UNIVERSITY OF ILLINOIS LIBRARY AT URBANA CHAMPAIGN STACKS MINER AND ELWELL SERIES PRINCIPLES OF BOOKKEEPING CORPORATION AND VOUCHER ACCOUNTING BY GEORGE W. MINER AND FAYETTE H. ELWELL, A.B., C.P.A. PROFESSOR OF ACCOUNTING^ UNIVERSITY OF WISCONSIN GINN AND COMPANY BOSTON • NEW YORK • CHICAGO • LONDON ATLANTA • DALLAS • COLUMBUS • SAN FRANCISCO COPYRIGHT, 1912, 1916, BY GEORGE W. MINER COPYRIGHT, 1918, BY GEORGE W. MINER AND FAYETTE H. ELWELL ALL RIGHTS RESERVED 318.6 HEftc satftengam 3&rteg GINN AND COMPANY • PRO¬ PRIETORS • BOSTON • U.SA. 7.0 fa PREFACE The large number of business enterprises conducted by corporations has resulted in a demand for a bookkeeping text which would cover the basic and fundamental points connected with corporation accounting. The points which distinguish corporation accounting from sole pro¬ prietorship and partnership accounting are explained in this work in some detail, and the optional exercises of the text allow the student an opportunity to apply the principles presented. In contrast with the various kinds of mercantile businesses taken as the bases for the preceding laboratory sets, the manufacturing business is used in this text as the basis for a practice set so that the student may become familiar with records, books, accounts, and statements suited for this type of industry. The voucher system of recording commodities purchased is illustrated and used in Set IX. Students will find no difficulty in mastering its basic principles or in understanding the application of such variations of the system as may be found in practice. In the last chapter of the text the authors give a descriptive intro¬ duction to the subject of cost accounting, and touch upon those points with which the cost clerk should be most familiar. The authors wish to acknowledge their indebtedness to the follow¬ ing persons for helpful suggestions and criticisms of the manuscript: Henry R. Hatfield, Professor of Accounting, University of California; Stephen W. Gilman, Professor of Business Administration, University of Wisconsin; John R. Wildman, Professor of Accounting, New York University; J. A. Book, Head of the Commercial Department, South Division High School, Milwaukee, Wisconsin; Ivan E. Chapman, Head of the Commercial Department, Northwestern High School, Detroit, Michigan; Elizabeth Campbell, Commercial Department, High School, Somerville, Massachusetts; Myron F. Palmer, Principal of Bay Path Institute, Springfield, Massachusetts. Business men, bookkeepers, and certified public accountants have also been consulted freely regarding many features of the text, and their practical suggestions have added to the working value of the book. VA iii CONTENTS CHAPTER PAGE XXXIII. Introduction to Corporate Organization .... 417 XXXIY. The Stock System. 421 XXXY. The Stock Books. 424 XXXVI. Opening the Financial Books. 429 XXXVII. Disposition of New Profit. 434 XXXVIII. Corporation Bonds. 437 XXXIX. Revenue Accounts and Operating Statement of a Manufacturing Business. 441 XL. Set IX. Chair-Manufacturing Business. 449 XLI. The Conversion of a Partnership into a Corporation 477 XLII. Introduction to Cost Accounting. 486 VA v Digitized by the Internet Archive in 2017 with funding from University of Illinois Urbana-Champaign Alternates https://archive.org/details/principlesofbookOOmine LIST OF EXERCISES Exercise 80 . Introduction to Corporate Organization. 420 Exercise 81 . The Stock System. 423 Exercise 82 . Opening the Financial Books. 432 Exercise 83 . Disposition of Net Profit. 436 Exercise 84 . Corporation Bonds. 440 Exercise 85 . Manufacturing Revenue Accounts and Operating Statement . 446 Exercise 86 . Conversion into a Corporation. 481 VA vii CHAPTER XXXIII INTRODUCTION TO CORPORATE ORGANIZATION Definition. A corporation has been defined as "an artificial being, invisible, intangible, and existing only in contemplation of law ” (Chief Justice Marshall, 4 Wheaton, 518). A corporation is formed only through process of law, by a number of persons associating themselves for the purpose of conducting a legal business. Three is the usual number prescribed by law as the minimum number of persons who may form a corporation. Formation of Corporations. The corporation laws of each state specify the manner in which a corporation may be formed, and they are the primary sources of power under which a corporation operates. In a few states corporations for certain purposes secure their charters only through special acts of the legislature. Since the corporation laws of the different states vary greatly, general statements cannot be made relative to the specific requirements to be followed in organizing a corporation in any state. The usual procedure may be summarized as follows: The persons desiring to form a corporation prepare written articles of association, containing the facts required by the corporation law. These articles are signed and acknowledged, and then they are sent to the proper state official. In some states the articles of association are prepared in duplicate: one copy is retained in the state official’s office, and the second, bearing the approval of the state official, must be filed in the designated county official’s office. The publication of notices relating to the application for incorporation, the payment of incorpora¬ tion and filing fees, and all other requirements of the state law must be satisfied. Charter. If the provisions of the statutes as to the purpose and the method of organization are fulfilled, the corporation receives a charter. The charter is frequently a formal certificate of incorporation issued by a state official, or it may be an authorization from the state in some other form. In New York, for example, the application to incorporate, approved by the Secretary of State, becomes the charter. The usual data contained in a charter relates to the name, capitalization, location, 417 418 PRINCIPLES OF BOOKKEEPING purposes, and duration or life of the corporation. The charter is also considered as including the law under which the corporation is organized. The persons who petition the state officials for a charter are known as the incorporators. By the act of subscribing to the capital stock they also become stockholders. After incorporation, a subscriber or the recorded purchaser of the capital stock is known as a stockholder. By-laws. The by-laws of a corporation are the rules adopted by the stockholders relating to the detailed management of the business. It is a fundamental principle of corporation law that the provisions of the by-laws must not conflict with the charter of the corporation or with the state laws. Kinds of Corporations. Corporations may be divided into two general groups: 1. Corporations not organized for profit, such as colleges, churches, and clubs. 2. Corporations organized for profit, of which there are three kinds, according to the purposes for which the organization was formed, — general business, public utility, and financial. The general business corporation class includes the usual manufac¬ turing, trading, and mercantile companies; the public utility corpora¬ tion class usually includes railroads, water, electric, gas, and telephone s companies ; while the financial class generally includes banks, trust com- I panies, insurance companies, and building and loan associations. The majority of states have different laws for the organization and the operation of these different classes of corporations. In this text atten¬ tion is given only to the general business corporation group. Domestic and Foreign Corporation Laws. A state frequently has two general business corporation laws, — the first relating to corporations organized within the state and known as the domestic corporation law, the second relating to corporations organized in other states but trans¬ acting business within this state and known as the foreign corporation law. The rights and the obligations of domestic and foreign corporations, as stated in these laws, often vary greatly, and when any question, arises, reference should always be made to the appropriate state law. Names of Corporations. The statutes of some states prescribe that the name of the corporation must contain certain words. For example, it is often compulsory for the name of a corporation to start with the word The and end with the word Company. In other state laws it is provided that the word Incorporated or the abbreviation Inc. must be stated in connection with the company name. In the majority of states it is provided that the names of corporations may not be the same as INTRODUCTION TO CORPORATE ORGANIZATION 419 sole proprietorships, partnerships, or corporations already engaged in busi¬ ness within the state, and cannot be so similar as to cause confusion in the mind of the general public. General Powers of a Corporation. The statutes grant to every business corporation certain general powers. While the general powers vary slightly in the different states, those generally conferred may be stated as follows: (a) To have succession ( d ) To purchase, to hold, and to convey ( b ) To sue or to be sued under lands and chattels its corporate name (e) To elect officers and to appoint agents (c) To use a common seal (/) To make by-laws Advantages of Corporate Organization. The advantages of the cor¬ porate organization are as follows: 1. The existence of the corporation is not dependent upon the life or the condition of any of its stockholders. 2. The corporation as a legal person, and not the stockholders as individuals, acts as a party in legal cases. 3. The corporation may deal in real estate as a legal person. 4. The directors assume definite responsibility, and their orders gen¬ erally result in a unification and a continuance of acts and policies highly advantageous to business. 5. The liability of stockholders for corporate indebtedness generally is limited to the stock subscription. 6. Advantages 1 and 5 combine in giving corporations a decided advantage over partnerships in the securing of capital investments. The Disadvantages of Corporate Organization. The disadvantages of the corporate organization, slight in comparison with the advantages given, are as follows: 1. The fees and the franchise taxes must be paid. 2. Foreign corporation laws are often stringent. 3. The limited liability of the stockholders and the legal artificiality of the corporation sometimes prevent the extension of credit necessary for the safe-conduct of the corporation’s business. 4. This type of organization is unsuited for professions in which individual skill and individual responsibility are the important factors. Examples are the medical, the legal, and the accounting professions. Some business men claim that the requirement of the majority of the states demanding an annual report to be filed with a state official is a disadvantage. On the other hand, a constantly increasing number of men of affairs believe that a detailed annual financial report, prepared 420 PRINCIPLES OF BOOKKEEPING or approved by a certified public accountant, offers distinct advantages to both the stockholders and the corporation itself. The following exercise is suggested #s the basis for a recitation. Exercise 80. Introduction to Corporate Organization 1. Define a corporation. 