topics and to model forms, a vocabulary of business terms 
 and words, the standard abbreviations, and the working 
 rules. The star (*) placed before words found in the 
 body of the work, is to call attention to fuller discussion 
 or definition in the Index-Commentary. 
 
PREFACE 5 
 
 It is hoped that this book may be found useful to 
 the business man, who needs a reliable, constructive guide 
 when planning or overseeing his accounting records; to 
 the bookkeeper, who will find it a convenient reference 
 as to bookkeeping or office problems, as well as to the 
 student of any modern bookkeeping course, who will, in 
 The Principles of Accountancy, find an excellent supple- 
 mentary reference text at all stages of his work. The 
 student who works out the several units of The American 
 Bookkeeping Series, will. find The Principles of Account- 
 ancy indispensable. 
 
 Whatever credit may be due for the production of a 
 work of this kind, should not be ascribed wholly to the 
 author of the book. The growth of accountancy science 
 is co-incident with the advance in co-operation and or- 
 ganization. For this, we are debtors to the Jew and the 
 Greek, to the Roman and the Continental, to the English- 
 man and the American. In this small volume, it is im- 
 practicable to mention the many leaders in the profession 
 whose works the author has consulted freely. To men- 
 tion the names of a dozen leading accountants, would 
 bring to mind a score of others that had been overlooked. 
 Yet the author could not make this attempt to crystallize 
 the mass of current accountancy authority frequently 
 diffuse, inconsistent, and even conflicting without draw- 
 ing upon his own stock of practical conservatism, gath- 
 ered through years of service at the bookkeeper's desk. 
 
 Without question, advancement in the science of ac- 
 countancy will necessitate some modifications in certain 
 details of the following pages. Yet the form and arrange- 
 ment of this book appear to us to be of a permanent 
 nature. We shall appreciate any criticisms from either 
 student, bookkeeper, accountant, or teacher, that may 
 tend to make The Principles of Accountancy a more use- 
 ful guide for all. 
 
TABLE OF CONTEXTS 
 
 ACCOUNTING : Principles Pages 
 
 Introductory Definitions 1-10 7- 11 
 
 Financial Statements 11-20 11- 20 
 
 Financial Ledger 21-40 20- 49 
 
 Real Accounts Asset 21-30 20- 38 
 
 Liability 31^0 38- 49 
 
 Profit and Loss Statements 41-50 49- 59 
 
 Business Ledger 51-60 59- 71 
 
 Nominal Accounts 51-60 59- 72 
 
 AUDITING : 
 
 In General 61-62 E 72- 74 
 
 For Accuracy 63-63 D 74- 77 
 
 For True Record 64-64 B 77- 81 
 
 For Fraud 65-65 E 81- 86 
 
 For Suitable Books and Records 66 87- 88 
 
 For Worth and Earning Power 67-67 C 88- 90 
 
 Legal Aspects 68-68 K 90-104 
 
 Single Entry 69-69 G 104-107 
 
 Report 70 107-108 
 
 BOOKKEEPING : 
 
 Original Entries 71-71 H 108-112 
 
 Charge and Credit 71 1-71 R 112-117 
 
 The Ledger 72-72 S 117-128 
 
 The Journal 73-73 G 128-134 
 
 The Cash Book 74-74 H 134-144 
 
 The Merchandise Sold Book 75-T-", 1 : 144-148 
 
 The Merchandise Bought Book 76-76 D 148-152 
 
 The Inventory Book 77-77 D 153-154 
 
 Primary Books 78 ir.J-156 
 
 Auxiliary Books : 79 156-158 
 
 Business Forms 80-80 C 158-167 
 
 Filing 81 167-168 
 
 INDEX-COMMENTARY ..169-end 
 
INTRODUCTORY DEFINITIONS (1-10) 7 
 
 Accountancy is the branch of mathematical science 
 that treats of the relations of values expressible in terms 
 of money. It is useful in discovering the causes of suc- 
 cess and failure in business. The principles of account- 
 ancy are applied to business concerns in three divisions of 
 practical art, named accounting, bookkeeping, and 
 auditing. 
 
 1. Accounting is the art of exhibiting the com- 
 ponent parts of a business Organization through their 
 expression in accounts, which are formed, continued and 
 closed in accordance with a body of governing principles 
 outlined in the course of centuries of progress in 
 accountancy. 
 
 An accountant arranges and prepares a bookkeeping 
 system adapted to the needs of a given business, and de- 
 rives from the system an accumulation of guiding facts, 
 for the benefit of the business organization. He is the 
 architect of the bookkeeping structure. 
 
 2. Bookkeeping is the art of recording business 
 transactions and operations. 
 
 There are two principal phases of bookkeeping: (1) 
 the preservation of a true business history of some cer- 
 tain *concern; (2) the classification of the items recorded 
 in such a way as to show the receipts and disbursements 
 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. 
 
 3. Auditing is the art of examining books, records, 
 accounts and the business interests with a view to dis- 
 covering the actual conditions. 
 
 An auditor is employed, ordinarily, (1) to detect 
 fraud; (2) to prove the mechanical and mathematical 
 
8 INTRODUCTORY DEFINITIONS (1-10) 
 
 accuracy of books; (3) to discover points in which the 
 books do not conform with the principles of account- 
 ancy; (4) to exhibit the true condition of a business; 
 (5) to make recommendations with a view to improve- 
 ment. 
 
 4. Business, in the commercial sense of the term, 
 means the various processes by which *utilities are ex- 
 changed or otherwise operated upon, with a view to 
 profit. 
 
 A private business organization is formed for the 
 purpose of buying or securing certain utilities, combining 
 these into a new utility, and selling the utility thus pro- 
 duced. Organizations for the transaction of public 
 business render various services to the public, and are 
 maintained from the collection of *revenues. 
 
 A business man must be guided in his transactions 
 and operations by his books of record and account, if he 
 would attain to business success. As a rule, the more 
 profitable a business is, the more complicated are its 
 processes that demand constant reference to records. 
 With the advance of civilization, business becomes in- 
 creasingly dependent upon accountancy. 
 
 Every business man should know enough about 
 accountancy, bookkeeping and auditing, to construct a 
 useful account analysis, to make or oversee the making 
 of good records, and to devise- an adequate proof of the 
 reliability of his own books. He should also be able, 
 when called upon, to take charge of the *finances of a 
 society, church, school district, township, county, city, 
 state, or nation, or of emergency undertakings. 
 
 5. Exchanges in business are of two kinds: (1) 
 transactions the exchanges between persons, as in buy- 
 ing and selling or in collecting and paying accounts; 
 (2) operations the change in the conditions of values 
 within a business; as, for example, the manufacture, 
 collection and distribution of ^commodities. 
 
 6. Entries. Every exchange involves a book entry, 
 which is a record of the facts about the exchange and an 
 
INTRODUCTORY DEFINITIONS (1-10) 1) 
 
 indication of the component parts of the business affected 
 by the exchange. The records of the facts about ex- 
 changes are called the memoranda; the names of the 
 component parts affected by the transactions are called 
 the account titles. 
 
 7. Books used in bookkeeping are of two general 
 kinds : 
 
 (1). Journals are books of original entry, in which 
 the exchanges of the business are recorded consecutively 
 as they occur. It is presumed that all journal entries were 
 in former times made in one book called the journal, al- 
 though modern bookkeeping assigns original entries to 
 various books, according to the kind of entry. Among 
 them are the journal, sales book, purchase book, inven- 
 tory book, and other special books of original entry. 
 The entries in all of these are properly called journal 
 entries. 
 
 (2). Ledgers are books of entries that have been 
 transferred from the journals or books of original entry, 
 according to a scheme of classification, into separate ac- 
 counts. Ledgers are also divided into various kinds, de- 
 pending upon the nature of the accounts which they 
 contain. Among them are the general ledger, customers' 
 ledger, accounts payable ledger, and notes ledger. 
 
 Note. The cash book generally contains a consecu- 
 tive record of transactions involving cash receipts and 
 payments, while it also contains the account of cash, thus 
 combining the nature of journal and ledger. 
 
 The purpose of all special books of original entry is 
 to admit of consecutive records and partial account 
 classification. 
 
 8. An Account consists of a detailed summary of 
 all the debits and credits pertaining to a given com- 
 ponent part of a business. The name of that part is 
 called the Title. The debits, regularly placed in a col- 
 umn to the left, show the value which the business or- 
 ganization as a whole has contributed to the named part. 
 The credits, regularly placed in a column to the right. 
 
10 INTRODUCTORY DEFINITIONS (1-10) 
 
 show the value which the organization as a whole has 
 received from the named part. 
 
 The Balance is the difference between the debit and 
 credit sums, or totals. 
 
 Real Accounts are those that represent cash, or 
 things of determined cash value either owned or owing; 
 Nominal Accounts are those that represent profits or 
 losses, resulting from business operations. 
 
 9. Standard Account System. All varieties of busi- 
 ness are so similar in their financial 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 for all the regularly named 
 and defined real accounts, but that so far as its organiza- 
 tion extends, standard account titles may be selected to 
 represent all of its real component parts. Such standard 
 titles should be selected because their use will render 
 financial analysis much better understood by all persons 
 interested than it would be if unusual titles were em- 
 ployed. 
 
 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 hun- 
 dred in the same concern. They are subject largely to 
 the special needs of a given business. 
 
 10. A Statement of a Business is an exhibit of the 
 condition and progress of the business as a whole. 
 
 There are two phases of the statement of a business : 
 (1) the Financial Statement, which shows in detail the 
 property and indebtedness of the business ,-m<I Ili n 
 sultant net worth or insolvency; (2) the Profit and Loss 
 Statement, which shows the causes and amounts of its 
 profits and losses for a given period of time, and the re- 
 sultant net profit or loss. 
 
 Tin- financial statement is regularly taken from the 
 real accounts, and the profit and loss statement, from the 
 nominal accounts. 
 
FINANCIAL STATEMENT (11-20) Resources, Assets 11 
 
 Recapitulation 1 to 10. The main processes of 
 bookkeeping are determined by the principles of account- 
 ancy, 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 ex- 
 hibits the condition of its finances and the results of its 
 operations, as shown by the records, in compact form for 
 examination and comparison. 
 
 11. A Financial Statement of a concern consists of 
 
 (1) a list of cash, claims collectible, and property owned, 
 (called assets or resources), showing the amount all told; 
 
 (2) a list of debts that must be paid out of the assets, 
 (called liabilities), and their amount; (3) the difference 
 between the total assets and liabilities, (called the net 
 worth). 
 
 Note. After opening a business, if the books are 
 properly kept, it should be convenient to prepare a finan- 
 cial statement on the last day of any subsequent *fiscai 
 period, from the results shown by a group of accounts, 
 called real or financial. The manner of keeping such ac- 
 counts so as to show the financial condition, is discussed 
 in the chapter following. (Prin. 21-30). 
 
 12. Resources are the cash, claims, other property 
 and advantages that have a value to a given business. 
 
 Examples. Moneys, commodities, and *real prop- 
 erty, owned and used. Services, or expense utilities 
 bought, are resources during the period of their con- 
 sumption, and are regularly included as such in the 
 statements of banks and other concerns. 
 
 13. Assets are the cash, claims for cash, and other 
 property that are of value not only to the concern owning 
 them, but that have a value to the purchasing public. 
 
 13 B. Eesources differ from assets in that the word 
 resources implies that the valuation placed on the prop- 
 erty so considered, is the cash amount that it would be 
 worth to the going business, (i. e. the business in opera- 
 
12 FINANCIAL STATEMENT ( 11-20 ) Liabilities 
 
 tion), while the word asset implies its value when offered 
 in the general market without the aid of the business 
 organization. 
 
 Example. A patent right might be worth $10,000 to 
 a going business as a resource, while it might not be 
 worth $1 as an asset, if offered for sale, or on winding up 
 the business. 
 
 14. Liabilities are the debts owed to others that are 
 to be paid from the assets of the business. 
 
 14 B. A statement of "resources and liabilities" 
 may or may not be identical with a statement of "assets 
 and liabilities." If the former statement should show 
 much greater net worth than the latter, the business is 
 to be considered hazardous to that extent. The tendency 
 of sound accountancy is to make clear distinctions be- 
 tween resource and asset valuations and to adopt the 
 latter as a basis for financial statements. 
 
 15. The Credit of a business, which means the 
 amount of money that can be borrowed for its use, is 
 determined by bankers on the basis of *net worth as 
 shown by a financial statement consisting of assets and 
 liabilities. The credit basis may be modified by the 
 lender's estimate of the borrower's business capacity and 
 honesty. 
 
 16. The Assets of a business may consists of many 
 different things, each having ledger accounts to show the 
 cost and value. The most common assets are: cash; ac- 
 counts receivable, showing amounts due from others on 
 open account; bills receivable, the notes and acceptances 
 collectible from others; inventory, showing the value of 
 floating property and claims that may be realized on; 
 ventures, showing value of moving property shipped out 
 but owned until sold; investments showing value of in- 
 come-earning property owned; real estate, showing value 
 of real property owned for occupancy ; furniture and fix- 
 tures, equipment, live stock, machinery, tools, etc., show- 
 ing cost and value under separate account titles. 
 
FINANCIAL STATEMENT ( 11-20 ) Schedules 13 
 
 17. The Liabilities of a business commonly consist 
 of accounts payable, showing amounts owed to others on 
 book account ; bills payable, showing the amounts of bills 
 or notes or other written obligations owed to others ; loans 
 payable, showing long-time notes or bonds outstanding 
 in favor of others ; and capital, surplus or general reserves 
 showing the amounts to be finally withdrawn from the 
 business organization by the investors. 
 
 18. The Financial Statement may be explained by 
 separate lists or schedules of the items making up single 
 amounts in the statement. For example, Accounts Re- 
 ceivable, given at a certain amount in the fiinancial state- 
 ment may be explained by a separate list of the persons 
 or firms that owe the business on book account and the 
 amounts they severally owe. Likewise an inventory list 
 of floating property, a list of notes or bills, or articles 
 making up furniture and fixtures, equipment, live stock, 
 machinery, tools, etc., may often be necessary to explain 
 in detail the articles making up the given amounts in the 
 financial statement. 
 
 18 B. If a financial statement is made from estimate 
 or appraisement of property, where no books have been 
 kept, or where the books are defective in this respect, all 
 items in it should be explained in the statement, or, if 
 there is not enough room in schedules attached to the 
 statement. (See forms 4F to 4H). 
 
 When a statement is made from properly kept books. 
 a list of the items of the fixed property, personal accounts 
 and bills may be found in the ledger, while floating prop- 
 erty and claims should be found in special inventories. 
 
 19. Inventory lists of *merchandise should show the 
 items extended at cost price in the first of two columns, 
 and the estimated decrease in value, if any, in the second 
 column. From the amounts of these two columns the 
 asset value is to be determined. 
 
 19 B. Not infrequently certain kinds of goods or 
 merchandise will increase in market value while awaiting 
 sale. Such increase should not be added to inventory 
 
14 FINANCIAL STATEMENT (11-20) Model Forms 
 
 value for the reason that the increase is estimated and not 
 fact, until it 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 any person's 
 estimate of what the property might be sold for. 
 
 However, the sum set by the purchase price must be 
 reduced, when the value has evidently decreased, because 
 safe business management demands that any impairment 
 of the assets be noted. 
 
 20. Forms of financial statements are taken up in 
 detail in this division, which should be read with the 
 forms referred to before you. Notice that some of the 
 financial statements are made from estimate or appraise- 
 ment, others from the records of a bookkeeping system. 
 Typical explanatory lists and schedules are also ex- 
 plained. 
 
 20 A. Form No. 1. The financial statement here 
 given shows the net worth of the business interests of a 
 certain person. If it is not derived from a set of books, 
 the first item, 1 A, is found by actual count of the cash in 
 possession of Mr. Weld. The second item, 1 B, is found 
 by an examination and listing of the bonds which he 
 owned at the time the statement was made. The third 
 item, 1 C, is taken from a schedule of the furniture now 
 owned. Since the furniture is entered at cost, without 
 any mention of depreciation, it is assumed that the articles 
 have not been in use long enough to deteriorate in value. 
 
 Since there are no liabilities, the total, 1 D, exhibits 
 the net worth, which is always classed as a liability of a 
 business organization to the owner or owners. 
 
 Should the owner intend to open a set of books, this 
 statement would provide the entries for four accounts; 
 viz: Cash; U. S. Bonds; H. H. Furniture; and Capital 
 account. 
 
 Note. If the proprietor had kept books prior to 
 nuikin*: tin- statement, the Hinoiints iliriv found would 
 have been taken from the accounts in his ledger. 
 
FINANCIAL STATEMENT ( 11-20 ) Model Forms 15 
 
 20 B. Form No. 2. This financial statement of the 
 business interests of James Madison shows a number of 
 assets and liabilities. After cash, there are entered three 
 account balances, 2 A, showing money collectible for the 
 business organization from three different persons who 
 owe Mr. Madison on book accounts. 
 
 The item, 2 B, shows a result of a list, or inventory, 
 of merchandise now in Mr. Madison's possession. The 
 items making up this total have been computed at the 
 price paid for them, and from this total there is de- 
 ducted an amount equal to the diminishment in the value 
 of any part of the merchandise, if there were such dimin- 
 ishment. It simply shows what the goods on hand were 
 safely worth at the time the statement was made. 
 
 The item, 2 C, shows the cost of the lot and building 
 occupied by the store. Unless there is a recorded decrease 
 in the value of the property since purchase, the cost is 
 considered the present worth of the property. 
 
 The items, 2 D, are balances payable by Mr. Madison 
 to the firms mentioned. They are liabilities, which ac- 
 counts for the amounts being carried to the right hand 
 or liability column. 
 
 The total liabilities taken from the total assets, leave 
 a remainder of $6941.41, which is entered in red ink in 
 the liability column, as the net worth, 2 E. It shows 
 what would remain after paying all debts. After enter- 
 ing the net worth, the two columns are proved by footing 
 them, and are then ruled. 
 
 20 C. Form No. 3. The financial statement of the 
 business interests of Henry Morgan is evidently derived 
 from bookkeeping records. 
 
 The items, 3 A, cash in hand and in bank would to- 
 gether appear as a cash balance of $470.10 in cash book. 
 This balance should be verified by actually counting the 
 cash on hand and adding the amount to the balance to 
 Mr. Morgan's credit in the bank. 
 
 The item, 3 B, shows the value of household furniture 
 by giving the cost of the various purchases of furniture 
 
16 FINANCIAL STATEMENT (11-20) Model Forms 
 
 amounting tq $1579.40, as the basis. This basis is modi- 
 fied by a careful estimate that the furniture has, through 
 *depreciation, lost 25 per cent of its original value, caus- 
 ing the deduction of $394.85. The remainder, $1184.55, 
 is the present asset value of the furniture. 
 
 The items, 3 C, show that two pieces of real property 
 cost respectively $3758.40 and $1600, which are considered 
 their present worth. The items, 3D, show that there are 
 owing two amounts to be paid. These amounts owed are 
 secured by mortgage on the two items in 3 C, so that the 
 equity of the owner in house and lot is the difference be- 
 tween the worth of the property and the mortgage 
 against it or $2158.40. His equity in the farm is $800. 
 
 The sum of the assets, $7013.05, diminished by the 
 sum of the liabilities, $2400, produces (3E) a net worth 
 of $4613.05, placed in the lesser column to show, by foot- 
 ing, the excess of assets over liabilities, and in red ink, to 
 show that the figures are the result of computations 
 derived from the previous parts of the statement. 
 
 20 D. Form No. 4. The financial statement of the 
 Walters Grocery Co., illustrates a number of the items 
 explained by separate schedules. 
 
 The item, 4 A, comprises the total of uncollected 
 charges to the customers for goods sold. This is ex- 
 plained in detail by referring to the list of Customers' 
 Balances, 4 F, where the persons and firms owing, and the 
 amounts owed are given in detail. The total of this list 
 verifies the amount entered in the statement. The page 
 numbers preceding the firm titles in the schedule refer to 
 the ledger pages in which the customers' accounts are 
 kept. 
 
 The item, 4 B, comprises the total face of notes owed 
 to the firm. This is explained by the form, 4 G, giving the 
 names of the note payers, the date, the maturities, and the 
 amounts, also the numbers which were given to the notes 
 wln-ii they were entered in a bills receivable book. The 
 figures before the amounts in notes Nos. 9 and 13 show 
 that No. 9 was originally for $82.50, but that $60 had 
 
FINANCIAL STATEMENT (11-20) Model Forms 17 
 
 v 
 
 been endorsed prior to taking the list. No. 13 shows an 
 endorsement of $50. 
 
 The item, 4 C, in the statement comprises the total in- 
 terest earned or accrued on the notes receivable. This 
 is explained by the column in 4 G headed 1 1 interest ac- 
 crued, ' ' where the amounts of interest accrued on the sev- 
 eral notes are given. 
 
 The item, 4 D, in the statement shows the value of 
 merchandise on hand at the time the statement was taken. 
 This is explained by the inventory, 4H, where all items 
 on hand are listed at cost, showing a total of $2812.45. 
 It is found that deductions should be made from several 
 of the items in stock, because of reduction in value of the 
 goods. The proportion of the reduction is indicated by 
 fractions y, !/2> etc., placed after. The amounts deducted 
 are placed in the second column, footed, and the total, 
 $467.31, subtracted from the gross inventory, leaving the 
 net inventory, $2345.14, which is the amount carried to 
 the statemnt. 
 
 The three items, 4E, in the statement comprise the 
 fixed property which should be found entered in detail in 
 ledger accounts, and consequently require no explanatory 
 schedules. In each case, however, there is deducted a cer- 
 tain per cent for depreciation. 
 
 Accounts payable is to be explained by a list of credi- 
 tors ' balances similar to form 4 F, showing the firms to 
 whom payment is to be made and the amounts. 
 
 Bills payable, consisting of only one item, is explained 
 fully on the statement. If the firm owes many notes, a 
 list similar to form 4 G would be made. 
 
 20 E. Form 5. The form of a financial statement of 
 a corporation does not differ from that of a sole proprie- 
 torship or partnership. In the form referred to, the items 
 entered are so extensive and show so many revisions, 
 that a better exhibit can -be made on an open journal 
 sheet with the assets on the left and liabilities on the 
 right, Such a form is suitable for any extensive busi- 
 ness whether organized as a corporation or not. 
 
18 FINANCIAL STATEMENT (11-20) Model Forms 
 
 Item 5 A. Referring to the form, observe that the 
 total cash balance is in three separate accounts. The 
 first three items should agree with the balance in the 
 cash book. 
 
 Item 5 B. After listing the balance of accounts 
 due from customers, it is decided that the total cannot 
 be collected but that 5 per cent of the total would equal 
 the uncollectible part, or eventual loss. This amount is 
 deducted from the face showing the asset value 'of ac- 
 counts receivable, as the difference, or 95 per cent, of 
 the face value. 
 
 The word reserve, indicates that a certain amount 
 of the profits is reserved or kept in the business instead 
 of being paid out as dividends to the shareholders. The 
 amount reserved for depreciation plus the asset value 
 of the accounts should together represent the cost of the 
 accounts; and thus the net worth of the business is not 
 diminished through shrinkage in collections. A reserve 
 for diminishment or depreciation of any business prop- 
 erty simply indicates that the owners of the business 
 have kept in the business enough cash, which otherwise 
 would have been paid out in dividends, to ;make good 
 the diminishment, or depreciation in the business prop- 
 erty. Thus the reduction in value of the property is 
 replaced by an equal increase in the amount of other 
 available assets. 
 
 Item 5 C. Bills receivable also show a shrinkage in 
 value of 5 per cent, which amount has been reserved 
 jiiid credited to a reserve account instead of being paid 
 as dividends. 
 
 Item 5 D. The floating property of the business 
 in three lots: (1) product or goods ready for sale as 
 shown by inventory in schedule A; (2) product in pro- 
 
 'I' manufacture which carries a cost to date of three 
 items taken from schedules B, (' and D; (these three 
 might be combined in one amount and entered as Un- 
 finished Product it' desired): CJ) raw or crude material 
 
FINANCIAL STATEMENT (11-20) Model Forms 19 
 
 ready for manufacture but not yet *routed as explained 
 in schedule E. 
 
 Item 5 E. The inventories of claims include earn- 
 ings of the business not yet collected, and utilities paid 
 for but not yet realized. 
 
 Item 5F, 5 G, 5 H. The three accounts of fixed 
 property each show cost diminished by depreciation 
 covered by reserve as in 5 B. 
 
 Item 5 1. The four accounts here given differ in 
 their significance, being both tangible and intangible, 
 but are alike in this respect that depreciation is not 
 represented in a reserve account, but depreciation is 
 entered directly into the asset accounts so that the led- 
 ger balance represents the actual value. 
 
 Item 5 L. Among liabilities and liability inventor- 
 ies taken from labor included in schedule C, but not paid 
 for, and interest accrued but not paid. 
 
 Item 5 M. This is the balance of the ledger account 
 of bills receivable which have been discounted to other 
 parties who will collect them in the ordinary course of 
 business. Until they are collected, they remain a *con- 
 tingent liability to be accounted for. 
 
 Item 5 N. The total reserve credited on the books 
 is $5602.42. This reserve is divided into six subdivisions. 
 The five named on the statement are to equalize the 
 various deductions made from assets for diminishment 
 in value. They amount, all told, to $3620.42. This 
 amount taken from the total reserve leaves $2000, a 
 general reserve, which is held in anticipation of business 
 reverses. This general reserve is an addition to the 
 capital, which has been derived from former profits. 
 
 Item 5 0. Of the capital stock, $13000 has not been 
 issued, leaving $62000 on which dividends to stockholders 
 are to be apportioned. 
 
 Item 5 P. The total liabilities deducted from the 
 total assets leaves a remainder of $5602.65 to be dis- 
 
20 FINANCIAL LEDGER (21-40) Real Accounts 
 
 tributed to dividends, reserve, surplus or wherever de- 
 termined by the owners. 
 
 Recapitulation 11 to 20. A financial statement is 
 made to show the net worth or insolvency of the busi- 
 ness. 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. 
 
 Any item of value in a financial statement should be 
 supported or explained by a special list, or schedule, of 
 all the items making up the total amount of the unit, or 
 by an itemized ledger account. 
 
 It is important that no items of value be entered in 
 a financial statement at more than their asset value, 
 especialy when such items are subject to waste, shrinkage, 
 or depreciation. As a guide to a correct estimate of their 
 worth, fixed property should be entered in the statement 
 so as to show the cost. Appropriate reductions are 
 made from cost in order to arrive at asset value. It is 
 the best usage to reserve from profits a sufficient amount 
 to offset estimated shrinkage or depreciation and show 
 the same in a reserve account or several reserve ac- 
 counts. By this means the net worth of the entire busi- 
 ness is kept from falling below the net worth at starting. 
 
 The difference between total assets and total liabil- 
 ities, including capital at begining, is the net profit or 
 loss at the close of the period covered by the statement. 
 
 21. The Financial Ledger contains 11n Real ac- 
 counts. These accounts show the financial condition, 
 that is, the items making up the capital of the business. 
 By this is meant, (1) the cash account which, although 
 generally kept in a different book, is to be considered a 
 t>art of the financial ledger; (2) the accounts of all ot lift- 
 assets; (3) the accounts of all liabilities, including capi- 
 tal stock, and all varieties of reserve accounts. 
 
 When all accounts pertaining to the business are 
 kept under one ledger cover, the financial ledger is that 
 division of the whole ledger which contains the above 
 
FINANCIAL LEDGER (21-40) Asset Accounts 21 
 
 named accounts, as distinguished from the Business 
 Ledger, which contains the nominal accounts, or those 
 which show the sources of revenue, income and other 
 profits, and the expenses and other losses. (The chapter, 
 "Prin. 72 to 72 S," discusses the ledger more fully.) 
 The financial ledger registers the activities of the finan- 
 cial management, as distinguished from the operating 
 activities. 
 
 21 B. The Financial Management of a business con- 
 sists in providing and dispensing free cash (called work- 
 ing capital) to pay for the needed utilities which must 
 be bought constantly. This working capital, or free 
 cash, is secured, first from the investors, and afterward 
 from receipts for services performed, from sales of prop- 
 erty, from the collection of accounts, notes, or other 
 claims, or from loans. Some of the business property 
 may be kept for sale, some for permanent use. Good 
 management requires that the investments in fixed prop- 
 erty, or that property which is kept for permanent use 
 and which cannot be disposed of at will, should not be 
 in too large proportion to the floating, or more easily 
 convertible, property. 
 
