PREFA C E

TH E mos t s trikin g d evel opm en t in th e educa tional field of la te is

t h e rush of stud en ts t o t h e comm e r cial d epa r tm en ts o f o ur s e c
o n dary sch oo ls and o ur c oll eg e s Wh a teve r e lse is or is n o t
.

taught in such depar tm en ts accoun tin g (in th e college s) or b ook

,

k eeping (in th e se con dary schoo ls ) is taugh t All over t h e coun .

t ry mor eo ve r c o rr espo n d en ce sch oo ls an d e venin g sch oo ls are

, ,

teaching acc oun ting Thousa nds of stude n ts of accoun tin g ar e

.

graduate d from o n e o r an o th er kin d of school eve ry y ea r an d ye t ,

p rofessional acc oun tan ts are c on stan tly callin g fo r good men and
canno t ge t them This is n ot be cause th e dem and is trem en dous
.
,

for t h e n umb er of practicin g acc o un tan ts in t h e c oun t ry is n o t

large but b e cause t h e supply is small Comparatively few who
,
.

study accoun ting p rove compe ten t for respo n sibl e po sitions .

Accoun ting re quires a certain type of native men tal capacity ,

as well as a c er tain amoun t of trainin g Tha t type of n ative ca .

p ac ity happ e n s t o b e ra r e Tw o . e ss en tials f o r acc o un tin g as dis ,

tin guish ed from b o okk ee pin g ar e a highl y d evel op e d an alytical

,

facul ty an d a good imagin ation Th e first is rare at b e st an d it

.
,

doe s n ot c ommonl y go al on g with t h e s ec on d It is futil e t o t ry .

t o p roduc e acc o un tan ts from mate rial that is la ckin g in e ith e r

facu l ty A n y teach er of t h e subj e ct should under stan d at th e star t
.

th ; o f t h e man y wh o fan cy th ems e lv e s call ed few will e v e r b e

c] osen Y e t though few can eve r b e acc oun tan ts every p erson
.
,

charged with ex ecutiv e respo n sibili ty should kn ow t h e fun dam en tals

of acc o un tin g fo r h e cann o t u n d e r stan d th e r epo r ts o f his o wn busi
,

n e ss (if h e has a goo d accoun tan t) unl ess h e kn ows what t h e accoun t
an t is talking abo ut an d h e cann o t dir e ct e ve n e l em en tar y ac
,

coun tin g (if h e has n o t a good accoun tan t) unle ss h e kn ows what
con s t itute s goo d acco un tin g E ve ry s t ud en t o f public aff airs
.
,

moreover should b e abl e t o in terp re t fin an cial repo rts b o th public

, ,

an d p rivate an d kn ow wha t busine ss facts lie b ehin d th em

,
Th e .

study o f accoun tin g t herefore is n ot futil e ev en for tho se wh o

, ,

cann o t b e accoun tan ts .

A r e sult of th e rush of c oll ege s tu d en ts to comm er cial studi e s ,

”
E l i 5 41 4 9 -
lV PRE FA CE

an d away from the humaniti e s is alarm on th e par t of coll ege au ,

t h ori t ies r e ga r din g th e m e n tal t r ain in g that un d e r t h e n ew ré gim e

th eir studen ts will ge t H ow ev e r regre ttabl e may b e t h e n e gl ect
.

o f th e humaniti e s b e caus e o f t h e limita ti o n o f t h e fi eld t o which

,

t h e n e w studi e s la rgely c o n fin e th ems elv e s th e r e n eed b e n o lo ss o f

,

m e n tal trainin g A s philos ophy an d math ema tics ar e di sciplin ary

.

studie s an d in the old p rogram ar e d e sire d n o t on ly for th eir con

,

ten t but fo r th eir disciplin a ry value in t h e n ew p rogr am acc oun t

, ,

ing may s o far as disciplin e is con ce rn e d tak e th e ir place

, ,
It is .

a c ompo un d o f phil o sophy an d math ematics that is th e only ,

m e thod of te achin g it that mak e s e ithe r succ e ssful accoun tan ts or

succe ssful in te rp re ter s of accoun ts is th e m e t ho d of teachin g philo s
o ph y an d math e mati cs A ccou n tin g must p ro ce e d by re ason in g
.
,

n o t by rul e : it is n o t a b o dy o f a rbit r a r y facts tru e m e r e ly b e caus e

,

t h e y ar e tru e an d th e r e fo re t o b e m em o rize d : it is a b o dy o f plain

,

c omm on s en se d ev elo pe d ou t of h ar d thinkin g about facts that

,

have b een an d imagin ati on t o se e what futu re n eed wi ll arise for

,

re cord t o day of facts that are It calls for m en tal a ctivi ty of t h e

-
.

high es t type : i ? is n o t oirgin ibus pueri s que .

Y e t its value bo th as a disciplin ary study an d as vocati onal train

in g d epe n ds wh olly upon t h e m e th o d o f in struction N0 o n e will .

e v e r u se acc oun ts succ e ssfully w h o is n o t abl e t o thi nk in abstr act

t erms abo ut the m fo r lik e math ematical te rms an d philo sophical

,

c on c epts th ey ar e t o gr eat exten t abstracti on s e xc ept t h e s impl e

bo o kk eepin g it ems o f cash acc oun ts r e ceivabl e e t c On e r ea

, ,
. «

s o n m or eov e r why with th o usa n ds o f stud e n ts gr aduatin g in ac

, , ,

coun tin g ann ually profe ssion al acco un tan ts are n o t abl e t o ge t
,

go od men is that so much o f t h e wo rk of th e studen ts has b ee n o f

t h e m e mo rizi n g rath e r tha n t h e r e aso n i n g va ri e ty Th e stud e n ts .

hav e tak en accou n ti ng as if it w e re a b ody o f sci en tifi c facts t o b e

m em o rized rath er than a phil o sophy of acco un tin g con duct .

Th e m e thod o f this b oo k is th e phil o sophical It starts with th e .

simpl e st obvio us fact n eeding re cord p rop e rty an d o wn e rship , ,

an d f rom this d e v el ops t h e n e ed o f pa r ticular accou n ts No t fo r .

sever al chapter s is any n eed foun d for th e always con fusin g n om

in al accoun ts an d th en th ey d ev elo p n aturally afte r th e statisti
,

cal n e ed for them has arisen Th e te chniqu e of b ookk e epin g do e s

.

n o t app ear un til t h e nin th chapte r, an d th en it r e sults f ro m a

 PRE FA CE V

n ee d o f labo r savin g d e vic e s

-
This techniqu e is dw elt up on onl y
.

en ough t o sh ow t h e f e asibility o f m o st o f t h e inf o rmati on that th e

accoun ta n t d e sir e s In d e e d t hough b ookk e e pin g is th e too l of

.
,

accou n tin g it is a too l so simple in prin ciple that t o ask an y on e

,

w h o d o e s n o t in t e n d t o b e e ith e r a b ookk e e p e r o r a pro fe ssi on al

acc ou n ta n t t o sp en d man y mo n ths in studyin g it is alm o st an
e ducati on al c rim e In d e e d t h e whole m e thod o f pro c e du re is
.
,

bas ed o n t h e fact that n o thin g is of in tere st un til some n eed of it ,

or curi o sity abo ut it is f elt ,

.

Th ough t h e b oo k d eals with fun dam en tals it is n ot sup e rficial ; ,

for fun dam e n tals are always t h e con tra ry o f s uperfi cialities A s far .

as it go e s it is compl e te It doe s no t avoid a matte r b ecause it

,
.

chan ce s t o b e abstract or diffi cult : if it did it wo uld have n eithe r ,

disciplin a ry n o r p r actical valu e It attempts to give all th e fun da

.

m en tal co n side rati on s of accou nting What more th ere is t o ao .

coun tin g is t h e application of th e se p rin cipl e s t o situati on s in

whi ch car eful an alysis base d on d e tail ed kn owl edge of th e par
,

ticular busin e ss has fo un d a way o f applica ti on s om e tim e s th rough

, ,

a maze of comple xi ty o f busin e ss r ela tion s .

On th e part o f th e se ni o r autho r th e s e le c tion o f mate rial and ,

th e m e th od o f e xp o si tio n fo llow twe n ty ye ars of Un ive r sity e x

p e rie n ce in t e achin g acc o u n tin g T h e ju ni o r auth o r o n th e o th e r

.
,

b an d w h o has but re c e n tly b e e n a stud e n t o f acc o u n tin g und e r

, ,

m e thods o f in struction simila r t o tho se in co rp o rate d h e re an d of ,

late has b e e n assistin g t h e s e ni o r b o th in som e o f his te achin g

an d in t h e p r actic e o f acco u n tin g brin gs t o t h e c o llab o r ati o n t h e,

co mbin e d p o in t of vie w o f th e studen t th e youn g in structo r and , ,

t h e p r actitio n e r .

T0 give c o n cre ten ess t o t h e p rin cipl e s wo rked ou t h ere appe n d ed ,

t o eve ry chapt e r are qu e sti o n s an d p robl ems whi ch t e st t h e r ea d

e r s ability t o apply his p rin cipl e s Th ese ar e in ten d ed n o t fo r rep
’
.

e tit iou s d r ill but as illustration s o f h ow t h e p rin cipl e s apply t o

,

con cre te facts If any on e wish es drill h e can e asily make addi
.
,

t ional p robl ems for hims e lf Those given afl ord large vari e ty
'

. .

W M C . . .

A . E G . .

CA MB RID GE , MA SS A CH U S ETTS
November 2 2, 1 020
 C ONTE NTS

I INTRODUCTION
.

Acco untan t like an e dit or, 1 wh t a acco un ant e t dit ki d f s, 2 n s o se

co u n t in g , 3 re latio n b tw e ee n accoun ting an d b kk pi g

oo dp d ee n 4 e en

b kk
, .

e n ce o n oo eeping, 5 accoun tin g for non acco un t an t s ,

-
6 .

II . D OUB LE ENTR Y A ND TH E B A LA NCE S H EE T

B as is o f d oub le e ntry , 7 alan ce s e e t , 8 ass e s , 8 b

owners hip h t
m v d b h b m h
o

clai s, 8 t e po rary ali it y o f alan ce s ee t , 9 alan ce s ee t al

w b k d h
ay s in alanc e , I O d bin s o f c ange s in asse ts , 1 0 o u le as pe ct , I 1

h w h m b t
c ange s in o n ers i p clai s, I I
’

alan ce in all r an sac t io n s , 1 2

d m w h m b h
-

se t s e t e r in in g o ne rs ip clai s, 1 2 alan ce s ee t illu s t rat ion s , I 3

h d b b q
- -

all t ypes o f c an ges in tou le as pect , 1 6 usin ess as e n it y , 1 8 ues

bm
t i ons an d p ro le s , 1 8 .

III . TE E FUNDA ME NTA L PRINCIPLE OF D EB IT A ND C RE D IT

D e fi ni t ion b kk dv
of accoun t ,for oo eepin g e ice , 2 0 20 ne e ad wh t
h d d x h
c an ges ne e re co r , 2 1 — e plan atio n o f c an ge s in as s e t s , 2 2 e plan at ion x
h w h m
o f c anges in o n e rs ip clai s, 2 2 s imilarit y o f di fi e re n t t yp e s o f e n

db d d d m d
-

t ry , 2 3 e it an d cre i t
-
i ff e re nt i ate , 23 — e an in g o f cr e it , 2 4

hm db d f m d
gen e ral sc e e o f e it an d cre it , 2 4 or s o f le ge r acco un t s , 2 5

h t h w h
c an ges afi ecti n g asse s , 2 6 c an ge s afi e ct ing o n e rs ip clai s , 2 6 m
mm q t bm
-

su t t
ary , 2 6 illus ra ions , 2 7 ues i ons an d p ro le s, 3 1 .

IV . TH E INTE RPRE TA TION OF D E B IT A ND CRED IT

Nat ure of d bit
e an d cr e dit 33 x mi i f typi l d bit 34
e a nat o n o ca e s,

mp ibl 39 mm y Of d bit x mi
,

te o rary un ce rt aint y pos s e, su ar e s, 4o e a na

ti o n o f credi t s , 4 1 gene ra l mm y 4
su q iar , d p bl m 4 3
2 ues t o ns an ro e s, .

V . TH E INCOME SH E E T
Re co r d s necess ary b tw b l
e ee n a ance s h t 4 4 k wl dg f i m t
ee s , no e e o nco e no

e no u gh44 se pa rat e accoun t s t o hws o d fi 5 mpl t

ca use an e e ct , 4 co e e

t ff t f i m h t fl t di
,

s t at emen t o f p ro fi t s an d lo sses , 4 6 ne e ec o n co e s ee re ec e n
b alan ce s ee t , 4 7 h ues io n s an q t d p bl m
ro 8 e s, 4 .

VI . TH E O PE R TINGA S TATE ME NT UND E R C O S T A CCOUNTIN G -

M OD ETH S

wl dg f
Kno e e o s pe cifi c cos ts and spe cifi c so u rces of gain giv en b y sub di v i
sion o f accou nt s , 5 0 typ ica l co s t accoun t s , 5 1 ass e t s c anging o r h f m
h dd dd
,

52 curren t c an ge s re co r e , 5 3 cu rre n t ch an ge s not rec o r e , 5 3

go o d s in p ro oess a ccoun t , 5 4
— fi nish ed goo s ac co un t , 5 5 so l goo s d d d
mm
- -

acco un t , 5 5 su ary , 5 5 p re cau tio n s , 5 6 illu s tration , 5 7 tran s

m
fe r o f e le en ts t o goo s in p ro cess , 5 8 d
r e lat ion e t ee n p rin cipal an d b w
bd v
- -

su i ision al acco un ts , 6o — p ro fi t an d lo ss , 6o — t h e Ope rating s tat e

m en t , 6 3 co m f
p ariso n O Ope rat in g s t at e en t wit in co e s ee t , 6 5 m h m h
wh en en t ries ar e a e , 66 md
u es tio n s an d p ro le s, 67 q bm .
V111 O
C NTE NTS

VII . OPE RA TING S TA TE MEN T UND E R TH E INVENTO RY

TH E

ME TH OD
In vent o ry me thod described 60 con so li dation o f co s ts 7 0 p ro fi t an d
t h e Ope rat in g s t at ement 7 4 c omp ariso n Of me th ods
, ,

lo ss 7 4 74
co nve rt e d a se ts a cco d
.
, ,

t 75 sp ro fi t an d lo ss acco t 77 i s tin ction

un un

be twe en n ominal a d real accoun ts 7 8 — mixed accounts 79 — use of

, ,

n omin al a ccoun ts 80 que stions an d p roblems 8 2

, ,

.
, ,

VIII . TH E C O NTENT OF C O MM ON ACC OUNTS

x
Fi ing th e con t en t o f a cco un ts , 84 gr o up s o f accoun s re t vi w d e e 84
th xb d ,

o er class ifi cat io n s , 8 6 fle i ili t y of le ge r titles , 8 7 .

AS S ET ACC OUNTS Th e imp m er an e n ce o f as se ts , 88 cas h 89 me r

hipm v bl
.
,

ch an dise , 89 s en t s , 91 n o t es re cei a e, 91 acco un t s rec ei v a

b le , 95 goo d
in p ro ces s , 96 s r aw at e r a , 9 s up p li es , 97 um i m il 6 f
q m x m hi w
- -

t u re an d fi t u res , 98 e uip e n t , 99 ac n e ry , 99
p o er p lan t ,
99 rea l es t atb d w d
e 99 o n s o n e , 1 00 s t o c s o n e , 1 01 un s , k w d f d
h
,

1 01 in t e res t as an asse , t 1 0 2 — ren t as an as se t , 1 04 o t e r accr ue d

d t
and p re pai h
a s s e s , 1 04 rig t s , 1 05 t
s u spe n se acco un s , 1 06 con

t in gen t as se t s , 1 06 .

CO A A OU NTR A ll w f h i k g 7 ll w f di
CC NTS o an ce or s r n a e, 1 0 a o an ce or s
v h d
.

co un t s , 1 1 0
p i i f ro s on or azar ,
1 1 1 .

OW P CLA M A OU
NE R SH I P pi v m t I p p i CC NTS ro r e t o rs In es t en 1 12 ro r
t d wi k db d
-
.
,

p p i
’
l
’
e o rs ra ng s , 1 1 2 pi l ro r e t o rs o an s , 1 1 3 ca ta s t oc an on s
i d 3 m p bl 3
s su e 1 1 p y bl
ot e s h py ay a e, 1 1 a cco un t s a a e, 1 1 4 ot er a a

bl 5 d li bili i 5 li bili y p ym t 5
,

es , 1 1 a ccrue a t es , 1 1 a t on rep a en s , 1 1

un divid d p fi t d pl e 6ro ti g li bili i

s an 6 sur use s , 1 1 co n n ent a t es , 1 1 .