2. Define a charter. 3 . What are by-laws ? 4 . Can the by-laws be in conflict with the statutes or the charter? 5 . What are the two general kinds of corporations? 6. What general class of corporations in your state would be sub¬ ject to the domestic corporation law ? to the foreign corporation law ? 7 . What is the rule of law relative to the name of a corporation duplicating or closely resembling the name of another business ? 8. State six powers of a corporation. 9 . State six advantages of corporate organization over partnership organization. 10. Summarize the disadvantages of corporate organization. CHAPTER XXXIV THE STOCK SYSTEM Capital Stock. The Capital Stock account of a corporation records the investment in the business, and in this respect corresponds to the' proprietor’s investment account in a sole proprietorship and to the partners’ investment accounts in a partnership. Terms Used. Several different terms are used in referring to the authorization, the subscription, the payment, and the ownership of the capital stock of a corporation. The authorized capital stock is the maximum amount which may be issued. The subscribed capital stock is the stock which is subscribed. The paid-up capital stock is the stock paid for by stockholders. The majority of state laws require certain portions of the authorized capital stock to be subscribed and paid for before the corporation has legal existence. Only when authorized capi¬ tal stock is subscribed and paid for in full do the three terms refer to the same amount. Unsubscribed capital stock applies to the portion of the authorized capital stock not subscribed. Treasury stock is capital stock which, having been previously subscribed and paid for by stock¬ holders, is purchased by the corporation from the stockholders, or donated to the corporation by the stockholders. Outstanding capital stock represents the subscribed capital stock, or the difference between the subscribed capital stock and the treasury stock. Capital stock is usually issued as nonassessable. If it is not, assessments may be levied whenever the directors deem it advisable. Share. A share is one of the units of equal value into which the capital stock of a corporation is divided, and generally grants to its owner, called the stockholder, the rights of voting in the stockholders’ meetings, and of sharing in the profits earned and in the assets available for distribution upon dissolution. The amount of capital stock divided by the number of shares issued gives the par value of a share. In practice the par value of a share is usually decided upon first, and then the total amount of capital deemed necessary is divided by the par value in order to determine the number of shares to issue. A mini¬ mum amount which may be used for the par value of a share is designated in some of the state laws. 421 422 PRINCIPLES OF BOOKKEEPING Stock Certificate. Ownership of a share of stock is evidenced by a stock certificate, although one stock certificate may be issued for the total number of shares owned by a stockholder. A stockholder can¬ not claim ownership of any particular property belonging to the corpo¬ ration, since he has a right only to that proportion of all the corporate property which the shares he owns bear to the total shares outstanding. Classes of Stock. The varying conditions and limitations under which stock is issued to the stockholders of a corporation give rise in some states to several distinct classes of stock. The classes in general use are known as common stock and preferred stock. Common Stock. Common stock carries the same rights and obligations to all its owners. The use of the words capital stock without quali¬ fication as to kind implies that the stock of the corporation is all common stock. Preferred Stock. Preferred stock grants the owners thereof preferences over the common stockholders as to dividends, voting, or distribution of assets upon dissolution. The laws of the different states vary so widely regarding the meaning and the issuance of preferred stock that in every case involving de¬ tailed knowledge of the facts the specific state law under consideration should be studied. The right to share in the accrued profits before any allowance is made for the dividends on the common stock is one general preference granted the holders of the preferred stock. The dividend rate on pre¬ ferred stock is usually fixed at the time of issue. Thus an issue of 7 °] 0 preferred stock means that the dividend rate on this stock is 7% of the par value thereof. The dividends on preferred stock may be either cumulative or non- cumulative, and the stock is thus known as cumulative preferred stock or noncumulative preferred stock, respectively. If the dividends on cumulative preferred stock are not paid for one or more years, they cumulate and must be paid in full before other kinds of stock receive any portion of the profits. If dividends on noncumulative preferred stock are not paid for the period, they lapse and thus do not become a charge against the earn¬ ings of future periods. Book Value and Market Value. The value of the proprietary interest in a corporation may differ materially from the outstanding capital stock, owing to operating profits or losses, the difference between the book values of assets and liabilities and their actual values, and present con¬ ditions and future prospects of supply and demand for the product of the THE STOCK SYSTEM 423 business. The market value of a share of stock may therefore differ from the par value and from the book value of the share. One of the pur¬ poses of recording values is to learn the financial status of a business, and while it may be impossible to have the book values and the actual values correspond, every effort should be made to prevent a wide varia¬ tion between the two. In order to avoid the present practice of placing a par value on a share of stock at the time of organization and then seldom using it again, some state laws now allow corporations to be organized with no par value of stock stated. The subscribers decide upon the amount to be paid for each share at the time of incorporation and thereafter the value of a share is determined by dividing the net assets by the number of shares of stock outstanding. Undoubtedly within a few years corporations with capital stock of no par value will come to be a common occurrence. Corporate Administration. Stockholders are the owners of the capital stock of a corporation. Upon incorporation and annually thereafter the stockholders meet and elect directors of the corporation, in accordance with the provisions of their by laws. Stockholders are allowed a vote for each share of stock owned, and may vote in person or by proxy. The elected directors are known as the board of directors, and they direct the management and the general administration of the corpora¬ tion’s affairs. The directors of a corporation elect the officers of the corporation. The usual officers are the president, vice president, secretary, and treasurer. The board of directors also has the power to appoint agents to transact business for the corporation. Cumulative Voting. This is a method of voting prescribed by some state laws, and possible under others, the object of which is to place representatives of the minority stockholders upon the board of directors. The following exercise is suggested as the basis for a recitation. Exercise 81. The Stock System 1. Give a definition of the following terms: capital stock, authorized capital stock, subscribed capital stock, paid-up capital stock, unsub¬ scribed capital stock, treasury stock, a share, a stockholder, common stock, preferred stock, cumulative preferred stock, noncumulative preferred stock, cumulative voting. 2. What are the general rights of a stockholder ? 3- Distinguish between the book value and the market value of stock. CHAPTER XXXV THE STOCK BOOKS The corporate stock system necessitates the use of certain books in which all transactions of the system may be recorded. The books kept for this purpose are referred to as the stock books of the corporation and should be distinguished at all times from the financial records of the company. The stock records contain details of official transactions and data relative to the purchase, the payment, the ownership, and the transfer of stock, and the payment of dividends thereon. Some of the financial transactions occurring in connection with these data may appear in the financial records, in summary form, but the details of all transactions should be found in the appropriate stock record. Minute Book. This book contains a record of all the meetings of the stockholders or of the board of directors, and is usually kept by the secretary of the corporation. Subscription Book or List. This book or list contains the date of record, the names and the addresses of the subscribers, the number of shares, and the amount subscribed for by each stockholder. We, the undersigned, do hereby subscribe for and agree to take the number of shares of the Madison Chair Company’s stock set opposite our respective names: Number Date Name of Stockholder Address of Shares Amount Feb. 1 George Clark Madison, Wis. 175 17500 1 F. M. Williams Madison, Wis. 175 17500 1 E. M. Hadley Madison, Wis. 175 17500 1 F. W. Kramer Madison, Wis. 175 17500 1 W. R. Wood Madison, Wis. 175 17500 1 John R. Inman Sheboygan, Wis. 125 12500 100000 FORM OF SUBSCRIPTION BOOK OR LIST Installment Book or List. This book or list is used when subscrip¬ tions are paid in installments, and contains the number and amount of each installment, when it is due, and the names of the subscribers. 