 22. Assets consist of cash and of property or claims 
 convertible into cash. The different kinds of assets are 
 divided into several groups with reference to the readi- 
 ness with which they may be turned into working capi- 
 tal. They are as follows: (1) cash; (2) accounts receiv- 
 able, notes receivable, bonds or other obligations of out 
 side people to pay a determined amount of cash; (3) 
 floating property, including merchandise, material for 
 manufacture, shipping supplies, etc., not yet converted 
 into cash or claims; (4) fixed chattel property, including 
 furniture, fixtures, equipment, machinery, tools, etc. ; (5) 
 real property, including ownership of lots, lands and build- 
 ings; (6) rights or priveleges guaranteed by law, includ- 
 ing franchises, right of way for railroads, patent and 
 copyrights, good will, or business advantages derived 
 from reputation and promotion. 
 
22 FINANCIAL LEDGER (21-401 Cash Account 
 
 23. Accounts of Assets should be kept in such a. 
 way as to show: (1) the case of cash, the receipts, the 
 disbursements, and the amount on hand ; (2) in the case 
 of claims against others, when and how they are to be 
 collected; (3) in the case of *fixed property, the cost 
 separately from depreciation in order to detenu ii it- 
 asset value; (4) whether all shrinkages, waste, or depre- 
 ciation in property have been made good to the business 
 in reserves in order that the capital of the business may 
 not diminish through the diminishment of any part of 
 its property values. 
 
 24. The Cash Account is the first and, as a rule, the 
 account most generally necessary to all business. It 
 ranges from the simple record of receipts and disburse- 
 ments, unconnected with any other books or accounts, 
 to the elaborate special-column forms joined with the 
 ledger accounts of intricate bookkeeping. 
 
 The cash account should show by its title whether 
 it is a record of current cash (that is, for general expen- 
 ditures), or whether it is a record of cash set aside in a 
 fund to be paid only for some specific purpose. Ordin- 
 arily, the term, cash account, is understood to be an ac- 
 count of cash that is to be paid, in a general way, for 
 all purposes of the business, while cash set aside for a 
 specific kind of payments, is called a fund. 
 
 The cash account should show, at any time, (1) when 
 and from what source cash has been received into the 
 business; (2) when and to what purpose cash was <lis 
 bursed or paid out of the business; (3) how much cash is 
 remaining. 
 
 The cash account may be kept in a ledger with other 
 accounts, but owing to the constant reference made to it, 
 both in making entries and in ascertaining the amount 
 on hand, this account is generally kept in a separate book 
 ready for immediate entry or reference. The term, cash 
 book, means the cash account kept by itself in a separate 
 book of original entry. Study carefully the following 
 forms : 
 
FINANCIAL LEDGER (21-40) Model Cash Accounts 23 
 
 24 B. Form 10 A. A simple cash account may be 
 used without reference to any other accounts or books. 
 In it are recorded all receipts and payments. The re- 
 ceipts are placed on the left, or debit side, and the pay- 
 ments on the right, or credit side. On any date, the 
 total credits may be deducted from the total debits, to 
 show the balance on hand. In the form given, this ac 
 count was balanced on Saturday at the close of Jan. 5, 
 and the amount remaining was carried down for the re- 
 opening of Jan. 6, under the double ruling, showing the 
 amount unexpended. Such a cash book may be balanced 
 daily, weekly, or monthly as may be most convenient. 
 
 Note. In form 10 A, are two columns headed, ''led- 
 ger account" and "postmark," which are to be disre- 
 garded if the entries in the cash book are not to be 
 posted to the ledger. 
 
 24 C. Form 10 B. This is the same cash book as 
 10 A, with the addition of the entries of the ledger ac- 
 count 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. 
 When the posting is done, 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. (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. (See 
 form IOC.) 
 
 24 D. When the payments and receipts of cash are 
 entered, with other transactions, in a complete journal, 
 the cash debits and credits are posted to a Cash account 
 kept in the ledger. This account is illustrated in form 
 12 C. This form may be used where the payments are all 
 made by check in a small business. In that case the check 
 stubs must be looked to for a full record. 
 
24 FINANCIAL LEDGER (21-40) Funds 
 
 24 E. Form 10 C. Certain amounts of cash may be 
 separated from the general cash, and held apart for some 
 particular class of expenditures, or for some special pur- 
 pose. Cash thus set aside is called a fund. 
 
 One may set aside cash in a bank savings account 
 with a view to the accumulation of the amounts saved, 
 and their accretions, for future needs, in a Savings Fund. 
 One may set aside an amount of cash each year, and in- 
 vest it in interest bearing securities, with a view to the 
 final accumulation of enough cash to meet a future 
 maturing debt. This would be called a Sinking Fund. 
 Cash may be set aside in a Building Fund, with a view to 
 constructing a building when sufficient savings are 
 accumulated. 
 
 Funds are set up for temporary purposes: thus, a 
 Contingent Fund consists of amounts set aside to pay ob- 
 ligations likely to arise, but not yet fully determined; a 
 Cashier's Fund, or Imprest Fund, consists of amounts en- 
 trusted to the cashier, out of which he makes payments 
 as occasions arise, and reports the payments, later, for 
 entry. 
 
 The account of a fund is charged for the money 
 transferred to it, or accruing to it; and is credited for any 
 money withdrawn from it. 
 
 24 F. Cash accounts are kept in cash books of var- 
 ious forms adapted to various business requirements. 
 (See Prin. 74 to 74 H.) These cash books may have many 
 columns on both the debit and credit sides. ( 1 nluimm : 
 cash books, if arranged to accord with correct accounting 
 principles, must contain one certain debit column which 
 includes all cash receipts, and one certain credit column 
 which includes all cash payments. These two columns 
 an- to be regarded, respectively, as the debit and the 
 credit sides of the account. Any extra columns 
 found in a cash book are used for purposes of classifi- 
 cation, and are to be distinguished from cash account. 
 
 25. Claims against others. After accounts of cash, 
 there follow a number of accounts that represent a *con- 
 
FINANCIAL LEDGER (21-40) Accounts Receivable 25 
 
 tracted amount of cash collectible on demand or at some 
 future time. These are divided into, (1) Accounts Re- 
 ceivable, or the current charges against persons and 
 firms; (2) accounts of Bills Receivable, or notes and ac- 
 ceptances, evidenced by paper signed by payers and held 
 in the business; (3) accounts of Bonds and Mortgages and 
 other long-time interest-bearing obligations, issued by 
 municipal authority, by corporations, or by individuals; 
 (4) accounts of Stocks, which represent a part interest in 
 the capital of other business concerns. These accounts 
 all represent appropriations of the capital of the busi- 
 ness, and are the result of the loan of money or of sales 
 to others on credit. They are called quick assets, be- 
 cause they may be either collected in a short time, or, in 
 the case of notes or securities, they may be disposed to 
 investors for ready cash. 
 
 25 B. Accounts Receivable are the ledger records 
 of the amounts owed to the business by persons and 
 firms that have received value on book account. The 
 terms "customers' accounts" or "trade debtors" are 
 often used in the same sense. The arrangement of ac- 
 counts receivable differs in the several ways mentioned 
 in the following paragraphs. 
 
 25 C. Where the accounts consist of only one item 
 to be collected from the person or firm named, they may 
 be entered under the general heading, ' ' Sundry Accounts 
 Receivable." Each person's debit occupies one line, 
 showing the date, payer, and amount. When payment 
 is made, the credit should be posted to the line opposite 
 the charge. (See Form 11 B.) Where a number of per- 
 sons are assessed or subscribe certain amounts to be paid 
 later, a similar account headed "Subscription" or "As- 
 sessments" is used. 
 
 The C. 0. D. (Collect on Delivery) account contains 
 the charges to sundry customers for goods to be de- 
 livered 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 
 
26 FINANCIAL LEDGER (21-40) Accounts Receivable 
 
 side. Sometimes the sale-number or the name of the col- 
 lector is entered instead of the buye'r'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 same line as the cor- 
 responding charge. The C. 0. D. account is kept among 
 the other customers' accounts. (See Form 14 M.) 
 
 25 D. Where the accounts receivable consist of ac- 
 counts on each of which there are a number of charges 
 or of credits, or both charges and credits, each account 
 should have, as its title, the name of the person or firm 
 to which the charges or credits relate (See Form 12 H). 
 The dates and amounts of the several charges are entered 
 on the debit side, and the dates and amounts of the pay- 
 ments are entered on the credit side. 
 
 Customers' accounts should be kept with the utmost 
 care, because they represent a certain portion of th- 
 capital of the business intrusted to outside persons, which 
 capital will be lost if collection cannot be made. In ad- 
 dition to the customer's name as title at the top of tin 1 
 account, and the dates and amounts of charges on the 
 debit side, with the dates and amounts of credits on the 
 credit side, other needed memoranda may appear in the 
 account, as follows: 
 
 (1) The address of the customer, which should fol- 
 low the title. 
 
 (2) The credit limit or the largest amount which 
 he is allowed to buy on account. If a person other than 
 the buyer is responsible for payment, the fact should be 
 noted in the explanatory space for debits. 
 
 (3) The terms of the sale, if special terms are 
 granted, should also be entered. 
 
 (4) The credit side may specify wln-tln-r credits are 
 in cash or in part cash, and part discount, or notes, or al- 
 lowances; also if sight drafts are drawn, this should be 
 si i own in pencil opposite the charge drawn against. 
 
 (5) Any memoranda that will aid in keeping tho 
 
FINANCIAL LEDGER (21-40) Bills Receivable 27 
 
 account from becoming too large, or in collecting it 
 promptly. 
 
 25 E. When the number of current accounts re- 
 ceivable increase so as to fill up the assigned division of 
 the complete ledger (Prin. 72 B) too rapidly, they should 
 be taken from the complete ledger and kept in a sub- 
 sidiary ledger (Prin. 72 C) called the Accounts Receiv- 
 able, Customers', Trade Debtors', or Individual ledger. 
 When so kept, the aggregate amounts of debits and 
 credits in the subsidiary ledger are posted to a control- 
 ling account in the general ledger. (Prin. 72 D). 
 
 25 F. Bills Receivable or Notes Receivable is the 
 title charged for the notes or acceptances received into 
 the firm from others. Such notes are ordinarily received 
 from sale of goods, in settlement of book accounts, or 
 for money loaned, and, as a rule, do not extend over one 
 year in time, usually but a few months. 
 
 They may be recorded in two general ways: 
 
 25 G. Where few notes or acceptances are received, 
 the record of each note may be made in a separate line 
 under the ledger title, Bills Receivable, among the asset 
 accounts. This line can show on the debit side the date 
 received, payer, when due, and amount. When the note 
 is paid, the credit should be entered in the credit side 
 on the same line, opposite the charge for the note that 
 the credit is payment for. Use x mark (See Form 11 C) 
 to indicate settlement so that in 'making, any list of 
 notes, those without x mark only will be included. 
 
 Remark. Business men frequently discount bills re- 
 ceivable, in order to secure ready cash, instead of holding 
 the notes until maturity. Although a discounted note is 
 supposed to be settled, so far as the payee is concerned, 
 when he indorses it to another, yet, on failure of the 
 maker to take it up at maturity, the endorser is ordi- 
 nariy liable for its payment. The note is not to be cred- 
 ited off the Bills Receivable account until this obligation 
 of the payee ceases. Its collection is a matter of concern 
 to the payee as well as to the holder. Bills Receivable 
 
28 FINANCIAL LEDGER (21-40) Loans 
 
 Discounted should be credited with the face of the notes 
 thus transferred. The account of Bills Receivable Dis- 
 counted represents a contingent liability, and is placed 
 in the liability division of the financial ledger (See Prin. 
 35 B). 
 
 Remark. Notes usually draw interest . The collec- 
 tions of interest have no effect on the Bills Receivable 
 account, but are credited to the Interest Account in the 
 business ledger, payments to apply on principal only 
 are credited to Bills Receivable account. 
 
 25 H. When bills receivable are sufficiently numer- 
 ous, they are recorded in a bills receivable book or a 
 note ledger which has columns for a complete description 
 of each note. Each line of the bills receivable book is 
 numbered and the number written on the note described 
 in the given line, so that the notes are known by num- 
 ber, and the number of any note refers to its description 
 in the note ledger. 
 
 When so entered, the title, Bills Receivable, among 
 the assets in the financial ledger is debited or credited 
 for the aggregate of all notes entered as received or 
 paid, in the note ledger, or bills receivable book. Bills 
 Receivable is the controlling account for the separate 
 bill record. 
 
 25 I. 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). 
 
 They are usually received directly from the borrower 
 or are bought as an investment by those who wish to 
 place their money on a safe income-earning basis and 
 who are satisfied with the profit derived from interest. 
 
 A ledger asset account under the title, Mortgage 
 Loans Receivable may be kept. This is in the same form 
 as the account of Bills Receivable (see Form 11 C). Tin- 
 account is charged 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 
 
FINANCIAL LEDGER (21-40) I'.omls. Inventory 29 
 
 is kept in the part of the ledger reserved for nominal 
 accounts. 
 
 Loan papers 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 will 
 be the face of the paper. When paid a credit is made 
 opposite 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 
 contains ruled columns for description of each item like 
 the bills receivable book. 
 
 25 J. Debenture Bonds or single Bonds 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 describing the kind 
 of bonds is charged for their face, when sold, the account 
 is credited at face and the difference to the Profit and 
 Loss account. 
 
 When a premium is paid at purchase, the amount of 
 the premium is to be charged to an account of Premium 
 on Bonds. This premium account is an asset to be 
 * amortized by annual proportionate amounts carried to 
 Profit and Loss. 
 
 When bonds are bought at a discount, the amount 
 of the discount should be credited to Discount on Bonds 
 account, a resreve liability, such discount to be extin- 
 guished by annual charges as in the case of premium. 
 
 26. The Inventory Account is charged at the close 
 of the fiscal period for the value of all floating property 
 
30 FINANCIAL LEDGER (21-40) Inventory of Mlst>. 
 
 on hand and for unrecorded collectible claims and con- 
 vertible values that have accrued during the fiscal period. 
 These debits remain in the account as nominal assets dur- 
 ing the following fiscal period and at the close are 
 credited out of the inventory account and charged into 
 the business accounts into which they are regularly ab- 
 sorbed. 
 
 At the time the old inventories (those carried from 
 the begining of a fiscal period) are closed out of Inven- 
 tory account into the business accounts, the new in- 
 ventories (those made at the close of the fiscal period) 
 are charged into the Inventory account where the latter 
 remain to the close of the next following fiscal period 
 and are in turn closed out as before. Thus reference to 
 the Inventory account in the financial ledger at any time 
 will exhibit the value of the otherwise unrecorded assets 
 of the business at the begining of the given fiscal period. 
 This amount may not be the real value of an inventory 
 taken subsequent to the entry, but it is the nearest esti- 
 mate that is suitable for record, and owing to its gen- 
 erally being taken when stock of merchandise is low, is 
 considered safe. 
 
 (For taking inventory see Prin. 77; for charge and 
 credit see Prin. 72 P; for liability inventory see Prin. 34.) 
 
 26 B. . Merchandise, or stock of goods for sale, gen- 
 erally comprises the most important inventory and fre- 
 quently the only one considered. The inventory v;i hit- 
 should be based on cost, not estimate. 
 
 The Cost of Merchandise is the purchase price and 
 all the expenses necessary to lay the same down in the 
 sales room. These expenses consist of freight and tnms 
 fer charges necessary to place same in the store. 11 is 
 customary 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 arrives. The warehouse expenses with the freight 
 mid inmstir expenses, are included as part of the cost 
 of tin- inci-cliniidisc. 
 
FINANCIAL LEDGER (21-40) Other Invoiitorirs 31 
 
 When the same articles have been bought at differ- 
 ent times for different prices, the last price paid is to 
 be used. After the cost of merchandise is found, de- 
 preciation in value of any of the articles should be 
 taken into account before the real value can be de- 
 termined. ( See Form 4 H.) 
 
 Remark. The inventory principles of determining 
 the asset value of floating property is often applied to 
 fixed properties such as furniture and fixtures, real 
 estate and even notes and accounts. This should be 
 discouraged because all such items remain in the busi- 
 ness as charged and their value is more safely determined 
 by estimating depreciation as a deduction from the cost 
 already recorded in the ledger. 
 
 Remark. When the Inventory of floating property 
 is charged for material, or expense items, the correspond- 
 ing credit is to the materials or expense account affected, 
 and is continued into the next period precisely as in the 
 case of merchandise. 
 
 26 C. Inventories of Claims Receivable. At the 
 
 close of a fiscal period, certain assets that have not been 
 previously recorded should be included. Among these 
 are interest accrued on bills or accounts receivable and 
 any other items chargeable and earned but not entered. 
 Such items should be entered in the inventory book, and 
 charged to Inventory account or the above title if a 
 separate inventory account is desired, through the jour- 
 nal or from inventory book, and the account to which 
 they pertain, credited. At the close of the following 
 fiscal period, the nominal account to which they pertain 
 is charged for the amount of the inventory and the 
 Inventory account is credited to balance. The latter ac- 
 count is then charged for the new inventory as before. 
 
 27. Permanent property may be owned either for 
 use or for sale. Furniture and fixtures, machinery, and 
 other equipment are purchased for use. Chattels may 
 be taken in payment of debt or purchased by way of in- 
 vestment or for speculation. There is a distinction be- 
 
32 FINANCIAL LEDGER (21-40) Equip' t Depreciation 
 
 tween the accounts of property for use and for specula- 
 tion. The forms explained under this article (27) refer 
 to chattel property purchased to be retained for the use 
 of the business. Such properties are called Fixed Assets 
 because they occupy a fixed place in the business organi- 
 zation. 
 
 27 B. Equipment is a title referring in a collective 
 way to the articles or property making up a special 
 outfit for a given business use (see Form 10 D). Differ- 
 ent business organizations may require delivery equip- 
 ment, building equipment, heating equipment, threshing 
 equipment, or other equipment. Certain universally 
 used kinds of equipment are given special titles, like 
 "Furinture and Fixtures," "Rolling Stock," "Machin- 
 ery and Tools," etc. 
 
 The account is charged for the cost of the articles 
 comprising the outfit. These charges should appear in 
 the ledger account in detail, that is, the name and price 
 of every article should be given a line. 
 
 If any of the articles of the equipment are sold, the 
 account should be credited for the cost price of the item 
 sold, the credit appearing on the same line of the ledger 
 account with the charge, and the difference between the 
 cost and selling price entered to Profit and Loss account, 
 or to Reserve for Depreciation, if such an account is 
 carried. By crediting sales from any property account 
 at cost, the ledger account will show the balance of the 
 account (or difference between the debit and credit foot- 
 ings) to be the exact amount invested in 'the remaining 
 portion. 
 
 27 C. In view of the wear and tear incident to all 
 buildings and equipment, the value of such property is 
 constantly undergoing depreciation, that is, ordinary re- 
 duction in value .by use. This depreciation is easily com- 
 puted from a knowledge of the ordinary term of use- 
 fulness of the kind of equipment considered. In order 
 that this depreciation may not impair the capital of the 
 business, the correct practice is to charge as an expense, 
 
FINANCIAL LEDGER (21-40) Furn. & Fix. R. Est. 33 
 
 at the close of each fiscal period, an amount equal to 
 the loss through depreciatoin ; that is, to enter deprecia- 
 tion as an expense belonging in the fiscal period, in which 
 the depreciation occurs. The account credited in the 
 financial ledger for the amount thus charged is entitled 
 Reserve for Depreciation (Sundry) if one reserve is kept 
 for depreciation on all accounts. It is frequently ad- 
 visable to open a separate reserve account for each fixed 
 asset account, thus, Reserve for Depreciation (Office Fur- 
 niture), Reserve for Depreciation (Delivery equipment), 
 etc. 
 
 When so treated, the accounts of fixed assets show 
 the first cost, which should equal the present value plus 
 amount credited in Reserve for Depreciation accounts. 
 
 When fixed business property is sold, the difference 
 between cost and selling price is a charge to the Reserve 
 for Depreciation account. 
 
 27 D. Furniture and Fixtures is the title of the ac- 
 count of the business equipment consisting of such items 
 as desks, chairs, counters, shelving, showcases, the office 
 and store appliances generally. Charge the account at 
 cost for items bought; credit at cost any sales; apportion 
 a reserve out of profits for depreciation as in special 
 equipment accounts above. 
 
 28. Any real estate held for the use of the business 
 should have a separate ledger title for each piece, thus. 
 "Building & Lot No. 58-60 Market St., "Lot 7, Blk. 2, 
 McGrews 1st addition 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. 
 
 Real Estate accounts should be charged for the dbst 
 of the property, including expenses of securing 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). They 
 should be credited at cost for sale of property or any 
 
34 FINANCIAL LEDGER (21-40) Intangible Assets 
 
 part of it, and the difference between cost and selling 
 price credited or charged as the case may be to Profit & 
 Loss account, or if Profit & Loss account is reserved for 
 the operating profits only, to Surplus account. 
 
 Remark. The ordinary expenses of keeping the 
 property up to the condition at starting and the income 
 derived from the rent of the property are entered to an 
 Income and Expense account, of the given property (See 
 Prin. 59.) 
 
 28 B. The general tendency of land is to increase 
 the value, of buildings to depreciate. Depreciation 
 should be equalized by an appropriate reserve from 
 profits, in order that capital may not be impaired. 
 
 Increase or appreciation in the value of the ground 
 is not properly represented by an account of ll Appre- 
 ciation" for the reason that such increase in value con- 
 tributes nothing to the available capital of a business 
 before the property is sold. If a person were to enter 
 appreciation in land value as a part of the business assets, 
 a fortunate rise in a piece of property might cause 
 that property to equal in value the entire original in- 
 vestment, causing all other property to appear as profits 
 subject to conversion and withdrawal. Such action 
 would result in there remaining no business organization. 
 
 Remark. Where greater exactness is desirable, the 
 general account of buildings and grounds should be 
 divided into two accounts one for buildings, or for each 
 building, the other for grounds. 
 
 29. A number of intangible assets may, under cer- 
 tain circumstances, appear in the ledger; among them, 
 Goodwill (Prin. 29 B), which account is charged for 
 the amount paid by a succeeding owner to the former 
 owner for the various trade advantages accruing to the 
 business from the advertising, promotion or location de- 
 veloped by the seller of the business who, through the 
 sale, relinquishes his right to compete; Franchise (Prin. 
 29 C), or the special business rights conferred on a public 
 service company; Insurance (Prin. 29 D), and Taxes, 
 
FINANCIAL LEDGER (21-40) Good Will, Franchise 35 
 
 when covering a period exceeding the fiscal period and 
 to be absorbed in the course of time; Copyrights (Prin. 
 29 E), or Patent Rights (Prin. 29 F), etc. 
 
 Such accounts should be charged for the actual cost 
 (not an estimated value) and ordinarily should be re- 
 duced by credit at the close of succeeding fiscal periods 
 for an estimated reduction of the portion actually con- 
 sumed, if such is plainly apparent, or arbitrarily reduced 
 with a view to final extinguishment. 
 
 It is not advisable to credit a reserve account for the 
 diminishing value of such assets (as is the better way to 
 account for depreciation in fixed property), but instead, 
 to credit the amount written off directly to the account 
 with a corresponding charge to Profit and Loss. 
 
 29 B. Good Will account should be charged for cost 
 at the time of purchase. Additional charges should not 
 subsequently be made, even though it is apparent that 
 the good will, if the business were sold, would bring a 
 much higher figure than appears on the ledger. On the 
 contrary, it should be reduced by credits out of the 
 profits at as early a date as possible with a view to its 
 final extinguishment. 
 
 29 C. Franchise account is similarly charged for the 
 cost of a franchise conveyed to the business. It is ordi- 
 narily extinguished by limitation of the period during 
 which it is enjoyed, and hence, represents a diminishing 
 asset that should be equalized by charging Profit and 
 Loss and crediting the franchise each year with the 
 amount of the expired portion. 
 
 29 D. Insurance account is charged for the cost of 
 premium on insurance policies. At the close of regular 
 periods, sometimes monthly, sometimes annually, the 
 account should be credited for the consumed portion 
 and the expense account of the business, or of the de- 
 partment to which it belongs, charged. 
 
 29 E. Patent Rights account should be charged for 
 the price paid to a patentee of a right to manufacture 
 and sell a patented article. Such patents expire by time 
 
36 FINANCIAL LEDGER (21-40) Speculative Acc'ts 
 
 limitation. The account should be credited from time to 
 time for an amount sufficient to equalize the diminishing 
 value of the patent. The account-title should describe 
 the particular patent. 
 
 29 F. Copyrights account covers the right to print 
 and sell books, pictures or other copyrighted matter. 
 This account is treated in the same way as patent 
 rights. 
 
 30. Speculative Accounts. Speculation is busi- 
 ness venture that involves unusual 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 it for a greater sum than 
 that paid for it. Such speculation differs from business 
 investment. In the latter, property is bought for use or 
 for trading, that is, distributing goods to consumers by 
 purchase and sale primarily without reference to market 
 *fluctuations. Speculation may consist in buying com- 
 modities for shipment and sale in a distant market; 
 development of patents or copyrights, or securing prop- 
 erty or claims of any kind with a view to realizing more 
 than their present current value. It may also consist 
 in buying the obligation of another to deliver a commod- 
 ity at a future date as is frequent in board of trade 
 transactions. 
 
 Similarly treated, is property taken for debt, as 
 when a bank or lender takes over property given for 
 security. Likewise, when an educational or eleemosynary 
 institution 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. 
 
 An account of the 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." 
 
 Speculative accounts are charged for the cost of the 
 property bought (or the appraised value of gifts), also, 
 
FINANCIAL LEDGER (21-40) Stocks 37 
 
 for expenses attached to the speculation, and are cred- 
 ited for incidental incomes derived therefrom. When 
 the speculation is closed out by sale, the account is cred- 
 ited 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 & 
 Loss, from the original entry. 
 
 30 B. Shares of stock are the divisions of owner- 
 ship in the capital of the companies issuing the shares. 
 The stocks considered here are those issued by outside 
 companies and purchased and held in the way of specula- 
 tive investments The ordinary share of stock represents 
 a par value of $100, that is, a part ownership amounting 
 to $100 in the capital and a proportionate share of the 
 profits of the given business. However, shares are made 
 in different denominations, either greater or less than 
 $100. A stock certificate is a written acknowledgement 
 issued by the company that a given stockholder owns 
 so many shares. A single certificate may be written for 
 one share or for many. 
 
 When a business is successful and pays large divi- 
 dends to stockholders, the stock in that company is in 
 demand, and sells at or above par. When a business is 
 less successful and pays a lower rate of dividends, its 
 stock decreases in value. 
 
 In the city stock exchange, which is the market for 
 the stocks of all kinds of financial and industrial enter- 
 prises, stocks are sold daily at varying prices, either 
 below or above par. 
 
 Stocks Account is charged at cost, for the purchase 
 of stocks by the business. Each purchase is allowed a 
 line in which is entered the date, name, and the par 
 amount of the share, or block of shares, in the explana- 
 tory column; and the cost in the money column. 
 
 Brokers who handle stocks freely, open separate 
 ledger accounts for each kind of stocks. In that case 
 the name of the issuing company appears in the title; 
 thus, D. & R. G. Ry. Stock. 
 
38 FINANCIAL LEDGER (21-40) Acc'ts Payable 
 
 When a block of stock is sold, an entry is placed on 
 the credit of the account on the same line as the debit for 
 the same block of shares and at the same price. As it 
 often happens that the stocks are sold for either more or 
 less than their purchase price, the difference, if the sel- 
 ling price is less than the cost, is charged, or if greater, 
 is credited, to Profit & Loss. Dividends from the stocks 
 are credited to Income From Stocks account in the busi- 
 ness ledger. 
 
 31. An Account Payable is a ledger record showing 
 that we owe a person or concern on book account. The 
 title of the account is the name of the person or concern 
 we owe. The account is credited for our obligations to 
 the concern when we assume them, and charged for pay- 
 ment to the concern when we make them. When the 
 charges equal the credits, the account may be closed by 
 ruling. 
 
 31 B. When accounts payable are opened for goods 
 bought at retail, or for services as of transfer concerns, 
 doctors, mechanics, etc., unless otherwise specified, it is 
 customary to settle about the first of every month for 
 the amounts credited during the preceding month. 
 When so settled, a single charge for the cash paid will 
 balance the month's credits. If a part payment is made, 
 the amount paid should be entered as a charge to the 
 account, which continues open until a settlement, when 
 it should be ruled, new business being entered below the 
 ruling. 
 
 31 C. When keeping an account -payable for goods 
 bought at wholesale, it is usually better, and often neces- 
 sary, to pay each credit separately. This is done be- 
 cause wholesalers 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, or for otlu-r 
 reasons. 
 
FINANCIAL LEDGER (21-40) Bills Payable 39 
 
 Such accounts should show the credits entered when 
 the invoices are allowed, and in the explanatory space 
 of the ledger, the term of credit, should be entered, if 
 any special term is granted. The payment of a specified 
 credit should be charged on the same writing line as the 
 credit, thus showing what charge is cancelled. 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 charge 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 G.) 
 