NO AL A OU MIN N mi l CCi d l NTS7 o na a c co un t s t e to rea ac cc un t s , 1 1

mi l i h d bl h
.

no na ac co u n t s
p 7 l 8 p w t 9 ou e as e ct , 1 1 sa es , 1 1 ur c ase s , 1 1

f ih d g re g t di an iv d k —
ca rt a e , 1 1 di t 9 s co un t g en an ta en , 1 1 9 s co un

f fi d
or e te l h g d
1 22 l d 3 l f mb d
re n ta c ar e s an re n ta earn e 1 2 os s ro a

d bt dp i i d m i h mi l
-

, ,

e s, 1 24 6e re c at on an a n t en an ce , 1 2 ot er no na ac

cou n t s , 1 2 7 in t e re s t ac coun t s as t yp ical , 1 28.

A
C LE ARIN G CC OUNTS Nat u re o f cle arin g a cco un s , 1 30 clearing ac t
m h d h
.

coun t for e rc an i se , 1 1 — cas di sco un ts as p ro fit or los s , 1 3 2

3
clearin g a cco u n t fo r t ra in g , 1 3 3 asse d
Clearin g accou n s , 1 34 p ro fi t t t
clearin g a c co un t s, 1 3 4
— is t ri u ti e cl r g account s , 1 34
ea in d b v — clearin g

acc o un t s real o r no in al, 1 3 5 m

bm
.

Que stions an d p ro le s , 1 3 6 .

IX . TH E FUND AMENTAL PRINCIP LES OF BOO KKEEPING M ETH OD

Origin al en t rie s , 1 le ge r alan ces , 1 4 4
4 2 d
le ge r or f m or , 1 43 d b f m
o f o rigin al en t ries , 1 4 6 j o u r na lizafi o n 1 47 t h e j our n al 1 47 com ~ -

d
, ,
— h — illust rat ions , 1 4 9 co rrect i n g e r
p le te reco r 1 4 8 t e e n t r y, 4 9
1

fb k
,

ro rs , 1 5 2
— co rre ct ion ent rie s , 1 53
— loo l
se ea oo s , 1 5 4 — ~
q ues tio n s
b
-

an d p ro le ms , 1 5 4 .

X . TH E TRIA L B A LA NCE
Purpose 1 57 ne cessi t y , 15 7 mt
li i ati on s , 1 5 8 to tals or bl a an ce s ,

d q b
,

1 58 places o f erro r, 1 59 fi n ing e rrors, 1 6 2 ues tio ns an d pro

m
.

le s, 1 63 .
XI . TH E PRINCIP LE S or LA B OR S AVING-
DEVICES m B OO KS or

ORI GINAL ENTR Y

The S pe cial colu n , 1 6 5 m d b
wi e app lica i lit y , 1 66 e t en si o n o f p rin ci x
p le 1 6 7 c a s o o 1 68 — p u r c hb k
ase o o h b k
1 70 — sa les o o 1 7 1 di b k
v v b b
, , , ,

ision oi en t rie s , 1 7 2 di isio n o f t ransact ions , 1 7 3 a use o f la o r sav

in g, 1 7 4 loos e lea oo s , 1 7 5 fb k q
uest ion s and p ro le s, 1 7 5
-
bm .

XII . TH E PRINCIP LE S OF L AB OR S AVING D E VICE S -

N L DI E GE RS

b d
S u o r in ate le ge rs , d 1 78 co n tro lli ng acco un t s 1 8 0b di su o r nate
d b x bdivi i Of
,

le ge r a s tract s , 1 80 t en sion ofprincip le, 82

‘

e 1 su s on con

t rolli n g accoun s , 1 8 2 t q ues ti o n s an d pro le bm s, 1 83 .

XIII . S O ME H I GH LY D EVEL PE O D LAB OR S AVING D E VI CE S -

C h di as 8 5 — p u rc ase oo , s t o c
s co un t s , 1 h o o , and p ur c ase le ger b k kb k h d
combi d n e , 1 91 tb d
a ular le ger , a s oo O o rigin al e n ry , 1 93 o uc e r b k f t v h
p y bl
a a b
e sy s t em , a su st it ut e for a le ger , 1 95 p ri at e led ge r sy st e , d v m
q bm
-

199 u es t ions an d pro le s , 2 06 .

XIV TH E TECH NI QUE OF C LOS IN G TH E B OO KS

.

Purpose o f closing th e boo ks 209 varying task of clo sing wh t i 2 09 a s

d md m l m h d f
, ,

b tol fi
e c o se b p d wd 21 2 e ec t to e ro u 21 2 n a enta et o s o

m ki g Op i g m ki g Op i
, ,

l i gC os n 3 21 l 3 a n e rat n ac co u n t s rea 21 a n e rat n g

mi l 5 di l d l i g 7 m i f
, ,

accoun t s no na 21 rect e ge r c os n 21 co par son o

m h d f l i g 9 f m p limi y l i g 3 i l m
, ,

et o s o c os n 21 or s re n ar to c os n 22 s x co u n
m f—Of m t 6 ill i h
-

, ,

st at e 3 p ent , 22 7roo s t at e en 22 us t r a t o n , 22 ot er

imil t m t ll w m q
,

s 8
ar s t a e f f t p y
en s , 2 2 t 3
— a o an ces or u ure a en s , 2 0 ues
ti d p bl m
o ns an 3 ro e s, 2 1 .

XV AUX L ARY R O DS
. I I EC R

U f p t se h o 3 6 — i m e
p d tyy t m f
cas
p tty h 326 — resse s s e o e cas 2 no t e

b k bill b k 8 iv bl b k bl
, ,

oo or oo d 23 a cco un t s rece a e oo an ac cou n t s p aya e

b k 3 t—i kl h—
- -

, , ,

oo 2 9 i i f p c e rs , i i24 1 f s t at s t cs o u rc ases , 24 2 s t a t s t cs o

xp f p d h
,

e 43 i i
en ses , i
2 i i
s ta t s t cs o ro u ct on , 24 4 ot er s t at s t cs , 24 4

m h d f g —t h i g ti t i 5 —i p i g ti i i l d
et o s o a er n sta s cs , 2 4 n co r o rat n s ta s t cs n e g er
t 4 5 ill t d i m i ip l dmi i t i
ac co un s , 2 6 u s rat e
g l n un c a a n s rat on , 24 en e ra

mm t t ti ti 7 q ti
co en on s a d p bl m s 7 cs , 24 ues o n s an ro e s , 24 .

XVI . S O ME PE CU LI ARI TI E S or C O RP ORA TI O N A CCOUNTS

t k
Essen ial na t ure o f co rpo rat ions , 2 4 9 capit al s t o c accoun t in practi ce,

d b w m th d
-

25 0 is tin ction e t ee n iss u e an d sale , 2 5 1 p ro pe r e o o f h an

k b bd
dlin g capit al st oc , 2 5 2 k h d
un s u s cri e capit al s t oc au t o rize 25 2

b k d bv k d
.

s u script ions , 2 5 3 s to c is s u e at a o e par , 2 5 5 s t oc is s u e a t b e

d
lo w par , 2 5 7 k f f d b
on atio n s o f st oc , 2 5 8 or e it e su s crip t io ns , 2 6 1

v v b f b
con e rt ing p ri at e int o co rpo rat e f u siness 2 6 2 con u s ion e tween pro
d bt dv d
,

it s and asse ts, 2 6 3 ist ri u io n of p ro fi t s , 2 63 un i id e p ro fit s , 2 64

su rplus , 2 66 d
special s ur plus es , 26 6 e fi cit , 2 6 7 efi ect o f p ro fi t s on
v alues , 2 6 8 f m dvd d
in crease o f ca pi tal ro pro fi t s , 2 69 s t o ck i i e n s , 2 7 1

k wh
st oc s v b d q
it out par alue , 2 7 2 b on s , 2 73 ue st ion s and p ro
l m
e 7 s, 2 3 .
X O
C NTENTS

XVII WH E RE Do. PROFITS B E GIN P

W h at ar e co s t s , 2 7 6 vg a ueness o f
in epe n en ce o f cos t “
co st , 2 76 d d
an d se llin g p ri ce , 2 7 7 n e en en ce O cos t an d rep la ce i d p d
en t , 2 7 8 co s t f m
as o u t lay , 2 80 fin in g t h e cos t s , 2 8 1 d
i ision O co sts e t een pe rio s , dv f b w d
2 82 co s t an d in e n t o rie s , 2 84 v
pro fi t o n co ntract s , 2 8 7 cap ita l
lo sse s as co st s , 2 88 s t at e e n t o f s urp lus , 2 89 cap ital gains , 2 90 m
spe cial gains , 2 90 in co e t a es . 2 91 su ary , 2 91 m x
uestions and mm q
pro le bm s , 2 91 .

XV III . D E PRE CIA TI ON A ND M IN A TE N NCE A

Su mm ary Of p re iou s vis cu ss ion , d mit 2 95 dp e re cia tion Wi thout an e

5
n an ce , 2 9 m w h d p i i 96 m i
ain t e n an c e it out wi h e re c at o n , 2 a n t en an ce t
d p i i 97 d p i ti Of p p y 8 h d bit d
e re c a t o n , 2 e re c a on new ro e rt 29 t e e s an
Ob j i f q t —d f d p i ti 3
,

di t
cr e s, 2 99 e ct o n to re u en r e co r o e re c a on , 00 re

p i l m
a r s , re p ace d b m t 3 m h d— f im ti g d
e n t s , an e tt er en s , 01 et o s o e st a n e

p i ti
re c a 3 imp l b
on , Of d p i i
01 s 3 h e t i h li ase s e re c a t on , 02 t e s ra g t ne
m hd 3 i ki g f d m h d 3 3 d i gb l
-

et o th 02 e th
s n n un et o 0 e re uc n a an ce

m h d 3 3 th d i g f i m th d 3 d i i
- -

, ,

et o 0 e re uc n ract o n e o 04 ep r e c at o n

h d 5 ppli ti f bl k t t 3 6 pp i l m th d 6
-

, ,

c art e 30 a ca on o an e ra es , 0 a ra s a e o 30
p vidi g f m t 3 6 b kk pi g d Of v i
, ,

ro pl n or re ace en 0 oo ee n re co r con e rs on

p i l p vi i m t 3 9 wh
,

Op i 3 8
e rat o n s , 0 f pl s ec a ro s on or r e ace en 0 e n n o re

m t mpl d 3 9 v 3 wh t m i
,

pl ace en Is co n t e t at e 0 se cre re se r es , 10 a 15 a n
-

h i gi t v d h
,

t e n an ce ,
3 10 c i gt
arg n g a a n s pi l re en ue an c a rg n o ca ta 31 1
th th f f h b l h
,

b re e f pi li
as es p i 3 ca tai zat on , 3 1 2 e un ct on o t e a an ce s ee t , 3 1

th b l h d lv y 3
e a an ce S h b l
e e t an h t sodi i di en c 14 t e a an ce s ee as cr e t n

th b l h t d i g v l 3 5 ppli ti Of
,
“ ”
ca t or ,
3 1 4 e a an ce S ee an go n a ue s , 1 a ca on

h t i d pli ti
e co s t o b i —3 5 i f tili y —3 7 ppli i Of h
u ca on as s , 1 ts u t 1 a cat on t e
b f b h t d
- -

i g
e arn n p i y i ca ac
3 7 i t t t ili ty 3 8
as s , t h l 1 s u 1 e a an ce s ee an

Of th t b i i v l
-

t l
a c ua 3 9 ppli ti
co s t s , 1 t l a 9 ca on e ac ua co s as s , 31 ts a ue ,

b m d mm d h h b
-

3 20 t l ac uai i 3co s t as s f su se 32 co on groun o t e t ree as e s ,

p bli i d p i ti f m h
-

3 24 t i u pi li ti
c n t ere s
3 4 n ca ta za on , 2 e re c a on o erc an
di 3 5 q i se , 2 d p bl m 3 6 u e s t on s an ro e s, 2 .

XIX T D O . H E ON OR P O S IS P S ITI R FIT

C f i f
on u s on o t with di p iti Of p fi t 3 9
co s t f di p iti
s os on ro s, 2 a ccoun or s os on

f p fit
o ro m s, ppli
330 i f p fit 33
nu ero u s a v 33 cat o n s o ro s, 1 r ese r es , 2

i k i
s n f d 3 33 ng — unv f i ki g f d 334 mm y 3 6
s, re se r e or s n n un su ar 3
q ti d p bl m 33 7
, ,

u es o n s an ro e s, .

XX . THINTE RPRE TA TION OE FINA NCIAL S TA TE ME NTS

E

Un ce rt ain s tanda rds fo r fi nan cial stat ements 3 3 9 u lt imat e and imm edi

v 3 t t m t f d li bili i h f m
,

at e so l e ncy , t 40 a s a e en o as s e s an a t es , 34 0 t e or

ofb l h 3 3 p i l d ig ti f p ifi i m 3 6 fi d
a an ce s ee t s , 4 s ec a es na on o s ec c te s, 4 n

i g
n d i 3 6 mm y f b l h t h
ten en c e s , 3 6 4 l ifi su ar o a an ce s ee c an ges , 4 c ass

fb l h th b h h
-

i
cat o n o 3 8 i i
a an ce s g l t gee c an ge s , 4 n t e rp re t n a an ce S ee c an es ,

f m f Op ti g t m t 3 5 m
- -

35 0 or l i
o f Op ti ge ra n s at e en 0 re at on o e ra n s ta t e e nt

db l h t 35 m d t m Of
,

an l ti
a an ce s f Op ti g ee 1 re a on o e ra n stat e e n t an s ta e en t

b l h h g 5 3 g l fi t f xp i 5
,

a an ce s ee t c an es , 3 e ne ra e ec o e ans o n , 3 4 s ta t e

m t f fi i 35 5 d fi i y t t m 35 9 q i d p b
-

en o a a rs , e c en c s a e e nt , u e s t on s an ro

l m 36
e s, 0.
 O
C NTENTS

XXI TH E EFFECT OF INTE RE S T ON VAL UES

.

Pres ent value o f fut ure realizations 3 6 5 value k 3 66 g d o f s t oc s , oo

will 6 7 d m k 68 p ight 3 6
,

3 i p t t
t ra e d ar s, 3 con ce ss on s , a e n s , an co yr s, 9
l h ld 3 7 b d 3 7 fi di g t h v l f b d 3 7
ease
,

o s, 1 on s, 2 n n e a ue o a on 3 ac

b d b d t bl m m
,

i g f
coun t n 75 or ti ion ds, l i
3 on a es , a or sat o n , an accu u at on ,

3 76
— imp t f m i ti d m l i 3 78 p fi d
o r an ce — o a ort sa on an ac cu u at on , ro t an

l b d l 37
o ss o n ti g f
on f b d 38
sa es , h 9 acco un n o r Is s ue rs o on s, 0 -
ot er

b d id i 38 q ti
on cons d p bl m 3 8
e rat o n s , 1 ue s on s an ro e s, 1 .

XXII F ND N . CO T PAR ICU LAR P ODU C S O S V

I I G TH E S or T R T R ER

ICE S

Th e f dm
un a ent al re qi m
u re en s ,t 3 84 th e re sul tin g a ccoun s , t 3 85
t ype s d d v
o f co s t
fi n ing, 3 86 fin ing a e rage cos t s , 3 86 sou rce O a e rage fv
co s t s 3 8 7 d d d
fin in g spe cial cos t s , 389 — i re ct an d in irect cos t s , 3 90
d b d m h b d
,

ire ct la or , 3 91 ire ct ate rial, 391 — o t e r di rect co s t s , 3 92 — ur e n

co s t s , 392 m ff d b
i po rt an ce O fb d
ai r is t ri u t io n O u r e n , 392 ge ne r al
m et o s of hd d b d b h b
is t rib u t ing u r e n , 3 93 la or ou r as is , 3 94 age s w
b m b h b k m hd b f
-

asi s , 3 94 p ri e c o s t asis 3 9 5 o t e r lan e t e t o s 3 95 ri e

b d m h
-

, ,

an aly s is o f ur e n , 3 96 — t h e p rin cip le o f ac in e rat e s , 3 97 s u pple

m e nt s t o m h
ac ine rat e s , 3 97h d
co s t S e e t s illu s t rat e , 3 98 in t e re s t as
d
co s t o f p ro u ct i on , 3 99 d d
fi n in g co s t s illu s t rat e , 4 0 1 t h e p ur po se o f
c st a
o c co un ti g , 4 06
n wd b f th
i e applica ilit y O e se p ri n c i l
p es , 4 60 — ues q
b
,

tions an d pro lems , 4 07 .