424 THE STOCK BOOKS 425 Installment Scrip Book. This is a book of blank receipts to be filled out and signed by the secretary and the treasurer as the installments are paid. Installment Ledger. This book is kept by some corporations in order to record temporarily the accounts of subscribers paying for stock on the installment basis. A subscriber is charged with the amount of each installment when it becomes due, and is credited with installment pay¬ ments as evidenced by the installment scrip book. Stock-Certificate Book. This book contains blank certificates, with stubs, to be filled out and signed, usually by the president and the secretary of the corporation. For convenience, these certificates are numbered consecutively. The stockholder frequently signs the stub as a receipt when the certificates are issued to him. A bill of sale in blank is always printed on the back of the certifi¬ cate to facilitate the sale and the transfer of stock. A separate stock-certificate book should be kept for each kind of stock issued. The stubs of the stock-certificate book usually serve as a posting medium to the stock ledger. Stock Ledger. This book is a ledger which, according to one method of keeping it, shows the number of shares of stock held by each stockholder. • Date To Whom Transferred Number of Certificate N umber of Shares Date From Whom Transferred Number of Certificate Number of Shares STOCK-LEDGER RULING Data for the accounts with stockholders are obtained from the stock- certificate and the stock-transfer book, the accounts being credited with the shares issued and debited with the shares transferred. The 426 Os •J2 & STOCK-CERTIFICATE BOOK THE STOCK BOOKS 427 balance of each individual stockholder’s account indicates the number Df shares in his possession, while the balance of the stock ledger kept in this manner should agree with the total shares of the capital stock outstanding. Some of the state corporation laws prescribe the data to be contained in the stock ledger, and strict compliance with the pro¬ visions of such laws should be made by all corporations subject to them. There are various other methods of keeping the stock ledger. The chief among them is the use of amounts, as well as the number of shares, on a double-entry basis, the making of the stock ledger self¬ balancing, and the using of the Capital Stock account in the general Ledger as a controlling account, with the stock ledger as a subsidiary to that account. Separate stock ledgers should be kept for each kind of stock issued. Stock-Transfer Book. This book contains blank transfers with stubs and is used to record the transfer of stock from one person to another. It evidences ownership of the stock mentioned therein, before stock certificates are issued. In some corporations a stock-transfer book is maintained only at the office of the company, while in other corpora¬ tions, particularly those whose stock is transferred frequently, transfer agents are appointed in different cities and transfer books are kept at each office. The form of the transfer book may vary to conform to the method of transfer used in different corporations, but the vital infor¬ mation of such a record is shown in the following illustration. In some states the laws prescribe the data to be recorded in the stock- transfer book, and a state official prescribes the form of the book. The data from the stock-transfer book are recorded on the stub of the stock- certificate book, and from there postings are made to the stock ledger. No. of Certificate canceled Z No. of New Certificate issued / 2 - Shares Ledger canceled Folio TRANSFERRED BY / 0 z , New Shares issued TO / o For Value Received, do hereby assign and transfer to ’r &’.ZbtZZ Shares of the Capital Stock of TT/?e Madison Chair Co., Madison, JVis. Witness^rzsy hand and seal, this Z^C'day of ■ Sealed and delivered in the presence of i-3.] STOCK-TRANSFER BOOK 428 PRINCIPLES OF BOOKKEEPING Dividend Book. This book shows the names of the stockholders, the number of shares of stock, the par value of each share, the amount of dividend due each stockholder, and the date on which the dividend was paid. The stockholder sometimes receipts for dividends in the dividend book. When payment is by dividend check, this is, of course, unnecessary. First Semiannual Dividend, Aug. 1, 1917, 8% Stockholder Certifi¬ cate No. Number of Shares Par Value per Share Amount of Dividend When Paid Signature for Payment George Clark 1 175 100 525 Aug. 5 George Clark F. M. Williams 2 175 100 525 5 F. M. Williams E. M. Hadley 3 175 100 525 5 E. M. Hadley F. W. Kramer 4 175 100 525 5 F. W. Kramer W. R. Wood 5 175 100 525 5 W. R. Wood John R. Inman 6 125 100 375 5 John R. Inman FORM OF DIVIDEND BOOK I CHAPTER XXXVI OPENING THE FINANCIAL BOOKS Names of Accounts for Recording Capital Stock. If all the capital stock of a corporation is common stock, the investment account is called . Capital Stock , but if two or more kinds of capital stock are issued, separate accounts are maintained for each kind of stock. Proper account names may be obtained in each case by prefixing the name of the kind of stock to the term capital stock. Thus, if a corporation issues both common and preferred stock, two accounts are kept, one with Common Capital Stock and the other with Preferred Capital Stock. Separate subscription accounts for each kind of stock should also be kept. The entries in the following discussion all refer to common stock, but the same principles apply to the recording of other stock issues. A Completely Subscribed Issue. When a corporation is formed and the entire amount of capital stock is subscribed and paid for in cash, there are two ways of recording the transactions in the financial records: in the first method, Cash is debited directly with the amount of capital stock; in the second method, an account with Subscription is used as an intermediary account. To illustrate these two methods, assume the capital stock to be $75,000. The entries for the two methods are, in order, as follows: 1 Cash 75000 Capital Stock Capital stock subscribed and paid in full. 75000 2 Subscription 75000 Capital Stock Per subscription list. 75000 Cash 75000 Subscription Payment of subscription in full. 75000 The capital stock may be subscribed in full, and only a portion of the subscribed amount paid. In this case, assuming $25,000 of the $75,000 subscription to capital stock to be paid, the journal entries are: 429 430 PRINCIPLES OF BOOKKEEPING Subscription Capital Stock Per subscription list. Cash Subscription Portion of subscription paid. '5000 25000 '5000 25000 A Partially Subscribed Issue. Frequently only a portion of the authorized capital stock is subscribed, and only a part of the subscrip¬ tion paid. There are two methods of recording these facts. The first, and the one preferred, is to make entries corresponding to those just made in the preceding case. Thus, assuming the authorized capital stock to be $75,000, of which $50,000 is subscribed and $25,000 paid, the entries are : Subscription Capital Stock Per subscription list. Cash Subscription Portion of subscription paid. 50000 50000 25000 25000 In the Capital Stock account a memorandum should be made under¬ neath the account name, giving appropriate details of the authorized capital stock. If the authorized capital issue of $75,000 is divided into 750 shares of $100 each, the Capital Stock account heading would appear as follows: Capital Stock Authorized capital, 750 shares, $100 par value, $75,000 When financial statements are compiled for any purpose, the fact that the capital stock outstanding is only a portion of the authorized issue should be clearly shown. In the case under consideration the capital stock item appears as follows: Capital Stock Authorized $75000 Unsubscribed 25000 Outstanding $50000 That portion of the outstanding capital stock unpaid is reflected by the balance of the Subscription account, which appears among the assets of the corporation. Under the majority of subscription agree¬ ments it represents a definite, collectible debt due the corporation. OPENING THE FINANCIAL BOOKS 431 The second method of recording the fact that only a portion of the authorized capital stock is subscribed and only a part of the subscrip¬ tion is paid is to open an account with Unsubscribed Capital Stock for the proper amount. Using the same case as before, the journal entries would be as follows: Subscription 50000 Unsubscribed Capital Stock 25000 Capital Stock 75000 To open the Capital Stock account, re¬ cording both the amounts subscribed and unsubscribed. Cash 25000 Subscription Portion of subscription paid. . 25000 Since the Unsubscribed Capital Stock is not an asset account but only a record of the right of the corporation to issue more stock, the amount of such stock should be subtracted from the authorized issue in preparing the financial statements and only the amount of capital stock outstanding should be extended. The same form may be used for this purpose as is used in illustrating the first method. As portions of the unsubscribed stock are subscribed, the Subscrip¬ tion account is debited and the Unsubscribed Stock account is credited. The Unsubscribed Stock account, therefore, balances when all the capi¬ tal stock is subscribed. The Subscription account balances when pay¬ ment is made for all the subscribed stock. Installment Payments. Stock subscriptions are often paid in install¬ ments. When the first installment is due, the journal entry, assuming the amount of the installment to be $5000, is as follows: Installment No. 1 Subscription Portion of installment due on first install¬ ment, per installment book. 5000 5000 If payments on this installment totaling $4000 are received, the entry is as follows: Cash Installment No. 1 Cash received on this installment, per installment scrip book. 4000 4000 432 PRINCIPLES OP BOOKKEEPING Installment accounts are opened in sequence as installments become due, and each is closed when the respective payments have been made. A record is also kept in the installment book, and scrip is issued for installment payments as described on page 425. The by-laws of corporations generally provide that if installments on stock subscriptions are not paid, the payments already made are for¬ feited thereby to the corporation. The disposition of the subscribed stock is a matter to be decided by the directors of the corporation. In the illustrations used in this chapter all entries are expressed in journal form, though cash entries may be made just as accurately in the cashbook. All payments for subscriptions are assumed to be by cash. Organization Expense. In organizing corporations there are frequently many expenses incurred for which nothing tangible is received, and yet such items cannot be charged equitably against the profits of the first fiscal period. Thus, expenses for investigating proposed locations • for factories, expenses for investigating the processes or the methods employed by different companies, legal fees, and the cost of promotion are items often incurred before a corporation is in actual operation. Such items are usually charged to an account called Organization Expense, and a portion of it, called Organization Expense Written Off\ is charged against the profits of each period. The amount to be charged periodically depends upon the amount of the organization expenses and the possibilities of profits, and this is a % matter to be decided by the board of directors of the corporation. Exercise 82 is recommended for drill in opening the financial books of a corporation. Exercise 82. Opening the Financial Books 1. A corporation has been formed with a capital stock of $75,000. This sum has been fully paid in cash. Required, the necessary entries. 