 31 D. The title Accounts Payable is the name of 
 the controlling account in the financial ledger or financial 
 statement that represents 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 th'e total credits to 
 firms for merchandise bought, and charged for the total 
 debits to firms on account of payments or ^allowances. 
 The balance shown by the controlling account can be 
 verified by a comparison with the total of a list of un- 
 paid balances taken from the purchase ledger or, if a 
 *voucher system is used, from a list of the vouchers 
 payable. 
 
 32. Bills Payable or Notes Payable is the account 
 in which notes or acceptances due to other persons or 
 firms are credited. The account is credited for notes or 
 acceptances as issued, and it is charged for all payments 
 on notes for which the accounts have previously been 
 credited. The record details of this account are identi- 
 cal with those of Bills Receivable. (See Prin. 25 F to 
 25 H.) 
 
40 FINANCIAL LEDGER (21-40) Liability Invty. 
 
 32 B. The title, Bills Payable, is the name of the 
 controlling account that represents, in the financial led- 
 ger, the aggregate of outstanding notes, when the notes 
 are entered in *subsidiary bills payable book, or bills 
 payable ledger. 
 
 33. Mortgage Loans Payable is the title for the ac- 
 count of long-time loans secured by mortgages, kept in 
 the same manner as Bills Payable. 
 
 34. Liability Inventory Account. At the close of 
 a fiscal period, certain liabilities that have not been 
 recorded should be taken into account. Among these, 
 are accrued interest on notes or accounts payable, wages 
 and salaries earned but not yet paid, or other payments 
 to be made for unrecorded benefits already received. 
 These should be listed in the inventory book and their 
 total credited to the account of Liability Inventory. A 
 corresponding charge is then made to the business ac- 
 count to which they pertain. At the close of the follow- 
 ing fiscal period, the inventory account is charged and 
 the business accounts involved are credited, thus bal- 
 ancing out the old inventory, when the new, or current, 
 inventory is entered as before. 
 
 35. Contingent Liabilities are obligations to be met 
 should another person, who is the principal debtor, fail 
 to pay them. They consist principally of bills receivable 
 discounted (Prin. 35 B) and *accommodation paper (Prin. 
 35 C). They should be entered among other liabilities 
 in the financial ledger, as their settlement is an important 
 matter, to be followed closely by the accommodation 
 party. A failure to give due attention to contingent 
 liabilities has ruined many an easy-going business man. 
 
 35 B. Bills Receivable Discounted account should 
 be credited for the face of all bills receivable which nave 
 been endorsed over to the bank or to other individuals 
 for cash or credit. The items should be entered and 
 described as in the Bills Payable account. The corre- 
 sponding charges are to Cash and to Interest & Dis- 
 count. When the notes are paid by the makers to the 
 
FINANCIAL LEDGER (21-40) Conting't Liabilities 41 
 
 holders, entries are to be made charging Bills Receivable 
 Discounted account and crediting Bills Receivable ac- 
 count. 
 
 If the endorsee fails to collect, the endorser is 
 obliged to pay the amount of the indorsed paper. In 
 that case he charges Bills Payable Discounted for the 
 notes returned to him, the Bills Receivable account stand- 
 ing without any change. 
 
 35 C. Accommodation Paper account is credited for 
 the face of paper signed for the accommodated party. 
 Each item should be entered with the same attention that 
 is given to a bill payable. The corresponding charge 
 is to the party accommodated, thus, ''John Smith, Ac- 
 commodation." When the paper is paid to the holder, 
 an entry is made charging Accommodation Paper, and 
 crediting the party who was charged for the accommo- 
 dation. 
 
 36. Reserve Accounts. Profits of the business, after 
 the deduction of expenses, may be accounted for in two 
 general ways, depending on the disposition made of the 
 profits : 
 
 (1) In a private business, it is usual to carry the 
 amount of net profit to the credit of the Capital account, 
 thus increasing the credited investment of the owner or 
 owners, or it may be carried to separate drawing or 
 private accounts of the owner or owners, to be drawn 
 out at their option, without increasing the capital. 
 
 In the case of a stock company, the same effect is 
 secured by apportioning the profits to the *stockholders 
 in a Dividend account which is closed when the divi- 
 dends are paid. 
 
 (2) Before allowing all apparent profits to be with- 
 drawn, the prudent directors of a business may find it 
 advisable to keep or reserve some of the profits in the 
 business, either as an offset against diminishing capital, 
 through depreciation in value of property owned, or as 
 an offset against bad debts, or as an addition to the gen- 
 eral resources of the business. Such amounts reserved 
 
42 FINANCIAL LEDGER ( 21-40 ) Reserve Acc'ts 
 
 are represented by Reserve accounts, which receive credit 
 for the amount retained in the business. The cash or 
 property reserved is included in the aggregate of the 
 asset accounts which balances the credit in the Reserve 
 account, in the same way that the accounts of the re- 
 mainder of the assets (less liabilities) balances the Capi- 
 tal account. Reserve accounts have the same physical 
 relation to the business that the Capital account has, and 
 indeed they are really special capital accounts. 
 
 36 B. Reserve for Depreciation account is credited 
 for the loss sustained through the diminishing value of 
 fixed property through ordinary wear. The credits to 
 this account should, in the explanatory column, show 
 the particular property account that each item pertains 
 to, if one reserve for depreciation account is kept for all 
 property. If the number of entries is great enough, or if 
 a close classification is desired, a separate reserve account 
 may be opened for each property account ; as, Reserve for 
 Depreciation (Plant), Reserve for Depreciation (Deliv- 
 ery Equipment), etc. These accounts should show 
 enough reserved to equal the difference between the cost 
 of the property and its present market value. The credit 
 to Reserve for Depreciation account is balanced by a 
 charge against the revenues in the business ledger. De- 
 preciation 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 charge to the Reserve for Depreciation 
 for an amount to balance the credit in the reserve account 
 applying to the sold property. 
 
 36 C. Reserve for Doubtful Accounts. When an 
 examination of the accounts receivable discloses the fact 
 that any of the accounts cannot be collected, or that 
 losses will probably occur in enforcing collection, it is 
 apparent that the total of accounts receivable balances 
 
FINANCIAL LEDGER (21-40) Surplus, Undiv. Profits 4^ 
 
 is greater than the asset value of the accounts. This 
 estimated shrinkage in value should be offset by an 
 amount taken from profits and credited to an account of 
 Reserve for Doubtful Accounts. The amount of this re- 
 serve should be watched and revised annually to an 
 amount equal to the probable losses to be incurred 
 through bad debts. When such reserve has been set up 
 at the end of a fiscal period, the actual losses incurred 
 from accounts becoming worthless in the following period 
 should be charged to the reserve account and not to the 
 Profit & Loss account. 
 
 36 D. General Reserve Accounts. This account may 
 be used to contain credits or reserve for depreciation or 
 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 carry- 
 ing reserves beyond business needs is, that such reserves 
 may be made without the knowledge or consent of certain 
 investors, who would be entitled to a larger share of 
 profits, if such profits were not retained in the business. 
 
 36 E. Surplus Account is an account credited for 
 cash profits reserved from time to time to increase the 
 working capital of the business and to provide reserve 
 capital to meet losses that are not chargeable to other 
 revenues. The report of the United States comptroller 
 of the currency shows statements from many banks that 
 have surplus accounts equal to, or even greatly in excess, 
 of the capital stock. Any business concern other than a 
 bank should build up a surplus if there is risk of loss 
 through a wasting away of the assets. 
 
 36 F. The Undivided Profits Account is credited for 
 part of the profits neither paid to owners of the business 
 nor placed in any permanent reserve account, but retained 
 until definitely disposed of. The account should be 
 charged when disposition is made. When it is the 
 policy or obligation to pay a fixed annual, semi-annual or 
 quarterly dividend regularly, a fund to meet such divi- 
 dends may be taken out of undivided profits, when the 
 
44 FINANCIAL LEDGER (21-40) Capital Acc'ts 
 
 current profits of a dividend period are insufficient to 
 meet the required dividend. 
 
 37. The Capital Account of an Individual Proprie- 
 torship is the account credited for the money claims or 
 property (assets) invested, or that the proprietor owns 
 as component parts of the business 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 possessions 
 included in the concern. 
 
 The capital of the concern is its cash and property, 
 less debits, represented in the financial accounts. Capital 
 should be distinguished from the Capital account. 
 
 The Capital account is a credit, because it is a liabil- 
 ity of the concern to the owner ; it equals the net amount 
 of assets standing in all other accounts of the financial 
 ledger. 
 
 37 B. The revenues and incomes of the business in- 
 crease the capital, and the expenses diminish it. If both 
 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 cus- 
 tom is to credit the revenues and incomes and charge the 
 expenses to certain nominal accounts which, once a year 
 or other period (called the fiscal 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 once a 
 year, the nominal accounts showing the increase or de- 
 crease in that capital during the intervening time. 
 
 37 C. As a genonil rule, in the larger business con- 
 cerns, as well as in many of the smaller ones, the capital 
 of a concern is fixed at an amount not to be increased or 
 diminished by the profits and losses of the business opera- 
 tions. In this case, the amount of the net profit of loss of 
 a fiscal period is not carried from the nominal accounts 
 
FINANCIAL LEDGER (21-40) Capital Acc'ts 45 
 
 to the Capital account, but is carried to the proprietor's 
 Drawing account, an account credited for amounts which 
 he may draw out of the concern 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 assigned to the capital account 
 in the ledger varies with different bookkeepers. It 
 seems preferable to make it the last account in the finan- 
 cial ledger, 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, the last of these being 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 the financial ledger are closed, leaving the 
 ledger intact to that point. 
 
 37 E. Forms of individual Capital account: 
 Forms 10 E and 10 P. The account is here credited 
 for investment and for revenues and charged for ex- 
 penses 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 
 beginning of the fiscal period, while the revenues are 
 credited in a nominal account (Form 10 I) and the ex- 
 penses in another (Form 10 J). 
 
 The same accounts, copied on the opposite page, 
 show the revenue (Form 10 M) and the Expense (Form 
 10 N) carried to Profit & Loss (Form 10 0) 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 0) 
 it had been decided not to increase the capital, but to 
 withdraw the profits, the balance of the Profit & Loss 
 
46 FINANCIAL LEDGER (21-40) Capital Acc'ts 
 
 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. 
 
 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, on 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 fiscal 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 as explained in 
 Prin. 37 C. 
 
 38 B. Agreement of Partnership. The relations be- 
 tween partners are so likely to be misunderstood, and the 
 power of one partner to involve the others in undesirable 
 business obligations is so great, that a mutual agreement 
 in writing should be made to govern their actions and 
 authority as affecting one another. 
 
 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 charged ; and the Capital account is credited. 
 But this condition rarely exists, for the reason that the 
 entire capital cannot ordinarily be secured from the 
 
FINANCIAL LEDGER (21-40) Capital Acc'ts 47 
 
 investors at one time, but is frequently collected in in- 
 stallments. Furthermore, subscribers 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 records 
 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 
 accounts of this nature are entitled, Subscriptions, Un- 
 subscribed Stock, Unissued Stock, and Treasury Stock. 
 
 Profits or losses are not carried to the Capital Stock 
 account of a corporation, but are carried to Reserve, 
 Surplus, Dividend, or Assessment account in the financial 
 ledger. 
 
 39 B. After a sufficient number of subscriptions are 
 secured to enable a corporation to organize, an entry is 
 made charging Subscriptions account and crediting Capi- 
 tal Stock account. If the subscriptions fall short of the 
 proposed capital, the amount not subscribed is charged 
 to an account of Unsubscribed Stock. These two debits 
 equal the amount of credit to the Capital Stock account. 
 When they are posted, the Capital Stock account will 
 stand without further change, unless the capital stock 
 is increased or diminished by some future action. 
 
 39 C. 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 
 
48 FINANCIAL LEDGER (21-40) Capital Acc'ts 
 
 receiving th transferred shares is credited on the next 
 line below as before. If unsubscribed stock is taken, 
 the line in the Capital Stock account credited for unsub- 
 scribed 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 account shows the names of stockholders and the 
 amount of stock belonging to each, together with the 
 unsubscribed portion. 
 
 39 D. When there are many stockholders, and when 
 the shares are transferred from one holder to another 
 quite freely, an auxiliary 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 amount held. 
 
 The total credits in the stock ledger should be equal 
 to the credits of the Capital Stock account, less the 
 amount standing in undescribed or treasury stock. 
 
 Recapitulation 21 to 40. The financial accounts pro- 
 vide the data for the financial statement or detailed 
 statement of the worth of the business. They are kept 
 in the financial ledger or financial division of the general 
 ledger. These accounts are divided into asset accounts 
 and liability accounts. 
 
 Asset accounts begin with accounts of cash, followed 
 by accounts of property, arranged in the order of their 
 convenient convertibility into cash as follows: (1) cash; 
 (2) accounts and bills receivable, bonds, and mortgage 
 loans; (3) inventory of merchandise and other floating 
 assets; (4) equipment, including furniture and fixtures, 
 machinery and tools, etc.; (5) real property; (6) in- 
 tangible assets, including good will, franchise, patent 
 rights, etc. 
 
 The liability accounts follow: They include, (1) 
 
PROFIT AND LOSS STATEMENTS (41-50) 49 
 
 accounts, bills, mortgages and bonds payable; (2) liabil- 
 ity inventory; (3) accounts of contingent liabilities; (4) 
 reserve accounts; (5) accounts of capital investment. 
 
 The Cash account should be kept in such a way as 
 to show conveniently at any time, the amount of cash 
 on hand. 
 
 The Inventory account should show the net totals 
 of all floating assets as taken from an inventory made at 
 the close of each fiscal period, where cost price is dimin- 
 ished by the amount of any reduction in the value of the 
 property. 
 
 The accounts of fixed property should show, as led- 
 ger debits, the cost of all items. Depreciation in the 
 value of fixed property should be offset by appropriate 
 Reserve accounts. 
 
 Intangible assets should be entered in their respec- 
 tive accounts at cost, and diminishing value offset by 
 credits in the same accounts. 
 
 The liabilities should follow in the order of their 
 necessity for settlement. 
 
 The difference between the total of assets and liabili- 
 ties, is the value or worth of the ownership, either in the 
 form of investment or profits, which the proprietors have 
 in the business. 
 
 41. Profit and Loss Statements. A profit and loss 
 statement may consist of a very simple showing of the 
 sources and amounts of income or revenue, diminished 
 by a showing of kinds and amounts of expenses, leaving 
 as a remainder, the net profit or loss for the given period 
 under consideration. (See Form 10 R.) It may be more 
 complicated, showing the revenues, incomes, and ex- 
 penses classified in greater detail. (Forms 12 N, and 
 Forms 6 to 9). One essential to be insisted on at all 
 times is that the statement must not show, as profit, any 
 income or revenue resulting from a reduction of the capi- 
 tal of the business, as shown by the books at the begin- 
 ning of the fiscal period, and must not show, as loss, any 
 
50 P. & L. STATEMENTS (41-50) Revenues, Incomes 
 
 expenditures for property that remains in the business 
 as an asset. 
 
 41 B. Profits are derived from, (1) Revenues, (the 
 collections coming to the business from the regular busi- 
 ness processes, such as sales and services performed) ; 
 (2) Incomes, (the collections coming to the business from 
 the use of capital, such as interest and rents) ; (3) Un- 
 classified Profits, or returns from irregular or accidental 
 sources, as, for instance, the amounts realized from specu- 
 lation and subsidy. 
 
 41 C. Losses are expenditures which result in a 
 diminishment 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, fuel, 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 fiscal period, or, 
 if lasting over, would be so, damaged by use as to be 
 unsalable. Unclassified losses arise from irregular 
 causes, such as theft, gifts, fires, accidents, or specula- 
 tions. 
 
 41 D. In preparing a profit and loss statement, the 
 first distinction to be noted is that revenues, incomes, and 
 unclassified profits are (in the American form) carried 
 to the right hand, or credit column, and the expenses and 
 unclassified losses to the left hand, or debit column. (The 
 English form reverses these columns.) 
 
 The difference between the two columns, or the net 
 profit or loss, is entered as a balance, and the two columns 
 are then footed and ruled. (See Form 10 R.) 
 
 A second section may be added, by carrying the net 
 profit or loss below the ruling, and balancing it by an 
 entry showing the disposition. (See last section, Form 
 12 N.) Such a statement is often sufficient, but more 
 detail is ordinarily desirable, or even necessary, especially 
 in an \t. nsive business, where the different classes of 
 
P. & L. STATEMENT (41-50) Trading & Mfg. Profit r,i 
 
 profits and losses are given separate sections in the state- 
 ment as discussed in Prin. 42 to 49. 
 
 42. Trading Profit. The principal revenue of a 
 trading business is derived from merchandise sold. To 
 exhibit this revenue, a trading statement is drawn up, 
 in the first section of the profit and loss statement (See 
 Form 12 N). This section shows, in the credit column, 
 the net amount of collections made, or receivable, from 
 merchandise sold during a given fiscal period. Against 
 the proceeds of merchandise sold, are entered in the 
 debit column, the cost of the merchandise sold, meaning 
 by cost, the price paid plus freight and other expenses 
 incurred in connection with the goods, up to the time 
 when they are laid down in the storeroom for sale. The 
 difference between the net amount of merchandise sold 
 and the cost of the merchandise sold is entered as a bal- 
 ance, with the explanation, Gross Trading Profit. 
 
 The trading statement is then ruled, and the gross 
 trading profit is carried down to the credit side, below 
 the ruling, to be further increased by other revenues and 
 incomes (if any) and to be diminished by such expenses 
 as may be incident to any kind of business, as explained 
 in Prin. 46-49. 
 
 43. Manufacturing Profit. The principal revenue 
 of a manufacturing business, like that of a trading busi- 
 ness, is derived from the sale of merchandise. The net 
 merchandise sold of a fiscal period is entered to the credit 
 of the trading section of the profit and loss statement, 
 and a corresponding entry of the cost of merchandise sold 
 is entered in the debit column ; by so doing, the difference 
 may be entered as a balance, called, "Gross Trading 
 Profit," to be carried down to a following section. This 
 may be increased by other revenues or incomes, if any, 
 and reduced by such expenses or losses as may be inci- 
 dent to any kind of business, as explained in Prin. 46-49. 
 
 The trading section of a manufacturing profit and 
 loss statement may be the first or the second section of 
 the statement. Its position depends on whether the de- 
 
52 P. & L. STATEMENT ( 41-50 ) Service & Financial Profit 
 
 tails of the manufacturing (which include items showing 
 cost of material, labor, and manufacturing expenses), 
 can be conveniently entered on a first section, (See Form 
 6) or whether they are so complex and diversified as to 
 require a separate manufacturing statement, supple- 
 mentary to the profit and loss statement. 
 
 44. Service Profit. The principal revenues of a 
 service business include the earnings from its sales of 
 service,which are carried to the first section of the profit 
 and loss statement from the accounts showing their 
 amount. 
 
 Thus, in a livery and transfer business, livery hire, 
 stable board, drivers and transfer service might include 
 the principal earnings; a hotel might classify lodging, 
 table board, news stand, pool room, etc. ; a railroad must 
 classify passenger, freight, express, and mail earnings, 
 as separate items. These revenues are entered to the 
 credit column (See Form 7) of the first section of the 
 statement, and a balance, called Gross Earnings is 
 carried down below the ruling, to be increased by other 
 incomes and diminished by expenses, incident to any kind 
 of business, as explained in Prin. 46-49. 
 
 45. Financial Profits. The principal incomes of a 
 financial business are derived from the loan of money or 
 credit, and the rent of property, or other earnings, de- 
 rived from the use of the firm's capital by others. Such 
 incomes are entered to the credit column of the profit 
 and loss statement, followed by the revenues for such 
 services as generally are included in financial business.. 
 The expenses are entered in the left or debit column, and 
 the difference or "net profit for distribution " is carried 
 down to the second section. 
 
 46. Selling Expenses. Having found the gross 
 trading, service or financial profit, tho first, of the three 
 general classes of expense to be deducted in the typical 
 
 ^statement, is the group comprising Selling Expenses. 
 This group m;iy ocr-npy a section in the statement, or 
 I... included in tin- s;nm- section with others, depending 
 
P. & L. STATEMENT (41-50) Expenses 53 
 
 on the extent of primary classification. Among these, 
 may be included advertising, commissions paid, trans- 
 portation on shipments to customers prepaid but not 
 charged, salesman's and shippers' salaries and expenses, 
 and any other expenditures for promoting or effecting 
 sales. When these expenses are deducted from the gross 
 profit, the remainder is the net financial, service, or trad- 
 ing profit as the case may be. 
 
 47. Office Expense. After deduction of selling ex- 
 penses, a group called Office Expenses, Administrative 
 Expenses, or Overhead Expenses, is to be deducted. 
 These include the cost of management. Among them are, 
 office salaries, books and stationery, postage, insurance, 
 taxes, light, heat, and other expenses not directly enter- 
 ing into the production of the utility sold, or of expenses 
 incurred in securing customers. After this deduction, 
 there remains the Ordinary Business Profit. 
 
 48. Capital Expense and Income. Having found 
 the ordinary business profit, the group of expenditures 
 chargeable to Capital Expenses follow. These include 
 interest for money used for the support of the business, 
 and discounts on bonds or stocks of the business that 
 have ben sold. In this division also appears the interest 
 credits arising from surplus money loaned ; some concerns 
 frequently having a large surplus of cash in the fall and 
 winter, making them lenders, while they are borrowers in 
 the spring and summer. 
 
 49. Special Income and Expense. When capital is 
 invested in property which is not a necessary part of the 
 business organization, but is held either for the income 
 it produces, or to be disposed of at a favorable time, or 
 for speculation, the incomes^ from the property and the 
 expenses of its upkeep are considered in one item called 
 Income and Expense (of Property). This account shows 
 the net profit or loss arising from the given property 
 during the fiscal period. If the special income exceeds 
 the special expense, the difference is carried to the right, 
 or profit, column of the profit and loss statement ; if the 
 
54 P. & L. STATEMENTS (41-50) Model Forms ' 
 
 special expense exceeds the special income, it is carrie'd 
 to the left, or loss, column. 
 
 50. After deduction of the. above, (Prin. 46-49) there 
 remains the Net Profit for Distribution. 
 
 Note. The disposal of the net profit for distribution 
 may be shown on the Profit and Loss statement as in 
 Form 7 D or 8 E. 
 
 In making a Profit and Loss statement, the book- 
 keeper should remember that not all of the divisions out- 
 lined in Art. 42 to 49 necessarily appear in all cases. 
 
 While there are business concerns in which the classi- 
 fication of profits and losses is of no practical importance 
 whatever, such is not generally the case. Such a classifi- 
 cation should go into detail, to such an extent that it 
 will give exact information on all elements of profit and 
 loss that may be controlled, or even modified, by the 
 management. 
 
 The steps outlined above provide the accountancy 
 basis for an exhibition of the following matters vital to 
 the interests of any business organization conducted for 
 profit : 
 
 (1). The volume of the sales of goods during a given 
 period, the percentage of sales, as compared with capital 
 and with the cost of sales, and the percentage of profit, 
 as compared with sales, and with the investment. 
 
 (2). The cost and percent cost of effecting sales or 
 securing a market. 
 
 (3). The cost and percent cost of general direction, 
 management and control. 
 
 (4). The cost and percent cost of the capital or 
 credit used to conduct the business. 
 
 Illustration of Profit and Loss Statements. In order 
 to illustrate the general resemblances in the business 
 statements of representative kinds of business, 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 wheat is produced to the time 
 
P. & L. STATEMENTS (41-50) Model Forms 55 
 
 when the bread appears on the table. The lines of busi- 
 ness involved are: (1) first production; (2) milling; 
 (3) transportation; (4) wholesaling; (5) retailing; (6) 
 household; (7) 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. 
 
 50 B. The wheat first appears as the production of 
 the wheat grower. At the close of the year, having kept 
 an account of the expenses entering into the wheat crop, 
 he is able to show the entire cost of the crop in an exhibit 
 similar to the first section of Form 6. Instead of the 
 items there given, the main divisions of seed, labor, and 
 farm expenses (including ground rent, supplies, depre- 
 ciation on machinery, harvesting expenses, and the like) 
 would be used. The result would be the production cost. 
 
 A second section showing the gross trading profit, 
 in similar form to 6 B may follow. All general expenses 
 may be included in the detail desired in one section, in- 
 stead of being divided as in Form 6 C to 6 E. 
 
 Having deducted the general expenses, the remainder 
 shows the net profit for the year. 
 
 50 C. Form No. 6. The next statement taken up 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 (Manufacturing) 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 con- 
 stitutes the "cost of product." 
 
 The trading section shows that there was billed out 
 during the year, mill product valued at $26943.87, but 
 that the mill took back product amounting to $1497.83, 
 
56 P. & L. STATEMENTS (41-50) Model Forms 
 
 leaving net sales $25464.04. The cost of these sales is 
 found by adding to the inventory at begining of year, 
 $5291.63, the cost of the year's product, $22967.39, and 
 from the sum, deducting the inventory of stock on hand, 
 $9647.83, leaving $18611.19, the net cost of the product 
 sold. 
 
 The difference, or gross trading profit, $6852.85, is 
 carried down to the next section. Against this are en- 
 tered selling expenses, office expenses and capital ex- 
 penses, given in some detail. 
 
 The final result, after all deductions, is the "net 
 profit for the year." 
 
 50 D. Form No. 7. The railroad, which carries the 
 flour to the wholesale house, secures its profit from carry- 
 ing passengers, freight, express and mail. The primary 
 accounts of income and expenditures in a large under- 
 taking of this kind may number 200 more or less, but 
 these primary accounts are brought together into general 
 accounts, of which the items in the statement are repre- 
 sentative. First, are listed four items of income; 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 
 necessitates 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 applying to all roads. For 
 example, the first expense, Maintenance of Right of "Way 
 and Structures, represents a group of over twenty pri- 
 mary 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, 
 
P. & L. STATEMENT (41-50) Model Forms 57 
 
 wages to conductors, brakemen, switchmen, telegraph 
 and telephone operation, etc. 
 
 After deducting operating expenses from the gross 
 earnings, there remains 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 working 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 re- 
 ferred to as a representative statement for a service busi- 
 ness, and may be adopted for any other service business, 
 such as livery stable, garage, hotel, repair shop, gas or 
 electric light and power companies, educational institu- 
 tions, etc., the titles for sources of income and for oper- 
 ating expenses being varied to suit the business. 
 
 50 E. Form No. 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 utmost value, as from it may be 
 taken the volume of business, and the percent of gross 
 profit. 
 
 The second section, 8 B, shows the gross trading 
 profit, diminished by selling expenses, leaving net trading 
 profit. 
 
 The third section, 8 C, shows net trading profit di- 
 minished by office or administrative expenses, producing 
 the business profit. 
 
 The fourth section, 8 D, shows the business profit 
 diminished by capital expenses, or the expenses of bor- 
 
58 P. & L. STATEMENT (41-50) Model Forms 
 
 rowing, and maintaining^ the value of capital accounts. 
 The remainder is the net profit for distribution. 
 
 The fifth section, 8 E, shows net profit for distribu- 
 tion and how it was distributed. 
 
 50 F. Form No. 9. In the household profit and loss 
 statement, there appears first a list of the revenues and 
 incomes received from various sources. The item, "5th 
 Ave. Property," shows the rents received, diminished by 
 the expenses for maintainance of the property. The total 
 income is carried to the second section. 
 
 Prom the total income are taken the current ex- 
 penses divided into such primary accounts as desired, 
 leaving net profit or deficit for the year. 
 
 50 G. Form No. 7 D. % 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 remit- 
 tance; (3) interest on bonds or other securities owned 
 by the bank; (4) charges for collecting paper for cus- 
 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, in- 
 cluding cost of books and stationery, heat, light, rent, in- 
 surance, 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 fiscal period. 
 TIu'iv ;m three general kinds of business; viz: trading, 
 service, financial. In a typical profit and loss state- 
 ment for any of these, the leading section exhibits the 
 income derived from the ordinary business operations, 
 diminished by the direct cost of producing any utilities 
 sold. This section thus exhibits gross business profit. 
 
BUSINESS LEDGER (51-60) Nominal Acc'ts 59 
 
 This gross business profit is diminished by selling, ad- 
 ministrative, and capital expenses, and increased by capi- 
 tal 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 sur- 
 plus capital. 
 
 (5). The net profit for distribution. 
 
 51. Nominal Accounts. The Profit and Loss ac- 
 count is the permanent ledger record of the profits (on 
 credit side), and the losses (on debit side), accumulated 
 during a given fiscal period. 
 
 The profits consist of revenues, incomes, and un- 
 classified profits. The revenues and incomes are carried 
 to the credit of the Profit and Loss account, at the close 
 of a fiscal period, from the primary accounts described 
 in Prin. 52 to 55. Unclassified profits are credited di- 
 rectly to the Profit and Loss account from the original 
 entries. 
 