A . D RAFTS
Ques tions an d prob ems l
B . S IMPLE INTERE S T A ND B ANK D IS COUNT
Ques tions and problems
C . C OMPO UND INTERE S T C OMP OUND , DISCOUNT, A ND ANNUITIE S
Que sti ons an d problems

D . SINGLE ENTR Y
 T H E FU ND A ME NT A L S OF
A C C OUNT ING

CH APTER I
INTROD UCTION
An A ccountant like an Edi tor . accoun tan t may b e com
Th e
pared in some re spe cts t o th e edi tor of a n e wspap er or a magazin e .

Th e busin e ss man re quire s t o b e con stan tly inf orm e d ab out t h e

con di tio n s an d o pe ratio n s Of his busin e ss jus t as h e re qui re s t o b e
,

inf orm e d of t h e con di ti on s and op eration s Of th e busin e ss wo rld

with which h e has de alin gs It is inde e d m ore imm ediately inn
.
, ,

por tan t that he shall kn ow just h ow thin gs are go in g on within hi s

own busin e ss than it is that h e shall kn ow h ow thin gs ar e go in g o n

Outside for sin c e his own busin e ss is un de r hi s dire ct con trol h e

, ,

is resp on sible for its guidan ce day by day wh e re as adjustm en t t o

,

t he outsid e busin e ss wo rld with which h e has n e c e ssary d e ali n gs is

Often a matte r Of weeks or mon ths n ever t oo so on be gun but le ss ,

se rious if an e rror is made for more tim e is available for correc

,

ti on H owe ve r we ll inf orme d h e may b e ab out pe o ple s deman d for

.
’

good s o r for se rv ice s unle ss h e is con ductin g hi s own busin e ss in

,

such a way that h e can p rov i de goods or s e rv i ce s when wan ted h e ,

is faili n g t o con duc t busine ss succe ssfully It is impo rtan t th ere

.
,

fore that a busin e ss man shall b e in formed wi th frequ en cy ab out

,

his own busine ss an d t hat this in fo rmation shall cover a large

,

vari e ty of facts such as hi s stock Of goo ds on han d th e co st Of that

, ,

stock o f goods (wh e th e r purchase d or man ufactu red) th e expen se s ,

Of con ductin g hi s busin e ss ( S O subdi vide d that h e can kn ow wh e th er

his e xpe n s e s in an y particular direc tion are runn in g highe r than

forme rly or are ou t Of relatio n t o th e amoun t of busin ess don e) th e ,

amoun t Of indebte dn e ss h e has soon t o pay th e amoun t of m on e y

,

comin g in an d soon t o b e available for payin g de bts th e am oun t of ,

cash in han d th e am oun t Of inve stm e n t in his busin e ss th e profits

, ,

which h e is making an d the availability Of tho se pr ofits for with

,

drawal .
2 U OF A C COUNTING
TH E F ND AM ENTAL S

Wh t th A o tant Ed its Just as th dit r must g t i to th

a e cc un . e e o e n e

ha ds Of t h public at fr qu t i t rvals i f rmati with r gard

n e e en n e n o on e

t o th e ws Of t h e world o r with re gard t o so me sp e cial field Of

ne

activity or l e arn in g S O th e acc oun ta

,
n t must ge t in to t h e han ds of

th e busine ss man a t re as on ably fre que n t in t e rvals such inf o rma

ti on as has : been e n umerate d Usually the re are s everal pe rson s in
‘

th e em
.

p y
l o Of a b usin e ss wh o s e t ask 1 5 in par t t o p r e pare inf o rma

t io n f or th e e n er al man age r but usuall y such inf o rmati on 15 e ith e r

g ,

no t in t h e par ticular shape mo st us e ful for t h e man age r or is n o t S O

“

corre late d with o th e r inf ormation as t o b rin g ou t th e large r fac ts

that t h e m anage r n e e ds t o kn o w It is th e t ask Of th e accoun tan t
.

t o put t h e inf ormati on in th e d e sir e d S hape an d t o co rr e lat e various

“ ”
kin ds Of inf ormation o r as w e comm only say e dit th e inf orma
, , ,

ti on B e caus e th e acco un tan t must p re pare inf o rmation for th e

.

ge n e r al man age r or o th er Office r h e usually o ccupie s a more or le ss

,

confide n tial po sition an d Ofte n is a vice pre siden t of a corpo rati on

,
-

H e must hav e t h e knack Of pr e parin g informati on in shap e for use

by o th e rs h e must have suffi ci en t imagin ation t o se e what so r t Of
,

inf ormation th e various offi cials w ill de sire and h e must have ,

suffi ci en t p ow e r Of an alysis t o s e e h ow t o ge t th e s or t Of inf ormation

that will e n able th e o pe ratin g Offi cers Of th e busin e ss t o tie up
t h e va rious parts Of t h e busin e ss with e ach o th e r an d with th e
outsid e busin e ss wo rld an d h e sh oul d p rovid e t h em wi th such

inf ormation e ve n if th e y have no t re aliz e d th e n e e d Of such par

t icular inf o rmati on It is hi s task in a s e n se t o fore se e wha t
.
, ,

in formation ab out th e busin e ss will b e later re qui re d an d t o see

that such information will b e available at th e prope r tim e H e .

must an ticipate th e n e ed for inf o rmation S O that h e may have his ,

lin e s laid b e fore t h e o ccu rren c e Of th e e ven t for th e pro cu rem en t Of ,

that inf o rmation as soo n as th e even t happe n s This is just th e .

task Of th e edi tor Of a n ewspap e r o r a magazin e for h e no t onl y tells ,

pe opl e what the y already wish t o kn ow bu t h e give s th em what ,

they are glad t o know though the y had no t previously known that
,

th ey n e eded t o know it .

Many Kin d s of Accounting Just as there are various type s Of.

e dito r s s om e Of th e m pre parin g d aily n e ws fo r t h e gen e ral public

, ,

som e pre parin g literary article s for tho s e wh o are in te re sted in

literary matt ers some who are preparing te chnical matte rs for t he
,
 INTROD U CTION 3
t chni cal public S O th e re are various type s Of accoun tan ts wh o are
e ,

preparing i nf ormation for various type s Of busin e ss man age rs .

Rar e ly an accoun tan t is also th e bo okk e e pe r an d h as pre pare d th e

,

preliminary figure s as well as edi te d th o se figur e s an d provided

t h e edi torial matt e r t o corr ela te th e m p rop e rly fo r th e man ager .

More Often th e accoun tan t doe s not prepare origin al figure s but ,

m erely edits th e figure s Of o th er p eopl e combining th em in various

,

ways an d drawing from th em importan t con clusion s that only a

trained pe r son could se e M any Of th e figure s are statistical n ot
.
,

e xp r e ss e d in do llars an d c en ts but ar e quit e as impo r tan t as fi n an

,

cial figur e s . Th e matte r s Of acc oun tin g are alm o st as various an d

diff eren t in n ature as th e matters which are publish e d in n ews
paper s an d magazin e s It would b e virtually impo ssibl e for any
.

man t o pre pare hims elf t o e dit all kinds Of n ewspape r s an d maga
zin e s for som e Of th em are extremely te chn ical an d a man must b e
,

an e xp e r t in c e r tain lin e s Of knowl e dge b e fo re h e can e dit a n ews

paper in th o se te chn ical lin e s S imilarly a man is n ot comp e tent

.
,

t o edi t t h e r e cords of a hi ghl y t e chn ical busin e ss like th os e Of a

,

Ch e mical wo rks un til h e is fami liar with th e pro c e ss e s Of t h e ch e mi

,

cal plan t an d un til h e has made a study Of th e accoun ting probl ems
conn e cte d with c e r tain t e chni cal Ope r a tion s .

Limitation s of Accountants NO eff o rt is made in this b ook to

.

take up more than a few Of th e technical matte rs Of accoun tin g and ,

such matte rs are far more num erous than t h e p e rs on Of lim ited
acquain tan ce with accoun t s would usually suppo se Th e p eculiar .

an d t e chn ical matt e r s Of acc oun ting are n o t m e r ely th o s e made

ne c e ssary by t h e p e culia riti e s Of c e r tain in dustri e s : th e y ar e Oft en

common t o all industri e s but p e culiar t o ce r tain re lati on s Of busi

,

ne ss ,
such as p e culiar par tn er ship arran geme n ts p e culiar cor
,

p o r at ion o r gan izati o n s e,

ttl e m e n t Of bank ruptci e s pu
,
r chas e an d

sal e Of rights wh e re a lon g pe riod elaps e s b e twe en th e pu r chase

an d th e d e liv e ry and agr e em en ts in which various c on ting en ci e s
,

are inv olv e d . All th e se matte rs ne ed peculiar kinds Of records in

orde r that at an y tim e du rin g t h e histo ry Of t h e tran sacti on o r lat e r

o n e may s ee h ow t h e various pe r son s c on ce rn e d in t h e tr an saction

were fin an cially related t o it In an elemen tary b ook it is un de

.

sirable t o tak e up complicate d re lations for n o on e is compe ten t t o

,

unders tan d th em an d to mak e or con trol th e re cord of th em unl ess

4 U
TH E F ND AM ENTALS OF ACCOUNTIN G
he is thoroughly familiar by e xpe rien ce with th e re cord making for -

m ore or le ss simpl e tran saction s e lse th e re c o rds which h e may

mak e will conf us e th e complica ted sor t Of tran sac tion with th e
tran saction which is Of a more sirnple sort and it will b e impo ssible
,

from th e re cord to in te rpret th e actual fac ts Of th e case Un .

for tunate ly a gr e a t many pe r son s wh o have familiarize d th em

se lve s With t h e fun dam en tals Of accoun ts have thought that th e y
h ad mast e re d t h e wh ol e subj e ct an d have un d er tak en t o make
re cord Of tran saction s which th e y did n o t at all un de rstand ; and
lat e r wh en a di spute has aris e n re garding th e tran sactions th e
, ,

re c ords have prov e d in ade quate an d have Often led t o wrong se ttl e
men t me re ly b e caus e th e pe rson w h o made t h e rec ord pre tende d t o
b e m o re comp e te n t than h e was It is quite as impo r tan t that a
.

pe rson studyin g accoun ts kn ow what h e doe s n ot understand and ,

thus kn ow what t o avoid as it is that h e sh all kn ow h ow t o d o th ose

,

thin gs which h e is quite sur e that h e un derstan ds Just as on e .

may kn ow a gr e at de al of law and ye t b e in compe te n t and kn ow ,

On e s s elf t o b e in compe ten t in ce r tain c omplicate d an d weighty

’
,

matte rs Of law S O a p e rson wh o kn ows much Of acco un tin g can

,

some time s give be st p ro of Of his kn owledge by indi cating frankly

what h e is n o t compe ten t t o d o .

Re lati on b e twee n Accounting an d B o okke e pin g It has b e en .

sugge ste d that th e accoun tan t is like th e e ditor in that he doe s no t

usually p rov i de th e origin al figure s on whi ch h e bas e s any repo rt .

This is b e caus e th e accoun tan t is n ot usually exce pt by chan ce a , ,

m ere b o okk ee pe r ; th ough lik e th e e ditor h e Often dir e cts what

, ,

sor t Of thin g shall b e writt e n an d h ow it shall b e written Th e task .

Of t h e b ookke e p e r is t o re co rd kn own facts an d th e se facts may b e

,

kn own b e caus e th e y are ve ry simpl e an d Of an Obvious so r t or th ey ,

may b e kn own b e caus e an accoun tan t or s ome on e e lse has an a

lyzed a busin e ss tr an sac ti on an d h as t old th e b ookk ee pe r exactly
what is t h e S ituation t o b e re corde d Th e task Of th e b ookk e e pe r
.
,

th ough impo r tan t doe s n o t o rdin arily in volve a v e ry k een an alysis

,

Of a busin e ss situation Th e pro cesses Of b ookk ee pin g th ough re

.
,

qui r in g in te llige n ce ve ry gre at accu racy and ge n e ral good comm on

, ,

s en s e are chi e fly those Of routin e Wh en nee d arise s for an alys is

, .

Of a c ompl e x situation or for statem e n t o f a compl ex situa ti on S O

,

th at th e re cord will b e pe rfe ctly cl e ar not onl y in its elf but in rela
6 U
TH E F ND AM ENTALS or A CCOUNTIN G
d e tail from th e application in o th e rs A ca re ful exami n atio n will
.

e n abl e an y on e familiar with t h e fun dam e n tal pr in cipl e s t o l e arn

from any s e t Of b oo ks e xactly how th e sys tem is working an d h e ,

is th ere fo re j ust as c omp e te n t to inte rpre t th o s e books an d t o pas s

judgment upon them as if h e had made a pre vious spe cial study of
t hat par ticular fo rm an d had h ad th e pe rso n wh o d evis e d t h e sys
t em t e ll him h ow it i s in t en de d t o wo rk S in c e an un de rsta n ding
.

Of all b ookk e e pin g prin ciple s is e sse n tial t o an acco un tan t s w ork
’
,

in th e foll owing page s th e fun dam e n tal prin cipl e s Of bookk e epin g
will b e first discuss ed and th en a study Of th e gen eral application
,

Of la b o r saving d e vice s t o th o s e fun dam en tal prin cipl e s will foll ow

-

Vir tually n othing fur th e r will b e s aid abou t b o okke eping fo rms .

Accounting f or Nou—Accountants In th e e arly part Of this in

.

t rod uction e mphasis w as laid upo n th e n e c e ssity Of an accoun tan t s

’

e ditin g th e figu re s which are t o b e pre s en te d t o a gen e ral man age r ,

bu t it S h ould b e just as Cl e arly un de rstood that a busin e ss man as

well as an accou n tan t should have a c e r tain familiarity wi t h th e
in t erpre tatign Of an accoun tan t s figure s for th e re is no t unif orm
’
,

prac tice with re gard to th e state men t of such figu re s and a man ,

Often finds it ne ce ssary t o inte rpre t t h e figur e s of o th e r busine sse s

whe re th e fo rms of statem en t not only are en tirely unlik e his own
bu t are in fact unf or tun ately chos en A ny man in an e xe cutive
.

posi ti on in a busin ess wh e th e r h e has anything dire ctly t o do wi th

,

accoun ts or n ot an d any man havin g d e alin gs with g en e ral busi

,

ne ss as an inve st or or a s tud en t Of public aff airs n e eds a ce rtain

, ,

familiarity with accoun tin g proce dure and s tatemen ts so tha t h e ,

may judge how busin e ss aff airs b o th public and private are b ein g
, ,

conduc ted Atten ti on is de vo ted in this book the re fore as much

.
, ,

to th e in te rpre ta tion of accoun ts as to th e ir co ns t ruc tion .

 D OUBLE ENTRY A ND TH E B ALANCE S H EET

Basi s of D ouble Entry . doubl e en try is a realization

Th e basis of

that in modern busin e ss th e re are no asse ts lyin g abo ut withou t

claiman ts TO eve rything havin g valu e some one is a claim ant
. .