2. A corporation has been formed with a capital stock of $35,000. This sum has been subscribed and paid in cash. Make the necessary entries. 3. A corporation has been formed with a capital stock of $150,000. Of this sum, $125,000 has been subscribed and paid; the balance, $25,000, is to be held in reserve, unissued. Required, the necessary entries. 4. A corporation has been formed with a capital stock of $75,000. Of this sum, $50,000 has been subscribed and paid; the balance, $25,000, is to be held in reserve, unissued. Make the necessary entries. 5. A corporation has been formed with a capital stock of $100,000. Of this sum, $75,000 has been subscribed, of which $50,000 has been paid in cash, and the balance, $25,000, is to be paid in five equal OPENING THE FINANCIAL BOOKS 433 monthly installments. The balance of the capital is to be held in reserve, unissued. Required, the necessary entries. One month after the organization of the corporation the first payment on installments was made. Required, the necessary entries. 6. A corporation has been formed for the manufacture of paper-box machinery, with a capital stock of $150,000. The owner of the patents is to receive for his inventions 400 shares of stock, at $100 per share. Of the stock remaining, 800 shares have been subscribed and paid in full, and .300 shares are to be held in reserve, unissued. Make the entries necessary to open the books of the corporation. 7. A corporation has been formed for the purpose of manufacturing paper boxes. The capital stock is to be $50,000, divided into 1000 shares of $50 each, 200 shares of which are preferred stock, and the remaining 800 shares common stock. The preferred stock has been sub¬ scribed and paid. Of the common stock, 60 % has been subscribed at par. Of this latter sum, 40% has been paid in cash, and the balance is to be settled for in five equal monthly installments. The balance of the capital stock is to be held in reserve, unissued. Make the entries necessary to open the books of the corporation. 8. A corporation has been formed with a capital stock of $40,000, divided into 400 shares at $100 per share. Of the capital stock, 75% has been subscribed at par, and full payment made in cash; the remainder is to be held in reserve, unissued. Make the necessary opening entries. 9. a. Explain the exact relationship of the following amounts to one another, and state the books, financial or stock, or both, in which the details or the sums would appear. Installment No. 1, calls in arrears $1000 Installment No. 2, called 2000 Authorized Capital Stock 10000 Subscribed Capital Stock 9000 Amount paid in at time of subscription 3000 Amount called in by Installment No. 1 » 2000 Unissued Capital Stock 1000 Payments on Installment No. 1 * 1000 Cash on hand 5000 Payments on Installment No. 2 1000 Balance of Subscription account 2000 b. Give the journal entries which would produce the data given in a . c. Give the trial balance of the corporation as far as these capital stock items are concerned. CHAPTER XXXVII DISPOSITION OF NET PROFIT The Surplus Account and the Dividend Account. The nominal and the summary revenue accounts of a business are the same whether the business is conducted as a sole proprietorship, a partnership, or a cor¬ poration. However, the proprietary interest accounts differ for each type of organization, and therein lies one of the distinguishing features of corporation accounting. Since the individual stockholders’ accounts are not in the general ledger, and since the capital stock of a corpo¬ ration may not be changed except by due process of law, some method other than that used in sole proprietorships and partnerships must be found for recording periodical profits and for distributing them to the owners of the business. The method of closing corporation books and distributing the profits involves the use of the Surplus account and the Dividend account. The balance of the Appropriation revenue account is closed into the Surplus account at the end of each fiscal period. Assuming that the Appropriation account shows a credit balance of $10,000, the journal entry is as follows: Appropriation Surplus To transfer the net profit of the period to the Surplus account. 10000 10000 The word surplus implies excess income, and the Surplus account is used to record accumulated profits. The stockholders have no legal right to claim any portion of the surplus until the directors declare dividends. Dividends may be de¬ fined as the portion of the corporation surplus allotted to stockholders. Cash Dividend. Should the directors decide to declare an 8% cash dividend on a capital stock of $100,000, and thus vote to distribute $8000, the entry to record such declaration would be as follows: Surplus Dividends Declared To record declaration of 8% dividend, payable. 8000 8000 434 DISPOSITION OF NET PROFIT 435 When the dividends are paid, the entry expressed in journal form is as follows: Dividends Declared Cash Payment of 8% dividend. 8000 8000 Stock Dividend. Under the corporation laws of many states divi¬ dends may be paid in stock. In case the authorized amount of capital stock has to be increased, due permission must be obtained from the proper state officials in the manner prescribed in the state corporation law. The entry to record the declaration of a stock dividend, using the same figures as in the above illustration, is as follows: Surplus Stock Dividend To record declaration of 8% stock dividend, payable. 8000 8000 When the stock dividend is distributed, the journal entry is as follows: Stock Dividend Capital Stock To record distribution of 8% stock dividend. 8000 8000 How Dividends are Declared. The amount of dividends declared for each kind of stock may be expressed either as a percentage or as a definite amount per share. The former method is the general practice, and the fact that a board of directors declares an 8% dividend on the common stock means that each holder of common stock will receive 8% of the par value of the stock owned. Dividends are usually numbered consecutively, and either separate accounts may be kept for each dividend or the Dividends Declared account may be made a controlling account. If both -common and preferred stock are outstanding, separate divi¬ dend accounts should be used for each class of stock. Dividends may be declared annually, semiannually, or quarterly, but the period does not alter the use of the Dividend account. From What Payable. With the possible exception of solvent cor¬ porations operating wasting properties, — mines, quarries^ timberlands, — the dividends are payable only out of net profits, and thus capital investments remain intact for the benefit of the creditors and the future stockholders. The payment of dividends out of the capital is prohibited by law in most of the states. 436 PRINCIPLES OF BOOKKEEPING To Whom Payable. Dividends are payable only to bona-fide holders of stock certificates, as evidenced by the stock records of the corpora¬ tion. The amount of each dividend payable to each stockholder appears in the dividend book, one of the stock records. In large corporations whose stocks are actively traded in on the exchanges, the dividends are usually declared payable to stockholders of record on a given date. The notice of this fact may often be found in the metropolitan daily and financial papers, worded somewhat as follows: " The annual divi¬ dend of the X Company is payable July 1. Stock books close June 10 and open July 5.” The Dividends Declared account is a current liability of the corpora¬ tion, and the stockholders have the same rights with regard to its collection as other creditors have with regard to their claims. Dividends upon cumulative- preferred stock are contingent upon profits being earned, and until that condition exists, they are not a liability of the corporation and should not appear upon the books of account. It is highly advisable, however, that all stockholders should be informed of any cumulative preferred dividends, and a footnote, giving the appropriate data and appended to the financial statement, is considered the best method of imparting the information. The following exercise is suggested for drill in the use of the Surplus account and the Dividend account. Exercise 83. Disposition of Net Profit 1. The capital stock of a corporation is $250,000, divided into $100,000 of 7% cumulative preferred stock, and $150,000 of common stock. Dividends have not been paid for five years past, but during the year under consideration $90,000 profit was made. Give the journal entries to record properly the distribution of the profit to the stock¬ holders for the six years. What dividend rate per cent do the common stockholders receive ? 2. The capital stock of a corporation is as follows: Q>°/ 0 First Preferred Stock $250000 7 °J 0 Second Preferred Stock 200000 Common Stock 150000 The net profits for the year are $44,000. Assuming the directors declare dividends for the entire amount, give the journal entries to record properly the distribution of the profits. CHAPTER XXXVIII CORPORATION BONDS Definition. A bond is the written promise of a corporation to pay the stated sum on the given date with interest at the stated rate. Bonds are generally issued when a corporation desires to obtain for use over a long period of time a large sum of money for the construc¬ tion of fixed assets or for the improvement or the extension of the present property. The majority of bonds issued have a life varying from ten to fifty years. The statement of all the conditions relating to issuance and payment appears upon the face of the bond and is called the bond recital. Security for Payment. Security for the payment of the amount bor¬ rowed generally takes the form of a mortgage on the property, and the bond is then called a mortgage bond. The bondholders may claim the property if the debt is not paid when due. Mortgage bonds are of different kinds; for example, first , second , general , and blanket are terms used in connection with mortgage bonds to indicate the type of security given and the order in which the claim may be satisfied if the mortgages are foreclosed. Interest. Interest upon bonds must be paid at the date when due or bondholders may satisfy their claims through legal procedure. For this reason, bond interest is referred to as a fixed charge. Bond interest is usually payable semiannually. A coupon bond is one issued with interest coupons attached so that the bondholder merely detaches the coupon at the time the interest is due, and presents it at a bank, the office of the corporation, or the office of a broker in order to receive the actual interest money. Coupon bonds are negotiable, and presentation of the matured bond itself is accepted as evidence of ownership. A registered bond is one upon which interest is payable to the per¬ son whose name is recorded in the office of the corporation as being the owner thereof. When the bond becomes due, payment is made to the name contained in the register of bondholders. Some bond issues provide for the registration of the face of the bond and for the payment of the interest by coupons. 