 The losses consist of expenses and unclassified losses. 
 The expenses are carried to the Profit and Loss account, 
 at the close of the fiscal period, from the primary ex- 
 pense accounts described in Prin. 56 to 59. The unclassi- 
 fied business losses are charged to the Profit and Loss 
 account directly from the original entries, with the ex- 
 ception of losses that have been anticipated by a reserve, 
 such losses being charged to a reserve account. 
 
 After all the above charges and credits have been 
 carried to the Profit and Loss account at the close of the 
 
60 BUSINESS LEDGER (41-50) Distribution of Profits 
 
 fiscal period, the credit excess is a net profit, or the debit 
 excess is a net loss, for the period. 
 
 The net profit or loss is carried out of the business 
 ledger into the financial ledger, or from the business di- 
 vision to the financial division of a complete ledger, to the 
 credit (if a profit), or to the debit (if a loss), of such 
 accounts as the owners of the business determine. 
 
 51 B. When the business is owned by a sole proprie- 
 tor, the net profit is very generally credited, or the net 
 loss charged, to the Capital account. (See Form 10 
 closed into 10 L by direct closing ; or Form 12 V closed 
 into 12 P by the last journal entry on 12 O.) 
 
 If it is not desirable to increase the capital, the net 
 profit may be closed either into the proprietor's drawing 
 account, or into a reserve account. 
 
 51 C. When the business is owned by partners, the 
 net profit or loss may be divided according to agreement, 
 and closed out of the Profit and Loss account into the 
 several partners' Capital accounts, or into Drawing or 
 Reserve accounts as above. 
 
 51 D. When the business is owned by stockholders, 
 the net profit may be closed into one or into several ac- 
 counts, of the financial ledger. It may be closed into 
 Dividend account, into Surplus account, into Undivided 
 Profits account, or into Capital Stock account by an issue 
 of *stock dividends, or into a reserve, or any or all of 
 these. 
 
 The net loss may be closed into Undivided Profits, 
 Surplus or other general reserve account, if such account 
 shows reserve sufficient to offset the loss in question; or 
 it may be closed into Assessment account, in which the 
 stockholders are individually charged pro rata, for their 
 assessments to meet the loss. 
 
 It is not good practice to leave the Profit and Loss ac- 
 count open from one fiscal period to another, \yhich is 
 sometimes done when the management fails to make a 
 financial disposition of the net losses. 
 
BUSINESS LEDGER (51-60) Revenue Acc'ts lil 
 
 52. Revenue Accounts are credited for the earnings 
 arising from the sale .of commodities or services, and 
 show, at the close of a given fiscal period, the amounts of 
 gross profits from the ordinary business operations. 
 
 While revenue is the general term for business earn- 
 ings, a more specific title is ordinarly used to show the 
 particular kind of business service sold. It is impracti- 
 cable to enumerate all titles of revenue accounts; a few 
 follow : 
 
 Wages, earnings of a person, usually for manual 
 labor. 
 
 Salary, earnings of a person for personal service en- 
 gaged 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. 
 
 Collection, 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. The trading account 
 contains several factors requiring somewhat lengthy 
 comment. (See Prin. 53.) 
 
 After the titles of the revenue accounts are de- 
 termined, such accounts receive credit from the books of 
 first entry, for the given revenues, as earned, and are 
 charged for any deductions from such earnings. At the 
 close of the fiscal period, the revenue accounts are closed 
 and the balances carried to the credit of Profit and Loss. 
 
62 BUSINESS LEDGER (51-60) Trading Acc't 
 
 (See Form 12 M closed directly into Form 10 ; or 12 S 
 closed by journal entry into 12V.) 
 
 53. The Trading Account (see Form 12 S, or 14 J) 
 is set up to show the revenue arising directly from mer- 
 chandise sold during a given fiscal period. It is charged 
 for the amount of merchandise inventory carried over 
 as stock from the previous fiscal period, also for the net 
 merchandise bought or of merchandise manufactured, 
 during the fiscal period which it closes. These charges 
 include the invoice cost of merchandise, the in-freight, 
 and any other -expenses necessary to lay the goods down 
 in the store ready for sale. 
 
 It is credited for the inventory of merchandise 
 carried over as stock into the following fiscal period, 
 also, for the net amount of merchandise sold during the 
 fiscal period closing. 
 
 After these items are posted, the difference between 
 the debit and credit sides is a profit, if the credit side is 
 greater, and a loss, if the debit side is greater. This bal- 
 ance is carried to Profit and Loss. 
 
 
 
 Note. The trading account, under the name of Mer- 
 chandise account, has by many bookkeepers been charged 
 and credited directly from the books of first entry, but 
 the more detailed attention given to that most extensive 
 of all the business processes the purchase and sale of 
 the stock in trade has convinced most accountants that, 
 as a rule, the Trading account should receive its debit 
 and credit entries from certain primary accounts of 
 which the Merchandise Inventory, Merchandise Sold, 
 Merchandise Bought, and Merchandise Manufactured ac- 
 counts are the most important examples. The principal 
 primary accounts are discussed in Prin. 52 B to 52 F. 
 
 53 B. The Merchandise Sold account (see Forms 
 12 E, 12 A or 14 G), frequently called Sales account, is 
 credited for the amounts of merchandise sold from the 
 sales records, and charged for any rebates, allowances, 
 or incidental deductions, which diminish the amount of 
 
BUSINESS LEDGER (51-60) Mdse. Bought and Sold 63 
 
 the collections realized, or to be realized, from the mer- 
 chandise sold. 
 
 At the close of a fiscal period, the account is closed 
 and the balance is carried to the credit of the Trading 
 account. 
 
 53 C. The Merchandise Bought account (see Form 
 12 F, 12 R or 14 H), also called Purchase account or 
 Purchases account, is charged for the cost of all merchan- 
 dise bought for sale. This cost includes invoice price, 
 in-freight, transfer, and storage or warehouse charges, 
 if any, all told, being the cost of laying the merchandise 
 down in the store. It is credited for any rebates, allow- 
 ances, or other incidental deductions which diminish the 
 amounts paid, or to be paid, for the merchandise bought. 
 
 At the close of the fiscal period, the account is closed 
 and the balance carried to the debit of the trading ac- 
 count. 
 
 Note. The Merchandise Bought account is some- 
 times divided by opening a separate account of Freight 
 on Merchandise Bought. (Prin. 53 D.) 
 
 53 D. The Freight on Merchandise Bought account 
 (see Form 14 I) is debited for the freight and transfer 
 charges on the merchandise bought, and credited for any 
 freight deductions, allowances or rebates. The balance, 
 at the close of the period, is carried to the Trading ac- 
 count. (See Form 141.) 
 
 53 E. The Freight on Merchandise Sold account is 
 to be handled in one of two ways: (1) If it represents 
 freight prepaid and charged to the customer in his bill 
 a custom in many houses the account is handled pre- 
 cisely as with Freight on Merchandise Bought, that is, 
 closed into Trading account. (2) If it is prepaid but not 
 charged to the customer, that is, if the prepayment is a 
 selling inducement to the purchaser, the account is 
 treated as a selling expense. (See Prin. 56.) 
 
 - 53 F. The amount of merchandise standing in the 
 Inventory account at the beginning of a fiscal period, is 
 charged, at its close, to the Trading account, along with 
 
64 BUSINESS LEDGER (51-60) Mdse. Manufactured 
 
 the merchandise bought during the period. The reason 
 for this is that merchandise on hand is received into the 
 trading operations from the owner out of his capital. 
 The merchandise bought is received into the trading op- 
 erations from outside sources. 
 
 The inventory of merchandise at closing is credited, 
 along with the total of merchandise sold, to the Trading 
 account, the merchandise inventoried being returned 
 from the trading operations, the owner's assets, while 
 the value of merchandise sold has already been returned 
 to the assets in cash or book accounts. (See Form 14 J.) 
 
 Remark. In the Trading statement, the inventory at 
 closing is deducted from the other debits of the Trading 
 account to show cost of merchandise sold in one amount. 
 In the ledger, Trading account, which is a ledger record 
 of the trading statement, it is usual to post deductions 
 from one side of an account as additions to the opposite 
 side, thus securing the same aggregate result without re- 
 sorting to both addition and subtraction in the same 
 column of the ledger. 
 
 Thus the amount of the current inventory, which, 
 must, in the statement, be subtracted from the amount of 
 merchandise bought, on the debit side, to show the cost 
 of merchandise sold, in the ledger account is added to the 
 amount of merchandise sold, on the credit side. The 
 resultant difference or profit is the same in either case. 
 
 53 G. The Merchandise Manufactured account, or 
 Production Cost account, is the account showing the costs 
 entering into the finished product which is offered for 
 sale. 
 
 This account is, as a rule, made up from several 
 primary accounts which are closed into it before Mer- 
 chandise Manufactured is closed into the Trading ac- 
 count. The four principal primary manufacturing ac- 
 counts are: 
 
 (1). Materials, charged, like Merchandise Bought 
 account, for the cost of material entering into manufac- 
 turing. 
 
BUSINESS LEDGER (51-60) Income Expense 65 
 
 (2). Labor, charged for the wages of operatives. 
 
 (3). Factory Expenses, charged for the miscellane- 
 ous expenses in the factory. 
 
 (4). Overhead, charged for the prportion of the 
 general office expenses that are absorbed in production. 
 
 The manner of gathering these costs and assigning 
 them to production units are discussed in a separate 
 division entitled Cost Accounting. 
 
 At the close of the fiscal period, the Merchandise 
 Manufactured account is closed and the balance carried 
 to the debit of Trading account. 
 
 54. Income Accounts are to show the yield to the 
 business from money or other capital in the hands of 
 others. Such accounts are credited for the cash or col- 
 lections yielded to the business during the fiscal period, 
 and are charged for any deductions from such yield. At 
 the close of the fiscal period they are closed into Profit 
 and Loss. Several titles of income are: 
 
 Interest, (see Form 12 U) the earnings from loaning 
 money. 
 
 Premiums, the earnings from financial assurance 
 against fire or loss of life, etc. 
 
 Exchange, the earnings from transfer of money by 
 means of credit. 
 
 Cash Discount, the earnings arising from the use of 
 ready cash in paying future maturities. 
 
 Rents, the earnings from the use of property. 
 
 55. The Complete Expense account is charged for 
 money, or its equivalent, spent to procure things con- 
 sumed in maintaining the business organization. Thus, 
 the cost of rent, light, heat, stationery, and office books, 
 salaries, interest, depreciation, etc., and the like are 
 charged to Expense. In a simple business, the single 
 Expense account may include them all, but a more exten- 
 sive business demands that expenses be subdivided into 
 various primary expense accounts, of which the three 
 kinds named in Prin. 56, 57 and 58 are observed by care- 
 ful business men and accountants. 
 
66 BUSINESS LEDGER (51-60) Expense Speculation 
 
 The complete expense account is closed into Profit 
 and Loss at the close of the fiscal period. (See Form 
 10 N closed direct into 10 O, or by journal entry 12 T 
 into 12V.) 
 
 55 B. Department Expense. When business is de- 
 partmentized, the expenses should be charged to the con- 
 suming department, instead of to the organization as a 
 whole. Thus, in a department store, which may have ?.ll 
 the way from two to two hundred Departments, selling 
 as many kinds of merchandise, each department is under 
 a manager, or buyer, who is responsible for the success 
 of his department. Each department is charged for all 
 expenses incurred for its maintenance, including its share 
 of floor space, light, heat, salaries, advertising, deprecia- 
 tion, interest on capital used, stationery, etc. 
 
 A branch store is similarly conducted by a manager, 
 and the expenses pertaining to the store are included in 
 a separate expense account. 
 
 55 C. Speculations and Ventures give rise to ac- 
 counts of various kinds of property, bought with a view to 
 selling when the market price advances. Such accounts 
 represent the cost of distinct things, as a piece of land, 
 a car of wheat, a block of stock. These would be charged 
 severally for all costs. The account is closed when sale 
 is made. The expenses pertaining to a speculative ac- 
 count are charged directly to the account of the specula- 
 tion, which is kept in the financial ledger, and considered 
 a part of the cost. 
 
 Thus a piece of land bought for speculation would be 
 directly chargeable for the expenses, and credited for the 
 incomes from the speculation, rather than in an Income 
 and Expense account as would be the case if the property 
 in question were purchased for business use. 
 
 56. Selling Expense includes the outlays made in 
 effecting sales of the merchandise from tin- lime tin- mer- 
 chandise is laid down in the store, until it is disposed of. 
 It is often best to charge all selling expenses to one ac- 
 count, and, under conditions, a number of primary ac- 
 
BUSINESS LEDGER (51-60) Expense 67 
 
 counts will serve the purpose better. Among these 
 primary accounts are, (1) Store Room Help; (2) Sales- 
 men's Salaries and Road Expenses; (3) Advertising, in- 
 cluding postage and expressage applied to advertising; 
 (4) Supplies, including cartons, wrapping material and 
 incidentals; (5) Delivery Expense (not charged to cus- 
 tomers) ; and (6) Depreciation (on property used by the 
 selling department). 
 
 Such primary accounts are to be opened separately, 
 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 fiscal period, the primary accounts 
 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. 
 
 Remark. The inventories may include property on 
 hand or obligations pertaining to any of the above ac- 
 counts. If assets, the inventories are entered to the 
 credit of the Selling Expense account as in the Trading 
 account. If a liability, the inventory is entered to the 
 debit, as in the Interest account. (See Form 14 K.) 
 
 57. Office Expense, variously called Administrative 
 Expense, or Overhead Expense, or General Expense, 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 primary 
 accounts; these are: (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. 
 
 Such primary accounts may be closed directly into 
 Profit and Loss at the close of the fiscal period, or they 
 may be closed into Office Expense, which in turn is closed 
 into Profit and Loss. 
 
 58. Capital Expenses include the expenditures or 
 losses incurred in securing or retaining capital. This 
 
68 BUSINESS LEDGER (51-60) Depreciation 
 
 account may be divided into several primary accounts; 
 among them are: (1) Interest and Discount Paid, charged 
 for payments for the use of money borrowed from others ; 
 (2) Expense of a specified property as of a house and 
 lot owned by, but not used in the business. Such ex- 
 penses are usually charged to income from the given 
 property. (See Prin. 59.) (3) Depreciation in property 
 which is not assigned to any business use. 
 
 Such primary accounts may be closed into Profit and 
 Loss direct, or through Capital Expense and Incomes at 
 the close of the fiscal period. 
 
 58 B. Depreciation is the expense sustained by the 
 business, or any part of it separately considered, through 
 the ordinarary wearing out of the fixed property assets. 
 The amount of this diminishment in value is estimated 
 when the books are closed, and is charged to that nominal 
 account which explains the use of the property in the 
 business economy. Thus depreciation in delivery equip- 
 ment is charged to Delivery Expense; in machinery, to 
 Manufacturing Expense, etc., and a corresponding credit 
 is made on the account of Reserve for Depreciation, in 
 the financial ledger. 
 
 To estimate the actual depreciation in the value of 
 machinery, furniture, fixtures, or other property, requires 
 that one should be familiar with the proprety in question, 
 and know how long it should be useful under the wear 
 to which it is subjected. Much equipment and machinery 
 is assumed to.be useful for ten years ; this would place 1 he 
 depreciation at one-tenth, or ten per cent, each y-,ir. 
 provided the entire value is extinguished at the end of 
 the ten years. A certain per cent of depreciation an- 
 nually computed on the remainder after previous deduc- 
 tions, is often recommended by accountants, especially 
 in the case of property which may be sold, after it has 
 ceased to be useful to the business. It is easily seen tluit 
 some property, under certain conditions, would not last 
 for ten years. In this case, the annual depreciation would 
 be greater than ten per cent. Other property might be 
 
BUSINESS LEDGER (51-60) DiininislumMii 05) 
 
 useful much longer, making the annual depreciation less 
 than ten per cent. Hence, the amount to charge off for 
 depreciation must be governed by circumstances. 
 
 The effect of charging the expense account for the 
 decrease in value during a fiscal period, is to reduce the 
 profit for distribution by the amount charged in 
 other words, to leave enough cash in the business to 
 offset the diminishing value of the depreciating property. 
 
 This amount, while charged like any other expense, 
 does not represent any cash paid out, but is accounted 
 for by the credit to the account of Reeserve for Depre- 
 ciation, as previously explained. 
 
 58 C. Good Will, Patent Rights, Franchises, Patterns 
 and Drawings, Premiums on Bonds, and any accounts of 
 assets of an intangible or a strictly temporary nature, 
 (which will be valueless after a lapse of time, whether 
 used or not) but whose life may extend over years, 
 should be reduced each year by writing off the portion of 
 diminishment sustained, during the year. This is done 
 by charging the proper expense account, and crediting 
 an equal amount to the asset account (not by crediting 
 a Reserve for Depreciation account). The reason for 
 doing so, is that the accounts represent assets, which 
 cannot be replaced by .purchase, that, practically speak- 
 ing, they have no independent market value, also, that 
 they are to be absorbed in profits as rapidly as possible. 
 
 Small and frequently replaced articles of equipment, 
 such as tools, may be treated in the same way. Their 
 presence must be accounted for by their being checked 
 up with an itemized record of them in the tools ledger, 
 (an auxiliary book) as any other fixed assets are com- 
 pared with the ledger accounts; yet, their diminish- 
 ing value must be determined by estimate, since 
 they must be replaced, when missing, or supplied in 
 greater or less quantity as needed. Thus, the annual 
 diminishment in the value of tools, while chargeable to 
 the proper expense account, should be credited to the 
 
70 BUSINESS LEDGER (51-60) Income & Exp. Interest 
 
 Tools account direct, to which account the tools ledger 
 bears the relation of an inventory. 
 
 Note. Losses and gains arising from no ordinary 
 operation of the business, but in the way of accident, are 
 not to be connected with depreciation. They should be 
 entered directly into Profit and Loss or, when desired, 
 in a reserve account to be closed later into Profit 
 and Loss. Among such causes may be mentioned theft 
 of money, or, receipt of money by gift, also destruction 
 of property by fires, accidents, etc. 
 
 59. Income and Expense accounts contain, as credits, 
 the incomes earned from a certain investment of capital, 
 and as debits, the expenses pertaining to the particular 
 investment that yields the income. Thus, the investment 
 in a piece of property, which we may call ' ' Irving Flats, ' ' 
 may yield a rent income, but will require expenditures 
 for repairs, and taxes, and perhaps for advertising and 
 commissions to an agent. (See Form 11 E.) The income 
 would be credited, and the expenses charged, to an ac- 
 count of Income and Expense, Irving Flats. The bal- 
 ance of this account, called the net income, would be 
 closed into Profit and Loss, at the end of the fiscal period. 
 
 59 B. Interest received is an income ; interest paid 
 is an expense. The former may be credited and the 
 latter charged to a single Interest account, (which, wln-n 
 so treated, is really an income and expense account) and 
 the balance of this account closed into Profit and Loss 
 at the end of the fiscal period. (See Form 12 U.) 
 
 It is often better to divide the general interest ac- 
 count into primary accounts entitled, Interest Paid and 
 Interest Received. 
 
 60. Before closing nominal accounts into Profit and 
 Loss, the Inventories account must be considered. 
 
 (1). All resource or liability inventories, standing 
 in the financial ledger since the close of the previous 
 fiscal period, should, when the ledger is again closed, be 
 closed into the nominal accounts to which they belong. 
 
 (2). All inventories taken at the closing time, 
 
BUSINESS LEDGER (51-60) Inventories 71 
 
 should be entered in the nominal accounts, resource in- 
 ventories on the credit side, and liability inventories on 
 the debit side. 
 
 The most common inventories are: 
 
 (1). In Trading account, stock of merchandise on 
 hand at closing. 
 
 (2). In other revenue accounts, services rendered 
 but not yet charged. 
 
 (3). In Income accounts, interest or rents accrued 
 but not collected. 
 
 (4). In expense accounts, material or labor charged 
 to the account but not yet consumed. 
 
 The most common liability inventories are : 
 
 (1). In Expense account, wages accrued or mater- 
 ial consumed but not yet paid for. 
 
 (2). In Interest account, interest payable accrued 
 but not yet paid. 
 
 After the entry of the inventories, the difference 
 shown by a nominal account is a profit or a loss pertaining 
 to the fiscal period under consideration. 
 
 Recapitulation 51 to 60. The Profit and Loss ac- 
 count shows, as credits, all profits, and, as debits, all 
 losses of a given fiscal period. The balance, which is 
 net profit or loss, is closed into the financial ledger. 
 
 The profits are principally derived from revenues and 
 incomes which are posted from the books of original entry 
 to primary revenue and income accounts, these accounts 
 closing either directly, or through some intermediate ac- 
 counts, into Profit and Loss at the end of the fiscal 
 period. Added to these, may be unclassified profits, which 
 are posted to the credit of Profit and Loss from the origi- 
 nal entries. 
 
 The losses consist of expenses or unclassified losses. 
 Expenses are first posted to certain primary expense 
 accounts, which are closed into Profit and Loss at the end 
 of the fiscal period. Unclassified losses are posted di- 
 rectly from the original entries to the Profit and Loss 
 account. 
 
72 AUDITING ( 61-70 ) Purposes 
 
 Before closing current nominal accounts into Profit and 
 Loss, such accounts require credits for resource inven- 
 tories, and charges for liability inventories, taken at the 
 time of closing. 
 
 After the ledger is closed, all nominal accounts ap- 
 pear in a closed condition, and their net result appears in 
 the financial ledger. 
 
 61. Auditing (see Prin. 3) involves a review of 
 books and records, with attention to their supporting 
 vouchers^ or other evidences of their correctness, ac- 
 curacy or adequacy 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. 63.) 
 
 (2). To show that the entries and accounts are true 
 records of actual transactions and existing values. 
 (Prin. 64.) 
 
 (3). To show fraud, or absence of fraud, on the part 
 of officers or other employes of the business. (Prin. 65.) 
 
 (4). To show that books and records kept are suit- 
 able, economical and complete. (Prin. 66.) 
 
 (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. 67.) 
 
 61 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 set of books 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 the order of procedure may be only be- 
 ginning for additional investigations, which may be found 
 
AUDITING (61-70) Conditions Records 73 
 
 necessary, because of the insufficiency of the records at 
 hand. 
 
 A bookkeeper may keep a set of books in such a way 
 that an audit is merely a formality, or they may be kept 
 in such a way that an auditor will be obliged to do the 
 bookkeeper's work from the start. Good bookkeeping 
 is the forerunner of inexpensive auditing. 
 
 62. 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 any given date in its progress. If 
 an audit between given dates is undertaken, the prior 
 records are the subject of inquiry only as they affect the 
 given period. 
 
 62 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. 61. His preparation should 
 accord with the purpose. 
 
 62 C. The auditor should study the conditions of the 
 business and estimate the probable volume and kind of 
 its business operations, consider the ordinary terms of 
 purchase and sale, investigate manufacturing processes, 
 if any, and the ordinary conditions under which the busi- 
 ness is operated. He should then make an outline of the 
 accounts and books that should be kept for that business. 
 Having in mind what the books should be, and what they 
 should show, he should make a complete list of the books 
 that are actually kept, separating the posting books from 
 the auxiliary books. 
 
 62 D. Auditor's Records. An auditor should pre- 
 pare a record, setting forth his agreement as to the gen- 
 eral 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 
 
74 AUDITING (61-70) Mechanical Accuracy 
 
 should be so arranged as to exhibit any vital points that 
 may not be shown in the bookkeeper's records. 
 
 62 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 
 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. 
 
 The auditor must supplement the omissions and de- 
 ficiencies in the bookkeeping. These involve matters 
 which are taken up in detail in the sets accompanying 
 this text, and are too numerous and far reaching for dis- 
 cussion in a single chapter. 
 
 63. The Audit for Mechanical and Mathematical 
 Accuracy is to show that transactions have been properly 
 entered; that the proper accounts have been correctly 
 charged and credited ; and that the resultant trial balance 
 is correct. Proceed as directed in 63 B to 63 D. 
 
 63 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 should be called in the audi- 
 tor's record to their absence. 
 
 63 C. 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 dis- 
 covered. If the bookkeeper is generally accurate, and 
 has reviewed all footings and transfers to the trial bal- 
 ance, and if the audit period is short, there are not likely 
 to be more than one or two errors. To locate these, pro 
 ceed as follows : 
 
AUDITING (61-70) Mechanical Accuracy 75 
 
 (1). Find which side of the ledger is short and the 
 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, review 
 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 not posted. 
 
 (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 show an equality of charges 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 best to do this first, especially 
 if the bookkeeper's work is evidently faulty in many 
 
76 AUDITING (61-70) Mechanical Accuracy 
 
 points. Note that it is unnecessary 4o check back the 
 work if the method in 63 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. 
 
 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 sought are always before you. 
 
 If the discrepancy is not found, after checking, re- 
 view the ledger to see if there are any amounts, within 
 the audit period, which you have not checked. 
 
 By this means a balance should be found. 
 
 63 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 prooof 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, as ex- 
 plained above, but to go directly to the Abstract of 
 the Accounts. This consists of rather large sheets of 
 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 tin- 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 til Irs. 
 not by pages. 
 
 The general accounts (financial and business) will 
 be easily Incut. <! without rc-;irnm<:cmci)1 if they arc in 
 
AUDITING (61-70) True Record 77. 
 
 their places, if not, arrange them in their proper order. 
 (See Prin. 72 B.) 
 
 Carry all amounts from the trial balance at the be- 
 ginning of the audit period to the abstract, and all 
 amounts during the period from the posting books. 
 
 The results should balance when the posting is fin- 
 ished, and .each item in the abstract of accounts should 
 check with the previous trial balance taken from the 
 ledger, if the work is correct. 
 
 64. An Audit to Show True Record goes into the 
 the matter of the first entries to determine whether they 
 are the records of actual transactions, of which the party 
 or department charged, received the full benefit. This 
 is not entered into with a view to the discovery of fraud- 
 ulent intentions, but to determine whether there is any 
 business laxity in failing to exact full value for any of 
 the obligations or payments. The following are examples 
 of this kind of items: (1) entries for invoices before 
 receipt of tlje 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 without any equivalent 
 item, (an instance of the last mentioned is the acceptance 
 by a city council, and payment to an agent, for the 
 purchase of a park buffalo which was neither purchased 
 nor 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, until claims become outlawed or otherwise 
 uncollectible. Serious matters, along this line, concern 
 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 
 
78 AUDITING (61-70) True Record 
 
 machinery, may be carried on the books at a nominal 
 value, after they are worthless. There is a case of a 
 ship load of hemp appearing on the books as an asset, 
 ten years after the vessel and cargo foundered in mid 
 ocean. 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 has probably 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 price it was worth, 
 which amounts to the same thing. The auditor must use 
 care to discover, if possible, what the goods are really 
 worth. 
 
 The ledger may show intangible assets, which are 
 not only intangible, but that 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 
 all accounts payable and bills payable on the books en- 
 tered at their full amount? Have bills receivable, when 
 discounted, been entered as contingent liabilities? Is the 
 firm liable on accommodation paper? 
 
 The books 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 secrete 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 
 
AUDITING (61-70) True Record 79 
 
 are many ways in which this account may be misleading. 
 It would be difficult to estimate the number of corpora- 
 tions that 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 needs looking into for uninten- 
 tional regularities. Is the balance in the cash book all 
 real 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 
 convertion into money. 
 
 Is the bank account correct? This can best be as- 
 certained by a reconciliation of the bank statement with 
 the depositor's record discussed in detail in Prin. 64 B. 
 
 64 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 
 book or his bank 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 no cancelled checks are mis- 
 sing. 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 
 
80 AUDITING (61-70) True Record 
 
 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, from its own 
 tickets, which have not been credited on the depositor's 
 account; (4) the bank may have credited collections made 
 for the depositor, which the latter has not entered; (5) 
 there may be mistakes in the bank statement or in the 
 depositor's account. 
 
 To reconcile, make additions to and deductions from 
 the balance reported in the bank statement, as follows: 
 
 (1). Check 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 statement. 
 
 (2). Check 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). Check the bank statement to discover any 
 petty charges made by the bank that you have not had 
 notice of, or have not credited. If any are found, add 
 their sum to the bank's balance. (Do not overlook in;ik 
 ing an entry of them in your current account, if they are 
 allowed.) 
 
 (4). Look for any credit given in the bank state- 
 ment for collections or other items that have not been 
 entered; if any are found, subtract their sum from the 
 bank's balance as shown on the statement. (Do not 
 neglect to make an entry in your current account for 
 such items.) 
 
 (5). If there are errors either on the bank state- 
 ment or in your account, revise the bank balance for the 
 errors in the bank statement, making memoranda in red 
 ink, showing the revision, or revise your own account for 
 your errors, as the case may be. 
 