If in a busine ss the re is an y prop er ty or any right o r any in tangible

, ,

quality that b rin gs valu e li ke a repu tation that draws tr ade so me

, ,

on e cl aims that pro pe r t y or right o r quality If one is to have a .

statem en t of a busine ss a t any particular ti m e therefore one will , ,

n ee d t o kn ow e xactly what p ro pe rty rights an d qualitie s are in t h e

, ,

busin e ss an d wh o may claim tho se par ticular el e m en ts which go to

make up th e busin e ss as a whole We must distin guish moreove r
.
, ,

o ne kind Of ass e t from an o th e r for o th e rwis e e very tim e w e con

,

t emplate a particular trans action w e might n eed t o visit some part

of th e establi shm en t t o l e arn whe th er that tran saction is possible
for th e busin e ss as it n ow stan ds w e cann o t o rdin arily pay deb ts
with equipme n t n or s ell me r chan dis e if we have only raw material
, ,

nor pay di v ide n ds if w e have onl y sto cks an d b on ds S imilarly we .

must di stingui sh on e kin d Of claims to th e asse ts from o ther kin ds

o f claims fo r diff e re n t claims are e nfo rc e abl e in difl ere n t ways an d
,

may b e met at difl ere n t time s S ince howeve r as already indi

.
, ,

cat ed all valu e s ar e claim e d by s om e on e it must follow that th e

, ,

t otal value s attache d t o t h e list Of asse ts must e qual t h e total

claims whi ch are e stablishe d against th e busine ss by pe rsons in ,

cluding th e propri e tor s wh os e claims are re cognize d by it S O

, .

even t h e simpl e st stat eme n t tha t can b e drawn up fo r a busin ess

“ ”
must b e in balan ce t h e asse t S ide will e xactly e qual or
balance wha t w e may call t h e own ership claim side E quali ty
“ ” ~
.

is always th ere for if an y value is in th e busin e ss it must belong to

,

some one and that own e rship must b e re c orde d bo t h on t h e books

,

and on such a stat em e n t Th ere is no way by which total asse ts

.

can incre ase with out a parall el in cre as e in claims t o asse ts ; th ere

is no way by which to tal asse ts can d e creas e with out a par allel de
crease in Claims t o ass e ts ; th e re is no way by which to tal claims to
asse ts can incre as e wi th ou t a parall el in cre ase in asse ts to b e
8 U
TH E F NDAM ENTAL S OF A CCOUNTIN G
claimed ; an d the re is n o way by which to tal claims t o as se ts can
de cr e as e wi th out a par all e l d e cre as e in t h e ass e ts t o b e claimed .

Anythin g else would me an eithe r that there were some un claimed

ass e ts or that so m e on e had a claim t o pro pe r ty which did n ot
,

e xist . E ith e r is absurd Th e asse ts de t e rmin e (

. fix a limi t t o) th e
o wn er ship claims T hi s doe s n o t m e an Of cours e that a pe rson
-
.
, ,

may n ot pre se n t a claim for prop er ty wh en th e re is n o t pro pe rty

en ough t o satisfy hi s Claim as in t h e cas e Of a bankruptcy an d Often
, ,

a pe rso n claims prop er ty which some on e e lse at th e same time

Claims In such cas e s som e Of t h e Claims are n o t en f or ce able or
.

re al claims an d it is e ithe r th e task of a boo kke e pe r t o show th e

,

reduction Of clai ms t o match th e asse ts or th e task of a lawye r or a ,

judge t o se ttle th e rival claims .

Balan ce S h e e t A Simple illustration Of such a statement which

.
,
“
is comm onl y called a balance S he e t is attache d b e low It is
”
, .

customary in Am e rica for all asse ts t o appe ar on th e le ft side of

s uch a stat em en t owne rship claims at th e right -
.

94 w as
Re al Es tate Proprietor
Fi xt
ur es Accounts Payable
A ccoun ts Receivab le
M e rchan dise

A s se s t A
ll items on t h e asse s S ide
. t
ab ove excep t accoun ts re
ceiv ab le rep re se n t ass e ts wh ich can b e valu ed or coun ted by Ob
se rvation A ccoun ts re ce ivabl e doe s n o t r e pre se n t tan gible prop
.

e rt y in t h e o rdi n ar y s e n se but re pr e s e n ts claims Of this busin ess

,

again st o utside pe o pl e for m e rchan dis e pu r chas e d from t h e busi

n e ss in s om e past pe ri od Th e se may b e re po rt e d e i th e r individu
.

ally by nam e 01 in a group as above Th e statem en t is n o t a com

, .

p le t e balan c e S h e e t un l e ss it c ov e r s all t h e it e ms Of valu e b e l o n gin g

t o th e busin ess .

Owne r s h ip Claims Even though th e busin e ss is own ed by one

-
.

man t h e proprie to r h e is n ot n e ce ssa rily th e o wn e r o f all th e prop

, ,

crt y sh own on th e l e ft han d side o f t h e stat em en t ; for usually a man

-

con ducts busin e ss with o th e r capi tal th an his own In that case .
,

though th e people who h ave len t him money canno t wi thout spe cial
 U
DO B LE ENTRY A ND TH E B ALA N CE SH EET 9
le gal provis ion ste p in and carry Ofi any of th e asse ts on th e groun d
that a part Of th e busine ss be lon gs t o them it is n ever th eless true ,

that the y have a claim again st t hose asse ts indepen den t Of th e

prop rie tor s own ershi p In o rde r t o in dicate th e fact that a pro
’
.

rie t or is n o t t h e so le an d unhampe re d o wn e r o f t h e p ro pe rty on

p
t h e l eft han d side Of th e sh e e t it is n e ce ssary e ith e r t o S h ow th e
-

n ame s o f o th e r peo pl e wh o have claims agains t th e p ro pe rty o r t o ,

S h ow th e to tal claim o f all such pe r son s in a gr oup o r in se ve ral ,

groups accordi ng t o th e na ture Of th e ir claims an d this mus t b e ,

don e for t w o re asons first t o S how h ow much Of th e owne rship

,

actually b e l on gs t o t h e pro pri e to r an d se con d t o S h ow h ow much

, , ,

Of th e ass e ts must soo n e r o r lat e r b e turn ed o ve r t o th e cr e di to r s Of

t h e busin e ss in o rde r t o satisfy th e ir claims In t h e case Of th e .

balan ce S h e e t ab ove th e accoun ts payabl e b ein g just t h e reve rse Of

, ,

th e accoun ts r e ce ivabl e on t h e o th er side re pre se n ts sums payabl e

,

by th e busin e ss t o o utside rs wh o have furn ishe d me r chan dise I t .

may in d eed happen that th e s e outside rs cann o t imm ediate ly claim

, ,

paym en t of t h e sums which ar e owe d th em it may b e that th e mer .

ch and ise was bo ught un d e r t e rms Of cr edi t

— specifi cally that t h e ,

debts must b e paid In t en o r thirty o r Sixty days On ly through

, ,
.

le gal proc e ss can th e holde rs Of th e accoun ts payable force a dis tri

b ution Of t h e ass e ts t o th e m if t h e pro pri e to r withholds paym e n t .

Te mporary V alidity of Bal an ce S h e e t A n importan t thing t o .

no te ab o ut a balan ce sh ee t is that it will n o rmally ho ld tru e for

o nl y a ve ry b ri e f m om e n t Of tim e If th e busin e ss is co n tinuing

.
,

t h e ve ry first h ou r Of t h e n e xt day it is p ro babl e that some thin g will

happe n t o chan ge som e Of t h e figure s gi ven h e re If any paymen t .

Of de bt is mad e cash will b e l e ss than be fo re an d accoun ts payable

, ,

will b e le ss than b e fore If an y me r chan dise is s old t h e mer

.
,

ch andis e will b e l e ss an d t h e acco un ts re ce ivable wi ll b e more or ,

t h e cash will b e mo re ; an d if as is o f co ur s e usual m e rchandise

, ,

is sold at a profit t h e n e w figure Of cash o r accoun ts rec eivable

,

will b e large r than th e figure for th e m e rchandise surrendere d for

it In o th e r wo rds t h e change in th e characte r of th e as se ts from
.
,

merchandi se t o acco un ts re ce ivable or cash brin gs no t an exact

e quival e n t in e xchan ge but in ad di tion a n ew o r e xc e ss ass e t aris
, ,

ing from profit an d that pro fit in turn c onstitute s in cr e ased pro

,

p rie t o rship or o wn e rshi p claim -

.
 TH E FUND AM ENTAL S OF A C COUNTING
Balance S h ee t al ways in Balance . Our n ext fun dam ental ma tte r
to no e t abo ut accoun ts is that just as our balan ce S h e e t sh owe d
,

ass e ts an d what w e may call o wn e r shi p claims t o b e e qual n o -

chan ge that can lat e r o ccu r in an y part Of th e busin e ss or from an y

cause can de stroy that e quality an d it e xist e d from t h e be gin

ni n g of t h e busine ss . It is inh eren t in t h e con stitution Of busin e ss .

Le t us examin e this .

Kin d s of Ch ang e s in As se t s .Th ere ar e four and only fou r types

of sources from whi ch a busine ss can ge t asse ts :
()
1 I n v e stm e n t b y t h e o w n er o f t h e business
()
2 L o a n s mad e t o t h e busi n ess

(3) E xcha n gi n g a n O ld as se t f or a n ew

(4 ) P r o fi t acc rui n g t o t h e bus in e ss

This is on e Of t h e axi omatic c ommon s en s e thi ngs that one mus t
,
-

se e e arly in his study of acc oun tin g Obvi ously an asse t must
.

come ei th e r f rom in side th e busine ss o r from outsid e for th e re

are n o o th e r plac e s : if t h e n ew ass e t c om e s fr om o utsid e t h e busi

n e ss it must co m e e ith e r fr om an o wn e r o f t h e busin e ss o r from on e

,

wh o is n o t an o wn e r for th e re are no o th e r s ; if it com e s from an

,

owne r th e cas e is that Of t h e first type liste d abo ve (inve stm en t) ;

,

if from on e wh o is no t an own e r t h e cas e is Of th e s e con d type (loan

,

t o t h e busin e ss) ; if it c om e s from in sid e th e busin e ss it must come ,

e i th e r from what was th ere b e fo re or from what was n o t th ere b e

fore ; ii th e n ew ass e t is de rive d from an asse t that was in th e busi

n e ss b e for e it com e s by e xchan g e whi ch is t h e thir d type n am ed
, ,

above ; if it come s from in side th e busin e ss but from some t hing not
th ere be fore it must have b e en cr e ate d in side an d is Of th e fourth
,

type (an d that is just what w e mean by profits) This give s us our .

four source s S imilarly th e re are onl y four cause s Of re duction of

.

asse ts : (1 ) withdrawal of inve s tm en t by an own e r Of th e business ,

(2 ) re payme n t t o a l e n de r (3) givin g on e as se t in e xchan ge for an

,

o th e r an d (
, 4 ) l o ss suffe re d by th e busin e ss Th e in t er e stin g thin g .

abo ut th e se four so urce s of ass e ts an d ab out th e s e con trar y causes

,

Of reducti on of ass e ts is t hat any pro p e r accou n tin g must no t only

,

rec ord th em but r e cord the m as dis tin ct from e ach o th er We

, .

must distin gui sh propri e tor s claim from l en der s claim Of course
’ ’
, ,

for th e proprie tor is e n ti tl e d to all growth in ass e ts ( as well as re

quired to suffer, if possible all S hrinkage) , whereas the lender has a
,
 D OUBLE ENTRY A ND TH E BALANCE S H EET II

claim for a fix ed sum onl y We must distin guish th e am oun t Of th e

.

p rop rie tor s in vestm en t from th e amoun t of his profits of course

’
, ,

for o th erwise h e will n o t kn ow h ow h e is pro spe rin g We have a] .

ready s een that w e must distinguish on e kind o f asse t from an o the r .

Two Aspe cts of Ch ange s As se t s We saw s ome time ago that.

th e e xis ten c e Of ass e ts must b e sh own on th e r e cords e ach kind ,

separately an d w e have n ow just se en that all sou rce s Of asse ts an d

,

all cause s Of re duction in asse ts must also b e shown on th e re cords .

If we have more cash for e xampl e w e n e ed t o re cord no t on ly th e

, ,

chan ge in th e cash but also th e fact that th e p rop rietor investe d

,

it o r that a profitabl e tran saction yi elded it or that som e one len t

, ,

it or that w e e xchan ged some o th e r asse t for it Th e re verse is

,
.

true of course of th e disappe arance of asse ts We fin d then that

, ,
.
, ,

n ge Of o n e ass e t f o r an o th e r Of t h e
(with t h xc pti Of xcha
’

e e e o n e

sam e kin d as a t en d oll ar bill fo r t w o fiv e s o r on e articl e o f

, ,

me r cha ndise fo r an o the r) a Change in an y ass e t whe th er in crease ,

or de cre ase must b e re corded in d oubl e aspe ct

,
th e e ffe ct Of th e
chan ge in th e reco rd o f th e ass e t its elf an d th e re as on for th e
, ,

Chan ge in t h e rec o rd Of th e thing whi ch brought ab out or Coope r

,

ated in that ch an ge .

Two A spe ct s of Ch ange s Own e r ship Claim s Approa chin g

!

-
.

these ch ange s fr m o t h e o wn e r s hip

~c l aim e n d t o o w e fin d th e sam e , ,

nec e ssity fo r th e doubl e aspe ct re cord -

A lende r canno t lend with.

ou t l e n din g s om e thing ; an d h en c e it is in con c e ivabl e t hat w e sh ould

record a pe rson as a l en d er with out also re cording th e thing that h e

len t Th e sam e is tru e of in ve stm en t by th ep roprie tor : h e cann o t
.

inve st with out inve stin g som e thing ; an d that s om e thing must b e
record e d as an asse t quite as much as t h e fact Of hi s inve stm ent
must b e r e corde d in conn e cti on wi th his n ame L astly even profit
‘

.
,

and lo ss are in con c e ivabl e exce p t in a d oubl e aspe ct : no man can b e

rich er without b e in g riche r in s ome thin g ; if h e has not m ore cash ,

or m o re m e r chan dis e o r m or e c o ll e ctibl e acco un ts or m o r e o th e r

, ,

prope rty or fe wer d ebts h e is n ot ri che r ; if you can re cord more

, ,

worth in c onn e cti on with his n am e you can re cord ei ther m ore ,

assets or fewer de bts If his profit lie s in th e fact that h e has fewe r
.

d ebts one own e rship claim (his) h as b een substitut ed for ano the r
,
-

(t h e cre ditor s) an d t h e change in e ach needs re cord For propri

’
.
,

e torship wi thdrawals of inve s tmen t, for a m ts to l d rs d

p y e n en e an ,
12 TH E F NDAMENTALS U OF A CCO UNTING
for lo sse s of cours e th e sam e prin ciple is tru e
, if th e claims ar e
,

reduced t h e ass e ts whi ch were us ed t o pay th e m ar e als o re duced

, .

Just as we find th en that it is impo ssible t o have an asse t aff e cted

, ,

without an e ffe ct on th e proprie tor s re cord or t h e p rofit an d lo ss ’

,

re cord or a len de r s re c ord o r th e re co rd Of some o th e r asse t S Owe

,
’
, ,

fin d that it is impossibl e t o aff e ct t h e prop rie tor s r e cord o r any

’
,

oth er Own e rshi p claim re cord without an eff e ct on an asse t re cord

-

(e xc e pt Of
,
c o u r s e in cas e Of an e xchan ge Of own e rship claims as a
,
-

substituti on of on e Claim fo r an o th e r n o t ch an gin g t h e t o tal of

o wn e r sh ip claims an d S O n o t changin g th e ass e ts t o which th ey are

-

B alance in Tran saction s In o the r words w e have s e en that

all .
,

just as a balan ce S he e t must always b e in balan c e with e quality Of ,

asse ts an d own e rship claims t h e re cord Of subs e qu en t tran sacti ons

-

, ,

wh e the r th e y are large or small Of whate ve r so r t must con tin u e , ,

that e quality no t on ly all in all and in th e long run but for e ach ,

tran saction in dividually for we have foun d this prin ciple true of ,

all po ssibl e tran saction s Thi s may b e tabulate d s o as t o S h ow fo r .

e v e ry po ss ib I
e chan ge t h e f our po ssibl e s o u r c e s o r caus e s which

re quire re cord as much as d o th e chan ge s fir st n am e d .

() 1 In cre as e Of ass e t fr om proprietor fr om profi table tr an sac

‘

tion s from b orr o win g fr om exchan ge

, ,

(2 ) G ivin g up O f as se t t o t h e pro prie to r in unpr ofi tabl e tr an s ,

action s t o lender s in exchan ge

, ,

(3) In cr ease O f o wn ership claim through in v estmen t b y pr oprie -

t o r makin g a pr o fi t b orr o w in g e xchan ge

, , ,

(4 ) D e cr e as e of o wn ership claim thr ough withdraw al b y proprie -

t or losin g payin g a l en d e r gi vin g in exch an ge

, , ,

It will b e Obse rve d that (e xce pt for t h e e xchan ge items whi ch apply
onl y within a group) whateve r is (1 ) ab ove is also an d must b e

rec orde d in b o th asp e cts ; an d whateve r is (2 ) is also an d must

so b e r e c ord e d This is t h e e sse n ce of doubl e e n try Eve ry en try

. .

has an o th e r half which give s th e o t he r asp e ct Of t h e same

“ ”
,

transaction .