437 438 PRINCIPLES OF BOOKKEEPING Date of Maturity. All the bonds of an issue may have the same date of maturity or the bonds may be issued serially, in which case bonds within a certain range of numbers fall due at different dates. Redemption. Bonds may be redeemed in different ways. Among the several methods of redemption, the bond recital may provide that the face of the bond is to be paid in gold at maturity, that the bond is convertible into preferred stock within a given period on a certain basis of exchange, or that the bond is redeemable in cash before maturity on a certain basis. Recording the Sale of Bonds. If an issue of 1000 twenty-year 5% first-mortgage bonds, denomination $100, were sold at par, the entry expressed in journal form would be as follows: Cash First-Mortgage Bonds Payable Sale of bond issue at par. 100000 100000 If the bond issue were sold for $102,000, the entry would be: Cash 102000 First-Mortgage Bonds Payable Premium on Bonds Issued Sale of bond issue at 102. 100000 2000 If the bond issue were sold for $98,000, the entry would be: Cash Discount on Bonds Issued First-Mortgage Bonds Payable Sale of bond issue at 98. 98000 2000 100000 The majority of bond issues are not sold for their face or par value, since the condition of the money market, the market rate of interest, the rate of interest which the bonds bear, and the credit of the cor¬ poration issuing the bonds cause the bonds to be sold at a premium (above par) or at a discount (below par). Par is always considered 100; a premium of 2% may be expressed as 102, and likewise a dis¬ count of 2% may be expressed as 98. Recording the Interest on Bonds. If the interest on the bonds referred to above were payable semiannually, the entry to record the payment of interest would be as follows: Interest on First-Mortgage Bonds Payable Cash 2500 2500 Semiannual interest on bonds. CORPORATION BONDS 439 Interest on Bonds Payable is a financial expense account and is closed into the Financial Income and Expense account. Sinking Fund. A sinking fund is a fund set aside for the redemption of bonds at maturity. There are two general methods of determining the amount of money which shall be set aside annually to provide for the actual redemption of the bonds. The first is the pro-rata method in which the amount of the bond issue is divided by the life of the bonds, and the resulting quotient gives the amount to be set aside each year. The second general method is based upon the fact that the interest upon the installments should be considered. The pro-rata method is used in this text. To illustrate the use of the sinking fund, assume that it is desired to accumulate a sinking fund for the redemption of the $100,000 bond issue referred to above. The life of the bonds is twenty years, and thus the pro-rata contribution to the sinking fund is $5000. The money must be available for the redemption of the bonds, and it is accumulated by setting aside annually this amount. The journal entry to record this transaction is as follows: Sinking Fund Cash Periodical contribution to the sink¬ ing fund for the redemption of first- mortgage bond issue. At the end of twenty years the entry to record the payment of the debt is as follows: First-Mortgage Bonds Payable Sinking Fund Redemption of bonds from sinking fund accumulated for the purpose. Bond recitals frequently provide that, in addition to the security given, a sinking fund shall be accumulated for the redemption of the bonds by periodically charging the annual sinking-fund installment against the profits of the period. Such procedure is impossible of ful¬ fillment without violation of fundamental accounting principles, since a fund is always cash or assets readily convertible into cash, and a liability cannot be paid by charging revenue. The actual effect of such a sinking-fund clause in a bond recital is to prevent all the surplus being available for dividends by reserving annually a portion 100000 100000 5000 5000 440 PRINCIPLES OF BOOKKEEPING of the surplus equal to the sinking-fund installment, entry to record this reservation is as follows: Surplus Appropriated Surplus for Sink¬ ing-Fund Requirements Annual reservation of surplus equal to sinking-fund installment. 5000 The annual 5000 The entries relating to the actual fund are the same as those just illustrated. The annual entry for the accumulation of the sinking fund is to debit Sinking Fund and to credit Cash , and the entry to record the redemption of the bonds is to debit the Bond account and to credit Smking Fund. When the bonds are redeemed the surplus reserved is transferred to the Surplus account, and thus made available for dividends by the following journal entry: Appropriated Surplus for Sinking- Fund Requirements Surplus To transfer the amount reserved back to the Surplus account, the bonds having been redeemed. 100000 100000 The following exercise may be used as drill in points relating to corporation bonds. Exercise 84. Corporation Bonds 1. The Patton Manufacturing Co. authorizes the issue of $200,000 first-mortgage ten-year bonds, denomination $500, interest at 5%, pay¬ able semiannually. Make the proper journal entries to record each of the following assumptions: a. The entire issue is sold at par. b. The interest is paid on the bond issue for the first six months. 2. a. The recital in the bonds above mentioned provides for the pro¬ rata annual reservation of profits to insure the payment of the bonds at maturity. Required, the necessary annual entry. b. If in addition to 2. a. the recital provides for the establishment of a sinking fund, give the annual entries. c. How would the two sinking-fund accounts and the bond account stand before the bonds are redeemed ? after the bonds are redeemed ? CHAPTER XXXIX REVENUE ACCOUNTS AND OPERATING STATEMENT OF A MANUFACTURING BUSINESS Trial Balance. The method of compiling the revenue accounts and the operating statement for a manufacturing business is illustrated by taking data from the books of the Colby Manufacturing Co. The tri balance on Dec. 31, 19—, is as follows: Cash $2500 Accounts Receivable 8976 Reserve for Bad Debts $800 Inventory, Finished Goods, Dec. 1 3000 Inventory, Goods in Process, Dec. 1 5000 Inventory, Raw Material, Dec. 1 10000 Factory Equipment 31200 Reserve for Depreciation, Factory Equipment 4500 Office Equipment 1440 Reserve for Depreciation, Office Equipment 144 Unexpired Insurance 750 Accounts Payable 4026 Accrued Taxes 100 Capital Stock 50000 Sales 20000 Mdse. Discount on Purchases 115 Raw Material Purchases 5000 Factory Dabor 9000 Factory Rent 100 Factory, Power, Heat, and Light 670 Sundry Factory Expenses 45 Repairs to Factory Equipment 85 Salesmen’s Salaries 750 Salesmen’s Expenses 300 Advertising 350 Sundry Sales Department Expense 150 Office Salaries 200 Office Supplies 14 Office Heat and Light 10 Sundry Office Expense 15 Mdse. Discount on Sales 130 $79685 $79685 441 442 PRINCIPLES OF BOOKKEEPING Notations : Estimated taxes for the month, $50. Insurance for the month, $30. Reserve 1% of sales for bad debts. Depreciation on factory equipment, 10% per year. Depreciation on office equipment, 5% per year. Inventory, Finished Goods, Dec. 31, $3250. Inventory, Goods in Process, Dec. 31, $5250. Inventory, Raw Material, Dec-. 31, $9000. The entries to record the taxes, insurance, bad debts, and depreciation charges are as follows: Taxes Accrued Taxes To charge operating expenses with the month’s share of estimated taxes. 50 50 Insurance Unexpired Insurance Portion of insurance chargeable to December. 30 30 Bad Debts Reserve for Bad Debts To reserve 1% of sales for antici¬ pated loss from bad debts. 200 200 Depreciation, Factory Reserve for Depreciation, Factory Equipment Portion of depreciation on factory chargeable to December. 260 - 260 Depreciation, Office Reserve for Depreciation, Office Equipment Portion of depreciation chargeable to December. 6 6 Entries which record the charges for such items as taxes; insurance, bad debts, and depreciation are sometimes called adjusting entries. The data for calculating these charges are usually stated in the notations, supplementary to the trial balance. The adjusting journal entries should be posted to the ledger before the closing journal entries are made. STATEMENT OF A MANUFACTURING BUSINESS 443 Revenue Accounts. Since this is a manufacturing business, the reve¬ nue accounts include a Manufacturing account. The entries necessary to place the proper revenue accounts upon the books of the Colby Manufacturing Co. are as follows: Manufacturing 33240 Inventory, Finished Goods 3000 Inventory, Goods in Process 5000 Inventory, Raw Materials 10000 Raw Material Purchases 5000 Factory Labor 9000 Factory Rent 100 Factory Power, Heat, and Light 670 Taxes 50 Insurance 30 Depreciation, Factory 260 Sundry Factory Expenses 45 Repairs to Factory Equipment 85 To close these accounts into the Manu¬ facturing account. Inventory, Finished Goods 3250 Inventory, Goods in Process 5250 Inventory, Raw Materials 9000 Manufacturing 17500 To credit the Manufacturing account with the inventories on hand at the end of the month by placing them upon the ledger. Trading 15740 Manufacturing 15740 To transfer the balance of the Manu¬ facturing account, representing the cost of goods sold, to the Trading account. Trading 1750 Salesmen’s Salaries 750 Salesmen’s Expenses 300 Advertising 350 Bad Debts 200 Sundry-Sales Department Expenses 150 To close these accounts into the Trad¬ ing account. 