 After you have accounted for discrepancies between 
 the two accounts, report to the bank any errors in the 
 bank statement and have these corrected. 
 
AUDITING (61-70) Fraud 81 
 
 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 you reconcile the next following 
 statement. 
 
 65. 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 securities; (2) misappropriation, or theft of property; 
 (3) misrepresentation of business condition 'to the injury 
 of investors or outside persons. 
 
 65 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 any one misappropriated cash or prop- 
 erty, or made any showing on the books that would 
 cause either investors or outside parties 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 defalcations, for embezzlers, as well 
 as others, do not wish to confuse themselves by a variety 
 of methods. 
 
 It is the province of accountancy to outline account- 
 ing records of such a nature that the opportunity for 
 concealment is reduced to the minimum. Systems can 
 be devised, that, if followed out to the letter, would re- 
 duce the risks of fraud to a negligible quantity. But to 
 avoid the expense of operating such systems, certain safe- 
 guards are often omitted; especially where the reputa- 
 tion and moral qualities of the trusted persons entitle 
 them to confidence, or where the risk is not great. There 
 is a widespread disposition among business men to pay 
 larger salaries to employes who are trustworthy, rather 
 than to provide mechanical safeguards against fraud, 
 
82 AUDITING (61-70) Fraud 
 
 the added expense of which would necessitate lower 
 salaries. 
 
 The first safeguard, then, is a suitable accounting 
 system which, so far as practicable, eliminates oppor- 
 tunities for the grosser forms of attempt at fraud. The 
 student who has followed the bookkeeping sets in this 
 text should be familiar with the more important of these 
 safeguards provided by good accountancy. 
 
 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: 
 
 65 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 book balance taken at the time the 
 cash is counted. 
 
 Before going further, keep in mind that many tricks 
 may be practiced on the cash drawer by which the cashier 
 may abstract money without making any permanent 
 record. To do so is foolish as well as dishonest, but both 
 foolish and dishonest people continue to take the places 
 of those already in jail. Among these devices of the 
 tricky cashier are the following: 
 
 (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- 
 
AUDITING (61-70) Fraud 83 
 
 amined closely, for a ticket of that kind should, as a rule, 
 not be over a day old. 
 
 (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, and "borrows" the cash for 
 his own use. The following day he credits the ticket 
 properly (except one day late) and holds out credit for 
 another payment or other payments, enough to make 
 the $100, which is borrowed from 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 
 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 
 placed in the books, and footings entered as equal, when 
 they really would not be equal if properly added. Such 
 a forced balance necessitates an equal change in some 
 amounts posted to the ledger ; in other words, an amount 
 from the cash book must be omitted in the ledger, or 
 else posted as an amount sufficient to equalize the dis- 
 crepancy in cash. Thus, cash might be forced, $9.90 and 
 an item of $10 posted as 1*0 cents to satisfy the trial 
 balance. 
 
84 AUDITING (61-70) Fraud 
 
 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 can be footed separately on two lists covering 
 the entire period. Whatever the number of columns in a 
 cash book, there should be one column for net cash re- 
 ceipts, and one "for 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, 
 Merchandise Bought and unclassified losses should be 
 examined with a view to unreasonable or unnatural 
 charges. Also, the vouchers should be scrutinized, and 
 all payments 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? Attention may be called to allowances, recorded 
 as deducted from bills, although neither called for nor 
 allowed. For example, a remittance of $100 on account 
 might be entered for only $80, and an entry made credit- 
 ing the customer for $20 allowed for damaged goods or 
 other cause. For this reason, n -hates and allowanr. s 
 need attention. 
 
 It in doubt as to the correctness of the entri* 
 checks and drafts received, secure the deposit tickets. 
 for the period, from tin- bank, and compare tin- it mis 
 thereon with the entries in the cash book. Tin- bank 
 account ilsrlt may be carried on the books at a grc.it r 
 than the i-ml balanc-.-. Reconcile the hank statcim-iil. 
 (Prin. 64 B.) 
 
AUDITING (61-70) Fraud 83 
 
 (7). Securities (stocks, bonds and notes) must be 
 checked to see that they are all there, are genuine, and 
 that they agree 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. 
 
 65 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 merchandise bought when 
 it is suspected that the goods were not received, an 
 auditor should first eliminate the invoices from reputable 
 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 the sale should exist. 
 Certain items especially looked for, may be checked 
 through the sales records to show disposition. A suffi- 
 cient number of such items, thus verified, should estab- 
 lish 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, where practicable. 
 
 A rough way of determining whether there is any 
 great loss in stock, is to compare, from previous periods, 
 the average percent profit on merchandise sold. By 
 
86 AUDITING (61-70) Fraud 
 
 deducting 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 passed out of the store 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. See 
 whether this has been done. 
 
 65 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 which are likely not to be re- 
 paid. A merchant may represent himself as being worth 
 more than he is, in order to secure larger credit in goods 
 or money than he otherwise is entitled to. A business 
 manager may overstate the profits of a given period, in 
 order to secure the approval of stockholders and a con- 
 tinuance of management. Directors of a company may 
 declare and pay dividends on stock, by borrowing money 
 to do so, or by taking the so-called dividends out of the 
 capital. This is done to make the stock appear more 
 valuable than it is, and thus attract other investors. On 
 the other hand, the profits of a business may be con- 
 cealed, although great enough to entitle stockholders to 
 receive dividends which are not declared. Under such 
 conditions, 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. 64. 
 
AUDITING (61-70) System 87 
 
 66. An Audit to Show Suitable Books involves a 
 knowledge of the business considered, so far as its needs 
 of record are concerned, and a knowledge of the most 
 suitable books and records for the transactions and op- 
 erations. The auditor should begin with an outline of 
 books, rulings, records, etc., theoretically suited to the 
 conditions. 
 
 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 economies or advantages pos- 
 sible. 
 
 Changes advised by an auditor should not be of in- 
 definite advantage, but 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, and the safeguards should be suggested, with a 
 good reason for them. 
 
 He should propose changes, with a view to retaining 
 all of the old features that can be made- to work in with 
 his 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 in learning to post from left to right with any- 
 thing like equal ease. To even change the position of a 
 light might disturb a habit, and give rise to numerous 
 errors. The auditor must study the working force as 
 well as the system. 
 
 Again, it is practically useless to recommend an 
 otherwise good system, 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-intentioned systematizers, who gauged the 
 manager's power to grasp and utilize information derived 
 from the books, by their own practice in this direction. 
 The auditor must keep in mind that the manager often 
 
88 AUDITING (61-70) Worth and Earning Power 
 
 gauges the capacity of every one else by his own. The 
 constructive auditor should recommend office changes 
 with a careful regard to the ability of those who are to 
 utilize the system, 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. Even when his well-considered plans are re- 
 jected, he may feel some satisfaction in knowing that 
 more than one great business organization owes its ex- 
 istance to a manager who understood bookkeeping better 
 than his fellows. 
 
 67. 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. 
 
 67 B. The worth of the business is exhibited in the 
 financial ledger, or where the different groups of ac- 
 counts are not segregated, in the capital or financial 
 accounts. These consist of, (1) cash and cash collectible ; 
 (2) floating property; (3) fixed property; (4) specula- 
 tive property; (5) intangible property; (6) indebtedness 
 to persons outside the firm; (7) indebtedness to the 
 owners. 
 
 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. 
 
AUDITING (61-70) Worth and Earning Power 89 
 
 Speculative property should be viewed particularly as 
 to its present worth, and a sufficient reserve account 
 kept 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 financial 
 statement. 
 
 67 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 revenues, 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 
 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 
 
90 AUDITING (61-70) Legal Aspects 
 
 under such circumstances as these, are not a criterion 
 as to the earning power of the business. 
 
 68. 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 often 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 in this 
 chapter. 
 
 68 B. Sale of Goods. To sell, is to transfer prop- 
 erty 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 measures. 
 
 Having made a contract to sell, the important <iues- 
 tion arises as to whether the sale has been so made that 
 the buyer cannot legally avoid payment. 
 
 Sales of goods on credit are made cither on a vn-b.-il 
 or a written order, which order is delivered to the seller 
 or to his {inthori/ed ;ir<-nt. 
 
 (1). If tin verl>;d order without any restrici inns. 
 the acceptance of the commodity by the buyer is evidence 
 of his ntfiMMMiient to pay for it. It' no price is specified. 
 the regular published price, or the regular market price 
 
AUDITING (61-70) Legal Aspects 91 
 
 of the goods on the day named is collectible. To avoid 
 paying for goods, the buyer may refuse to accept them 
 when they are offered, or else 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 the 
 property from the seller to buyer ordinarily takes place 
 when the seller delivers the goods to the railroad or 
 other carrier as 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 
 buyer. Since the terms signify that the buyer is not 
 entitled to possession until he pays for them, the practi- 
 cal outcome is, that regardless of any legal rights, the 
 
92 AUDITING (61-70) Legal Aspects 
 
 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 transferred 
 by the delivery of warehouse receipts, or where title to . 
 property is transferred by delivery of a bill of sale. 
 
 68 C. Collection of Accounts and Notes. After a 
 time-sale is made, provision must be made for collection. 
 The first step is usually to send the customer a state- 
 ment of the amount owed on the first of the month 
 following the sale. This statement may not be a re- 
 minder to pay, if the account is not due; it may merely 
 afford 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. <-i 
 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, coiTrspnmlrncr 
 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 to be more easily 
 handled, besides making it draw a specified rate of in 
 
AUDITING (61-70) Legal Aspects 1)3 
 
 terest, 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, d mortgage given would be fol- 
 lowed by foreclosure, and the sale of the mortgaged 
 property, with a view to apply 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. When this time 
 has expired in the several cases, the debtor may plead the 
 statute of limitations and thus avoid payment. 
 
 68 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 course of time, 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 
 
94 AUDITING (61-70) Legal Aspects 
 
 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 do this personally, but secure an Abstract of 
 Title, which is a carefully prepared explanation or digest 
 of all documents that affect the title of the given prop- 
 erty. This abstract is based on the county records. Any 
 doubtful question about title to property should be sub- 
 mitted 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 
 purchaser's title. He will thus have priority of record 
 as protection against other claimants who might, through 
 the errors or double dealing on the part of the seller, 
 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 for are the 
 following: Mortgages; rights of heirs of a former de- 
 ceased 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 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. 
 
 68 E. Commercial Papers consist of drafts and 
 checks, acceptances, promissory notes, and bonds. They 
 are demands upon a person (the drawee) or promises 
 
AUDITING (61-70) Legal Aspects 95 
 
 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 directs. 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 
 
96 AUDITING (61-70) Legal Aspects 
 
 they draw bank drafts for sale to customers who wish to 
 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 accounts of Bills Payable or 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 are 
 negotiable, as ordinarily made. 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 this 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, 
 
AUDITING (61-70) Legal Aspects 97 
 
 and individuals, are usually drawn in negotiable form, 
 like notes, and can be transferred by endorsement. 
 
 All commercial paper received as cash, should be 
 collected or deposited promptly, checks especially, within 
 a day after receipt, as there are contingencies that might 
 stop payment. 
 
 68 F. Agents are persons authorized to act and who 
 do act for others. General agents represent the princi- 
 pals in all business covered by 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. 
 
 68 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 time 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 
 
98 AUDITING (61-70) Legal Aspects 
 
 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. 
 
 Ordinarily each partner, as agent of the firm, has 
 power to bind the others in the firm contracts. Each is 
 personally liable for the entire indebtedness. A close 
 relation of trust exists between the 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. 
 
 An auditor frequently discovers that one partner has 
 unfair advantages over another which are difficult 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. 
 
 68 H. A Corporation enables several persons to com- 
 bine their capital and services under one maim^t -UK -nt. 
 
AUDITING (61-70) Legal Aspects 99 
 
 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- 
 cate, or license, which evidences their compliance with 
 the law. Their compliance with the legal provisions en- 
 ables the corporators 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 may, provided they are within 
 the purposes for which the corporation was formed. 
 
 Specific information about the powers, rights, and 
 obligations, must be looked 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 where 
 the corporation is organized. 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. 
 
100 AUDITING (61-70) Legal Aspects 
 
 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 
 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. 
 
 68 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 
 vpon th em, or have reason to think other creditors have 
 undue preference ; and bring the action in bankruptcy as 
 a. means of securing their share of the assets, rather than 
 risk further delay. It may be made on petition 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 provisions of the 
 law. 
 
 One national 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- 
 rupt. 
 
 The bankrupt is entitled to the benefit of state ex- 
 tmption laws, which permit him to rrtnin crrtjiin prop- 
 erty for his personal use the amounts he may retain 
 varying in different states. 
 
AUDITING (61-70) Legal Aspects 101 
 
 68 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 
 receives his court appointment from this fact. 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- 
 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. 
 
 68 K. Income Tax. The federal laws provide for 
 an annual income tax to be paid by all persons who re- 
 ceive income in the United States in excess of the spe- 
 cific exemption, consisting of $3,000 for individuals, or 
 $4,000 if it is the combined income of husband and wife. 
 
 At this writing (November, 1913) many features 
 about this law are subject to dispute, and must be settled 
 in course of time by rulings from the Treasury Depart- 
 ment of the United States and by the courts. The bearing 
 it has on accountancy and on the duties of an auditor, 
 may be gathered in a measure from the following brief 
 summary derived from a synopsis written by Judge Hull, 
 who prepared the income tax provision of the law (see 
 Congressional Record, Vol. 50, p. 6330). 
 
 The Normal Tax of 1 per cent on annual income ap- 
 plies to individuals within the provisions, and to all cor- 
 porations conducted for gain. The Additional Tax ap- 
 plies to individuals only, and is added to the normal tax 
 as follows : 
 
 One per cent on incomes from $20,000 to $50,000; 2 
 
102 AUDITING (61-70) Legal Aspects 
 
 per cent, .from $50,000 to $75,000; 3 per cent, from 
 $75,000 to $150,000 ; 4 per cent, from $150,000 to $250,000 : 
 5 per cent, from $250,000 to $500,000 ; 6 per cent, over 
 $500,000. 
 
 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). 
 
 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 $20,000, except that Nos. 8 and 9 are not de- 
 ducted in finding the additional tax. 
 
 Partnerships are recognized in law only through the 
 individual members, who are subject to tax through their 
 individual shares in the profits. 
 
AUDITING (61-70) Legal Aspects 103 
 
 Corporations and Joint Stock Companies are subject 
 to normal tax on all net profits. Additional tax does not 
 apply to them because such tax is returnable personally 
 by the individuals who receive dividends. 
 
 In arriving at the net profits of a corporation, not 
 only dividends declared, but profits carried to surplus, or 
 any sorts of secret reserves set up to obscure profits, 
 would come under the head of taxable income. This 
 should not be construed to include as taxable, any reason- 
 able or ordinary surplus or reserve justified by the con- 
 ditions of the business. The Treasury Department of the 
 United States provides a form of profit and loss state- 
 ment to be filled by corporations in making their returns. 
 On this statement space is provided for the following 
 allowable deductions from earnings for the purpose of 
 arriving at taxable income : 
 
 1. Total ordinary expenses paid in maintenance and 
 operation. 
 
 2. Rentals paid for use of property. 
 
 3. Losses sustained not compensated by insurance. 
 
 4. Reasonable depreciation in property. 
 
 5. Interest accrued and paid within the year on in- 
 debtedness to an amount not exceeding one-half 
 the sum of the indebtedness and the paid up 
 capital stock. 
 
 6. Taxes imposed under authority of the United 
 States; and separately, taxes imposed by foreign 
 governments. 
 
 Returns. The law provides that individuals shall 
 make a true and accurate return of all net incomes of 
 $3,000 or more to the collector of internal revenue in his 
 district, on March 1, 1914, and on or before March 1 each 
 year thereafter, but no return of income not exceeding 
 $3,000 is required. 
 
 A suitable blank form for this purpose is provided 
 by the collector of internal revenue for the district. They 
 shall be notified by the collector of the amount taxed by 
 June 1 following, and shall pay the same by June 30. 
 
104 AUDITING (61-70) Legal Aspects 
 
 On income tax unpaid after June 30, and after ten 
 days' demand by the collector, 5 per cent penalty shall 
 be added, and interest at 1 per cent per month additional 
 until paid. 
 
 Note that an individual is entitled to deduct from 
 the amount of taxable income any income from which the 
 tax has already been collected at the source as explained 
 in the following: 
 
 Collection at the Source. Persons, firms and com- 
 panies, including lessees, mortgagors, trustees, executors, 
 employers, having control of the payment of interest, 
 rent, salaries, wages, premiums, annuities, compensation, 
 remuneration, emolument, or other fixed or determinable 
 annual or periodic gains, profits, or income of another 
 person, exceeding $3,000 for any taxable year, are author- 
 ized and directed to deduct and withhold the normal tax 
 thereon and to pay it to the United States official author- 
 ized to receive it. 
 
 It thus appears that the purpose of the law is to col- 
 lect as much as possible of the income tax at the source, 
 rather than from the individual's returns. 
 
 Accounts. A business ledger, kept as outlined in 
 Prin. 72 B, or more fully in Prin. 51 to 60, will furnish all 
 data for full returns within the requirements of the law. 
 If such a ledger is not kept, an auditor will find some 
 trouble in preparing the necessary returns. Care should 
 be taken to make all allowable deductions in arriving at 
 net income. 
 
 In addition to that, persons required to withhold in- 
 come tax at the source, should keep an auxiliary record 
 of the above enumerated payments passing through their 
 hands to the persons liable for payment at the source. 
 
 69. Single Entry Bookkeeping is .-my systom of 
 bookkeeping which lacks the completeness of double 
 entry in the matter of equal debits and credits. It is 
 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 
 
AUDITING (61-70) Single Entry 105 
 
 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. 
 
 69 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- 
 ceipts and payments; (3) a ledger containing personal 
 accounts. Such entries as are not posted to the personal 
 
106 AUDITING (61-70) Single Entry 
 
 accounts, remain in the original books, as memoranda. 
 Any auxiliary book may be added. 
 
 69 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 sheets, for the 
 items sold. An original sheet 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. 
 
 69 D. When a single entry set of books is used, the 
 net profit or loss for a fiscal period is usually found by 
 comparison of the net worth at the beginning with that 
 at the close of the period, as exhibited in financial state- 
 ments. 
 
 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 
 be found. Such statements as Nos. 1 and 2 (Book of 
 Forms) may be used. 
 
AUDITING (61-70) S. E. Changed to D. E. 107 
 
 69 E. Single entry bookkeeping always has been, 
 and probably always will be, used by small retail con- 
 cerns. It is defective in the kind of account analysis 
 that enables a proprietor to know the operation and re- 
 sults of the business in detail, and judge the future by 
 the record of the past. It is pre-eminently the system 
 for persons whose entire business expansion is to come 
 through their own personal efforts. 
 
 69 F. To Change Single Entry to Double Entry, is 
 a simple process. After making a financial statement, 
 journalize it. (Form No. 13 A affords a good model.) 
 If it is desired to retain the old ledger, check such ac- 
 counts 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. 
 
 70. 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 entered in 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. 
 
 The report of a complete audit includes the financial 
 and business statements, divided with such minuteness as 
 the case demands. The items in these statements are 
 
108 BOOKKEEPING Original Entries ( 71-71 H) 
 
 further explained by schedules and analysis sheets, at- 
 tached to the statement. 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. 
 
 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 accounts. 
 
 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. 
 When the facts are recorded, the next step is to determine 
 and enter, for the purpose of posting, the titles of the 
 accounts affected by the transaction. 
 
 In a business having numerous account subdivisions, 
 the account to charge 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 coiit;iin 
 all records of the facts about transactions, and the Jour- 
 nal was used to show the posting titles and amounts de- 
 rived from these facts. These two books, in mon- reeeni 
 bookkeeping, have been combined into one book, retain- 
 ing the name Journal. Yet, this latter book is now used 
 to contain all original entries of a business, only un.lt i- 
 exceptional business conditions. In the average office, ii 
 contains such entries as other books of orijriiml miry 
 ejiimot proprrlv explain ;md classify. 
 
 However, it is possible to make every entry in jour 
 
BOOKKEEPING Original Entries ( 71-71 H) 109 
 
 nal form, and the journal form of an entry is the one 
 used in discussing the account analysis of any 
 transaction. 
 
 71 B. At the present time, the great mass of book 
 records are most economically made in a number of 
 books, intermediate between journal and ledger, and con- 
 taining 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 though 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. 
 
 The Merchandise Sold Book is probably next in im- 
 portance among the books intermediate in function be- 
 tween journal and ledger. This book gives a consecutive 
 record of selling transactions, while it may be totaled to 
 find the entire merchandise sold without posting, item by 
 item, to the credit of a Merchandise Sold account in the 
 ledger. 
 
 The Merchandise Bought Book, the Bill Book, the 
 Inventory Book, the Voucher Register, the Draft Regis- 
 ter, the Account Sales Register, and many other books 
 applying especially to certain lines of business, take the 
 place of the journal, for original entries, while they re- 
 lieve the ledger of a more or less complete classified 
 record of results. 
 
 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, 
 and between the members of the same concern, as well as 
 to explain the business operations. 
 
 The adjustment of differences between a concern 
 and outside people, or between its several members, may 
 
110 BOOKKEEPING Original Entries ( 71-71 H) 
 
 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, as a rule, ac- 
 cepted 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 (71 D), systematic (TIE), 
 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 defined 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- 
 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, tends 
 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 shoufld 
 show the straightforward, open record of one who is 
 accustomed to write facts only, and to write 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. 
 
BOOKKEEPING Original Entries ( 71-71 H) 111 
 
 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 Enterics. 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 : 
 
 (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 "title column," the "posting column," the "money 
 columns," etc. The order and arrangement of these 
 column's are open to the preference of the bookkeeper, 
 and are determined by the following considerations: 
 
 (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- 
 
112 BOOKKEEPING Charge and Credit ( 71 1-71 R) 
 
 keeper. To reduce one's daily entry and posting time 
 by one hour, should increase one's earning capacity as 
 a bookkeeper something like fourteen per cent. 
 
 The arrangement of the books of original entry 
 should be studied with the same care that one studies the 
 arrangement of the ledger account classification. 
 
 71 1. Bear in mind that all bookkeeping entries of 
 transactions are made to show the effects of the trans- 
 actions upon the business organization for which the 
 books are kept. It is idle for a bookkeeper to spend 
 any time in considering the effect of transactions upon 
 the persons with whom dealings are carried on, as the 
 viewpoint of firms without the business has nothing to 
 do with the results sought in his books. 
 
 As a starting point for the mastery of the theory of 
 charge and credit, we will assume that the typical busi- 
 ness involves the following greater processes: (1) the 
 appropriation of cash for capital; (2) the expenditure of 
 cash for business necessities with a view to producing 
 a commodity or service; (3) the sale of the commodity 
 or service, so produced, for cash. 
 
 In business, the processes of paying for business 
 necessities and of receiving pay for product or service, are 
 continuous, and are not expected to come to a full con- 
 clusion until the business winds up its affairs. The busi- 
 ness manager, however, assumes that the business closes 
 at the end of some definite period of time, called the 
 fiscal period, usually covering one year. At this time 
 he expects his books to show him, (1) the kind of prop- 
 erty remaining in the business and its net value ; (2) the 
 excess of his sales over the cost of selling and conducting 
 the business. 
 
 To make such a final showing, every transaction 
 involving a change of values must be recorded when it 
 occurs, and entries must be made to show the financial 
 effect of the given transactions in the accounts. 
 
 From the viewpoint of the reason for charge and 
 credit, we divide accounts into six kinds. 
 
BOOKKEEPING Charge and Credit (71 1-71 R) 113 
 
 (1). Accounts of cash (71 J). 
 
 (2). Accounts of cash to be collected (71 K). 
 
 (3). Accounts of cash to be paid (71 L). 
 
 (4). Accounts of cost (71 M and 71.0). 
 
 (5). Accounts of yield (71 N and 71 0). 
 
 (6). Accounts of re-classification (71 P). 
 
 71 J. Rule for Accounts of Cash. Charge the Cash 
 account to show amounts received; credit, to show 
 amounts paid. 
 
 Note. This account may be kept in a cash book, in 
 a ledger account of cash, or in a bank checking account, 
 in a memorandum book, or on a ticket. It may refer to 
 floating cash or cash held in a special fund. 
 
 71 K. Rule for Accounts of Cash to be Collected. 
 Charge such accounts to show amounts that others as- 
 sume to pay into the business. Credit such accounts to 
 show amounts we collect or the value we receive to apply 
 on such charges. 
 
 Note. Included in above, are the current accounts 
 of customers and patrons, opened under the name of the 
 debtor, or considered collectively under the title, Ac- 
 counts Receivable; Customers' Accounts, or Trade 
 Debtors; notes and acceptances payable to us under the 
 title Bills Receivable or Notes Receivable; also such 
 accounts as Bonds, Mortgage Loans, and other claims 
 for a definite amount of money payable to us immediately 
 or remotely. 
 
 71 L. Rule for Accounts of Cash to be Paid. Credit 
 such accounts to show the amounts we assume to pay 
 out of the business; charge such accounts to show the 
 payments we make or amounts allowed, in settlement of 
 such credits. 
 
 Note. Such accounts are simply the reverse of 
 those mentioned in 71 K, that is, we are to pay instead 
 of collect. For open accounts payable, the title is the 
 creditor's name and address, or collectively the titles, 
 Accounts Payable, Creditors' Accounts, Trade Cred- 
 itors, or Vouchers Payable ; for notes and acceptances 
 
114 BOOKKEEPING Charge and Credit ( 71 1-71 R) 
 
 due others, Bills Payable or Notes Payable. Other ac- 
 counts under this summary are Bonds, and Mortgage 
 Loans Payable, John Smith, Capital, Capital Stock, etc. 
 
 71 M. Rule for Accounts of Cost. Charge such ac- 
 counts to show the cost to us; credit such accounts to 
 show returns or allowances that diminish the cost. 
 
 Note. These accounts pertain to everything in the 
 way of property, services, or uses secured for a consider- 
 ation. Among them are, Furniture and Fixtures, Ma- 
 chinery, Real Estate, Chattels, Merchandise Bought, 
 Materials Bought, Freight on merchandise or materials 
 bought and Expenses. 
 
 71 N. Rule for Accounts of Yield. Credit such ac- 
 counts to show the source of the value received; charge 
 such accounts to show returns or allowances that dimin- 
 ish the receipts. 
 
 Note. Among these accounts are the following 
 titles: Merchandise sold, Wages Earned, Services Sold, 
 Exchange, Collection, showing the revenue derived from 
 services of the business, Interest Received, showing the 
 income derived from loaning money. 
 
 71 0. Cost and Yield may be combined in one ac- 
 count when the cost and yield are limited to some desig- 
 nated part of the given business, and not to the business 
 as a whole ; for example, Shipments, charged for cost of 
 goods sent on sale, and credited for proceeds of sale; In- 
 terest, charged for interest paid and credited for interest 
 collected ; Income and Expense (of property), charged for 
 the expenses and credited for the incomes of a given 
 property; Trading, charged for the costs entering into 
 Merchandise Bought and credited for Merchandise Sold. 
 
 The present tendency of account analysis is to dis- 
 continue certain cost and yield accounts formerly quite 
 common, especially where it is plain that the credits in- 
 clude elements not found in the debits; tor example, 
 Merchandise account, in which the debit shows the cost 
 of merchandise bought, whereas the credit shows the 
 yield from not only the merchandise bought, but from 
 
BOOKKEEPING Charge and Credit ( 71 1-71 R) 115 
 
 the store service; also Interest account, wherein interest 
 payments and receipts are often the results of entirely 
 different operations. Such accounts are, as a rule, better 
 divided; Merchandise, into Merchandise Bought and 
 Merchandise Sold; Interest, into Interest Received and 
 Interest Paid. 
 
 71 P. Rule for Accounts of Re-Classification. 
 
 Charge such accounts to show cost resulting in loss ; credit 
 such accounts to show yield resulting in profit. 
 
 The entries in such accounts do not represent trans- 
 actions, but merely a re-classification of primary accounts 
 under other titles. 
 
 Note. Of this nature, are accounts of Surplus, Re- 
 serve,, Assessments, Dividends, or other accounts in the 
 financial ledger taken from the Profit and Loss account. 
 The latter account is a re-classification from the Trading 
 account and various primary accounts. The Trading 
 account is a re-classification from separate accounts of 
 Merchandise Bought and Merchandise Sold. 
 
 71 Q. One General Rule, showing the reason for 
 charge and credit, in all instances has often been at- 
 tempted, and we may say successfully attempted, from 
 a general economic viewpoint. But from the viewpoint 
 of business management, we must make two rules for 
 charge and credit one for cash, the other for all ac- 
 counts other than cash, to show the real or supposed 
 relation of the latter kind to the business concern in 
 terms of cash. The following rules committed to mem- 
 ory will aid the bookkeeper in making entries. 
 