As se ts D ete rmining Owne rsh ip Claims Th e conditioning ele -

.

m en t is th e asse ts fo r the y are re al an d de te rmine t h e o wn er ship

,

claims (for the re can b e no Claim t o what doe s no t e xi st) S in ce .

there can b e no increas e in ownership claims without an in crease in -

14 TH E FUNDAMENTAL S OF A CCOUNTING

This ad ds l m e n ts
t wo a new asse t with ou t e xchange Of
n ew e e

th e old an d a n ew own e rship claim ; an d it must have b o th o f the se

,
-

if e ith e r for th e n ew ass e t must have an owne r some wh e re

,
1
.

Now we give our p romi ssory n ote s for t o s ome Of o ur

creditors as a way Of ackn owl edgin g form ally through nego tiable
, ,

ins tr um en ts our deb t for t h e m erchan dise

,
.

4 C a s h P rop rie to rs hip clai m -

Offi ce Furniture A ccoun ts Payab le claim

.

Notes Payab le claim

This subs titu te s a n ew o wn e rship claim for an Old a claim in di -

“ ”
cated by n o te s for a claim in dicate d by a b ook accoun t This .

illustr a tion may fur th e r e xe mplify chan ges in o wn er shi p claim if -

we suppose an in t e rm ediat e st e p to b e take n : t h e p rop ri e to r in ,

s tead Of giving promissory n ote s to hi s credi tors as assum ed ab ove , ,

may give his n o te s t o a bank in e xchan ge for cash an d give th e cash

t o his creditor s If h e we re t o do so th e balan c e sh e e t would b e
.
,

just th e s ame as that given abo ve In tha t cas e however th e

o
.
, ,

thre e own ership claims shown would s tand not only for thr ee kinds
-

Of own e r ship claims but for thr e e s e parate groups of p eople h old
-

ing th o se claims In e ith e r cas e h oweve r th e fou r th balan ce she e t

.
, ,

as compar e d with th e t hi rd sh ows n o chan ge in t o tal ass e ts an d n o ,

chan ge in to tal own e rship claims ; but it do e s S h ow a chan ge in th e

-

di s tribu ti on Of own e r ship claims an d it involve s t wo chan ge s

-

an

in cre ase in on e accoun t and a d e cr e ase in ano th er .

Now we s ell m e rchan dis e that c ost us f or in cas h

, ,

reducing our me rchan dis e by in cr e asin g our cash by

an d sh o wing a n e w propri e tor ship profi t claim -
.

5 C as h Proprietors hip (inves tmen t)

Accounts Payable
.

Ofli ce Furni ture

M erchan dise No tes Payab le
Proprietors hip (profi t)

This give s us a quadrupl e chan ge : an e xchange Of on e typ e Of asse t

1
will b m mb d h h di h
It e re e e re t at t e cr e t or as n o m h
le gal clai t o t e se s pe cifi c as
(x p d di i ) b w b hd m
»

se t s e ce i l
t un l e r ce r ta n e ga con t o ns u t h e h as a n e ly e s t a lis e clai to
m f h b i (whi h p ti l w d m d
,

so e as se t s o t e us n ess c ar cu ar asse t s ill b e e t e r i ne b y lat er de

v e lop ments) .
 D OUBLE ENTRY A ND TH E B ALAN CE S H EE T 15

for an oth e r (mer chandise for cash whi ch al one woul d not afi ect
t h e to tal Of e ith e r asse ts o r own e rship claims ) ; an d an in crease of -

to tal ass e ts — for cash was re ce ive d in exce ss Of th e cost Of th e

merchan di s e ; and this in turn involve s an in cre ase in ownershi p
, ,

claim profit adde d t o p ropri e to rship but sh own se parately , .

Onl y thr e e chan ge s appe ar on t h e balan ce sh ee t but that in cash is ,

really double for Of th e incr e ase in cash is from th e exchan ge

,

Of th e me r chan dise and is from profit .

Next w e u s e par t Of our cash t o pay ou r n ote s payabl e .

6 Cas h Proprietors hip (inves tmen t)

Of A ccoun ts Payable
.

fi ce Furniture
M erchan dise 2 000 Proprietorship (profi t) I 000

This give s a n ew type t h e re duc ti on of b o th ass e ts an d own e r

ship claims ; an d Of cours e th e y must go t oge th e r f or if as se ts have
-

gon e without r eplac em en t by o the r ass ets own e rship has di sap ,

pe ar ed als o .

Now w e will suppo se tha t a chan ge Of styl e in me r chandi se f orces

us t o s ell our remainin g m e rchandi s e for $ 5 00 in cash .

7 C as h $ 1 1 5 00 P roprietorship 1

Offi ce Furniture
.

A ccoun ts Payable
$ 1 2 5 00

Thi s also giv e s a re duction in asse ts bu t h ere though of c our se th e , ,

disappe a ran ce Of asse ts is accompani ed by a reduction Of owner

ship claims t h e r eduction Of o wn ership re sults n ot from th e pay
-

ment of claim s but from th e annihilati on Of th em B usin ess con

, .

ditio ns h ave d e stroyed wo rth Of valu e an d h en ce have ,

destroyed n o t only what was pre viously propri etors gain bu t ’

,

also $ 5 00 Of th e original inve s tmen t C ash has in cre ased t o b e .

,

sure but m er chan dis e has b ee n re duced by much m ore than an

,

e quival e n t T hi s give s four chan ge s

. de cre ase Of asse ts ,

sh own in t w o accoun ts an d $ 1 5 00 de cr e ase of own ershi p claim s

, ,
-

shown in two accounts .

L astly you withdraw from th e busin e ss taking in cash your

, ,

1
v h d
Fo r reaso n s t o b e gi en lat e r , t is co nso li at ion o f in es tme n t an d p ro fi t in to v
on e it e m w d
for th e p ur pos e o f r e gis t e rin g a lo s s , oul n ot in p r act ice b e us ually de
b h b b
,

sir a le , b u t fo r t h e pur pos e o f illus t ration e re it is uno j ect ion a le .

16 TH E FUNDAMENTA S L OF A CCOUNTIN G
share but I con tinu e alon e
, . Th e b alan ce S h ee t of th e business will

C as h Proprietorshi p
Ofli ce Furniture
‘
Accoun ts Pay able

This last case give s us again a re ducti on in ass e ts , an d in propri e to r

shi p , but he r e is n o lo ss Of valu e On e Of th e p roprie to rs as an in
.

dividual has re ce ive d what th e b usme ss has give n up .

All Type s of Ch ange s Th e se e ight chan ge s are typical Of all

. t he
chan ge s that can o ccur in busin e ss as in di cated on page 1 2 ,
. To
pu t th em in tabular f o rm :

In dividual asse ts increas e d from S ee bala nce S h ee t

P rop ri e t ors inves tmen t ’
#1
Profi table transactions 5
B o rro ing w #3
xh f
E c an ge O asse ts #2 (
o fli ce f urnit ure )
vd
Indi i ual as se t s re uced b y d S ee bala n ce S h ee : t
hd w
Wit r a al by p rop rietor #8
Un profi t ab le tr ansactions #7
Payment t o len ers d #6
xh
E c an ge h # 2 (cas )
dvd
In i i u al ownership claims increased b y S o
b la h t ee a n ce S ee

I v tm t
n es en # 1

P fit
ro 5
L di g (l di g t b
en n wi g b y th b i ) #3
en n o, o rro n e us ness
Ex h g 94 ( t p yabl )
,

c an e 4 no es a e
7
I di vid l w
n hip laim d a d b y
ua o n ers S -
b la h t
c s ecr e se ee a nce s ee :

Withd w l O f i v tm t
ra a n #8
es en
L o ss #7
P ym t f d b t
a en o e #6
E x ha g
c n e #4 (a t payabl ) ccoun s e

D ubl A p t
o It has b
e s ect d i th tabl ab v Of c urs
. e en no e n e e o e, o e,

that ach bala c sh t is m d twic Thi s is b cau v y

e n e ee na e e . e se e er

tr sacti has a d ubl aspect d h c

an on bala c h t
o e ,
an en e n o n e S ee can

eve r re cord on e chan ge only o n e Chan ge on a balan c e S h ee t

would sh ow what asse ts had incre as ed o r de cre ased but would ,

n o t S h o w wh o s e asse ts th e y w e re o r wh e re th e y cam e fr om o r it ,

would S h ow wh o had more o r fe we r claims but would n o t S h ow ,

h ow th o s e claim s cam e ab out or h ow th e y happe n e d t o b e can

cell ed ; an d d oubl e en t ry give s bo th aspe cts of e ve ry t ransac
 D OUBLE ENTRY A ND TH E BALAN CE SH EET I7

ti on . Th e illustra ti s abov may now b tabulat d c mpl

on e e e o e e t ly

A s sets
1 Increase d f ro m Increased (proprie to rs ’
in v es tment)
2 On e increase d on e d ecre se d a
f Increased (p ayab les)
,

3 In cr e ased ro m
4 One in crease d o ne de cr ease d
d d
,

One in cr ease a
{
on e e cre se d

d f Increase d (prop rie tors

,
5 In cre ase t)
m
’
ro p r o fi
6 D ecrease d by D e creas e d (
p ayab le s)
On e in creas ed , decrease d
{
o ne
7 D e cre ase d by D ecrease ( d
p rop rie tors lo ss )
’

7? 8 D e crease d by D ecr eas e d (

p r op ri e tors
’
in e s tment) v
S ummary The se may s till further b e summan ze d
'

of Entrie s .
,

this time by ultimate n ature as follows : ,

(a) Wh en to tal ass e ts are in creas ed ,

to tal o wn ership claims ar e in cr eas ed (1 3 5 )

-

, ,

(b ) Wh en to tal ass ets are decreas ed ,

to tal own ership claims are decr eas ed (6 7 8)

-

, ,

(c) Whe n in dividual ass ets are in cre as ed but not to tal assets ,

some other asse ts ar e decreas ed and to tal ownership claims ,

-

ar e n o t afi ect e d (2 )

(d) Wh en t otal o wn er ship claims ar e in cr eased -

t o tal as se ts ar e in cr eas ed (1 3 5 ) , ,

(e) Wh en total o w n ership claims are decreas ed -

to tal ass e ts are decreas ed 8)

(f) When in di vidual own er ship claims ar e in cr eas ed but n ot th e -

to tal ,

some o ther own ership—claims ar e decreas ed an d total assete ,

ar e no t afi ec t ed (4 )
One more b o ili g d wn of the seitems is worth whil e
n — o

An in cr eas e asset is al w ays accompanied b y (b ecause only so

in an y

can it b e explain ed) an in cr eas e in some o wn ership— claim (1 3 5 ) , ,

o r a decr eas e in some o th e r ass e t (

2)

A decr eas e in any as se t is al ways accompanied b y (b e cause only so

can it b e explained) a de cr ease in s ome own ership claim ( 6 7 8) -

, ,

or an in cr eas e in some o th er ass e t (2)

A n in creas e in an y o wn ership claim is al w ays accompan ied b y ( be-

cause only s o can it b e explained ) an in crease in some asset (1 3 5 ) , ,

18 TH E FUNDAM ENTA S L OF A CCOUNTING
Ad c as e in any own ership claim is al w ays accompanied by (b e
e re ~

cause only so can it b e explain ed) a de cr ease in s ome as se t (6 7 8) , ,

or an in cr e as e in s om e o th er own er ship Claim (

4)
-

En ti True of any B u sine s s Organization Though th e illus tra

r es .

tions Of double en try as given here are confi n ed t o a busine ss having

individual p ropri e to rshi p t h e sam e thi n g will b e tru e th ough th e
,

busine ss b e owne d by man y partne rs or by a co rporation Th e .

n ame s Of th e vari o us acco un ts re p re s en ting prop ri e torship will b e

diffe ren t but th e sam e prin cipl e s will apply as will b e s e en late r
, , .

B u s ine s s as an Entity Th e re is an o the r general appro ach t o th e

.

me th od Of double en try subs titutin g for th e ide a of con stan tly

,

chan gin g p ro p ri e to rship wi t h e ach gain or l o ss t h e ide a of th e

, ,

busin e ss as an en tity in de pen den t of its owne rs Thin king Of th e .

busine ss as owne d by an in di vidual by partn e rs or by an organiza , ,

ti on Of shareholde rs on one han d an d thin king Of it as an en tity in

, , ,

depe nd en t oi th e own e rs on th e o th e r give th e same handlin g of th e

, ,

accoun ts Wh en th e busine ss is tr eated as an e n tity th e accoun ts

.
,

Of t h e p rop ri e to r Of th e partn e rs Of t h e s to ckh old e rs rep re sen t in a

, , ,

sen s e li ab ilitigs of t h e busin e ss to t h e owne rs at t h e b e ginn ing of

any pe ri od as if o wn e rs we re o utsid e rs ; an d th e n any chan ge s in t h e

ne t val u e of t h e busin e ss as a wh ol e are ca r ri e d in acc oun ts repre

sen ting incre as e o r de cre as e in n e t valu e durin g tha t pe riod as if th e

busine ss had n o own e r o r were an indepe nd en t en tity When th e
,
.

e arnin g pe ri od is cl o s e d howe ve r t h e e n tity Of t h e busin e s s has a

, ,

se ttl emen t with th e owne rs and th e profits and losse s are carrie d to
,

t h e accoun ts Of th e own e rs t o whom t h e busine ss is liable ,

In a .

se n se th e re fo re wh en th e busin e ss is tr eated as an e n ti ty it may b e

, ,

said t o m ake a fre sh star t at th e b e ginni ng of eve ry fin an cial pe riod ,

an d th e n th e o wn e rs S O far as t h e boo ks are c on c e rn ed s tan d

, ,
“
h an ds Ofl durin g that p e riod ; but a t th e clo se Of th e pe riod th e
”

results Of th e pe riod s busin ess are en te red in th e accoun ts Of th e

’

own e rs on ce more and again th e busine ss as an enti ty m akes a

,

fre sh start .

Q UES TIONS P ROB LEM S A ND

1 IS it poss ib le t o t ell from t he b alance s heet giv en in Qu estio n 8 b elo w

h o w mu ch merch an dis e has b ee n han dled during t h e pe riod prior t o th e
.

b al an ce s he et ? h ow many sale s have b ee n made ?

2 . What would be th e effect on the balance sh eet of a b usiness of donating
, ,
 OUB LE ENTRY A ND TH E B ALANCE SH EET
D I9

an un u s e d mall b ildi g d th la d whi h it ta d t i d

s u n an e n on c s n s o an n e

p d
en t o penati v t
Co d t
erd b y m p l y O f t h b
e s or e coni ? uc e e o ees e us ness

G iv ill t ati
e an O f payi g a d b t b y m a
us r on f th ati fa w n e e ns o e cr e on o ne

d bt (a) wh th h g w ld aff t th b la h t d (b) wh

e en e c an e ou ec e a n ce s ee an en
it w l d t aff t th b ala h t
,

ou no ec e nce s ee

ibl t t ll f m t h b ala h t giv i Q ti 8 b l w

.

4 I it p
s o ss e o e ro e n ce s ee en n u es on e o

wh th th a t payabl w i d f th p ifi m ha
.

e er e ccoun s e er e n curr e or e S ec c er c n

di i l d d am g th
se nc u e t? on e as se s

I a f th
n c se o p lai d di pp a
e un ex f a t d th ab d ne sa ear n ce o an sse an e an on

m t fhp f v y t h b k b k p t i b ala
,

en o o e o r eco ? If
er , can e oo s e e n nce so,

h w ? If
o t wh y t?
no no

G iv O f ttl m t wit h a ti i g p a t w
,

6 ill t ati
e an us r on f hi
se e en re r n r ner or s o n er

hip l im with t t h imm diat d ti f y a t th b l

.

s o
c a ou e e e re uc on o an ss e s o n e a

an ce Sh t d pp i g l t hav
ee an su d os n no oss es o e oc curr e

Th f ll wi g i th bala h t f th b i f A wh h i v t d
.

e o o n s e nce s ee o e us ness o o as n es e

Proprie tor A
Sh w h w th bala h t will l k aft th f ll wi g t a a ti
o o e n ce s ee oo er e o o n r ns c ons

A b y m ha di f a h
u s ercd fi xt f nah seH or c s an u r es or c s e
b y a t m ha di f H a dmi t B
, ,

u s on cco un a pa t erc n se or e s as r ner

q al t m with him lf B i v ti g
on e u er w th f
s se on
’
s n es n or o

8 . Th b ala e h t f B C 8 C mpa y i f ll w
n ce S ee o , 1 o n s as o o s

C h as 8 P pi B ro r etor

P pi C ro r e t or

A R iv bl
c c o un t s A P y bl
ece a e cco unt s a a e
Fix t ures 5 00

h w th w b ala h t aft th f ll wi g t a a ti
S o e ne nce s ee er e o o n r ns c ons :

B withd aw $ 5 i a h f hi p r al s 00 n c s or s e rso n use.