444 PRINCIPLES OF BOOKKEEPING Sales 20000 Trading To close this account into the Trading 20000 account. Trading 2510 Administration 2510 To transfer the balance of the Trading account, representing trading profit, to the Administration account. Administration 245 Office Salaries 200 Office Supplies 14 Office Heat and Light 10 Depreciation, Office 6 Sundry Office Expenses To close these accounts into the 15 Administration account. Administration 2265 Appropriation To transfer the balance of the Adminis¬ 2265 tration account, representing net oper¬ ating profit, to the Appropriation account. Mdse. Discount on. Purchases 115 Financial Income and Expense To close this financial income ac¬ 115 count. Financial Income and Expense 130 Mdse. Discount on Sales 130 To close this financial expense ac¬ count. Appropriation 15 Financial Income and Expense To close this account, representing 15 net financial loss. Appropriation 2250 Surplus 2250 To transfer the net profit of the month to the Surplus account. If the Appropriation account shows a debit balance, a net loss occurs, and this last entry is reversed. STATEMENT OF A MANUFACTURING BUSINESS 445 Operating Statement. The operating statement which would piled from the technical revenue accounts appears as follows : Colby Manufacturing Company Operating Statement For the month of December, 19— Sales Cost of production: Raw Material: Inventory,, Dec. 1 $10000 Purchases 5000 Inventory, Dec. 31 $15000 9000 $6000 Factory Labor 9000 Factory Rent 100 Factory Power, Heat, and Light 670 Taxes 50 Insurance 30 Depreciation, Factory 260 Sundry Factory Expenses 45 Repairs to Factory Equipment 85 Goods in Process, Dec. 31 $5250 $16240 Goods in Process, Dec. 1 5000 250 Cost of goods made $15990 Deduct: Finished Goods, Dec. 31 $3250 Finished Goods, Dec. 1 3000 250 Cost of goods sold Gross profit on sales Trading expenses: Salesmen’s Salaries $750 Salesmen’s Expenses 300 Advertising 350 Bad Debts 200 Sundry Sales Department Expense ' 150 Trading profit Administrative expenses: Office Salaries $200 Office Supplies 14 Office Heat and Light 10 Depreciation, Office 6 Sundry Office Expense 15 Net operating profit be corn- 120000 15740 |4260 1750 $2510 245 $2265 446 PRINCIPLES OF BOOKKEEPING Deduct: Financial Expense $2265 Mdse. Discount on Sales $130 Add: Financial Income Mdse. Discount on Purchases 115 15 Net profit for December $2250 Exercise 85 is suggested for a drill in compiling the revenue accounts and operating statement of a manufacturing business. Exercise 85. Manufacturing Revenue Accounts and Operating Statement 1. a. On sheets of ledger paper open the accounts necessary for record¬ ing the preceding trial balance data and for posting the closing entries. b. Prepare a financial statement from the ledger of the Colby Manu¬ facturing Co., as obtained in a. 2. The following is the trial balance of Wiles & Co. on Dec. 81, 19—: Common Capital Stock $175000 Preferred Capital Stock 50000 Sales 725000 Mdse. Discount on Purchases 500 Accounts Payable 22500 Purchases $225000 Wages 375000 Inventory, Jan. 1 100000 Cash on hand 6125 Office Expenses 1750 Office Salaries 2800 Buildings and Fixtures 25000 Machinery 69500 Furniture and Furnishings 1500 Taxes 500 Unexpired Insurance 500 Mdse. Discount on Sales 4075 Sales Commissions Paid 36250 Accounts Receivable 125000 $973000 $973000 Notations : Inventory, Dec. 31, $107,500. Depreciation on buildings and fixtures, per year. Depreciation on machinery, 5% per year. Depreciation on furniture and furnishings, 5% per year. Reserve 1^% of sales for bad debts. Accrued wages, $1500. Insurance for the year, $350. STATEMENT OF A MANUFACTURING BUSINESS 447 a. Prepare the revenue accounts and operating statement. b. Give the journal entries necessary to record the declaration of a 7% dividend on the preferred stock and a 10% dividend on the common stock. 3. The following figures are taken from the Manufacturing Co. on Dec. 31, 19—: Inventories, first of year : books of the Warner Finished Goods $5750 Goods in Process 10245 Raw Material 15725 Raw Material Purchases 75630 Factory Wages 115915 Rent of Factory Building 12000 Factory Heat, Light, and Power 9135 Office Heat and Light 210 Packing Supplies, Used 2017 Sundry Factory Expense 3575 Machinery and Equipment 45700 Salesmen’s Salaries 20115 Salesmen’s Expenses 10547 Sales $313300 Interest Paid 415 Notes Payable 1500 Trade Acceptances Receivable 6270 Sundry Sales Expense 1870 Advertising 6540 Office Salaries 3250 Officers’ Salaries 4800 Good Will 10000 Sundry Office Expense 6825 Cash on hand and on deposit 4768 Returned Sales 3758 Accounts Receivable 30260 Accounts Payable Reserve for Depreciation, Machinery and 15360 Equipment 5780 Reserve for Bad Debts 4827 Office Furniture and Furnishings 3050 Reserve for Depreciation, Office Furniture ‘ and Furnishings 215 Mdse. Discount on Purchases 1560 Mdse. Discount on Sales 2485 Capital Stock 65000 Surplus 3313 #410855 #410855 448 PRINCIPLES OF BOOKKEEPING Notations : Inventories, end of year : Finished Goods $7890 Goods in Process 15480 Raw Materials 8745 Reserve 10% for depreciation on machinery and equipment. Reserve 5% for depreciation on office furniture and furnishings. Reserve 1% for bad debts. a. Prepare the revenue accounts. b. Prepare the operating statement. CHAPTER XL SET IX. CHAIR-MANUFACTURING BUSINESS THE VOUCHER SYSTEM General Principles. The purchase of commodities may be recorded according to one of two general plans, — the use of the purchase book and the use of the voucher system. The purchase book has been used in previous sets, and in this set the voucher system will be described, illustrated, and used to record the commodities purchased. Madison Chair Co. To_ Dr.. No.. Madison, Wis.,_19— Date Description of Purchase Items Amount Extension and distribution verified by Goods received Prices Bookkeeper Receiving Clerk Purchasing Agent Approved for payment General Manager FACE OF VOUCHER The voucher system derives its name from a special form of an abstract of the invoice, sometimes combined with an affidavit, receipt, or check, which is issued for purchases, and perhaps for other expenses of the business. The general principles of the system are so susceptible of modifica¬ tions that the details in use by different companies even in the same industry may differ materially. In each case the content of the printed voucher form, the expenses for which vouchers are issued, the signatures required to validate the voucher, and the methods of numbering and filing the vouchers may vary without violating the general principles 449 450 PRINCIPLES OF BOOKKEEPING underlying the system. It is an excellent illustration of the fact that each business should have an accounting system which is best adapted to its particular conditions, and which enables one to obtain the greatest amount of information with the minimum of effort. In this set vouchers are issued only for material purchases. The Voucher. As soon as any invoice or bill has been received and audited, a voucher, usually consecutively numbered, is issued for the transaction. The face of the voucher is simply an abstract of the invoice or bill, and it usually provides for the approval by signature of the proper officials of the company. Thus the bookkeeper may certify to the accuracy of the extensions of the bill, the receiving clerk to the receipt of the goods, the purchasing agent to the unit prices, and the auditor or other official may approve the voucher for payment. The illus¬ tration on the preceding page shows the face of a voucher form. The back of the voucher generally con¬ tains space for the number, the date, the name of the creditor, the amount, the names of the accounts to which the voucher may be charged, and the distribution of the par¬ ticular voucher among such accounts. These data are so arranged that when the voucher is folded all pertinent data appear on one side of the folded sheet. The accompanying illustration shows the data printed on the back of the voucher form, the face of which was just shown. The voucher form described is sometimes called a voucher jacket, on the theory that the invoice or other evidence of the expense may be attached to the inside of the voucher and filed with it. Sup¬ porting papers are generally filed according to the number of the voucher, the name of the creditor, or the purpose of the expense. Different Forms of Vouchers. Affidavits, receipts, or checks may be printed on the same sheet as the voucher. For example, the youcher in use by many governmental departments provides space for the affidavit of the vendor. Voucher No. Date_ To__ $ Account Debited Amount Lumber Veneer Hardware Cane Upholstering Finishing Materials Packing Supplies Sundry Factory Supplies Total BACK OF VOUCHER SET IX. CHAIR-MANUFACTURING BUSINESS 451 Receipt forms are often printed upon the voucher so that the vendor may fill in the spaces when payment is made, and return the voucher to the issuing company for filing. The following illustration shows the ruling of the face of a voucher combined with a receipt blank. The back of the form might be ruled the same as the one already illustrated. Madison Chair Company No. To Dr., Madison, Wis., 19 Date Description of Purchase Items Amount Account verified by Approved for payment Auditor President 19 Received of Madison Chair Company $ Dollars In full for the above account VOUCHER AND RECEIPT The most common form of a voucher is in some particular combina¬ tion with the check issued in payment of the account. The check may be printed upon the back of the voucher itself, or it may be printed upon a perforated blank which may be detached by the payee before being deposited. If the check is printed upon the back of the voucher, the latter is folded lengthwise, with the check on one side and space for the indorsements on the other. The folded voucher check is de¬ posited by the payee and in due time it is filed in the office of the drawer of the check, the best possible evidence of the payment of the account stated in the voucher. Under this arrangement the dis¬ tribution of the amounts on the back of the voucher is usually left off the voucher itself, but the necessary data appear upon the stub of the voucher retained in the office of the payer. The combined voucher checks and the stubs may be bound together in the form of a voucher book, or blocked together in pads. In the latter case the stubs are generally filed according to number and thus made available for quick reference. 