 1. General Rule for Cash Account: Charge to 
 show receipt; credit to show payment. 
 
 2. General Rule for Other Accounts: Charge to 
 show cost; credit to show yield. 
 
 71 R. Practical Journalizing. A bookkeeper should 
 be able to arrange any entry in journal form, even though 
 that is not the form for the given entry regularly used 
 in his books. There are several reasons for this. 
 
116 BOOKKEEPING Charge and Credit (71 1-71 R) 
 
 (1). Complicated transactions may arise wherein 
 he may not see clearly the equality of several charges 
 and credits, unless they are all 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 
 explaining to others orally the accounts to be charged 
 and credited. While a bookkeeper may post charges 
 and credits from all sorts of books, without direct refer- 
 ence to an equality of charges and credits, 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 charges 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 charged 
 and credited, the debit title or titles are named first; 
 afterward, the credit title or titles, with "to" between 
 the charges and credits. Thus, if an entry requires that 
 John Smith be charged $50, and Merchandise Sold be 
 credited $50, we would say "John Smith to Merchandise 
 Sold, 50." If a transaction should require several 
 charges, as Merchandise Bought, $60, Expense $5.50: 
 and several credits, as Cash $10 and Bills Payable $55.50. 
 \v<- would say, "Merchandise Bought $60, and Expense 
 $5.50, to Cash $10, and Bills Payable $55.50." What- 
 ever the number of charges or credits, the sum of the 
 charges must equal the sum of the credits. 
 
 Bookkeepers are frequently at a loss to read amounts 
 so as to be quickly and easily understood by the one to 
 whom read. In offices wln-ro oral reading is required, a 
 
 in for calling off the numbers is necessary in order 
 to facilitate work. This system may be learned in five 
 
BOOKKEEPING The Ledger (72-72 S) 117 
 
 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 combinations: 
 
 $ 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-0-three. (The word "0" 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-0-eight, 0-seven. 
 259546.03 Two fifty-nine, five forty-six, 0-three. 
 When indicating on paper, either ruled or unruled, 
 the titles affected by a journal entry, the titles and 
 amounts charged are to be written first, and to the left; 
 the titles credited and their amounts are written after- 
 ward, and to thje right, thus: 
 
 John Smith $50.00 
 
 Merchandise Sold $50.00 
 
 Merchandise Bought $60.00 
 
 Expense 5.50 
 
 Cash $10.00 
 
 Bills Payable 55.50 
 
 72. The Ledger In this division we discuss the led- 
 ger with reference to its use by the bookkeeper. The led- 
 
118 BOOKKEEPING The Ledger ( 72-72 S) 
 
 ger is ordinarily ruled so as to divide the space vertically 
 into two equal portions the left for debits, the right for 
 credits. 
 
 The ledger may contain all of the accounts of the 
 business in one cover, or it may be divided into several 
 ledgers each containing a certain section of the accounts. 
 (Prin. 72 B and 72 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. 72 F, 72 Gl- 
 and 72 H.) 
 
 Whatever the form, a bookkeeper should carefully 
 consider the makeup of his ledger with a view to: 
 
 1. The order of the accounts for convenience in 
 posting, making trial balances, and statements. (Prin. 
 72 B.) 
 
 2. Sufficient space for all entries likely to be made. 
 (Prin. 721.) 
 
 3. Indexing of accounts for prompt reference. 
 (Prin. 72 E.) 
 
 4. Size and binding to suit the kind and number of 
 accounts. 
 
 72 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 is called the 
 financial ledger, and the part containing the nominal 
 accounts is called the business ledger. These two parts 
 belong in one book, although occasions arise where they 
 are kept under separate book covers. The dividing line 
 between the two is of utmost importance to the auditor. 
 
 In the financial ledger, the asset accounts are placed 
 first, these being followed by the liability accounts. Of 
 the asset accounts, the quick assets are given first place, 
 followed, in order, by the assets less easily convertible 
 into cash ; then come those most remotely convertible, 
 
BOOKKEEPING The Ledger (72-72 S) 119 
 
 and finally those that are not convertible at all. Follow- 
 ing these are liability accounts, in like order, concluding 
 with the accounts of capital. Following this arrange- 
 ment, the financial ledger of an ordinary trading busi- 
 ness might contain the following accounts in the order 
 given: (1) Cash; (2) Accounts Receivable (see note); 
 (3) Bills Receivable; (4) Inventory; (5) Furniture and 
 Fixtures; (6) Equipment; (7) Real Estate; (8) Good 
 Will; (9) Accounts Payable, (see note); (10) Bills Pay- 
 able; (11) Mortgages and Bonds Payable; (12) Liability 
 Inventories; (13) Reserves; (14) Capital Accounts. 
 
 In the business ledger, the order of accounts is not 
 so easily outlined, owing to the great diversity in kinds 
 of income, revenue and expense. The following is the 
 general order sought in a trading business: (1) Mer- 
 chandise Sold; (2) Merchandise Bought (or other ac- 
 counts primary to Trading; (3) Trading; (4) Expense 
 (often subdivided into primary accounts of Selling, 
 Office and Capital Expense and other divisions discussed 
 later) ; (5) Profit and Loss. 
 
 Note. In a complete ledger, it is impossible to re- 
 serve space for the accounts payable and receivable in 
 the order given above, although that is the order occu- 
 pied by them in a financial statement, or by their con- 
 trolling accounts in a general ledger (Prin. 72 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 ordinarly be determined, and the ac- 
 counts receivable all of the remainder. 
 
 72 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; 
 
120 BOOKKEEPING The Ledger ( 72-72 S) 
 
 likewise, the accounts payable, the accounts of bills re- 
 ceivable, of bills 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 
 charges and credits posted to a subsidiary ledger. The 
 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. 
 
 72 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 common, 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 
 
BOOKKEEPING The Ledger ( 72-72 S) 121 
 
 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 title may be the name 
 of the ledger itself. 
 
 The customers' charges are posted to the debit of 
 customers' accounts in the subsidiary ledger, and the 
 monthly totals of these charges are posted to the debit 
 of the controlling account in the general ledger. The 
 customers' credits for the month are posted to the credit 
 of 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. (See 
 25 E.) 
 
 Accounts Payable, Bills Receivable, Bills Payable, 
 Capital Stock, Consignments, Shipments, Agents' Ac- 
 counts, Branch Store, are some of the controlling accounts 
 that may be kept in general ledgers to represent the 
 named classes of accounts in subsidiary ledgers, as ex- 
 plained in detail in foregoing paragraphs. 
 
 72 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 
 
122 BOOKKEEPING The Ledger ( 72-72 S ) 
 
 from its place in the ledger without need of a special 
 index. 
 
 Small indexes are generally bound in the first part 
 of the ledger ; larger ones under separate covers. 
 
 72 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 in a year's time, but 
 which are used for reference long after their date. A 
 bound general ledger can be arranged to last through the 
 entire general history of a business. If all the leaves 
 remain in a bound book, we can easily assume that the 
 records are intact. In a loose-leaf book, there is no as- 
 surance that some leaves have not been replaced by 
 others that do not contain the entries as written at first. 
 
 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 carried 
 around without fear of losing some of it. This is worth 
 considering, especially in an office not well provided with 
 conveniences for the safe-keeping of office books and 
 papers. 
 
 72 G. The Loose-Leaf Ledger consists of a binder, 
 and the sheets, the latter being securely fastened in, 
 although removable at pleasure. The loose-leaf arrange- 
 ment is ordinarily preferable to the bound book for sub- 
 sidiary ledgers. Subsidiary ledgers usually contain many 
 accounts which may either extend 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 
 
BOOKKEEPING The Ledger (72-72 S) 123 
 
 index. With a loose-leaf ledger, the bookkeeper, can re- 
 move closed accounts entirely, thus keeping the whole 
 ledger for active accounts. If an account runs over the 
 leaf provided for it, another leaf can be inserted and the 
 account continued. The bookkeeper can file all removed 
 leaves in other binders called Transfer Binders. This is 
 considered sufficient care to take of settled accounts that 
 are kept merely for reference in the matter of future 
 collections or payments. As the transferred accounts 
 can be inserted where desired, they may be in alphabeti- 
 cal order by surnames, or towns, or in any other order 
 that may be more convenient for self -indexing. 
 
 72 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 
 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, 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 between 
 territories for which separate sales ledgers are kept. 
 
 72 I. 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 will be filled 
 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 
 
124 BOOKKEEPING The Ledger ( 72-72 S) 
 
 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. 
 
 72 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- 
 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 pa"ge 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 charts. 
 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 can know that the omission of a check mark m ;ms 
 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 
 
BOOKKEEPING The Ledger ( 72-72 S) 125 
 
 same way is your best protection against errors. If you 
 are not -methodical, you may make, in a second, a slip in 
 posting 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. 
 
 72 K. Verifying the Posting. After all charges 
 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 
 charges 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 charges and 
 credits into the ledger accounts, that is, that you have 
 not disturbed the equality of the total ledger debits and 
 credits. The ordinary proofs of posting are given in 
 Prin. 72 L and 72 M. " 
 
 72 L. Taking a Proof Sheet is the easiest means of 
 assurance 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 footings of debit 
 and credit columns tends 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. 
 
 72 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 
 trial balance is more useful for reference, as in any re- 
 view of the business, the balances of the accounts would 
 be of more interest than the totals. The equality of 
 
126 BOOKKEEPING The Ledger (72-72 S) 
 
 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 ac- 
 count titles with the debit and credit totals (instead of 
 the debit or credit balances) a trial balance. As a 
 matter of convenience in the discussions arising in this 
 book, the term trial balance should be taken to mean a 
 trial balance of account balances, while a trial balance 
 of account totals is referred to as a proof sheet. 
 
 72 N. When the Trial Balance Does not Foot 
 Equally. (See Prin. 63 D.) 
 
 72 0. Closing the Ledger involves three important 
 processes: (1) the re-adjustment of the financial ac- 
 counts so as to exhibit the assets and liabilities of the 
 business at their revised valuation when the books are 
 closed; (2) the transfer of the balances of the nominal 
 accounts into Profit and Loss, which shows as a result a 
 net profit or a net loss; (3) the distribution of net profits 
 or losses from the business ledger to the financial ledger 
 into such acounts as may be determined by the owners. 
 
 Below are given the various steps of ledger closing 
 in paragraphs numbered 72 P, 72 Q, and 72 R, for finan- 
 cial ledger ; and 72 S for business ledger. 
 
 72 P. The Inventory Account. When closing a 
 ledger, if this account shows charges or credits from the 
 beginning of the fiscal period, such amounts should be 
 transferred from the Inventory account in the financial 
 ledger to the nominal accounts to which they apply. 
 For example, the charge of merchandise to Inventory 
 account from the beginning of a fiscal period, is closed 
 into Trading account at the close of the fiscal period. 
 
 The Inventory account should be charged for the 
 inventory of merchandise taken at date of closing. This 
 
BOOKKEEPING The Ledger (72-72 S) 127 
 
 charge is balanced by a credit to Trading account. 
 (Prin. 26.) 
 
 The Inventory account should be charged for any 
 other asset inventories at date of closing. The charge 
 is balanced by crediting the nominal account which is 
 used to show the final disposition of the assets. 
 
 Liability Inventory account should be credited for 
 current liability inventories taken at the time of closing. 
 These credits are balanced by charges against such nomi- 
 nal accounts as show the final disposition of the inven- 
 tories. (See Prin. 34.) 
 
 After the foregoing entries have been made, the. In- 
 ventory account shows, as debits, all assets, and the 
 Liability Inventory account shows, as credits, all re- 
 sources and liabilities that are floating. 
 
 72 Q. Accounts of Fixed Assets. The accounts of 
 fixed assets are examined at the time of closing to de- 
 termine the amount of depreciation during the fiscal 
 period then terminating. If it is decided that the values 
 of any of the fixed assets have diminished below the cost 
 as shown by the account, the amount of depreciation 
 should be credited to Reserve for Depreciation, or to 
 the account itself under circumstances explained in Prin. 
 29. (See 35 B.) This credit is balanced by a charge to 
 the proper expense account in the business ledger. 
 
 72 R. Closing the Financial Ledger. After the net 
 profit for distribution of a given fiscal period is deter- 
 mined and the amount rests in the Profit and Loss ac- 
 count, a final entry must be made, to transfer this amount 
 to the financial ledger. Net profit may be credited to 
 proprietors' Capital accounts, or to proprietors' 
 Drawing accounts, in a non-stock company; in a stock 
 company it should be credited to a Dividend account, a 
 Surplus account, an Undivided Profits account, a gen- 
 eral or special Reserve account or it may be divided 
 among two or more of these, as decided by the owners. 
 When so carried, the Profit and Loss account is charged, 
 and, being in balance, is ruled. 
 
128 BOOKKEEPING The Journal ( 73-73 G) 
 
 A net loss may be charged to owners' Capital or to 
 Drawing accounts, in a sole proprietorship or partner- 
 ship. In the case of a stock company, it may be charged 
 to Surplus or general Reserve accounts if there is suffi- 
 cient credit to balance the loss, or to an Assessment ac- 
 count, if it is intended to collect the loss from the stock- 
 holders. The charge is balanced by a credit to Profit and 
 Loss account. After posting, the Profit and Loss ac- 
 count, being in balance, should be ruled. 
 
 72 S. Closing the Business Ledger. In a trading 
 business, after inventories have been posted to the nomi- 
 nal accounts involved, close the primary accounts of 
 Merchandise Bought and Merchandise Sold into the 
 Trading account. Close Trading account and all other 
 nominal accounts into Profit and Loss ; finally close Profit 
 and Loss into the financial accounts as explained in 72 R. 
 
 73. The Journal is the only book designed to con- 
 tain all original entries. Every business transaction 
 may be correctly entered in the journal. In certain 
 simple lines of business, a journal and a ledger are, all 
 things considered, the only books needed. But com- 
 monly, the ordinary routine entries of a business are 
 made in special books, leaving for the journal only such 
 entries as are of an unusual nature or importance. 
 
 On account of the importance of such journal en- 
 tries as are made for reference, 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 charged and credited in 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 
 
BOOKKEEPING The Journal ( 73-73 G) 129 
 
 among the owners of the business, if full facts are not 
 clearly stated. 
 
 73 B. Different Uses for Journal. A complete 
 journal (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) 
 contains entries of a special nature, as may be in- 
 dicated by such names as sales journal^ purchase journal, 
 shipment journal, credit journal, debit journal, and the 
 like. A columnar journal (73 F) is one that, in addi- 
 tion to the two ordinary charge and credit money col- 
 umns, 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 mem- 
 oranda usually required in a journal entry. Below the 
 memoranda are placed the titles of the ledger accounts 
 affected by the transaction. The charge title is placed 
 one space to the left of the memoranda in order to make 
 it clearly distinguishable, and above the credit title, 
 which is placed slightly to the right of the charge title. 
 Opposite these titles, in the money columns, are the 
 amounts. These are placed in the charge and credit 
 columns respectively and on the same writing lines with 
 the titles. Immediately before the money columns is the 
 postmark column. The postmark column should be 
 close to the amounts for greater convenience in post- 
 marking, as the posting proceeds, and to permit the 
 
130 BOOKKEEPING The Journal (73-73 G) 
 
 bookkeeper to verify more quickly the posting of the 
 amounts. 
 
 A journal may be footed, as in the model, to show 
 equality of charges and credits before posting. 
 
 The complete journal is often a journal of several 
 columns as described in 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 journal for entries of 
 such general nature. 
 
 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, assuming that in an ordi- 
 nary 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 bought book, mer- 
 chandise sold in the sold book), there remain certain kinds 
 of entries to be looked for in the general journal. Among 
 them are: (1) entries affecting the Capital accounts; 
 (2) entries showing the closing of the books; (3) entries 
 of an unusual nature; (4) entries of correction or ad- 
 justment; (5) entries or memoranda of contracts, agree- 
 ments, etc.; (6) entries that appear in part in some other 
 book of original entry, but cannot .appear wholly in the 
 special book. When such occur, the journal entries are 
 iv<j-;inlr<| ;is rnlrirs Id In- posted. ;iiid tin- rnlrirs iii 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 
 
BOOKKEEPING The Journal ( 73-73 G) 131 
 
 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 contain no entries but the charges; credit journals, 
 on the other hand, contain no entries but the credits. 
 
 A "sales journal" differs from a "sales book" in 
 that the sales journal contains merely posting data, while 
 the sales book contains a full record ; the same difference 
 applies to other "journals" and "books" of like relation. 
 
 In old style bookkeeping, the memoranda of trans- 
 actions were entered in a "day book," from which the 
 facts necessary for posting were transferred to a "jour- 
 nal." The journal in this relation, therefore, was a 
 mere intermediate book between day book and ledger, 
 and contained posting data only. 
 
 While the old time day book and skeleton journal 
 are no longer in use, but are now combined in one book 
 retaining the title, journal, we yet have certain special 
 "journals" that are used as abstract posting mediums, 
 having in this respect the same characteristics as the old 
 fashioned skeleton journal. 
 
 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, 
 
132 BOOKKEEPING The Journal ( 73-73 G) 
 
 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 that are recorded con- 
 secutively 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 and effort 
 to substitute special books of entry instead of adding 
 special columns to a journal. 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 into 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 suppyling 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. This will depend on the circumstances. 
 
 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 charges 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 
 
BOOKKEEPING The Journal ( 73-73 G) 133 
 
 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 descriptive columns, followed by four money col- 
 umns. The first column is for the date, the second for 
 explanatory matter, the third for titles of ledger ac- 
 counts, the fourth for the check number, (used when 
 the transaction involves the issuance of a check), the fifth 
 for the postmark of amounts in the general columns 
 posted to the ledger. The first money column is for 
 amounts to be posted as ledger debits (except the charges 
 to expense, which are to be posted to the expense book. 
 (See Prin. 74 F, Illustration No. 1.) This expense book 
 is conveniently bound in the same cover with the ledger.) 
 The second money column is for amounts to be posted to 
 the credit of ledger accounts. The third and fourth 
 money columns are really the bank checking account 
 the deposits and checks being carried directly to these 
 columns instead of being posted to them from the jour- 
 nal, thus saving the time required for this extra posting. 
 At the end of the month, the totals of deposits and checks 
 are carried to the general debit and credit columns, re- 
 spectively, thus completing the equality of the two gen- 
 eral columns. 
 
 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, 
 rather than to post the totals of these two columns to a 
 bank acount in the ledger, as could be done. When 
 carrying the totals of these two columns to the general 
 column at the close of the following month, care must 
 be taken to exclude the balance carried down from the 
 preceding month, that is, to carry only the receipts and 
 payments of the current month to the general column. 
 
 Note. Additional comment, not strictly pertaining 
 
134 BOOKKEEPING The Cash Book ( 74-74 H) 
 
 to the journal, may be inserted here in order to complete 
 the outline of the entire procedure of household account- 
 ing, which if properly carried on, is very valuable in 
 results as well as simple in execution. 
 
 Following the best usage of business generally, all 
 family moneys should be deposited in a bank under a 
 checking account. Progressive savings banks and the 
 ordinary commercial banks welcome individual checking 
 accounts, because a bank checking account is a step to- 
 ward thrift. Having placed the funds in a checking 
 account, the cash disbursements, being by check, are a 
 matter of record. Those who desire to classifiy the family 
 expenses, sometimes experience difficulty in securing a 
 convenient record for the large aggregate of payments 
 constantly made, a few coins at a time. If each person 
 who spends the household money will supply himself 
 with cash by means of checks, and carry with him a 
 ticket on which to jot down the expenditures as they 
 occur, this ticket (returned to the household bookkeeper 
 when the proceeds of the check is exhausted) will provide 
 the memoranda from which the expenditures may be 
 classified in the expense 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 
 
BOOKKEEPING The Cash Book ( 74-74 H) 135 
 
 promptly, for it contains the explanation as to all re- 
 .ceipts and payments of cash. 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 in the business ledger. 
 
 Cash receipts are posted to the credit of such ledger 
 accounts as explain the yield to the business; cash pay- 
 ments are posted to the debit of such .ledger accounts as 
 explain the cost to the -business. 
 
 There may occur certain cash book entries which 
 should not be posted to the ledger; for example, a com- 
 bined journal and cash book entry like this: Machinery 
 $500 to Bills Payable $400 and Cash $100. In this case, 
 the complete entry would be made in the journal, and 
 the payment of $100, after it is entered in the cash book, 
 would be postmarked "J" to show that the correspond- 
 ing charge for the cash credit of $100 is included in the 
 charge to Machinery of $500, which is to be posted from 
 the journal, and checked out of the cash book. Like- 
 wise, 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- 
 
136 BOOKKEEPING The Cash Book ( 74-74 H) 
 
 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 following money 
 columns are to be posted, the other for the postmarks, 
 which consist of the ledger page, showing where to post, 
 and a check mark, showing posting done. Cash receipts 
 are posted to the credit of ledger accounts ; cash payments 
 to the debit. In the illustrated 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 appear in the check 
 stubs. 
 
 74 C. In the Two Page Cash Book (see Form 13 B) 
 the cash receipts a*re 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 in a 
 bank, and this should be done except under unusual con- 
 ditions. 
 
 At the end of the month, any cash left over after 
 banking hours, should be entered on a deposit ticket, 
 and deposited separately from the receipts of the follow- 
 ing day, thus enabling the bookkeeper to extend all re- 
 ceipts of the month into the second, or deposits, column. 
 
 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 balance is the difference between llu* 
 second columns of the two pages. 
 
 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 iv<-ri\ -injr 
 cash, and definitely locates the persons dealt with. Tlinv 
 should also be a sufficient explanation to show the pur- 
 pose of the receipt or payment. After this explanation, 
 
BOOKKEEPING The Cash Book ( 74-74 H) 137 
 
 the ledger title to be credited from cash received, or 
 charged 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. 
 
 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 time to be spent un- 
 necessarily in posting. 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. (Prin. 74 E.) 
 
 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, 
 as 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 kept with a cash book) as explained in 
 Frin. 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 
 hand?, 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 
 entries on the credit side of the cash book are taken from 
 the stubs. 
 
 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 
 
138 BOOKKEEPING The Cash Book ( 74-74 H) 
 
 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 10 A. 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 charged to Expense. 
 
 74 F. The Complete Expense Book may be used to 
 great advantage, where it is desired to classify expenses 
 under a number of special headings. Such a book con- 
 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 charges that are 
 included in the general term expense. To the right of 
 this column, are placed a number of 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 to the special 
 expense- accounts in the ledger, which are named to cor- 
 respond 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 expense columns at all, the total expense 
 should be included in the trial balance as one item which 
 is explained in detail by the distribution shown in the 
 separate columns of the expense book. 
 
BOOKKEEPING The Cash Book ( 74-74 H) 139 
 
 Illustrations: (1) In household bookkeeping, a 
 check for $20 (see Form 12 W, check No. 6) may be is- 
 sued to a member of the family for family expenses. 
 This amount would be posted from the original entry to 
 the general column in the complete expense book. Later 
 on, the member of the family may return a ticket or 
 memorandum showing that the $20 had been disbursed: 
 for clothing,. $10.80 ; for groceries, $6.59; for car fare, 25 
 cts. ; for literature, $1.10 ; for a frying pan, 25 cts. ; unac- 
 counted for or personal expenditure, $1.01 (see Form 
 12 X). These amounts can be distributed from the report 
 to the various columns headed to correspond with the 
 various classes of expense mentioned in the memorandum. 
 The last item is best entered in a column headed Personal 
 Expense (with the name of the member of the family 
 who is spending the money). Separate columns of per- 
 sonal expenditure for each member of the family will 
 tend to locate any disproportion in the personal expendi- 
 tures of the various persons in the family which would 
 otherwise be overlooked. The totals of these special 
 columns in the expense book, should equal the total of 
 the general column. Any ordinary business house may 
 distribute the expenses in a similar book. 
 
 (2). In a department store, (especially in a retail 
 store whose departments are in the hands of managers 
 responsible for department profits) it is advantageous 
 to distribute the expenses through a complete expense 
 book, to the departments as well as to the general Office 
 and Capital Expense accounts. Thus, weekly salaries 
 amounting to $321.40 should be distributed: to Office, 
 $105.40; to Department No. 1, $31.25; to Department No. 
 2, $45.60 ; and so on until the entire amount is distributed. 
 Rent, light, and heat are distributed according to floor- 
 space occupied ; advertising according to newspaper 
 space all expenses according to the department bene- 
 fitted thereby. 
 
 The totals of the respective special columns are 
 charged monthly to the corresponding ledger accounts. 
 
140 BOOKKEEPING The Cash Book (74-74 H) 
 
 74 G. All cash receipts, large and small, should be 
 entered in the main 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 primary 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. 
 
 (1). A special column is used to segregate fre- 
 quently repeated items that are to be posted to the same 
 ledger account. Such items, standing alone, can be 
 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 Mer- 
 chandise Bought, 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 Merchandise Bought, 
 the total of that column could be posted in one operation. 
 
 A special column on the receiving side of cash is 
 frequently advisable for Merchandise Sold. Columns 
 for accounts receivable, accounts payable, discounts, and 
 expenses are often advisable. 
 
 (2). 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 -ubsidiary 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. 
 
BOOKKEEPING The Cash Book ( 74-74 H) 141 
 
 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 
 their total to Accounts Receivable, (the controlling ac- 
 count) in the general ledger. 
 
 Likewise, when the purchase accounts are kept in a 
 subsidiary purchase ledger, a similarly used special col- 
 umn in the cash book (paying side) would be headed 
 Accounts Payable. 
 
 In the commission business, a similar column headed 
 Consignors, segregates the payments chargeable to ac- 
 counts in a subsidiary consignors' ledger. 
 
 (3). Whatever special columns are included in a 
 columnar 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 easily handled, and readily audited: (a) the 
 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 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 
 
142 BOOKKEEPING The Cash Book ( 74-74 H) 
 
 column for the purpose of posting by totals. For a 
 fuller description and illustration of a columnar cash 
 book, study the following paragraphs: 
 
 (4). (Form 161). The form given illustrates a 
 columnar cash book adaptable to a wholesale or a whole- 
 sale and retail business, either departmentized or not. A 
 change in" one or two headings will adapt it to a voucher 
 system, to manufacturing, or to a commission business. 
 
 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 explan- 
 atory matter. Column No. 3 shows the titles of such 
 acounts 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 amounts consist of a number 
 of first entries, and, at the close of the month, the totals 
 from columns 6, 7, and 8. Columns Nos. 6 and 7 are 
 considered together. No. 6 shows the credits to cus- 
 tomers who have remitted on book account, No. 7, the 
 amounts of cash discount allowed them. For example, 
 on Nov. 2, James Lee receives credit, $108.62, for pay- 
 ment of his invoice of Nov. 1, (11-1). He was allowed 
 $1.09, cash discount, having actually paid $107.53, as 
 shown in the net cash column, No. 9, in settlement of that 
 item. Column No. 8 shows the total of the miscellaneous 
 cash sales made during the day. This total may be taken 
 from cash registers, a list of cash sales tickets on sales 
 sheets, or otherwise totaled on primary records before 
 transfer to the cash book. Column No. 9 shows cash 
 actually received, which has previously been entered 
 for posting in one or several of the columns Nos. 4, 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 received after bank- 
 ing hours is entered on a deposit ticket, and deposited 
 the next day separately from the receipts of the next 
 day. By this means, the entire receipts of the month 
 
BOOKKEEPING The Cash Book (74-74 H) 143 
 
 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 columns 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 similarly to columns Nos. 1, 
 2, 3, 4 and 5 for cash debits. Column No. 12 is inserted 
 to give the check numbers for reference. Columns Nos. 
 
 17 and 18 show charges to creditors on book account, 
 and cash discounts allowed, the net remittance being 
 entered in column No. 21. All payments are made 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. 589.) When the 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 expense fund of $50. (See check No. 615.) 
 Column No. 19 shows payments which will be added, 
 and charged to Merchandise Bought at the end of the 
 month. Column No. 20 shows all items chargeable to 
 Expense. 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 im- 
 practicable to insert, in a compact cash book, columns 
 for such subdivisions. To distribute the items in this 
 column, post them to the expense book, (see Prin. 74 P) 
 where they can be distributed to the extent desired, 
 either in unit or department organization. 
 
 Before balancing the cash book, the disbursements 
 
144 BOOKKEEPING The Mdse. Sold Book ( 75-75 E) 
 
 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, (red ink) and after ruling and balancing, is carried 
 below the ruling to column No. 10. 
 
 75. A large share of the bookkeeping work in most 
 concerns is given to Records of Merchandise Sold. 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. For example, a system suitable for 
 recording the sales of a retail grocery, or meat market 
 would be entirely 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 chapter, systems of sales records for typical con- 
 ditions are discussed. 
 