A t payabl pai d
ccoun s e are

pai d
,

A t i blcco un s r ece v a e a re

M ha di i b gh t
,

er c n a t
se , s ou on ccoun
t payabl paid
.

A ccoun s e, ar e

ivabl
.

A t cco un s r ece paid e, are

M ha di ld f
.

ti g e rc i n h
s e cos n s so or cas ,

Th i y f w ki g
e eas es t hi p bl m i
wa p h b l
o hor n o ut t s ro e s to co y t e a an ce S ee t , as

gi
v en ,wi h mpl p t h a m gi f h h
e s d h
ace o n i di h t e t wo ar ns o t e s ee t , an t en to n ca te t e
h ge i h i m b pl i g i h m gi h m
c an s n eac te f h g ( i h pl
y ac n n t e ar ns t e a o un ts o c an e w t us
an d mi i ) pp i
n us s h m f h pp p i
gns o Th
o s te t h li e na e o t e a ro r a t e acco un ts en t e conso
d i fh i m wi h h ld will giv h fi l b l [ Thi
.

a t on o t e ne w te h s t t e O e t e na a a n ce S ee t . s IS not

b kk pi g m h d b i will h w h d h d f b kk pi g
oo ee n et o ut t S o t e s t u en t t e nee o a oo ee n
m h d b d ib d l ]
,

et o to e escr e ater
 CH APTER III
TH E F ND AM ENTAL U PRIN CIPLE OF D EB IT A ND CRED IT

De fini ti on of an A
ccoun t . Th e various
so rts of inf o rmation S O
far as the y can b e e xp re sse d in fin ancial figure s i e dollars an d , . .
,
“ ”
cen ts are ke pt in what are called accoun ts
,
an d th e wo rd

has a spe cific m e anin g as we ll as th e larger generic m e aning appli ed

t o acco un tin g an d b oo kk e e pin g as a wh ole In th e spe cific se n se .
,

an acc o un t is a Classifi e d arr an ge m en t Of all th e fin an cial items pe r

tain ing t o one kin d Of information about a busin ess an d that in ,

fo rmati on may b e con c e rn e d with th e rela tion s of th e busin e ss t o an

indi vidual as th e p roprie to r o r a l en de r or it may b e c on ce rn e d
, ,

with p rop e r ty as cash or m erch andi se Th e n am e Of th e accoun t

,
.

indicate s t h e sor t Of info rmation comprised un de r it Th e form Of .

t h e acc o un t is va ri e d ; but th e e ss e n c e Of an acco un t lie s in t h e fact

that it de als with one kin d Of info rma tion only that it cove rs all
fin an cial in form
,

ati on on that subj e ct for th e pe ri od Of tim e which it

is me an t t o cove r an d th e n e t figu re Of t h e accoun t at an y tim e repre
,

se n ts th e n e t fin an cial status Of th e busine ss at that time in re , ,

spe ct t o th e matte r in di cate d by th e title of th e accoun t If th e re .

,

fore th e form pro vide s cl e ar me an s Of S howing in cre ase s an d de

,

cr ease s in t h e fin an cial figure s for whi ch th e accoun t stan ds and ,

provide s also for S howin g t h e balance or n ot stan ding Of th e ao ,

c oun t it has se rv e d its purpo se In cre as e s an d de cre as e s in an

,
.

accoun t are a m e an s n ot on ly Of Ob taining th e balan ce at an y tim e ,

but o f S h owin g th e v olum e of tran saction s for an y pe rio d In .

crease s an d d e cre as e s are shown through what are call ed debits “ ”

“ ”
an d credi ts .

Ne e d f or B ookkee ping De v ice to Recor d Ch ange We have n ow .

Obse rv e d th at many in di vidual facts about busine ss n e ed re cord :

'

for e xample in o rd e r t o S h ow all t h e facts ab out e ach impo r tan t

,

aspe ct Of a b usin e ss separate accoun ts are kept for e ach such as

,

pee t an d the s e accoun ts con sis t of financial fi gure s arr an ged so as

,

t o S how all in c re as e s all d e crease s and to pro vide fo r sh o wing th e

, ,

balan ce or status at any time ; t wo gen e ral type s of accoun ts are

kept — asse ts and ownersh ip d aims ; any change In t h e to tal Of
,
22 U
TH E F ND AM ENTAL S OF A CCOUNTING

N0 o th e r change s po ssibl e of cours e for n o oth e rs can afl ect a

are , ,

balan c e she e t ; an d a balan c e S he e t can always e xpre ss th e status Of

a busin e ss If we we re t o give a shor t n am e for conveni en c e to
.
, ,

e ach Of th e s e f ou r chan ge s fo ur t e rms w o uld see m t o b e n e c e ssary

,
.

Y e t wh en w e re aliz e that asse ts an d own e rs hip claims can neve r ge t -

conf us e d with e ach o th e r if p rop er ( di stin ctive ) titl e s are use d for
t h e accoun ts r e p re s e n tin g th em it app e a r s that n o t four n am e s are
,

n ec e ssa ry for distin guishin g th e se chan ge s , but for re ason s n ow t o ,

be indicate d o nly t w o
,
.

Explan ati on s of In cre a s e s in As s e t s Th e t ask Of th e bookk ee pe r .

is t o S ho w t h e relation s Of th e busin e ss with its own e rs an d with

o th e r s havin g o wn e r ship Claims an d t o S h ow what p ro pe r ty th e
-

busin e ss has acc oun tability for Eve ry chan ge n ee ds e xplan atio n.

from b o th Of th e s e aspe cts In a s en s e e v e ry ch an ge in any balan ce

.
,

sh e e t ite m is mad e in o rd e r t o e xplain a chan ge in some o th e r item .

If w e buy goods on accoun t t h e incre as e in m er chan dise on th e

,

balan c e sh e e t is e xplain e d by t h e in cre as e in accoun ts payable and ,

t h e in cre as e in accoun ts payabl e is e xplain e d by th e in c r e as e in

me rch an dl s e Th e two chan ge s e xplain e ach o th e r an d e ach is th e
p
.
,

compl e m e n t of t h e o th e r If on t h e o th e r han d w e had bought th e

.
, ,

merchandi s e for cash th e d e cre as e in cash woul d have b e en just as

,

good an explan ation Of t h e in c re as e in m e rchandise as was th e in »

cre as e in accoun ts payabl e in th e o th e r cas e If we wish n am e s by .

“ ”
whi ch t o de sign ate kinds of bo okke e pin g re cords e n trie s as the y ,

are call e d w e may have t h e sam e n am e fo r a d e cre as e Of ass e ts that

,

we hav e for an in cr e as e Of own e rship claims fo r th e y s e rv e t h e -

s am e pu rpo s e as in t h e case above t h e d e cre as e in cash and th e

, ,

incre as e in accoun ts payable e qually explaining an in c re ase in

Explanati on s of Re d uc ti
Own e r s hip Claims S imilarly if
on s in -
.
,

th e p ro p ri e to r withd raws cash fo r his pe r s on al u s e his o wn e rship ,

claim is th e reby re duced an d th e de c re ase in c ash is th e e xplana

,

tion Of his reduced ownership ; but e qually th e reduction Of his

o wn e rship Claim is t h e e xplan ati on o f th e reduction in cash
-

Each .

is th e c omplem en t of th e o th er and n e i the r can stan d alon e for , ,

n e ith e r can e xplain its e lf If on th e o th e r han d in ste ad of dr awing

.
, ,

cash h e had purchased goods fo r his own u s e from a fi rm Of wh om

his busine ss buys an d had had th e goods in clude d in a bill charged
,
 U
F NDAM ENTAL PRIN CIPLE OF D EB IT A ND CREDIT 23

t o hi s busine ss an d t o b e paid by th e busin e ss th e in cre ase in ac ,

co un ts payable (fo r t h e goods tak e n by him) would e xplain th e d e

cre ase in hi s own e rship claim (just as if h e had withdrawn cash)
-

an d t h e d e c r e as e in his o wn e r ship claim wo uld e xplain th e in cre ase

-

in t h e o the r own e rship claim ( -

acco un ts payable ) .

S imilar ity of D ifi e r e nt Type s of Entry S O fo r pu rposes of ex .

l ti on Of in c re as e Of ass e ts a d e c r e as e Of ano th e r asse t is as g oo d

p a n a
,
as an in cr e as e Of owne r ship claims ; fo r e xplan ation of a de cre ase Of
-

ass e ts an in cr eas e Of o th e r ass e ts is as goo d as a de cre as e o f o wn e r

,

ship claims ; fo r e xpla n atio n Of in cr e as e Of o wn e rship claims a d e

-
-

c re ase Of o the r own e rship claims is as goo d as an in cr e ase of ass e ts ;

-

an d fo r e xplan ati o n Of d e c re as e Of o w n e r ship claims an in c re as e of -

o th e r o wn e r ship claims is as g oo d as a d e c r e as e Of asse ts

-
Th e re .

fore th e same n am e may b e give n t o a b ookk eepin g re cord which

shows in cre ase Of asse ts as t o o n e that S hows de cr e ase of own e r ship
claims and th e sam e n am e t o o n e which shows de cre ase of asse ts as
,

t o on e that S h o w s in cre as e Of own e rshi p claims .

De b it an d Cr e di t Th e t w o t e rms actually in use t o de sign ate

.

” “ ”
chan ge s in asse ts an d in own ership claims are debit an d credit -
.

Just what th es e te rms mean is n o t importan t at this momen t

inde ed it is S O little impo r tan t that so m e wh o se em t o go no far th er
say that t h e te rms m e an n o thing at all A s a matter Of fact th e u se .
,

Of th e m is much simplifi e d by kno win g and r e alizin g what th e y

m e an an d w e S hall Obse rv e that soon Their applica tion can b e
, .

b riefly tabulate d as follows :

A r e cord S ho win g an in cr ease of an asset or a decr ease Of an own er
S h ip claim is a d ebit
-

A record sho wing a de crease of an asset or an increase Of an own er

S h ip Claim is a cr ed it
-

It may s e em as if from this groupin g Of tran sac tion s gai n s and losses
have b e e n omitte d but it will b e re membe red that gain s are in
,

cre as e s in o wne rship claims an d lo ss e s are d e cr e ase s in o wn ership

-

claims an d h en ce all classes of tran sac tions ar e covere d by th e

,

items liste d ab ove .

Ab bre v iation s f or De bit and Cre dit B o th debit and credi t

“ ”
.
”

are c omm only abb r e viate d th ough ju st as som e d e n y that th e

terms have any me anin g s o some den y that th e abbreviation s have
,

Th e abbreviation D r doub t
“ ”
an ythin g t o d o wi t h th e s e t e rms . .
24 . TH E F ND AM ENTALS U OF A CCOUN TIN G
l e ss te ch nically stands for de btor but it is conve ni ently use d “
,

also t o in dicate that th e re cord with whi ch it is conn e cted is a

“ ”
de bit re co rd showin g what has b een liste d abo ve as a d ebit
,
“ ”
change . S imilarly t h e abbr e via ti on ,
Cr doubtle ss m ean s .

“ ”
credi tor but it is convenien tly us e d for an y cre dit re co rd sh ow
, ,

ing a cre di t chan ge .

Me aning of Cre dit Th e classification of re cords or en trie s

.
,

to spe cific accoun ts as debit an d credit may se em purely arbitrary

, ,

but it is clo se ly relate d t o t h e L atin words fr om which our b oo k

“
kee pin g re cords come an d t o t h e comm on words credit and
, ,

debto r an d cre ditor o f comm on sp e e ch A s a h elp in re

” “ ”
, .

memb e rin g which word applie s t o which chan ge on e sh ould re ,

m emb e r that cre dit in L atin me an s h e gr an ts h e en trusts

“ ” “ ”
, .

Fro m t his o n e fact an d t h e addition al fa ct that d e bit is th e op

“ ”

“ ”
p o s it e o f cr e dit t h e applica t,
i on o f th e t w o t e rms t o all po ssibl e

case s is o b v ious whe n o nc e o bs e rved A further assistan ce may b e .

foun d in th e r e alization that w e spe ak in eve ryday lan guage o f

giving a man cre dit fo r d o ing an y cre ditabl e thi n g That is just .

what w e db in b ookk e e ping “

give credi t for a thin g which
c onf e r s a b en efit up on th e busine ss We credit th e proprie tor for .

what h e in ve sts b e cause th e capital e n able s th e busin e ss t o con duct

,

o p eratio n s . We for th e sam e re as on credit a s elle r of goods who

furnish e s us o u r sto ck in trad e .

G e n e ral S ch e me W ith thi s fun dam en tal n otion of credit and

.

re alizatio n that d ebit is th e opp o site o f cre dit le t us work out a ,

gen er al sch em e of d ebit an d cr e dit an d a c onve n ie n t way of re

memb e rin g t h e disti n cti on b e twe e n de bit an d cre dit .

Th e wh l y t m m y b ba d t h f t that w dit t h
o e s s e a e se on e ac e cre e

p p i t
ro f f
r e ori g p th b i t h am
o r co n err n t f hi u on e us n ess e o un o s
i v tm t (
n i
es f w en hip l im) n crease o o n ers -
c a

Ev y h ha g i a t w hip l im i ith imila

.

er ot er c n e n s se s o r o n ers -
c a s s e er s r
t t hat ab v
o i th pp i t o mpl m t f i t
e or s e o os e o r co e en o

ha g i imila t it th di f
.

If t h e c n e s s a rdit o ,
e r eco r s, o co urse , cr e
t y
en r

O ly tw typ f ha g
.

n o imila t it t h fi t i t h i
es o c n a f
e ar e s r o : e rs s e n cr e se o

p p i t
ro hip l im th gh p fi t d h t hat i a
r e ors -

c a ro u ro s , an e n ce n cr e se

i dit d t w hip laim ; th

s cre e o o d i th f i g
n ers -
c e seco n s e co n e r r n on
th b i e (y y
b us n ess ) f a t t h wi tha b y i v t
an o ne o an sse o er se n n es
m t p fit
en b y l a th
or roi a i g d diti g w
, as o n, us ncre s n an cr e n o ne r
 U
F NDAMENTAL P RIN CIPLE OF D EBIT AND CREDIT 25

A ll o th e r ha g
c n e s are opposi e t t o, o r co mple m t
e n ar y t o, o ur b asic
cre dit as

a d ti h
,

re uc in p roprie to rship claim is th e oppo site c ange

on o

in t h e same accoun t ; an d t he e ntry is a e it ( oppo sit e db

o f cr e i t) d
an m m
in cre as e in an as se t is t h e co ple e n t po r tion o f t h e rec
w h
o r d o f an in cr ease o f o n e rs ip claim ; an d th e e ntry is -

db
a e it (Oppo site o f cre it) d
3 de cr eas e in an ass et is t h e Oppo site o f an in cr e as e in an

v db
.

ass et ; an d as t h e incre ase gi es a e it e n t ry, t h e de

c r ease m v d h h
us t gi e a cre it e ntry : t is c an ge is d oubly

t h e oppos ite o f an increase o f an o n e r s ip claim w h -

h d
fo r i t is t h e r evers e c ange , a ecr eas e , in a r evers e ac
co un t , an asse t, an d so t h e en try is it se l a cre i t f d
ma y th w
.

In su m r ,
en, e

cr e di t
w hp o aim accounts
n e rs i -
cl

ass et acco un ts
o w n e rs hip—l i m a
c a cco un s t
asse t accounts
For e very d ebit an e qual amoun t mus t b e credi ted t o som e ao
coun t else t h e debit will n o t b e explaine d ; an d for every credi t an
,

e qual am ou n t must b e d e bited e lse th e credi t will n o t b e explain ed

, .

S o debits must e qual cr ed its always .

Forms of Acco unts We mus t next ob se rve th e fo rm of acco un t s

. .

Th e followi ng give s co rre ct re sults but fails t o sh ow th e to tal v ol

ume of tra n sactions f o r t h e y e a r an d this volum e is o ften so im ,

por tan t for guidan ce t hat it is d e sire d for th e ope rating statemen t .

In e ach cas e in t h e illustra ti on b e l o w t h e n o tati on at t h e side

of th e am oun t sh ows what o th e r acc o un t was aff e ct e d by th e tran s

ac ti on which cause d th e chan ge .