452 PRINCIPLES OF BOOKKEEPING The check which is printed upon a perforated portion of the voucher may be attached to the voucher and sent to the payee, in which case the payee returns the voucher itself to the drawer of the check; or it may be detached from the voucher blank in the office of the maker before the remittance is made, and the folded voucher filed away for permanent reference. Variations as to the exact procedure followed may be found in different offices. Another form of a voucher check frequently used is a check contain¬ ing a memorandum statement regarding the purpose of the remittance. The following illustration is suggestive of this form of a voucher check. Voucher No. This check is given in settle¬ ment of our account as follows : c Uhe Union [Bank 19 Pay to the order of $ ‘Dollars Your statement Invoices Distribution Cash Discount Net Check No. If incorrect, return without alterations. Your indorsement will be considered a receipt for amount as stated. VOUCHER CHECK Size of Vouchers. In 1909, as a result of a meeting of committees representing the American Bankers Association, the American Associa¬ tion of Public Accountants, the Society of Railway Financial Officers, and the Association of Railway Accounting Officers called to reach an agreement regarding a standard uniform voucher check, three resolu¬ tions were passed. These resolutions are quoted in full from the Journal of Accountancy for February, 1909 (Vol. VII, p. 329), since the decision of such a representative group of business men should be given careful thought by any person who may wish to design a special voucher check. UNIFORM BANK VOUCHER CHECK Resolution No. 1. Negotiability That it is the sense of this meeting that the voucher check be made in negotiable form. Resolution No. 2. Form That it is the sense of this meeting that a voucher check should be in the form of a straight check or draft, and indorsement of the payee thereon be accepted as the only receipt required. SET IX. CHAIK-MANUFACTURING BUSINESS 453 Resolution No. 3. General Requirement That it is the sense of this meeting that the check voucher should be of the standard check size and in the standard draft form, with the number, date, amount, and signature at the right end in the order named, and the name of the payer (Bank or Treasurer of Company) in the lower left corner, and that where a folded voucher is considered necessary by railroad com¬ panies, it should fold to standard check size, the chfeck or draft to be at the bottom. That when a detachable check is used, it should be in the standard form described above. The conference committee further recommended the following gen¬ eral characteristics: Number, Date, Amount, Signature We believe that the number, the date, the amount, and the signature should all be in evidence on the right-hand side of the check. Paper That the paper of the original should be of good quality and that the paper of the copy should be of a different color, to distinguish it easily, and may be of inferior quality. Advertising Business Cards That no advertising or business cards should be placed upon the check form which may tend to confuse or blind the party handling the check or cause important details of the check to be obscured. Size The size of the check or draft form should be from 3 inches to 3^ inches wide by 8^- inches long, and folded vouchers of whatever size should readily fold to the same dimensions, and thus adapt themselves to all ordinary check files. Checks narrower, wider, or longer than these dimensions are objectionable. Note. The railroads make the voucher referred to above in duplicate, and designate it the "copy.” Filing Vouchers. Paid vouchers are filed separately from the unpaid vouchers. The unpaid vouchers therefore become the accounts payable of the company, but in the voucher system the Accounts Payable account is generally referred to as the Vouchers Payable account. Journal Vouchers. While the subject of vouchers is being considered, attention should be called to the use of the journal voucher. In many business offices the use of specialized books of original entry has so lessened the use of the journal that it is seldom kept as 454 PRINCIPLES OF BOOKKEEPING a bound book. Its use is limited practically to the opening and the closing entries, the adjustments and the transfers, and, in general, to entries which cannot be entered in any other book of original entry. All entries recorded in the journal may be entered on journal vouchers, which are generally approved by the bookkeeper as to accu¬ racy and by the proper official as to authenticity. Such journal vouchers may be attached to any documents supporting the entry, or they may be folded and filed numerically, or they may be placed in a loose-leaf binder. In some cases the journal voucher and the usual expense voucher are combined, and the voucher register (see page 455) is ruled to accom¬ modate not only expenses but also the usual journal entries. PRELIMINARY EXPLANATIONS Object of the Set. The object of this set is to illustrate the use of the voucher system and the imprest method of handling petty cash. Books Used. The books used in this set are the journal, the cash¬ book, the petty cashbook, the voucher register, the sales book, the general ledger, the customers’ ledger, and the creditors’ ledger. Journal . The journal in this set is the same as that used in previous sets. Cashbook. The cashbook used in this set is essentially the same as that used in Set VIII, the only changes being that the column for¬ merly called Accounts Payable is now termed Vouchers Payable. Both Accounts Receivable and Vouchers Payable are controlling accounts, controlling the customers’ ledger and the creditors’ ledger, respectively. Voucher No. Date F. Names Addresses Terms 1 Feb. 2 27 Merrill & Co. Chicago 6/10, net 30 da. 2 4 28 Fleming & Deming St. Louis 2/15, 60 da. net 3 4 24 Gray & Dunokle Sheboygan 30 da. net 4 2 33 Brown & Son Cleveland 2/10, net 30 da. 5 5 27 Merrill & Co. Chicago 6/10, net 30 da. 6 9 32 C. W. Hall Chicago 2/10, net 30 da. 7 12 34 Coates & Son Milwaukee 2/10, 1/30, net 60 da. 8 18 35 Bender & Hill New York 1/10, net 30 da. 9 17 26 C. H. Shaw Co. Memphis 2/15, 60 da. net MODEL VOUCHER SET IX. CHAIR-MANUFACTURING BUSINESS 455 In this set it will be necessary to forward the totals of the cashbook columns to a second page. On the last line of the first page write Carried Forward opposite the columnar totals, and on the first line of the second page write Brought Forward and insert the totals in the proper columns. Petty Cashbook. The petty cashbook used in this set is kept upon the imprest cash system. The entries for disbursements are made in the same manner as was followed in Set VIII for petty-cashbook entries, but the postings are made from the book in a different manner. The closing of the petty cashbook is described on page 464. The Voucher Register. The data contained on a voucher ar# copied into a book of original entry called the voucher register. The form of the voucher register used in this set is illustrated below. If vouchers are issued for only those expenses which, in previous sets, were recorded in the purchase book, the voucher register corre¬ sponds to the purchase book. In case vouchers are issued for all expenses (materials, labor, and all other expenses excepting petty cash), the use of the two books is not identical, since more transactions are recorded in the voucher register than in the purchase book. The voucher register is provided with columns which allow for the same distribution of the vouched amounts as may be recorded on the back of the voucher or on the voucher stub. When the voucher register is closed, the Vouchers Payable account is credited with the sum of all the amounts entered in the Amount column, and the several accounts with materials are debited with the totals of the respective columns; this is similar to the use of the purchase book in Set VIII. Amount Lumber Veneer Hard¬ ware Cane Up¬ holster¬ ing Finishing Ma¬ terials Packing Supplies Sundry Factory Supplies 387 25 387 25 976 48 976 48 362 68 362 68 265 12 265 12 294 39 294 39 179 .42 179 42 647 21 647 21 110 50 110 50 843 92 843 92 4066 97 1820 40 179 42 265 12 110 50 647 21 681 64 362 68 © / Authorized by Delivered by Received by Foreman STORES REQUISITION The stores credit slip , sometimes called a material returned slip, is a form accompanying the return of materials by departments to the stores room. The slip illustrated on the next page shows a ruling of this form which is made in duplicate, the original being given to the stores¬ keeper and the duplicate retained for the departmental files. These slips enable the storeskeeper to charge the appropriate accounts with the commodities returned, and the departmental file supplies evidence of the return which reduces the cost of materials charged to the order or the process. In many factories certain summaries or recapitulations of the stores withdrawn are made by the storeskeeper. These summaries are sent to the cost department, where each order or process is charged with the appropriate totals indicated. The purpose of having a stores INTRODUCTION TO COST ACCOUNTING • 495 distribution blank is to decrease the labor involved in posting material items to the individual order or process cost sheet. The summaries may be made daily, weekly, or monthly, according to the conditions prevailing in the plant under consideration. A columnar ruled blank may be used for distributing withdrawn stores by order numbers or process departments. The columnar headings may be inserted, and the totals of the columns posted to the proper accounts. Labor. The labor employed in a factory is of two kinds, productive and nonproductive. Productive labor is that spent directly upon the jobs or processes passing through the factory, and nonproductive labor is that made necessary by the operation of the plant, but not expended directly upon the article being manufactured. The labor of the work¬ men upon the jobs or processes, at bench or machine, is therefore pro¬ ductive, while the labor of the superintendent, the foreman, the janitor, or the repair men is nonproductive. Among the various systems of paying productive labor are the day wage, piece rate, premium rate, task, differential piece rate, efficiency, bonus, and profit-sharing methods, as well as many modifications and combinations of these systems. Nonproductive labor is usually paid a monthly or a weekly wage. A detailed description of the methods of paying productive labor is not given in this text, as the cost clerk is concerned chiefly with recording the time spent by the workmen upon orders in process and with verifying the time as charged to jobs with the time the workmen are in the factory. 496 PRINCIPLES OF BOOKKEEPING The time spent by workmen upon orders in process may be recorded by hand or by a time-recording device upon a daily time ticket, upon a job time ticket, and, in some factories, upon the individual job-order record itself. Regardless of the form upon which the time is recorded, the following information should be available: the date, the name, or the number of the workman, the job number or process worked upon, the time spent upon the job or process, and the signature or initials of the depart¬ mental foreman attesting the accuracy of the record. Space should also be allowed for the extension of the labor charges, but this is usually done in the cost department, where the workman’s unit rate is multiplied by the units of time spent. The exact form of time tickets depends upon the method of wage payment, upon the method of recording time, hand or machine, and upon the sundry auxiliary uses to be made of the tickets in the factory. DAILY TIME TICKET Da,e - Workman's Name Dept. Kind of Work Fr-oin To Time Spent Rate Amount Job No. s/ Total_ DAILY TIME TICKET A ruling of the daily time ticket is shown above. The total of the time chargeable to jobs should equal the total time spent in*the factory. When the daily time ticket is used, it is necessary for the cost- department employees to post, to the respective order, the time charge¬ able to each job or process. The daily time tickets may then be filed according to the date or according to the workman’s name or number. Very often several men may be working on the same job, and in order to save posting details to the job order, distributions by jobs are made INTRODUCTION TO COST ACCOUNTING 497 