 75 B. The ordinary Merchandise Sold Book (see 
 Form 13 C) commonly called, in the office, the sold book, 
 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 
 in a merchandise sold book. In the form, the date of the 
 sale is at the left, the name of the buyer and the terms 
 following on the same line. Below, in the explanatory 
 space, are the items extended into the first money col- 
 umn. The total is carried to the second column. Dis- 
 counts allowed at time of sale should be deducted, before 
 carrying the charge to the second column. If the sale 
 is tor 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 merchandise is sold on book ac- 
 
BOOKKEEPING The Mdse. Sold Book ( 75-75 E) 145 
 
 count, 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 Bills Receivable account, in the same manner 
 as a charge sale is to an individual account. 
 
 The merchandise sold book is footed and the total, 
 at the end of the month, is posted to the credit of Mer- 
 chandise Sold accounts. (See total, Nov. 30, posted to 
 Form 13 F.) 
 
 Thus, if the sold 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 the Merchandise Sold account. 
 
 750. The Duplicate Merchandise Sold Book con- 
 tains a number of bills to customers, printed on one page, 
 perforated at the margins, so that the bills may be re- 
 moved and delivered to the customers. The sheet under 
 the bill to be delivered, is a duplicate without perforation, 
 to be retained and posted from, as from an ordinary sold 
 book. The copy of the bill delivered is made on the du- 
 plicate sheet by means of carbon paper inserted 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 the two may be readily distinguished. 
 
 A number of these duplicate sheets may be bound 
 in a book, or they may be kept loose, to be transferred 
 into a loose-leaf binder. The loose-leaf binder is better 
 where great numbers of sales are made, as one binder 
 may hold a thousand or more duplicate sheets. 
 
 Other systems of duplicate billing are described 
 later. This system is good in any bulk merchandising 
 or service business, where the items billed are compara- 
 tively uniform in number. 
 
 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 
 
146 BOOKKEEPING The Mdse. Sold Book ( 75-75 E) 
 
 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 tickets alternating 
 with other tickets for carbon duplication. When an 
 order is filled the sale ticket 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 the charge tickets and duplicates, the balance due has 
 been carried from the previous ticket. This amount is 
 added in with the extensions of the present ticket, and 
 the total carried forward to the following ticket and 
 duplicate. Thus the amount owed by the customer is 
 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 ticket 
 and subtracted from the balance carried forward. 
 
 The bill and charge books for the several customers 
 are arranged on a rack 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 of records for merchandise sold is in 
 use in many of the best houses : 
 
 The orders for goods, whether coming from traveling 
 salesmen, from the mail, or by telephone, or from a cus- 
 tomer at the counter, are placed on uniform order blanks, 
 (see Form 16 A) showing buyer, quantity of each item, 
 prices, "routing, and terms. The order blanks also have 
 memoranda 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 a departmentized business. 
 These spaces are filled by the initials of the responsible 
 
BOOKKEEPING The Mdse. Sold Book ( 75-75 E) 147 
 
 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 (see Form 16 B) from which 
 it receives its number. This order register is to keep 
 the order in mind at the office, while the order itself is 
 going the route in being filled. 
 
 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 
 shipping 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 billing, the order 
 sheet is passed to the bookkeeper, who posts the charge 
 to the debit of the customer's ledger account. 
 
 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. (See Form 16 C.) 
 
 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 
 Merchandise Sold 'account ; or if the store is department- 
 ized, the credits would be divided among the various 
 Department Sales accounts, through sales distribution 
 sheets. (See Form 16 D.) The debit amounts to bal- 
 ance these credits, have already been posted to the cus- 
 tomer's accounts in a complete ledger, or, if the cus- 
 tomer's 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, from the cost of each 
 article shown on a cost sheet, will compute the profit on 
 
148 BOOKKEEPING The Mdse. Sold Book ( 76-76 D) 
 
 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 
 by salesmen's names and entering the amounts in col- 
 umns headed for the several salesmen. (See Form 16 E.) 
 
 76. Merchandise Bought Records. The records of 
 merchandise bought are kept in different ways, depending 
 on the volume, terms of purchase, and other circum- 
 stances, as well as on the requirements of the general 
 accounts affected. For example, the records of mer- 
 chandise bought in a department store must be kept in 
 different form from those of a store not departmentized. 
 Some kinds of business require constant 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 described systems for rec- 
 ords of merchandise bought are suitable for most con- 
 ditions : 
 
 76 B. The ordinary Merchandise Bought Book (see 
 Form 13 D), called in the office the "Bot. Book" also 
 called the purchase book, purchases book, or invoice 
 book contains the buying records entered in form sim- 
 ilar to the records in an ordinary sold book, showing 
 date, from whom bought, terms, items extended to 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 firm bought from (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 merchandise 
 bought for notes or acceptances are posted to the credit 
 of Bills Payable. 
 
 The bought book is footed at the end of the month, 
 and the total is charged to Merchandise Bought account 
 
BOOKKEEPING The Mdse. Bot. Book ( 76-76 D) 149 
 
 in the ledger. (See total Nov. 30, posted to Form 13 G.) 
 Thus, if the bought book is footed correctly before final 
 posting, there will be carried to the cash book and ledger, 
 credits that, in the aggregate, will equal the total carried 
 to the debit of Merchandise Bought account. 
 
 76 C. Buying Records Suitable for Extensive Busi- 
 ness. In most concerns, merchandise is bought mainly 
 on account, and in many lines, is 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 ac- 
 count (if not on account, credit Cash or Bills Payable) ; 
 
 (2) to make a monthly charge to the Merchandise Bought 
 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 
 accesible 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. (See 
 Form 16 F.) 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 firm bought from, sending the 
 original invoice and asking for a corrected invoice, or 
 other adjustment as the case may require. Do not make 
 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- 
 
150 BOOKKEEPING The Mdse. Bot. Book ( 76-76 D) 
 
 fying that it is ready for entry. In the model, the in- 
 voice has been passed by a person whose initials are 
 "R. L. D." 
 
 (6). The verified invoice should be given a one-line 
 entry in the invoice register (see Form 16 H) from 
 which it is posted to the creditor's account, if it was a 
 credit purchase. When conditions are such that the 
 invoices are to be paid, regardless of any discount period, 
 only the left page of the invoice register will be needed, 
 and the right page, as shown in the form, may be dis- 
 regarded. Where a strict watch is kept, to pay bills 
 within a discount period, the date set for payment 
 should be entered in the given month column of the 
 date payable section. 
 
 When the invoices are charged to departments, in- 
 stead of to the general Merchandise Bought account, the 
 amount of the invoice is carried to the proper depart- 
 ment column. 
 
 A check mark placed over the date, in the date 
 payable column, will indicate that the payment of the 
 invoice has been attended to. 
 
 Note. In department bookkeeping, it is customary 
 for wholesalers to enter the full amount of the invoice 
 in the invoice register, allowing the discount, when paid, 
 to go to a Discount from Creditor's account. 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 secure on his purchases. In 
 the latter case, if the management of the store should 
 fail to take advantage of discounts an unusual occur- 
 t. IK. this discount would be chargeable to Office Ex- 
 pense, and not to the cost of Merchandise Bought for 
 Ilif given department. 
 
 (7). After the invoice is entered and numbered, it 
 is placed in ;i filo with other invoices from the same firm. 
 
BOOKKEEPING The Mdse. Bot. Book ( 76-76 D) 151 
 
 A vertical file, with separate compartments for each 
 customer (see Form 16 J) is used where there are many 
 invoices. 
 
 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 Merchandise Bought ac- 
 count (or to department accounts if these are carried). 
 The credits have already been posted to the various ac- 
 counts payable, if in a complete ledger; but 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 
 is a method in which original invoices, or special ab- 
 stracts of the invoices are used, in place of the ledger 
 accounts. The following paragraphs outline the voucher 
 system as ordinarily used. 
 
 When an invoice payable is allowed, a blank form 
 called a voucher form, or a voucher jacket, is filled in 
 with whatever 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 charged for the several 
 purchases which may include merchandise, material for 
 manufacture, expense material, services or other items. 
 
152 BOOKKEEPING The Mdse. Bot. Book ( 76-76 D) 
 
 A credit column, headed Vouchers Payable, shows the 
 amounts of all vouchers. 
 
 The lines in the voucher register 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 invoices 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 totals 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 16 I, the heading of 
 .In inn No. 17, Accounts Payable, would be changed to 
 Vouchers Payable. 
 
BOOKKEEPING The Inventory Book ( 77-77 D) 153 
 
 77. The Inventory 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 merchandise, also because if kept in a 
 separate book, inventories for different fiscal 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 merchandise in stock, which is entered, as shown 
 in Form 4H, 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 inventory 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 fiscal period to the next. This, 
 if of considerable value, should be entered as an expense 
 inventory. 
 
 Interest earned by the business, but not yet paid, 
 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 inventory book. 
 
 The total asset inventories are shown in a journal 
 entry (see Form 14 D) charging Inventory account, by 
 items, for the entire amount, and crediting Trading ac- 
 count for merchandise ; Materials account, for materials ; 
 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 unrecorded 
 amounts to be paid, accrued at the close of the fiscal 
 
154 BOOKKEEPING Primary Books (78) 
 
 period. These should likewise be entered in the inven- 
 tory book. Among them, are interest accrued on bills 
 payable, and wages earned by employes but not paid. 
 The purpose of entering these in the liability inventory 
 is to keep an account of the losses assignable to the 
 given fiscal 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 Inventory 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 inventory book. 
 
 The amounts of depreciation are shown by a journal 
 entry charging the proper business account, and credit- 
 ing Reserve for Depreciation. (See Form 14 N trans- 
 ferred to 14 D.) 
 
 78. Primary Books and Records. When several 
 persons are doing the bookkeeping work in a single 
 office, it is generally necessary to divide the work of 
 making primary entries among assistants, each one re- 
 cording a . certain variety of transactions belonging to 
 his division of the work. These divisional records are 
 made in primary books, so arranged that the aggregate 
 results of the transactions recorded in any one book 
 may be summarized on tickets for the head bookkeeper, 
 who transfers the entries from the tickets to the posting 
 books. 
 
 Primary records should be distinguished from aux- 
 iliary records. The former contain records, the totals of 
 which are carried to the posting books ; the latter, certain 
 information, records, etc., that are not posted. 
 
 The primary books are, to a large extent, ruled and 
 printed to suit the business when- used, new forms being 
 made as needed. They are necessary in every large office. 
 In a bank, the following primary books are needed: 
 
BOOKKEEPING Primary Books (78) 155 
 
 (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 checks 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, 
 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 re- 
 cords pertaining to his office in primary 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 primary forms, and books, 
 as the work progresses. The final results or general 
 totals, of these daily records are to be transferred to 
 and charged in the posting books. 
 
156 BOOKKEEPING Auxiliary Books (79) 
 
 In a retail store, the cash sales are given a primary 
 record in cash registers and sales sheets, from which the 
 aggregates are carried to the cash book. 
 
 A traveling salesman makes primary 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 samples, it is readily seen that all 
 primary books should be preserved as a part of the re- 
 cords of the office, accessible to the auditor. 
 
 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 thus 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: 
 
 The bills receivable book contains a description of 
 notes and accepted bills of exchange received. Each 
 item is given a writing line in this book. Vertical col- 
 umns allow for description, usually consisting of the 
 date received, number, maker's name, payer's name, 
 date of note, time of note, date due, amount, interest 
 rate, and a final column in which to enter disposition. 
 The number in the bill book 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 cnlt-ii -s can be made direct from the transactions, 
 and tin- bill book record made at convenience. But 
 when notes are received actively, it is better to make 
 tli is n primary rather than an auxiliary book and trans- 
 ! r tin- charge to Bills Receivable from it by daily 
 totals, as in the case of tlie loan and discount register. 
 IVin. 78.) Wlii-n tin- rolL-d ions from paynx-nl of 
 notes are very active, tin- credits of Bills Receivable may 
 be posted to the- bill book from tho rash book, thus mak- 
 
BOOKKEEPING Auxiliary Books (79) 157 
 
 ing the bills receivable book a subsidiary ledger, called 
 the note ledger. Thus the relation of the bills receivable 
 book to the entire bookkeeping system is that of an 
 auxiliary book, a primary book, or a subsidiary ledger, 
 depending upon the conditions. 
 
 The bills payable book is similar to the bills 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- 
 ning with January 1, January 2, etc., and extend through 
 the entire year. A memorandum of a note or other 
 obligation due in 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 
 to refer to, once a day, 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 vertical 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 ver- 
 tical columns; thus a reminder for April 10, would be 
 written where fourth vertical column crosses the tenth 
 horizontal line. 
 
 The Advertising list is a book containing addresses 
 of prospective or regular customers, with information 
 about them, to whom advertising matter is sent. The 
 addresses are arranged in such a book, on the scheme 
 of classification, either by surnames or towns, alpha- 
 betically arranged throughout the entire list, or ar- 
 
158 BOOKKEEPING Business Forms (80-80 C) 
 
 ranged by states, or by other geographical sections. 
 Such lists must be constantly revised, by adding new 
 addresses, and by dropping off addresses of undesirable 
 firms. Care in keeping this .list correct and reliable is 
 usually appreciated by any business manager. 
 
 The customers' liability ledger is an auxiliary book 
 in which a credit man enters such information as comes 
 to him concerning the debts 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. 
 
 80. Business Forms are the papers, partly printed 
 and partly written, that pass among business men, in 
 the course of their transactions. When these papers 
 supply the evidence of the transactions, they are called 
 vouchers. Entries in the books are mostly based on 
 these forms. Whenever possible, vouchers should be filed 
 for future reference. 
 
 SOB. Bank Depositor's Forms. Form 15 A. When 
 a depositor opens an account with a bank, he is required 
 to write his signature in a book provided for the purpose, 
 called a Signature Book. Signature Cards are also used 
 by banks for the same purpose. Depositor's signatures 
 are kept where the paying teller may quickly refer to 
 them for comparison with the signatures on the deposi- 
 tor's checks, when the 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 
 unusual form or handwriting. A teller is justified in 
 r.-t'iisinsr a cln-ck. rvm though genuine, when the signa- 
 
BOOKKEEPING Business Forms (80-80 C) 159 
 
 ture shows any material variation from the signature 
 as filed with the bank. A model form of signature card 
 is given in Form 15 A. 
 
 Form 15 B. Deposit Tickets 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. 
 
 Form 15 C. On receipt of the first deposit, the teller 
 opens a Depositor's Pass 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 deposit 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, written in the pass book 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 banks. 
 
 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 
 book, so that it is not necessary for the depositor to 
 leave his book at the bank to be "written up," as for- 
 merly. When the statement method is in use, the bank 
 
160 BOOKKEEPING Business Forms (80-80 C) 
 
 pass book is merely the teller's memoranda of deposits 
 to be carried by the depositor. 
 
 Forms 15 D and 15 E. Check Books are usually 
 supplied to the depositor by the bank. They may con- 
 tain 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 per- 
 forated line, and remains 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 en- 
 tered 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 balance of $970, carried forward. 
 
 Stub No. 2 (Form 15 E) shows the balance carried 
 from Stub No. 1, and a second djeposit 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 for- 
 ward to the third stub, so continuing. 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. 
 
 Form 15 F. Checks or drafts when taken to the 
 bank for deposit, or when transferred to other holders, 
 must be endorsed. For endorsements transferring title, 
 five different forms are given. Of the transfer endorse- 
 ments, No. 1 is called an "endorsement in blank;" No. 
 2, an " endorsement in full;" No. 3, an "endorsement 
 without recourse;" No. 4, a "restrictive endorsement;" 
 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 frequently used. 
 
 Note. The two endorsements to the right of the 
 form apply to notes. 
 
 Form 15 O. At the close of the month, the bank 
 bookkeeper renders to the depositor a statement of his 
 
BOOKKEEPING Business Forms (80-80 C) 161 
 
 checking account, and returns with the statement the 
 depositor's paid and cancelled checks. In the form 
 referred to, two columns are reserved for the entry of 
 checks, and one column for deposits. The check col- 
 umns show the date paid and the amounts of the checks. 
 The checks are entered in numbered lines, so that the 
 statement readily shows how many checks are paid dur- 
 ing the month. The model shows forty-five checks 
 charged; hence the bank bookkeeper must return that 
 number of vouchers (cancelled 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. 
 
 Form 15 H. Persons, in transferring funds from 
 one city to another, find it convenient to do so by re- 
 mitting bank drafts. Any local bank will sell a draft 
 drawn on its correspondent, 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 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 
 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. 
 
162 BOOKKEEPING Business Forms ( 80-80 C) 
 
 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. 
 
 Form 15 1. 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 delivers 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. 
 
 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 amount by the de- 
 positor, or on his order. When money is left in this 
 way, it is customary for the banker to issue to the de- 
 positor 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 
 
BOOKKEEPING Business Forms ( 80-80 C) 163 
 
 may endorse the certificate to another person, who can 
 cash it. 
 
 Form 15 K. The payee of a check sometimes de- 
 mands 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 pre- 
 sented to the bank teller who has written across the face 
 a certification obligating the bank to pay the check 
 whenever properly presented. 
 
 Form 15 L. When depositors discount their cus- 
 tomers ' 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. 
 
 80 C. Miscellaneous Business Forms. Following 
 are described a number of business forms that are in 
 general use: 
 
 Form 15 N. The Order Blank 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. 
 
 Form 15 0. The Invoice or Bill is sent by the seller 
 to the buyer at the time an order for merchandise is 
 filled. On it are listed the items sold, the prices and 
 the amount. On the form are written the customers 7 
 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 merhandise received, and with his 
 order to note discrepancies in articles, quantity, or errors 
 in prices or extensions. 
 
164 BOOKKEEPING Business Forms (80-80 C) 
 
 Form 15 P. A Statement of Account 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. 
 
 Form 15 Q. This is a form of account sales, which is 
 a statement or report sent by the commission firm (Con- 
 rad Schopp & Co.) to the consignor (A. A. Kuhl & Co.) 
 of merchandise sent for sale on the market. 
 
 The commission firm undertakes to sell at market 
 prices goods consigned to it, and to remit to the con- 
 signor the proceeds from the sales after taking out dif- 
 ferent 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. 
 
 Form 15 R is a common form of receipt. It shows 
 that Henry T. Miller, being indebted to C. M. Hunter, has 
 paid $10.65 of the debt, and that Mr. Hunter acknowl- 
 edges this payment. The form shows the receipt, with 
 the accompanying stub, before the receipt is removed 
 from Mr. Hunter's receipt book. 
 
 That portion of the form to the left of the receipt is 
 called the "stub." It supplies the makrr 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. 
 
BOOKKEEPING Business Forms (80-80 C) 1C..", 
 
 A receipt is a written acknowledgement that the 
 maker has received into his possession money or other 
 property from the person to whom the receipt is given. 
 
 A receipt should always be required when money is 
 paid on account, and the receipt should state clearly the 
 purpose of the payment. Receipts should be carefully 
 filed and never destroyed until there is no longer any 
 possibility that they may be wanted. 
 
 Note. A receipt form like the one illustrated is fre- 
 quently not necessary. In Form 15 P, the payment of the 
 account is receipted on the statement. Invoices (see 
 Form 15 0) 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. 
 
 Form 15 S. A promissory note 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. 
 
 The form illustrates a standard promissory note and 
 its stub properly filled out. In entering the amount on 
 a note the same care should be observed to prevent "rais- 
 ing" or other alteration as in the case of a check. 
 
 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. 
 
 Form 15 T and 15 U. Drafts are used to adjust ac- 
 counts 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. 
 
166 BOOKKEEPING Business Forms ( 80-80 C) 
 
 Form 15 T is a draft drawn at thirty days sight, 
 meaning thirty days after sight, and 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, who forwards it for payment or acceptance. 
 
 Goods are often paid for with the buyer's aeceptance 
 at the time of purchase, the acceptance in such case being 
 used in place of a promissory note. 
 
 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 15 V. When a shipper delivers merchandise to 
 a transportation company for shipment, he usually brings 
 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. 
 
 The interstate commerce commission has prescribed 
 a form, to be used by all common carriers, called a Bill 
 of Lading. 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. 
 
BOOKKEEPING Filing System (81) 167 
 
 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. 
 
 Form 15 W illustrates a stock certificate issued to 
 Martin Goldman by the American Steel Corporation, as 
 evidence that Mr. Goldman owns fifty shares of the capi- 
 tal 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 owned 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. 
 
 81. 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 
 quickly and easily filed; (2) that they may be quickly 
 and easily located and found; (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. Most business men find it 
 better to have all invoices from a given firm in one binder 
 or folded, so that comparison of past prices, terms, etc., 
 can be made. If the invoices are thus filed, there remain 
 the expense vouchers and the cancelled checks to file. 
 
 All entries to Expense should be supported 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. A box of the proper dimensions to 
 allow them to stand side by side, will hold hundreds of 
 
168 BOOKKEEPING Filing System (81) 
 
 them and not take much room, while it will permit any 
 one of them to be located readily. 
 
 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. 
 
INDEX-COMMENTARY. 
 
 1. Aii index to topics in the text. 
 
 2. An index to models of books and blanks in the Form 
 Book. 
 
 3. A vocabulary of business words and terms, with denni- 
 nitions or comments. 
 
 4. Standard abbreviations and signs commonly used. 
 
 5. The rules for computing Interest, Discount, Fractional 
 Remainders, etc., as used in the sets in the American 
 Bookkeeping Series. 
 
170 INDEX-COMMENTARY 
 
 Abatement. An amount deducted for overcharge, damage, or 
 discount, from a sum payable. 
 
 Abstract of Accounts. Prin. 63 D. 
 
 Abstract of Title. Prin. 68 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. 
 
 Account. (Acct or a/c). Prin. 8. 
 
 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 
 
 Accommodation Paper. Commercial paper issued or indorsed 
 by one person for the support of another person's credit, and 
 without benefit to the accommodating party. Prin. 35 C. 
 
 Accounting. Prin. 1. 
 
 Accountant. A person who is proficient in the rules and 
 practice governing the analysis of business transactions. A pub- 
 lic accountant offers his services to public patronage for a fee. 
 A certified public accountant is one who has passed certain pre- 
 scribed examinations, and has received a training entitling him to 
 a certificate of proficiency issued by state authority, which cer- 
 tificate authorizes him to practice his profession in the state 
 where it is issued. 
 
 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. 
 
 Accounts Payable. Prin. 31 to 31 C ; Form 12 H. 
 
 Accounts Payable Account. Prin. 31 D ; Form 12 G. 
 
 Accounts Receivable. Prin. 25 B-25 E ; Form 11 B. 
 
 Accrued. Added by gradual increase, as the interest on a 
 note. 
 
 Adjustment Entry. An entry made to correct an error, In an 
 account 
 
 Adjustment Account. An English equivalent of the American 
 term, "controlling account." 
 
 Administrator. A person appointed by a court to have in 
 charge the estate of a deceased person. Prin. 68 J. 
 
 Administrative Expense. Prin. 57. 
 
 Adventure. (Adv.) A shipment by a merchant on his own 
 business risk, or Jointly with others; a speculation. 
 
 Affidavit. A written statement under oath and acknowledged 
 before a proper officer. (See Acknowledgment.) 
 
 Agent. (Agt) One who represents another in a business 
 transaction. The person represented is called the principal. 
 Prin. 68 F. 
 
 Allowance. A deduction from a debt allowed to a debtor for 
 some reason not considered when the debt was made; an 
 abatement. 
 
 Amount. (A nit) 
 
INDEX-COMMENTARY 171 
 
 Amortization. The clearing off or extinguishment of a debt, 
 usually by means of a sinking fund. 
 
 Annuity. A sum of money payable yearly for a given num- 
 ber of years, or during life. 
 
 Appraisement. An estimation of the value of property by a 
 properly authorized person. 
 
 Appreciation. Prin. 28 B. 
 
 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. The adjustment of differences or disagreements 
 by a disinterested person or persons chosen by the disagreeing 
 parties. 
 
 Article. (Art.) 
 
 Articles of Co-Partnership. The written agreement, or con- 
 tract, governing the relations and mutual obligations of partners. 
 
 Assistant. ( Asst. ) 
 
 Assessment. An amount collected from stock holders by a 
 stock- company to make good a deficit ; an apportionment of taxes. 
 
 Assessment Account. An account to which are carried from 
 Profit and Loss as debits, the amounts assessed against the dif- 
 ferent stock holders. 
 
 Assets. Prin. 13; consist of, Prin. 22; Asset accounts, Prin. 
 21-30. 
 
 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. 
 
 At. (@). 
 
 Attachment. A legal seizure of property to satisfy debt. 
 
 Audit. An examination of records of account with a view to 
 ascertaining their correctness. Prin. 61-70. 
 
 Auditing. Prin. 3. Prin. 61-70. 
 
 Auditor. A person appointed to examine and verify records 
 and accounts. Prin. 61 B. 
 
 Auxiliary Books. Books containing records additional to 
 those made in the posting books. Prin. 79. 
 
 Balance. (Bal.) The excess of one side of an account over 
 the other. Prin. 8. 
 
 Balance Sheet. A schedule showing the equality of assets 
 and liabilities. Financial statements, trial balances after closing, 
 or whenever the trial balance shows actual assets and liabilities, 
 are balance sheets. 
 
 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. 
 
172 INDEX-COMMENTARY 
 
 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 Check. Prin. 68 E. 
 
 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. 
 
 Bank Discount. A certain per cent deducted from the 
 amount of future due paper by a bank, for carrying the paper 
 to maturity. In the sets 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. 
 
 Bankruptcy. Prin. 681. 
 
 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. (1) An addition to property already owned. 
 Betterments increase the value of an investment, and are not mere 
 replacements of anything already installed. (2) Improvements 
 for the personal or social welfare of employees, as recreation or 
 lecture rooms, baths, etc. 
 
 Bill Book. (B. B.) 
 
 Bill of Exchange. A foreign draft. Prin. 68 E. 
 
 Bill of Goods or Services. An itemized statement of gonls 
 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. 
 
 Bill of Sale. A document formally transferring ownership 
 in personal property from one person to another. 
 
 Hills Payable. ' (B. Pay.) Prin. 32-32 B; Form 13 H. 
 
 Bills Receivable. (B. Rec.) Prin. 25F-25H; Form 
 11 C, 12 D. 
 
 Bills Receivable Discounted. (B. Rec. Dis.) Prin. 35 B. 
 
 Board of Trade. An organization of business men for the 
 :id\;inermont of commerce. 
 
 Bona Fide. In good faith; without deceit or fraud. 
 
 Bond. A document or agn-i-nn-nl under seal. The ordinary 
 ( ..iMiM-n-i.-il l.ond- ;ire issued by tin* (Jovernment. tin- St.-ile. :i 
 pvivaite rorporation or an individual. All promise Hi.- p:i\nieni 
 of money, together with interest payim -nt s on Qiftsame, A .<>U]H.H 
 bond \i:i< intercut coupons attached wlm-h MIT <-ut 1Y :nul col- 
 they niMtnre. Priii. 2"> .T. 
 
 Kond.d Goods. M<MTli:imli<e stored in :i Ix.nded warehouse, 
 or in bonded cars, the ..\\ner luivinir -hen bond- sc.-urin- ihe 
 pimiient of import duties or of Internal revenues, up m their re 
 mov.-il or their .-niivnl at some inland city of entry. ;md hefore a 
 specified time. 
 
INDEX-COMMENTARY 1 7.: 
 
 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. 
 
 Bookkeeping. Prin. 2. 
 
 Book Account. The account kept in the ledger with a person 
 to whom credit sales, or from whom credit purchases, are made. 
 
 Books of Original Entry. Such books as contain the first 
 entries of transactions, as opposed to ledgers, which contain the 
 posted entries. 
 
 Bought. (Bot) 
 
 Bought Book. Prin. 76. 
 
 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 
 cli.-iru'e for the service is called brokerage. 
 
 Bundles, (bdl.) 
 
 Bushels, (bu.) 
 
 Business. Prin. 4. 
 
 Business Forms. Prin. 80 ; For depositor, Prin. 80 B ; Miscel- 
 laneous, Prin. 80 C. 
 
 Business Ledger. The part of a complete ledger containing 
 the nominal, or profit and loss, accounts. Prin. 51-60. 
 
 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 
 a fiscal period, entered with more or less detail, as the case de- 
 mands. Also called a profit and loss statement. 
 
 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. 
 
 Capital. ( Cap. ) The amount of money or property set aside 
 for the use of the business. Where no definite amount is for- 
 mally set aside for this purpose, the net worth is the capital. 
 
 Capital Account. Prin. 37 to 39 H ; Form 10 E-F, 10 L, 12 P. 
 
 Capital Expense and Income. Prin. 48 ; Account of, Prin. 58. 
 
 Card Ledger. Prin. 72 H. 
 
 Care of. (c/o) 
 
 Cartage, (ctg.) 
 
 Cases, (cs.) 
 
 Cash Account. Prin. 24, 24 B, 24 C, 24 D ; Forms of, Prin. 
 24 B-24 F. 
 