CASH

B e cause this form fails to sh ow the vo lum e of tra n sac tions ,

26 U
TH E F NDAM ENTALS or A CCOUNTING
columns th e l eft is use d fo r debit s t o th e accoun t and th e righ t
for credi ts thus
,

Now th e to tal o f e ach c olumn is t h e v olu me Of tha t kin d Of trans

O

action fo r t h e p e riod t o date (in clu ding balan ce s f rom th e pre c e d

ing p e ri o d) an d th e diff ere n ce b e tw ee n t h e tw o column s of e ach
,

accoun t is th e pr e se n t b alan ce o r in dication of status as d e sired

, ,

for th e balan ce sh e e t .This balan c e can b e sh own at de sir e d tim es ,

by a dev ice t o b e d e scrib e d late r as cle arly by this paralle l co lumn

,
-

fo rm as by t h e singl e column form Th e b ook in whi ch this form is

-
.

“ ”
k ept is call ed th e ledge r Le t us s e e h ow d e bits an d cr e dits are
.

applied t o thi s form .

Ac quisition of As se t It is e asy t o remembe r for t he re ason

.
,

given on pages 2 4 2 5 that an own er shi p claim accoun t is cre dited

-

,
-

fo r th e c onf e rrin g of an asse t an d that an ass e t acco un t is debited

,

for t h e ass e t co n fe rr e d S O th e figu re for e ach ass e t stands o n th e

.

l eft or debit sid e Of th e l e dge r accou n t re pr e se n tin g it an d addi tions ,

t o t h e ass e t are r e c ord e d by additi on al ite ms o n th e sam e side o f th e

acco un t .

S ur r e n d e r of A s s e t A d e cre ase in an asse t is a subtracti on f rom

.

i t an d sin ce all asse t acco un ts are d ebite d wh en ass e ts ar e acquir ed

, ,

t h e b ookk ee pin g d e vice fo r r e c or din g a r e duction is me re ly t o c r e dit

t h e ass e t acc oun t by e n te rin g th e it e m o n t h e right o r c re dit side Of
t h e l edge r sho win g that t h e am ou n t is t o b e d e ducte d f ro m t h e
,

o th e r sid e wh en t h e balan c e o r p re se n t status o f t h e acco un t is t o b e

l earned .

Ch an ge s afi e cting Own e r sh ip Claims A d ecre as e in an own e r

-
.

ship claim is a subtr action from it and sin ce all own ership claim ,
-

accoun ts are cre dited wh en claims are c reated t h e b ookk eepin g ,

d evice for sub tr actin g from an o wne rship claim accoun t is t o d ebit -

it for t h e amoun t Of th e d ecr e as e in th e claim ; so as th e o rigin al ,

claim w as e n te red on t h e right side of th e ledge r th e re duction will ,

b e e n te red on t h e l e ft .

S ummary A ss e ts in th e posse ssi on of th e busin e ss are r e corde d

.
 FUND AMENTAL PRINCIPLE OF D EB IT A ND C RED IT 27

On th e de bit o r l eft side of th e l edge r as are additions t o asse ts ; an d

,

d eductions are e n t e red on th e credit or right side Own er ship .

claims an d addition s t o th em ar e cr e dits and d eductions are

, , ,

d ebits This may b e gr aphi cally exp re s se d by th e chart It will

. .

b e se e n that credi ts are in

all case s oppo site d ebits ,

an d d ebits in all case s are

Oppo site c re di ts Th e tw o
.

Oppo site s o f e ach po le ,

be ing o ppo site th e sam e

t hing ar e lik e e ach o th e r ;
,

an d as w e saw o n page 2 3
, ,

the y are e qually se rvice

abl e for explaini ng that t o
wh ich th e y are opposite an in cre ase in an o wn e rship claim is -

as good an explan ation Of an incre ase in an asse t as is a dec re ase

in an o th e r asse t e t c E ach pai r Of shad ed items c onn e ct ed by an
,
.

arro w r e pr ese n ts rec o rd o f a t r an sacti on — a d ebit an d a cr e di t

an d t h e pai rs o f it e ms re p re se n t e ith e r sin gly o r in c o mbi n ati on

, ,

all po ssibl e c ompl e t e t r an sacti on s ; fo r pairs n o t c onn e cte d by

arrows cann o t re pre se n t tran sacti on s b e cause th e y c omp ris e e ith e r

tw o debits o r t w o c redits an d a c omple te r e c o r d Of a tr an sacti on
,

must have e qual d ebits an d credits .

Illu st rati on s Le t us n ow try a few illus tr ati on s Of d ebit an d

.

credit rem emb erin g that fo r e ve ry dollar of debit made t o any ao

,

c oun t a d ollar of cr edi t must b e mad e t o so me acco un t ; f or all

fin an cial (b ookk eeping) tr an sacti ons must b e e xp re ssed in dollars .

We may use he re th e tr an sacti ons that w e us ed fo r c on structin g th e

balan c e shee ts in C hapter II n ow fo rmulating e n trie s for e ach
,

transacti on tran sferrin g or po stin g them t o th e l edge r an d from

, ,

th e l edge r c on structi n g a final balan c e she e t ( Th e p r o c e ss o f

.

tran sferr in g i t ems t o t h e l edge r is call ed Fo r th e con

v e nie n ce of t h e re ad e r in tracin g e n tri e s in t o th e l edge r th e parts ,

o f each e n try will b e l e tter e d and th e corr e spo n ding items in th e

ledger will b e ar th e same le tters .

Y ou an d I b e gin busin e ss as e qual partn e rs with in cash .

Th en w e th e prop rie to r s hav e an o wne rship—claim Of

, ,
to
th e prope rty w e h ave inves ted and w e cr edit Pr op ri e tor shi p
,
28 TH E F ND AMENTALSU OF A CCOUNTIN G

C laim for that am

un t Th e cash which w e have gran ted t o th e
o .

busin e ss is t h e comple men t of t h e p rop rie torshi p claim which w e -

hav e cre dite d an d th erefore is debited Th e en try exp re ss ing t h e

,
.

transac tion is

(a) Cash (b ) Proprietors hip -

Claim

We n owp o s t this t o th e l edge r o n page 30 l e tte rin g e ach item ,

in th e mann e r stated ab ove In act ual p r actice a page or d e finite

.

po rti on o f a page in th e le dge r is r es e rve d for e ach accoun t an d all ,

p ostings t o that accoun t must b e e n te re d in that place A n item .

po s ted t o th e wrong spac e in th e ledge r is wors e than on e omitted ,

fo r it m ean s that two acco un ts are wron g that in whi ch th e i te m

stands an d that from wh ich it h as be en omitte d ; an d as w e shall ,

see late r t h e omi ssion of an ite m is more like ly t o b e fo un d than its

,

posting to a wrong accoun t .

Now w e buy Offi ce fu rn itu re for in cash For th e acquisi .

tion of Offi c e furniture w e d ebit Offi ce Furni ture $ 1 000 an d S in ce in , ,

acquirin g this asse t w e hav e give n up an o the r asse t cash we credi t , ,

C ash This give s us th e en try :

Debit
Offi F i t
(0) ce urn ure (d) Cash
W w p st this t th l dg r
e no o o e e e .

N xt w buy m rcha dis

e e accoun t
e nWe have again
e on ,

acquir d
e ass t m rcha di s
an e e n e To re co rd this w e d ebit M er
,
.

ch an dis e We have h oweve r in cu rred a liability through , ,

this transaction i e our creditor has a Claim against us for

. .
,

which we are liable an d th er e f ore t o re co r d t h e Cl aim w e credi t

A ccoun ts Payable Th e e n try fo r this is :

D ebi t
3 .
() M e
e rch an dise f
() A ccoun ts Payab le

This is p osted t o th e l ed ge r .

Now w e give promissory n o te s for to some of our creditors

as a way of ackn owle dging fo rmally through n egotiable ins tru ,

men ts our d ebt We have exch ange d on e typ e Of own ership

, .

claim for ano the r No te s Payable for A cco un ts Payable S O we

,
.

c redi t th e inc rease d Claim (No te s Payabl e) and d ebit t h e decr eased
claim ( A ccoun ts Payable ) in th e following entry :
30 TH E FUN D AMENTALS OF AC COUNTING

L astly yo with dr aw from th e busin ess takin g in cash your

u ,

share but I con tinu e alone On e half Of th e p ropri e to rship Claim

,
.
- -

(y o ur sha r e ) is an d this am o un t is paid t o yo u in cash .

Th e re fo re C ash is c re dited a n d Prop ri e torshi p C laim is

—

d ebi te d for that amo un t Th e e n try is : .

D e bit
8() . P ro
r p ri e to rs h ip Claim (3 ) C
-
a sh

This is po ste d t o th e l edger .

Th e l e dge r which con tain s th e se pos tings l ooks as w e fi nd it b e

low I t has th e sam e d ebit an d cre dit i te ms as w e re give n ab ove
.
,

but th e a r ra n ge me n t is Classified rath e r tha n Ch rono l ogical .

LED GER
C A SH
(a) [ P roprie torship Claim] -

(d) O
[ ffi ce Furniture]
(i) [ S un di ]
r es (m) [ Notes Paya le] b
(n) [ M e rc ha din se ] 5 00 (s ) [ Prop rie tor]
PROPRIETORSH IF -
CLAIM

(p ) [ M e r c h an dise ] 5 00 (b ) [ Cash]
()
1 [ C as h]
OFFICE FURNITURE
(c) [ Cash]
M ERCH ANDIS E
(e) [ A ccoun ts Paya l e] b (j ) [ Cash]
q
( ) {S un dries!

(g) [ Notes Payab le] f

() [ Merchandise]
NOTE S PAYAB LE
(b ) [ Accts Paya le] . b
PROPRIETORS PROFIT CLAIM
’
-

(0) [ M erchandise] (k) [ Cas h]

I now wish t o s ee a balan ce shee t re fle ctin g th e presen t sta tus Of
th e busin e ss Listing th e debit an d credit balan ce s on th e ledge r
.

gives me what I wish as follows ,

1 m
Th e n a e o f an acco un t in rac e t s b k d
in icat es th e accoun t to ic t h e wh h
h f
o t e r h al o f t h e e n t ry is po s t e d h h
W e re a c ange in o ne acco un t is e p laine b y '

x d
h m h h h
.
.

c an ge s in o r e t an on e o t er accoun t , t h e o t e r acco un t s are no t ne cessaril

y
dvd md d d
in i i ually na e , b u t are in icat e as a group b y th e or “
S un ries ”
w d d .
 FUND AMENTAL PRINCIPLE OF D EB IT A ND CREDIT 3 1

B alance S h eet
Cash 50 Proprie tors hip
Offi ce Furniture Accounts P ayab le

Thi s c orr e spon ds exactly t o th e final balan ce sh ee t on page 1 6 ,

for it has r e sul t e d from th e same tran sacti on s .

It is Obvious that makin g e n tries an d po sting th e items t o l ed ger

acco un ts from which balan ce shee ts may b e at any tim e drawn up
is much e asie r an d simple r than c on structing pe rp etually chan gin g
balan ce sh e e ts as shown in C hapte r 11 .

N O TE . NOattempt is made in th e ear ly chapter s of thi s bo ok t o us e

for titl es o f acco un ts t h e exact forms common in bu sin ess Th e com .

mon bu s in e ss forms ar e mor e or l es s abbr eviated an d th e r e ad er may

,

b e co nf u s ed b y th em Th e titl es us ed he r e are me an t t o b e more sug

.

t i f t h c t n t f t h e acc oun ts than th os e commonly u s e d

g es v e o e o n e o .

QUE STIONS A ND P ROB LEM S

1. S tat e what transact ions wo uld give rise t o each O f t h e follo wing entries
()
1 A d e b i t t o C a s h an d a cr e di t t o A cco un ts R e c ei vable

(2 ) A de bit t o Prop rietors h ip an d a cre di t t o Cas h

(3) A de b it t o Notes Re ceivable and a cre di t t o A ccoun ts Receivab le
(4 ) A de b it t o Fixt ures an d a cr edi t t o P rop rie tors h ip
(5 ) A d e b it t o P r o p r ie
’
t or s P r o
-
fi t C laim an d a cr e dit t o M erchan dise
(6 ) A deb it t o M erchan di s e an d a cr e dit to A ccounts Payable
2 . What fi nancial s tatus is reflect e d b y each of th e following ledger ac
counts ?

ACCOUNTS RECEIVAB LE

MERCH ANDISE
3 2 TH E F NDAM ENTA L S U OF A CCOUNTIN G

3 m f w
D ete r ine fo r th e ollo ing tr ans actions wh h et e r th e accoun t named
h db d d d
.

in par e n t e s is is t o b e e ite or cre ite

v h db h
.

(1 ) Re cei ing cas fo r a e t due yo u (Cas ) , $ 5 00

m h d
(2 ) S ellin g e rc an ise (M e rchan ise ) , d
h
(3 ) P ayin g J o n Jon es wd o e h
him ( Jo n Jon es )
(4 ) B u yi n g m h d
e r c a n is e o n a c coun t ( h d
M erc an ise ) ,
q m
5 ) B uyin g e uip e n t for cas ( h q m E uip e n t) , $ 5 00
m
(6 ) B uying po stage s ta ps (Po stage) , $ 5 0
(7 ) Pa y in g f o r m e r ch a n di s e h(Cas ) ,
()
8 R ece i iv
n g cah s o n a cc oun ts d u e ( vb
Accounts Recei a le) ,
m h d
(9) B uyin g e rc an is e on acco un t (Accoun ts Paya le) , b
(
C u e : t h e e dbi ts c a d m
ll e f o r a o un t t o t hde cr e i t s, to

4 S o
. h w what is t o b e d b d wh
e ite an d d d h f w
at cre ite for eac of th e ollo ing
transac ti on s

() A i v t a h
1 n es s c s

( ) M h di i b ght
,

2 e rc an sea s t ou on ccoun

(3 ) Fixt b ght f a h
,

ur es ar e ou or c s

(4 ) M ha di whi h ld f
,

erc n t se i c $ 5 co s ah s so or 1 00 c s

(5 ) M ha di i b ght f ah
,

e rc n se s ou or c s

(6) M ha di p vi ly p ha d i
,

erc n se re w paid f
o us urc se s no or,

DO y d bit q l y
o ur e s e dit ? ua our cr e s

5 F m th
ro t i mad f Q ti 4
e en r es e t t t h l dg
or D
ues th on con s ru c e e er . oes e

t tal O f ll d b it l dg p ti g ag with t h t t l f th d b it i
.

o a e e er os n s r ee e o a o e e s n

Q ti 4 ? D O th
u es on di t l dg p ti g ag with th di t f
e cre e er os n s r ee e cr e s o

Q ti 4 ?
u es on

6 C t t d bit
on s ru c de di t p
s an i g t h t a a ti
cre giv b l w
s ex ress n e r ns c on s en e o
d p t th m t t h l dg
.

an os e o e e er

( ) Th p p i t i v t ah d
.