on a separate form, from which totals are posted to the order record at the end of a day, week, or month. A columnar ruled sheet, in which the job numbers are inserted for columnar headings, may be used for this purpose. A ruling of the job time ticket is shown in the following illustration. The total of the time recorded on the job tickets of a day gives the total time spent by the workman in the factory. Generally a record is made of the time and the output of each workman, to determine the wages to which he is entitled. The job tickets are filed in the cost department according to order number or process. A columnar ruled sheet may be used for obtaining totals to post to the individual job- order record. The job ticket possesses great elasticity and adaptability in meeting the requirements of any particular cost-accounting system. Dept. Jol Da 5 No. Workman’s Name ite Kind of Work Began Finished Time Rate Amount Approved Foreman JOB TIME TICKET In a few industries time tickets, either daily or job, are kept for machines, upon which one or more men may be employed. The following form shows the ruling of a job order which sometimes accompanies the materials through the factory, and upon which are re¬ corded all material and labor charges by the workmen or foremen. Sum¬ maries by workman’s name or number may be taken off the job-order record, to determine the wages due the workman and to reconcile the time charged to jobs with the time the workman was in the factory. In the great majority of cost systems the job order remains in the cost department, where the amounts of material and labor charges are 498 PRINCIPLES OF BOOKKEEPING entered upon it by the cost clerks. The file of uncompleted job orders represents the value of goods in progress throughout the factory. The handling of labor records well illustrates the manner in which checks for accuracy are obtained in modern accounting. The time the workman is in the factory should agree with the time charged to the job orders, and the amount of the pay roll should agree with the cost of labor charged to job orders. Manufacturing Expense. Manufacturing expense is often referred to as indirect expense, factory expense, and burden. Manufacturing For_ Job No- _ Date Ordered. Description_To be Delivered. Materials Labor Summary Date | Dept. Amount Date Dept. Workman 1 Amount 1 1 Materials Labor Mfg. Expense Factory Cost Selling Expense Discount on Sales Profit Sales Price Quoted Sales Price Profit or Loss on Est. Shipped via Charged to Account INDIVIDUAL JOB ORDER RECORD expense includes indirect materials, nonproductive labor, and all other factory expenses which cannot be charged against the jobs direct; such as factory rent, heat, light, power, depreciation, insurance, taxes, and maintenance charges. Generally the administrative expenses of a manufacturing concern are divided between manufacturing expense and selling expense, in proportion to the benefit each receives from the general administration of the business. The great problem in cost accounting is to determine the proper expense chargeable to the factory and to distribute the resulting INTRODUCTION TO COST ACCOUNTING 499 manufacturing expense over the manufactured product in such a way as to reveal the true cost of production. Several different methods of distributing manufacturing expense are in use, each one adapted to certain conditions which must prevail in order that satisfactory results may be obtained from the use of the method. Among the different bases and methods that are used in different in¬ dustries for distributing manufacturing expense are the productive- labor cost basis, the productive-labor hour basis, the productive-labor and material cost basis, the scientific machine-rate method, the fixed machine-rate method, the direct departmental expense basis, and the tonnage basis. A study of the method of calculation, use, advantages, and disadvantages of each of these plans is a most important part of a course in cost accounting, and is not included in this text. To illustrate the application of one-percentage method, assume that the expense is distributed on the productive-labor cost basis, and that the manufacturing expense percentage for the current period is given as 50%. For every dollar charged to an order for labor, 50% of the amount should be added as that portion of the total manufacturing expense which each order should bear. Selling Expenses. Selling expenses include all expenses incurred in marketing the manufactured product. Among such items are sales¬ men’s salaries, commission and expenses, salesroom rent, heat and light, depreciation on salesroom furniture and furnishings, maintenance of salesroom equipment, credit-department expenses, bad debts, shipping- room expenses, delivery expense, a portion of the administrative charges, and all other items connected with selling the product. While in some industries it is possible and practicable to charge the selling expenses directly against the order for which they are incurred, selling ex¬ penses are usually distributed over the entire sales on a percentage basis. To illustrate, assume that the total sales are $200,000 and the selling expenses, $30,000. Since the selling expenses are 15% of the sales, this percentage is taken into consideration in determining the selling price of the product. Discount on Sales. Discount on sales is an amount considered in fixing the selling price of an article so that if the customer takes advantage of the discount offered for prompt payment, the manufacturing profit of the seller is not thereby reduced. In present-day accounting methods, the Discount on Sales account is considered as a financial expense, a loss suffered through a customer paying his bill within the specified time. However, few manufacturers knowingly grant cash discount and suffer the loss themselves through reduced profits. 500 PRINCIPLES OF BOOKKEEPING Profit. Profit is the amount which a manufacturer desires to gain by selling an article, and is usually referred to in terms of percentage. To illustrate, a manufacturer may say he desires to make 10% profit, which means that the selling price of an article should be such an amount as will yield this percentage of profit after deducting the factory cost, the selling expenses, and the discount on sales. The calculation of the price at which a manufactured article should be sold to return a desired profit may be illustrated from the following facts regarding Job No. 10 just completed in the factory : The material cost is $50 ; labor cost, $75 ; the manufacturing expense is calculated at 50 % of the labor cost; the selling expenses are figured at 15% of the sales price; 8% sales discount is to be allowed for the payment of the bill within 30 da.; and a profit of 10% on sales price is desired. Job No. 10 Material Cost #50. Labor Cost 75. Prime Cost #125. Manufacturing Expense 37.50 Factory Cost $162.50 Selling Expenses 33.85 Discount on Sales 6.77 Profit 22.57 Selling Price #225.69 Note. Selling price minus (selling expenses plus discount on sales plus profit) equals factory cost; that is, 100% — (15% + 3% + 10%) = 72%. Hence $162.50 (factory cost) is 72% of the selling price, which is therefore $225.69. INDEX PAGE Adjusting entries.442 Authorized capital stock.421 Bonds, corporation date of maturity.438 definition.437 interest. 437, 438 recording the sale of.438 redemption.438 security for payment.437 sinking fund. 439-440 Book value.422 Burden, distribution of, in cost system, 498, 499 Business forms, Set IX .... 456-458 By-laws.418 Capital stock PAGE Discount on sales.499 Dividend book.428 Dividends cash.434 defined.434 from what payable.435 how declared.435 stock.435 to whom payable.436 Domestic corporation laws . . . . . 418 Foreign corporation laws.418 Good will in incorporation of partner¬ ship . 479-481 Illustrations of books, forms and rul¬ ings classes of.422 defined.421 names of accounts for recording, 429-432 of no par value.423 Cash dividend.434 Charter.417 Classification of accounts for manufac¬ turing corporation . . . 459-461 Common stock.422 Corporate administration.423 Corporate organization advantages.419 disadvantages.419 Corporation bonds. 437-440 defined . ..417 formation of.417 general powers.419 kinds.418 names of.418 opening the financial books of, 429-433 Cost accounting, introduction to . 486-500 Cost system defined.487 kinds.488 types.487 why necessary.486 Coupon bonds.437 Creditors’ ledger.456 Cumulative preferred stock .... 422 Cumulative voting.423 Customers’ ledger.456 back of voucher.450 daily time ticket.496 dividend book.428 face of voucher.449 individual job order record . . . 498 job time ticket.497 pay roll.468 petty cashbook.464 purchase order.492 purchase requisition.491 report of materials received . . 492 stock-certificate book.426 stock ledger.425 stock-transfer book.427 stores credit slip.495 stores ledger.493 stores requisition.494 subscription book or list .... 424 voucher and receipt.451 voucher check.452 voucher register. 454-455 Imprest cash system . . . 455, 464-465 Incorporating a partnership . . 477-485 Incorporating a sole proprietorship . 481 Installment book or list.424 Installment ledger.425 Installment payments and accounts . 431 Installment scrip book.425 Interest on bonds. 437-438 Job order record. 497, 498 Job time ticket.. . 497 Journal voucher. 453-454 Daily time ticket.496 Directors.423 Labor, accounting for, in cost system, 495-498 VA 1 11 PRINCIPLES OF BOOKKEEPING PAGE Manufacturing account.443 Manufacturing expense .... 498-499 Manufacturing set. 449-476 Material, accounting for, in cost sys¬ tem . 489-495 Minute book.424 Mortgage bonds . . . ..437 Noncumulative preferred stock . . . 422 Officers.423 Operating statement, manufacturing business. 441-448 Organization expense.432 Paid-up capital stock.421 Partnership, incorporating a . . 477-485 Pay roll.468 Preferred stock.422 Profit, manufacturing.500 Purchase order. 491-492 Purchase requisition.491 Registered bond.437 Report of materials received .... 492 Revenue accounts, manufacturing busi¬ ness . 441-448 Sales book.456 Selling expenses, distribution of, in cost system.499 Selling price, elements of.489 PAGE Selling price, how to figure .... 500 Selling price list.457 Share.421 Sinking fund. 439-440 Sole proprietorship, incorporating a . 481 Stock certificate.422 Stock-certificate book.425 Stock dividend.435 Stockholder. 421, 423 Stock ledger.425 Stock system. 421-423 Stock-transfer book.427 Stores credit slip.494 Stores distribution blank . . . 494-495 Stores ledger. 493-494 Stores requisition.494 Subscribed capital stock.421 Subscription account. 429-432 Subscription book or list.424 Surplus account. 434-436 Time tickets, in cost system . . 496-498 Trade discount. 469-470 Treasury stock.421 Unsubscribed capital stock account.431 defined.421 Voucher register ........ 454-455 Voucher system. 449-454 VA