 Cash Book. (C, B.) Prin. 74 to 74 H; Forms 10 A, 10 B, 
 11 A, 13 B, 161. 
 
 Cashier's Account. (C. A.) 
 
 Cashier. (1) One who has charge of money; (2) the exec- 
 utive officer of a bank. 
 
 Cash Journal. Prin. 73 G. 
 
 Cents, (ct. or <.) 
 
 Certificate. A written voucher attesting to some fact: as a 
 certificate of deposit, (which is a voucher that money has been 
 
174 INDEX-COMMENTARY 
 
 deposited in a bank) ; a certificate of stock, vouching the owner- 
 ship of stock in a company. 
 
 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 
 
 Changing Single to Double Entry. Prin. 69 F. 
 
 Charge. To charge an account means to make an entry to 
 be posted as a debit. 
 
 Charge and Credit, Theory of. Prin. 71 1 to 71 R. 
 
 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. 
 
 Checking-Account. The account of money deposited in a 
 bank subject to check. 
 
 Check Book. Prin. 74 D. 
 
 Check Mark. (V) A mark placed opposite amounts to show 
 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 Stub. Prin. 74 D. 
 
 Chose (pronounced shos). A thing recoverable by an action 
 at law. A "chose-in-action," is something to which one has th" 
 right but not the possession. Examples: A right to damages for 
 breach of contract or for injury. Notes, bonds and other prom is >s 
 not negotiable, are commonly called choses in action, as they evi- 
 dence the right to collect 
 
 Claims Against Others. Prin. 25-25 K. 
 
 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. 
 
 Closing an Account. An account is closed, by ruling closing 
 lines, when it ceases to represent an element in the busin & 
 This may be when both debit and credit totals are equal, or when 
 the difference between debit and credit sides are carrid to some 
 other account, as when an account is closed into Profit and Loss. 
 
 Closing the Ledger. Prin. 72 O; closing financial ledger, Prin. 
 72 R ; closing business ledger, Prin. 72 S. 
 
 Closing Entries in Journal. Form 14D-14F. 
 
 C. 0. D. Account. Prin. 25 C ; 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. 
 
 Collection of Accounts and Notes. Prin. 68 C. 
 
 Collection Charges. The charges made by a bank or col- 
 lector for collecting claims. In the sets accompanying this text, 
 bank collection charges are computed at 15^ per $100, or part 
 thereof. 
 
 Columnar Cash Book. Prin. 74 H. 
 
INDEX-COMMENTARY 175 
 
 Columnar Journal. Prin. 73 F. 
 
 Commercial Paper. Bills of exchange, drafts and notes given 
 in the course of trade. Prin. 68 E. 
 
 Commission. (Com.) A percentage given for the sale or 
 purchase of goods, or the transaction of other business. 
 
 Commodity. A term relating to everything movable that is 
 bought and sold. Examples : goods, wares, merchandise, the prod- 
 ucts 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. 
 
 Compact. An agreement or contract between parties. 
 
 Company. (1) A 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. 
 
 Complete Expense Account. Prin. 55. 
 
 Complete Expense Book. Prin. 74 F. 
 
 Complete Journal. Prin. 73 C. 
 
 Complete Ledger. Prin. 72 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. 
 
 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.) Merchandise consigned to an agent 
 to be sold. 
 
 Consignor. One who sends or consigns the merchandise. 
 
 Consumer. The person that uses up, appropriates to himself, 
 or changes the character of a utility received. 
 
 Contingent. Not certain. Contingent liability, Prin. 35 ; Con- 
 tingent fund, Prin. 25. 
 
 Contract. An agreement between parties specifying what 
 each, with the consent of the others, promises to do. 
 
 Controlling Account. Prin. 25 E ; also 72 C, 72 D. 
 
 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. 
 
 Copyright Account. Prin. 29 F. 
 
 Corporation. A number of persons associated together in 
 conformity with laws which give them certain powers to act as 
 
176 INDEX-COMMENTARY 
 
 an artificial person for conducting any enterprise specified in 
 their charter. Prin. 68 H. 
 
 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. 
 
 Coupon. An interest note, or certificate, attached to a bond, 
 which is cut off from the bond and collected when due. 
 
 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. (4) Business credit, Prin. 15. 
 
 Creditor. (Cr.) One giving credit; one whom we owe. 
 
 Currency. Paper money as distinguished from coin. In a 
 broader sense .the entire circulating medium of exchange. 
 
 Custom House. The place where government duties are 
 collected. 
 
 Customers. The persons to whom the business regularly sells 
 its goods or services. 
 
 Day Book. (D. B.) 
 
 Days, (ds.) 
 
 Debenture. A document under seal, acknowledging indebt- 
 edness; commonly seen in the form of debenture bonds or cer- 
 tificates issued by corporations, for loans drawing interest, and 
 easily transferable from one investor to another. 
 
 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 account 
 
 Debit and Credit, Theory of. Prin. 71 1 to 71 R. 
 
 Debt. The amount owed by one to another. 
 
 Debtor. (Dr.) The one who owes an amount. 
 
 Deed. A written contract under seal, transferring title to 
 real property. 
 
 Defalcation. (1) An abatement or discount; (2) nlso. MM 
 embezzlement. 
 
 Defaulter. A person who fails to account for money or prop 
 erty intrusted to him, usually applied to custodians of public 
 funds. 
 
 Deferred Charges. Expenses paid during <>n,> lisc.-il period t'r 
 tin- benefit of a following fiscal period, or a following long period 
 of thin 1 . Tims, a hirgr p;iyment for advertising mnd<> just l>efore 
 
 closing tin- I k* would be a deferred charge. Expenses of or- 
 
 iranizing ;i rom-ern are often deferred charge. 
 
 Delivery. Tin- tnmstVr of money or property to another. 
 
 Demand. A fnn:il pn-^Mit:ilitii of :i rlnim. 
 
 Department. (Dept) Dept. Expense, Prin. 55 B. 
 
 Deposit. (Dep.) The funds left in a bank for safe keeping, 
 or on checking account. 
 
 Deputy. A person appointed to act in the place of a public 
 official. 
 
I NDEX-COMMENTARY 177 
 
 Department Expense. Prin. 55 B. 
 
 Departmentized. Divided into several departments, each de- 
 partment being considered a unit of the entire organization. 
 
 Depreciation. (Dep.) Prin. 27 C; account of, Prin. 58 B; 
 when determined, Prin. 58 B. 
 
 Dishonor. Refusal to accept or to pay commercial paper 
 when it is presented to the debtor. 
 
 Discount. (Dis.) An allowance or deduction from the 
 amount of a debt. 
 
 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. 
 
 Distribution of Net Profit or Loss. Sole proprietorship, Prin. 
 60 A; Partnership, Prin. GOB; Corporation, 60 C. 
 
 Dividend. (Div.) The share in profits passed to a stock- 
 holder. 
 
 Dollars. ($) 
 
 Double Entry. (D. E.) A method of bookkeeping in which 
 the required debits and credits for all transactions are equal. 
 
 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). 
 
 Drawee. The person on whom checks or drafts are drawn. 
 
 Drawer. The person issuing a check or draft. 
 
 Drawing Account. An account of funds to the credit of a 
 person and subject to his withdrawal at will. 
 
 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. 
 
 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 
 
 Entry. The record of a transaction together with the ac- 
 count analysis. Prin. 6. 
 
178 INDEX-COMMENTARY 
 
 Equipment Account. Prin. 27 B; Form 10 D. 
 
 Equity. (1) The legal principles of right or justice which 
 may be invoked in a court of law to correct miscarriage of the 
 common or statute law ill particular cases. (2) An equitable 
 claim, or interest, as an owner's interest in mortgaged property, 
 beyond the amount covered by the mortgage. 
 
 Errors Excepted. (E. E.) 
 
 Exchange. (Exch.) (1) The process of transmitting money 
 by drafts; (2) the premium on drafts. In the American Book- 
 keeping 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. One appointed by will to settle an estate. Prin. 
 68 J. 
 
 Expense. (Exp.) Prin. 410. 
 
 Expense Accounts. Prin. 55 to 55 B ; Form 10 J-K and 10 N, 
 12 J ; Selling Expense, 56 ; Office Expense, 57 ; Capital Expense, 58. 
 
 Expense Book. Prin. 74 F. 
 
 Extension. The results computed from a certain column or 
 columns of figures, and carried to another column. 
 
 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. 
 
 Filing. Prin. 81. 
 
 Financial Business. The business of loaning money, renting 
 property or otherwise letting the use or benefit of capital for the 
 purpose of realizing income, as banking, insurance, renting, etc. 
 
 Financial Ledger. The part of a complete ledger containing 
 the real, or asset and liability, accounts. Prin. 21. 
 
 Financial Management. Prin. 21 B. 
 
 l-'i i i;in rial Profits. Prin. 45. 
 
 Financial Statement. Prin. 11, 20A-20E. Recapitulation, 
 Prin. 11 to 20. Forms 1, 2, 3, 4, 10 A, 12 M. 
 
 Finances. Funds or money. Financial operations are those 
 involving the receipt and payment of cash. 
 
 Firkin, (fir.) 
 
 Firm. A business organization owned by more than one 
 tor. 
 
 Fiscal Period. The time for a final summing up of the profits 
 HIM! losses of the business operations, ordinarily one year. Prin. 
 711. 
 
 Fixed Property. The property owned by a business which is 
 kept on account of ite usefulness, and thus occupies a fixed place 
 In the organization. Buildings occupied, equipment, and good will 
 
INDEX-COMMENTARY 179 
 
 are typical kinds of fixed property. An itemized list of all fixed 
 property should appear in the ledger accounts. 
 
 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 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 revenue or income. 
 
 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. 
 
 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.) 
 
 Foot or Feet, (ft.) 
 
 Footing. The sum of a column of figures. 
 
 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 
 
 Forward. (Fwd.) 
 
 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. 29 C; How written off, Prin. 580. 
 
 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. 
 
 Freight, (frt.) (1) The compensation to railroads or other 
 carriers for transportation of goods. (2) The goods transported 
 are termed freight. 
 
 Freight on Merchandise Bought. Prin. 53 D ; Form 14 1. 
 
 Freight on Merchandise Sold. Prin. 53 E. 
 
 Funds. (1) Money or capital set aside for a special purpose. 
 (2) The term "funds" often means ready money. Prin. 24 E. 
 
 Furniture and Fixtures Account. Prin. 27 D. 
 
 Furniture. The movable general equipment of a building for 
 
180 INDEX-COMMENTARY 
 
 the use of the persons occupying, e. g., chairs, desks, carpets, filing 
 cabinets, etc. 
 
 Gallons, (gal.) 
 
 General Accounts. The accounts kept in the general ledger 
 together with the cash account. 
 
 General Cash Book. Prin. 74 F. 
 
 General Expense. Account of, Prin. 57. 
 
 General Journal. Prin. 73 D. 
 
 General Ledger. Prin. 72 C. 
 
 Goods. Merchandise or commodities. 
 
 Good Will Account. Prin. 29 B ; How written off. Prin. 58 C. 
 
 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. 
 
 Gross Trading Profit. Prin. 42. 
 
 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. 
 
 Half, (hf.) 
 
 Handkerchief. ( hdkf . ) 
 
 Hogshead, (hhd.) 
 
 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. 
 
 Imprest Fund. Prin. 24 E. 
 
 Income. Prin. 41 B and 42. Accounts of, Prin. 54. 
 
 Income Tax. Prin. 68 K. 
 
 Income and Expense Accounts. Prin. 49, 54 and 59; Form 
 11 E. 
 
 Indenture. A mutual agreement in writing. 
 
 Index. Prin. 72 E ; Form 12 B. 
 
 Indorsement. See Endorsement. 
 
 Insolvency. Inability to meet indebtedness. A business Is in- 
 solvent when its liabilities exceed its assets. 
 
 Instant, (inst.) In the current or present month. 
 
 Insurance Account. Prin. 29 D. 
 
 Insurance Policy. (Ins. p.l.) The certificate given by the 
 insurance company to the assured, obligating the company to re- 
 imburse cither wholly or in part for any losses nsioned by 
 
 fire. water, storm, etc., as specified in the policy. 
 
 Installment. One of the parts of a debt payable at iutervnK 
 The iiist.MllTnent system of selling property useful to families, such 
 Bl IMM.UV. furniture, homes, etc., whereby payment is made weekly 
 or monthly, is common. 
 
 Intangible Asset Accounts. Prin. 29. 
 
 Interest. (Int.) A percentage allowance for the use of 
 money or its equivalent for a given time, usually one year. 
 
 In the American F.Mokkeei.ii^g Series, interest computation-. 
 
INDEX-COMMENTARY 181 
 
 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 Account. Prin. 59 B ; Form 14 K. 
 
 Intestate. Having died without leaving a will. 
 
 Inventory. (Invt.) An itemized schedule showing the values 
 <f property or claims owned, or liabilities owed on a certain date. 
 Floating property comprises the principal values found in the 
 regular inventory taken at the close of a fiscal period. Form 4 H. 
 
 Inventory Account. Prin. 60 ; of property, Prin. 26, 26 B ; of 
 claims receivable, Prin. 26 C ; of claims payable, Prin. 34. Closing 
 and opening, Prin. 72 P ; Form 13 G. 
 
 Inventory Book. Prin. 77 to 77 D ; Form 4 H and 14 N. 
 
 Investment. (1) The appropriation of money or capital for 
 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. 
 
 Invoice Book. (I. B.) See Prin. 76 B. 
 
 Jobber. A merchant who buys goods from importers and 
 manufacturers, and sells in quantity to wholesale and retail 
 merchants. 
 
 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.) Prin. 7; journal in detail, Prin. 73 to 73 G; 
 Form 12 A. 
 
 Journalizing. A systematic classification of the debits and 
 credits of business transactions. Readjustment entries, Form 
 14 D ; entries to close nominal accounts, Form 14 E ; entries to 
 close P. & L. acct, Form 14 F ; compound opening entry ing, Form 
 13 A : practical journalizing, Prin. 71 R. 
 
 Journalizing Orally. Prin. 71 R. 
 
 Journalizing Rules. Prin. 71 1 to 71 R. 
 
 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.) 
 
 Landlord. The owner of real estate which is leased to 
 tenants. 
 
 Land Buying. Prin. 68 D. 
 
 Lease. A contract, in writing, granting the occupancy of 
 property for a given period at a stated compensation. 
 
 Ledger. (L.) Prin. 8; ledger in detail. Prin. 72 to 72 S ; 
 financial ledger, Prin. 21-40 ; business ledger, Prin. 51-60. 
 
182 INDEX-COMMENTARY 
 
 Legal Aspects of Auditing. Prin. 68-68 K. 
 
 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. 
 
 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), for 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 #nd other public dues. 
 
 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. Prin. 14; consist of, Prin. 17. 
 
 Liability Inventory Account. Prin. 34; Priu. 77 C. 
 
 Lien. A preferred right in property allowed by law and 
 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, but has not been paid for. 
 
 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. 
 
 Liquidation. The act of determining the persons and amounts 
 owed, and of applying assets to settlement. 
 
 List. Prin. 18; inventory lists, Prin. 19. 
 
 Locating Errors. Prin. 63 C, 63 D. 
 
 l.oos.-l.raf Ledger. Prin. 72 G. 
 
 Losses. Prin. 41 C. 
 
 Maker of a Note. The one who signs it 
 
 Manager. (Mgr.) 
 
 Manufacturing Account. (Mfg. a/c). The account which 
 shows the cost of manufacturing the product 
 
 Manufacturing Business. The business of changin.u' raw ma- 
 terial into imMvhamliso. or commodities for sale. 
 
 Manufacturing Profit. Prin. 43. 
 
 Msit urity. ( 1 ) The date on which a debt is legally collectible. 
 
 Memorandum. (Man.) 
 
 Mercantile Ajjmcy. An organisation to gather financial in- 
 formation about business houses or individuals, and sell reports 
 of inf.. i -ii IM tion thus gathered to interested persons, as a basis for 
 
 Merchandise. (Mdse.) Goods or commodities in salable 
 condition. 
 
INDEX-COMMENTARY 183 
 
 Merchandise Bought Account. Prin. 530. 
 
 Merchandise Bought Book. Prin. 76 B. 
 
 Merchandise Sold Account. Prin. 53 B. 
 
 Merchandise Sold Book. Prin. 75. 
 
 Merchandise Manufactured Account. Prin. 53 G. 
 
 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. 
 
 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. 
 
 Mortgage Loan Account. Prin. 25 I, 33. 
 
 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. 
 
 Net. Not subject to further deduction, as net price, net profit. 
 
 Net Invoice. The sum of the invoice after discounts are de- 
 ducted. In the American Bookkeeping Series, one-half or major 
 fraction of a cent belonging to a discount is considered an addi- 
 tional cent discount. 
 
 Net Profit for Distribution. Prin. 50. 
 
 Net Trading Profit. Prin. 46 C. 
 
 Net Worth. The excess of assets over liabilities of a given 
 business or person. Prin. 67 B. 
 
 Nominal Accounts. Accounts that explain the sources of 
 profits and losses. Prin. 51-60. 
 
 Nominal Assets. Assets carried on the books at the last re- 
 corded value but which, in the meantime, may have increased or 
 diminished, as the goods or property listed in an inventory. 
 
 Normal Tax. Prin. 68 K. 
 
 Notary Public. (N. P.) A state ofllcer, 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 Book. (N. B.) 
 
 Notes Receivable Account. Prin. 25-25 H. 
 
 Notes Payable. Prin. 32, 32 B. 
 
 Number. (No.), also (#), when placed before the figures. 
 
 Office Expense. Prin. 47 ; account of, Prin. 57. 
 
 Operations. Prin. 4. 
 
 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 of Accounts in a Ledger. Prin. 72 B. 
 
 Order Book. Form 14 C. 
 
 Order Sheet. Form 14 B. 
 
 Ordinary Business Profit. Prin. 48. 
 
184 INDEX^COMMENTARY 
 
 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. 
 
 Ordinary- Business Profit. Prin. 47. 
 
 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. 47 ; account of, Prin. 57. 
 
 Packages, (pkg.) 
 
 Paid, (pd.) 
 
 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. 68 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. 
 
 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. 29 E; how written off, Prin. 
 58 C. 
 
 Patterns and Drawings. How written off, Prin. 58 C. 
 
 Pawn. To transfer possession of personal properly us 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 <r "pawning" personal property as security, the 
 pledge I.eini: ..n <(, million of forfeiture of ownership in the prop 
 eri\ if payment is not made according to the agreed terms. 
 
 Payee. The person nai 1 in commercial paper to receive 
 
 payment 
 
 Personal Property. Chattels, merchandise, conn Mtie-, ami 
 
 material, as opposed to real property. 
 
 Person. This term is used in a business sense to include 
 either .-in individual, firm, association, or corporation. 
 
 Personal Account. Of customer. Form ll'II. 1ML: of <-red 
 it..r. Form Ili <i. 13 K. 
 
 Per Centum. (%) 
 
 I VI ty Expense Book. (P. E. B.) Prin. 74 E. 
 
 Pieces. (PS. i 
 
INDEX-COMMENTARY 185 
 
 Posting. The process of transferring charges and credits 
 from first entries to ledger accounts. See Prin. 72 J. 
 
 Pound. (lb.), also (#) when placed after. 
 
 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. 
 
 Preferred Stock. (Pref. Stock.) The stock of a corporation 
 which is entitled to dividends before, or regardless of, the common 
 stock. 
 
 Premium. (1) The amount above par paid for commercial 
 paper. (2) The amount paid for insurance. How written off. 
 Prin. 58 C. 
 
 President. (Pres.) 
 
 Primary Accounts. Accounts which are carried to more gen- 
 eral accounts at intervals; thus, Merchandise Bought and Mer- 
 chandise Sold accounts are carried to a Trading account. 
 
 Primary Books. Prin. 78. 
 
 Principal. (1) The person employing an agent. (2) The sum 
 upon which interest is computed. 
 
 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. The utility which 
 they offer for sale is called their product. 
 
 Profit and Loss (Nominal) Accounts. Prin. 51-60. 
 
 Profit and Loss Account. (P. & L.) Prin. 59; Form 10 O, 
 12 V, 14 I. 
 
 Profit and Loss Statement. Prin. 41 to 50; Forms, Produc- 
 tion business, Prin. 50 B ; Manufacturing business, Prin. 50 C ; 
 Service business, Prin. 50 D ; Trading business, Prin. 50 E ; House- 
 hold or domestic, Prin. 50 F ; Financial business, Prin. 50 G. 
 
 Profit. The money gained from business or occupation. Prin. 
 41 B. 
 
 Proof Sheet. Prin. 72 L; Form 121. 
 
 Property. Things that a person may own or dispose of, 
 whether material or immaterial. 
 
 Property Accounts. Prin. 27. 
 
 Protest. A formal act of a notary public declaring . certain 
 paper dishonored by the payers, and holding the parties to the 
 paper liable. 
 
 Proximo, (prox.) In the next following month. 
 
 Purchase Account. Prin. 53 B. 
 
 Purchases Account. Prin. 53 B. 
 
 Purchase Book. (P. B.), and Records. Prin. 76 to 76 C; or- 
 dinary, Prin. 76 B ; for extensive business, Prin. 76 C ; Form 13 D. 
 
 Purchase Ledger Account. Prin. 31 D. 
 
 Purchase of Land. Prin. 68 D. 
 
 Quick Assets. 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. 
 
186 INDEX-COMMENTARY 
 
 Reading Journal Entries. Prin. 71 R. 
 
 Readjustment of Financial Accounts at Closing. Prin. 72 Q 
 to 72 R. 
 
 Real Accounts. Accounts that show the cash value of collect- 
 ible claims against orders and property owned, also the liabilities. 
 Prin. 21. 
 
 Real Estate. Property in houses, lands, and attachments 
 legally pertaining thereto. 
 
 Real Estate Account. Prin. 28 ; Form 11 D. 
 
 Rebate. A deduction from an amount assumed to be due. 
 
 Reading Amounts. Prin. 71 R. 
 
 Receipt. (Rect.) A written acknowledgment of money or 
 value received from another. 
 
 Receiver. One appointed by a court to hold in trust, disputed 
 or unsettled property or claims. 
 
 Reconcile Bank Statement. Prin. 64 B. 
 
 Rent. Money or goods transferable from tenant to landlord 
 in payment for use of property. 
 
 Reserves. Prin. 36; for depreciation, Prin. 36 B; for doubt- 
 ful accounts, Prin. 36 C; general, Prin. 36 D; surplus, Prin. 36 E. 
 
 Resources. Prin. 12. 
 
 Revenue. Prin. 41 B; Service, Prin. 44; Trading, Prin. 42; 
 Manufacturing, Prin. 43. 
 
 Revenue Accounts. Prin. 52 ; Form 10 I and 10 M. 
 
 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. 
 
 Ruling. Prin. 71 H. 
 
 Rules for Charge and Credit. Prin. 71 L to 71 P; general 
 rules, Prin. 71 Q. 
 
 Sale of Goods. Prin. 68 B. 
 
 Sales Account. Prin. 53 B. 
 
 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 ft. 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 curly iionplo. who generally 
 could not write, legal instruments renuiwl M seal instr.-id ..| si- 
 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 M cirelp, or in hrackc-t ;. is rre.|Heii11y u-<ed on documents, 
 and constitutes a seal. 
 
 >-rret Reserve. Prin. 64. 
 
 SHling Expense. Prin. 40: Account of. Prin. 56. 
 
 service Business. A business that sells prindpally services 
 rather than . oimnodit ies : us a dray line, railroad, hotel, liirbt. 
 heat and power eompany. etc. 
 
INDEX-COMMENTARY 187 
 
 Service Revenue. Prin. 44. 
 
 Shares of Stock. Prin. 30 B. 
 
 Shipment. (Shipt.) The goods shipped. 
 
 Short Extend. To enter or carry an amount short of, or be- 
 fore, the money column. 
 
 Sight Draft, (st. drl) 
 
 Signature. Prin. SOB. 
 
 Sinking Fund. Money set apart, in savings or investment, to 
 meet a future maturing debt. 
 
 Single Entry. A system of bookkeeping wherein entries of 
 transactions do not require equal charges and credits for every 
 exchange. Prin. 69-69 E. 
 
 Single Page Cash Book. Prin. 740. 
 
 Single Entry Changed to Double Entry. Prin. 69 F. 
 
 Silent Partner. A business partner who is not actively en- 
 gaged in the business, but whose investment entitles him to share 
 in profits. 
 
 Sold Book ( S. B. ) and Sales Records. Ordinary, Prin. 75 B ; 
 Duplicate, Prin. 75 C; Retail Shop Sale System, Prin. 75 D; 
 Wholesale Sale System, Prin. 75 E; Form 130. 
 
 Solvency. Ability to meet obligations. A business is solvent 
 when it has assets sufficient to meet its liabilities. 
 
 Space for Ledger Accounts. Prin. 72 I. 
 
 Special Column Cash Book. Prin. 74 H. 
 
 Special Income and Expense. Prin. 46. 
 
 Special Journal. Prin. 73 E. 
 
 Speculation. Purchase of laud, 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. Prin. 55 C. 
 
 Speculative Accounts. Prin. 30. 
 
 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. 
 
 Stocks. The shares in the capital of a stock company or 
 corporation. 
 
 Stock 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. Prin. 39 D. 
 
 Stocks Account. Prin. 30 B. 
 
 Stock Exchange. An association for the purchase and sale of 
 stocks and other securities. 
 
 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. 
 
 Stockholder. One who owns shares of the capital stock of a 
 corporation or stock company. 
 
 Storage. A charge made for keeping the goods of another 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. 
 
188 I \DEX-( '( JMMKXTARY 
 
 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. 25 E; 72 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. 
 
 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." 
 
 Sundry Accounts Receivable. Prin. 25 C. 
 
 Superintendent. ( Supt. ) 
 
 Surplus Account. Prin. 36 E. 
 
 Suspense Account. An account in which items, whose final 
 disposition is doubtful, may be charged or credited while awaiting 
 final disposition. 
 
 Syndicate. An association of capitalists formed to supply 
 capital for some financial undertaking. 
 
 Tare. A deduction of the weight of containers from the gross 
 weight. 
 
 Taxable Income. Prin. 68 K. 
 
 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. 
 
 Theory of Charge and Credit. Prin. 71 1-71 R. 
 
 Tickler. A book arranged to show future due paper or other 
 import a ni data in the order of the dates when attention should 
 he given to them. 
 
 Title. The heading of an account. Prin. 8. 
 
 Ton or Tons. (T.) 
 
 Tools Account. How written off, Prin. 58 C. 
 
 Trade Discount. A discount from certain list prices, or from 
 the amount of purchases, made to a dealer on account of a change 
 in the price, or to regulate the dealer's profit. 
 
 Trade Mark. A device placed upon manufactured goods to 
 li-tiiiiruisli tin-in from imitations. Trade marks arc copyriirlite I 
 to in-urc their exclusive use l.y the owner. 
 
 Trade Creditors Account. Prin. 31 D. 
 
 Trading Account. Prin. 53; Form 12 S, 14 .T. 
 
 Trading Business. The bnsinc ..r buying ami selling com- 
 modities A mercantile business. 
 
 Trading Revenues. Prin. 42. 
 
 Trading Statement. Prin. 42: Form 12 N. i: 1 , K. 
 
 Transactions. Prin. 3. 
 
 Transit. Checks or drafts are snid to l>e "in transit" when 
 they are held l.y parties between drawer and drawee. 
 
 Treasurer. iTrens.) 
 
INDEX-COMMENTARY IS!) 
 
 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." 
 
 Trial Balance. Prin: 72 M ; Form 10 G, 10 P, 12 J, 12 K. 
 
 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. 
 
 Trustee. A person who holds legal title to property for the 
 benefit of others. 
 
 Two-Page Cash Book. Prin. 74 C. 
 
 Ultimo, (ult.) In the month just preceding the present 
 month. 
 
 Unclassified Profits and Losses. Prin. 58. 
 
 Undivided Profits Account. Prin. 36 F. 
 
 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. 
 
 Utility. A salable property or benefit ; as, commodities, serv- 
 ices, uses, or conditions of time or place that may be given for a 
 price. The utility sold by a grocer consists of groceries; that of 
 a railroad, transportation ; that of an electric light company, 
 light or power; that of a teacher, instruction; that of a lawyer, 
 advice or service. 
 
 Verifying the Posting. Prin. 72 K. 
 
 Vouchers. The written evidence of business transactions. 
 The most usual are receipts for money paid or orders for goods 
 sent. 
 
 Vouchers Payable. Prin. 31 D. 
 
 Voucher System. Prin. 76 D. 
 
 Way Bill. A form accompanying .freight shipments to show 
 the routing and disposition. 
 
 Wholesale. Sale in quantity suitable for division by retailers. 
 
 Yards, (yd.) 
 
YB 18627 
 
 
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 M513301