1 e ro r e or n i
es s i n c s an n

al t t
re es a e

( ) M ha di i b ght f
2 e rc n se s ou t or on accoun

(3 ) Offi q ipm t i b ght f $ 8 5 i a h

ce e u en s ou or 0 n c s

(4 ) M h a di whi h
erc n t se i ld fc co s a t d s so or on ccoun an

$8 i a h
,

f or 00 n c s

5 ) Paym t i mad f en m ha di p vi
s e ly b gh t
or e rc n se re ous ou

i p p id $ 7 8
,

(6 ) I n s uran ce s re a

(7) M ha di wh i h
,

erc n t $ 5 i ld a
se c co s tf 1 00 s so on ccoun or

(8) Th p p i t withd aw $ 5 ah
,

e ro r e or i r s 00 n c s

(9) A p mi ro
y t i g i v
ssor i a
p y m
no e t f m sh a di p vi
en n l y en o e rc n se re ous

b ght a t
ou on cco un

( ) M ha di ld f
,

10 e rc ti g
n i
se cos n i h s so or n cas

( ) Paym t f
1 1 en i m ad f
o m ha di p vi ly b ght
s e or e rc n se re ous ou
Li t th d bit d dit l dg t tal at thi p i t
s e e an cr e e er o s s o n .
 APTE R IV CH
TH E INTE RP RE TATION OF DEB IT A ND CREDIT

Nature Of D e b it an d C r e di t illustratio n s tha t have be en

. Th e
use d in C hapter III have b ee n Of a simple typ e for all ass e ts cov ,

e red by th e m ar e tan gibl e an d e asily r e c o gniz e d as ass e ts It is .

n ow w o r th whil e t o tak e a fe w case s l e ss Obvi ous an d se e what w e

can disco ver ab out t h e n atu re o f d e bit an d c re dit Le t us fi rst .

summariz e our discussi on Of d ebit an d cr e dit t o thi s p oin t We .

have se en that w e have on t h e balan ce sh e e t onl y t w o main classes

of acc oun ts asse ts an d own ership claims (th e latte r emb r acin g
,
-

bo th t h e c on tr o lli n g own e r ship claims Of th e prop rie tor t o t h e

-

prope r ty o f th e busin ess [ his in ve stmen t plus p rofit min us lo ss] , ,

a n d t h e n o n c o n t r-
o lli n g —o wn e rship claims Of o utside rs) S in ce we .

have also s ee n that fo r e ve ry dollar of debit th e re must b e a d ol

lar of c r e dit ( e l se thin gs ar e n o t e xplain e d) it is Obvi o us that fo r
,

ev e ry d o llar o f d ebit t o an y asse t acc o un t th ere must b e a d o llar of

credi t e ith e r t o some o the r asse t acco un t or t o some own e rship

claim acco un t (fo r the re are n o o th er kinds of cre di ts) ; for e ve ry
dollar of cre di t t o an y asse t acc o un t th ere must b e a doll ar o f debit
,

e ith er t o s om e o th e r asse t acc o un t o r t o som e o wn e rship—claim ac

coun t ; fo e v ery do llar Of d ebit t o a y w ship claim acc oun t

r n o n e r — ,

th ere must b e a doll ar Of credit e ith er t o som e o the r o wn ership

claim accoun t o r t o s ome asse t accoun t ; an d for e ve ry d ollar of
c redit t o an y own ership claim accoun t the re must b e a do llar of
-

d ebit e ith er t o some o th er own e rship claim accoun t o r t o s om e asse t

-

accoun t Th e fo ll owing diagram e xpre sse s this in summary fashion :

.

Ow n er s hi p -
i
Cla m

Thi sdiagr am is a deve l opm e n t o f th e diagr am on page 2 7 . E ach

pair Of S had ed it e ms c o nn e ct e d by arr ows r e p r e se n ts an en try
34 U
TH E F ND AM ENTALS OF A C COUNTIN G

of th e
type in e di ca t d
an d all p o ssibl e e n tri e s are of o n e Of th e se
,

type s Though all this is math ematically an d lo gically tru e it is

.
,

n o t always Obvi ous in th e c on cr e te cas e s of busin e ss an d th e r e ,

f ore we must e xamine a n umb e r of typical tran saction s an d see

just th e significan ce Of th e se p rin ciples .

Examinati on of D e bit s Le t us e xamin e firs t th e d ebits wh ich .

are mad e wh e n ass e ts ar e give n up that is le t us take a n umb e r ,

Of cas e s in which an ass e t acc o un t is cr edite d an d se e just in wha t

sens e s it is trUe that th e complem en tary de bit re p re sen ts either
an o th er ass e t acquir e d or an own e rshi p claim reduced -

Wage s If w e pay wage s in a factory w e ar e ge tting valu e

.
,

add e d t o t h e raw mate rial o f o u r p ro ducti on an d h e n c e are ge ttin g ,

back in th e form o f finish e d goods (o r in go ods in —pro ce ss no t yet -

finished ) what w e pay in wage s We are me re ly e xchan ging cash .

for e nha n c e men t o f valu e in goods one ass e t for an o th e r Finish ed , .

G oo ds may b e d ebited an d C ash cr e dited 1

, .

S ale s S alarie s If w e pay a sal a ry t o a sale sman w e are again

.
,

ge t ting a n ew as se t for an old Th e sale sman if h e e arn s his salary .

, ,

is actually s e lling goods h e i s c onve r ting goods on th e sh e lve s

in to goo ds s old ; an d go ods In th e han ds of a satisfie d customer are
w o rth more than goods o n th e S h e lf A S a matte r Of gen er al eco .

n omic prin cipl e th e skillful m e rchan t re n d e rs a s e rvic e t o th e com

,

mu nity by adding t o t h e value o f go ods fo r t o t h e valuable quali ,

ties whi ch goods po ss e ss in th e hands of th e man ufacturer h e adds

t h e quality of b e in g wh e re th e y ar e wa n te d by t h e custome r wh e n
th e y are wan te d by th e custome r that is in an availab le store ,

re ady t o b e d e live red Th e sal e sman c on tribu te s t o that s e rvice

.

an d t o th e e nhan ce m e n t Of valu e arising from that s e rvic e an d ,

h en ce h e c onf e rs upo n th e me rch an t an ass e t (th e quality Of be ing

in th e custom e r s han ds at t h e right tim e) in e xchange fo r his sal
’

ary S old G oo ds may b e d ebite d an d C ash cr edited

.
(If th e sales .

man doe s n o t e arn his salary th e tran saction is Of a diffe re n t type , ,

t o b e e xplain ed late r ) .

1 m fh
Th e na giv h wi h pi l i i i l d h f
es o t e accoun t s are en e re t ca ta n t a s ; an er e a te r
wh i m i iv wi h i l i i i l d h wi w ld h v pi l
e n an te s g en t a cap ta n t a an ot er se ou not a e a ca ta
i will b d d f wi h h i l wh if h m i
, ,

t e un e rs t oo to re e r to an acco un t t t at t t e, e reas t e na e s

giv i h
en di m ll l i i i l i will b i d d f h hi g i lf
w t an o r n ar y s a e t te r n t a t e nt e n e t o re er to t e t n t se
t h C h m hb h m
-

”
and no t to an ac co un h f : t us as e ans t e acc o un t o r cas ut cas e an s

m y R lE wh
,

o ne ;
“
m hea f l
s ta t e
”
l ea ns t e acco un t or rea es tat e , ereas
“
rea es tat e
”

m h p p
eans t e y i lf ro ert tse .
 TH E INTERP RETATION OF DEBIT A ND CREDIT 35
Engine e r W age s If we pay wage s t o r ailro ad e n gin e er s we
’
s .
,

are exch anging cash fo r a n e w ass e t Th e n e w ass e t is t h e move.

men t of train s C ars an d locomo tives in th e storage yards are

'

e arn in g n o thin g ; but ca r s an d l o c om o tive s m o ving up an d d own

t h e ro ad ar e wor th m or e th an tho s e stan ding idl e an d this m ove ,

men t is an asse t se cur e d by paying cash as wages (am ong o th e r

things) in exchange for it M ovemen t of C ars may b e debited and .

C ash cre di t ed This is imm e diately f ollowed o f c o urse or sho uld

.
, ,

b e by an o t h e r c on ve rsi on
,
m ovem en t Of cars in to cash collected .

Wh en th e m ovem en t has so resulted C ash may b e d ebite d and ,

M ovemen t of C ars may b e credited If th e move men t doe s n ot re .

sult in cash c o ll e ction s (e ith e r dire ctly o r through th e sale Of tick

e ts ) w e ge t an o th e r typ e Of tran sacti on t o b e discusse d later
, .

Inte r e st If w e pay in te re st in advan ce w e e xchange on e ass e t

'

.
,

for an othe r C ash is giv en in e xchan ge for a right an d that right

.
,

o r cl aim c o n sists Of th e p rivil e ge o f usin g o th e r pe o pl e s m on e y fo r

’

t h e pur po se s Of busine ss Wh e the r th e m one y will b e use d t o earn

.

a profit or m erely t o carry on s ome d e sired e n te rprise such as th e ,

c on duct of an e ducation al in stituti on t h e privile ge of using th e ,

m one y is an ass e t for th e purpo se s of th e busin e ss who se accoun ts

w e are keepin g We may debit Use Of B orrowe d Fun ds and credi t
.

C ash .

In sur ance If w e pay fir e insur an ce premiums in advan ce w e

.
,

ar e exchan gin g cash fo r pro te cti o n agains t l o s s of p r o pe rty an d ,

sin ce a guaran te e Of re imburs em en t in case o f l o ss of prope r ty is o f

v alue that guar an t ee is an ass e t
,
We may debit In suran ce Pro.

t ection and c re dit C ash .

l T axe s Wh en w e pay tax e s we get no tangible ass e t but we get

.
,

t h e ri ght t o c on duct busin e ss in t h e lo cality (which would b e d enied

us by so cial custom if w e de clined t o pay) w e ge t th e pro te ction of ,

police an d fi re departm en ts w e ge t th e us e of r o ads an d sidewalks

,

and se wers e t c ,
Th e se in tan gible thi ngs are asse ts quite as real as
.

tangible goo ds Le t any one wh o denies it try th e expe rimen t Of

.

b ec omin g an outlaw and s till attempti n g t o d o busin e ss wi th

law abidin g peo pl e We may d ebit C ommun ity Privil ege s an d
-
.

cr edit C ash .

D e pr e ciati on We have n e xt t o conside r ce rtain tr ansaction s in

'

whi ch th e conve rsion of one type of ass e t in to an o th e r is le ss oh

36 TH E F ND AM ENTAL S U OF AC COUNTING
v iou s b ecause n o dire ct cash is involve d D epre ciation of machin .

e ry is a g o o d illustr ati on H e re n o dire ct exchan g e Of cash or any

.

o th e r sp e cific ass e t is mad e fo r a n e w asse t In re ality ho wev e r .

, ,

t h e e xchan g e is quite as re al as th e exchan ge o f cash fo r n ew mer

ch an dis e : t h e o n ly diff e re n c e is that t h e e xchan ge is gr adual r ath e r

than immedi ate S uppo s e we spe n d . fo r machin e ry th at will

l ast t en ye ars but will th en b e worn ou t or b ehind t h e time s and
,

virtually usele ss Wh y d o w e sp e n d . for th e machin e s u nl e ss

in t h e e xp e ctation Of ge ttin g back o ur inve stm e n t with a p rofit , ,

ou t o f th e p roduct Of th e machin e ? Th e machin e s in t h e p ro ce ss Of

we a ring o u t will in t h e t en y e a rs produce o r b e com e c o n ve r t ed ,

al on g with raw mat e rial and lab or an d fue l co nsum e d in creatin g

th e ste am t o driv e it in to finis h e d g o o ds whi ch will b e c on v e r t e d
, ,

in to accoun ts re ce ivabl e which will b e come cash which may b e

, ,

come n ew r aw mate rial an d n ew wage s an d n e w machin e ry and

profits S O th e we ar an d te ar Of th e machin e ry actually cre ate s
.

n ew ass e ts D ep re ciati on th e re fo re re sults in th e n e e d o f an e n try

.
, ,

debiting Goods in Pro ce ss o r Fini she d Goods an d cre ditin g M a

- -

chin ery an e xchan g e o f an old asse t ( in par t e ach ye ar) for n ew .

Expiration of In su ran ce A S imilar thing is true when w e u se up

.
,

t h rough th e laps e Of time such thin gs as fi r e in su r an ce p repaid

, .

If w e debite d Fire Pro te ction wh e n t h e in sur an ce was paid for in

advan ce w e sh ould as time go es by an d th e prepaym en ts be com e
,

e xhauste d without waiting for th e ir e n tire e xhaustion debit

, ,

Good in Pro ce ss o r Fin ish ed Goods or whateve r accoun t r epre

s — -

, ,

sen ts th e ass e ts which w e are ge tting from our busine ss activiti e s ,

an d cre di t Fir e Pro t e cti on .

Partn e r s S alary ’
Wh en w e pay cash to a memb e r Of a partn e r
.

ship for h is salary as may b e call ed fo r by t h e partne r shi p agr e e

,

m en t w e may b e d oin g any on e Of se veral thi ngs according t o Cir

, ,

cums t an ce s If h e sp e n ds his tim e in se l e cting an d o rde ring o ur

.

stock w e are payin g for a sto ck Of goo ds on hand ; for a we ll Ch o sen

,
-

sto ck is m o re valuable than on e of t h e sam e in itial valu e if ill as -

so r te d o r t oo la rge o r t o o small If h e s ells di rectly o r superin tends

.

sale sme n and di re cts th e ir activitie s so that th e y add t o th e value

o f g oo ds by ge ttin g th e m in to th e han ds o f cu s t omer s w e ar e payin g ,

for t h e in c re ase d valu e Of goods in t h e han ds o f custom e rs ; if h e is

t he fin an cial man age r of th e busin e ss an d e s tablishe s a line of cre di t
3 8 TH E F ND AM EN TALS U OF A C COUNTING

s hould have credi ted s ome own ership cl aim p erhaps employee s ,

a S imple cas e of asse ts and own er ship—claims

h
o wne rs ip claims -

in cre as ing to ge th e r Th en on paym en t Of wage s in July we sho uld

.
,

have debi t ed Empl oyee s Own e rs hip C laims (wipin g ou t that lia~
’

b ili ty) an d c re dite d C ash S O t h e disburs em en t Of cash th ough

.
,

no t fo r an o th e r ass e t wo uld have sh own t h e re ductio n o f an o wn

,

e rship claim (
— asse ts an d own e rshi p cl aims de cre asing toge ther) -

S in c e h owe ve r by supp o siti on w e di d n o t mak e an y en try in M ay

, , ,

for t h e work d on e an d for t h e de bt ( w e must u n d er doubl e e n try -

S h ow bo th if w e S h ow e ith e r) w e must in Ju ly wh en w e pay S h o w ,

th e eff e ct of t h e tran saction o n b o th Go o ds in Pro c e ss an d C ash - -

an d mak e p rovision for an e n try t o e ach Our en try is m erely b e .

h in d th e tim e s an d for th e sak e of c ompl e ten e ss Of re c ord w e shoul d

,

.
—
catch up Go od s in Pro ces s must b e debite d t o S how what w e go t
-

for th e wage s paid an d C ash must b e cr e dited ; an d it is qui t e th e

,

same thing wh e th er th e paym en t is made at th e tim e th e asse ts are

acquired o r late r e xce pt that as w e have just se en th eo re tically
, , ,

th e re is in th e m ea n tim e an owne rshi p claim b o th s et up an d paid -

Off . That ogvne rsh ip claim S h ould b e sh o wn o n th e b o oks if it

-

is u npaid for an y appre ciabl e tim e ; but in p ractice it is usually

omitte d alto ge th e r from t h e re c o r ds if stan di ng but a f ew days ; so

that Often wage s earn e d in on e we e k are no t en tere d in th e accoun ts

un til th e n ext w ee k if p ai d in th e n ext week an d th en are tr e a ted ,

with out m en tion of own er shi p claim at all as if t h e exchan ge were -

Goo ds in Pro c e ss di re ctly an d imm edi ately for cash

- -

S o in sum .
,

mary in case t h e liabili ty for t h e wage s is e n te re d on t h e b ooks th e

, ,

cash is given up for th e ca n c elling of an own e rshi p claim ; an d in -

case th e liability is no t so en tered th e cash is give n up for an o th er ,

asse t : bu t th e n e t efi e ct is th e sam e in b o th case s o n e ass e t ex

ch anged for an o th e r an d th e owne rship Claim can cell e d if s e t up at

,
-

all .

Ex Po s t Facto Payme nt Now suppos e it is said tha t if th e work

- -
.

don e in M ay wen t in to goods in proce ss in M ay an d no en tr y is - -

made un til J uly at th e tim e th e e n t ry is made in July th e asse t will

,

n o l on ge r b e in t h e fo rm o f g oo ds in pro ce ss for th e g o ods may have - -

b een fi nished an d sold an d paid for Thi s doe s n o t alte r t h e case . .

If th e goods have b een so conve rte d th ey have b e en con ve rted in to ,

o ther asse ts fo r th e purpos e of m aking goods in proce ss is t o con

,
- -
 TH E INTE RP RE TATI N O OF D EB IT A ND CREDIT 39
ve rt th em in to fin ish e d goo ds and t h e purpo se o f making finis h ed ,

goods is to conve r t t hem in to accoun ts re ce ivabl e an d t h e purpo se ,

o f g e tti ng acc o un ts r e c e ivable is t o co nve rt th e m in to cash an d t h e ,

purpo se Of ge ttin g cas h is t o turn part o f it in to n ew goo ds in -

pro cess (t o star t t h e cycle an ew) an d t o give p art Of it t o th e pro

p r ie t o r as his gai n A t w h at e v e
. r stag e in t h e p r o c e ss w e st o p o r

h ow e ve r far w e go as just followed through we fi n d th e cash paid

, ,

f or wag e s has b e com e e ith e r som e o th e r asse t or has paid an own er

shi p claim and th e o nly qu e stion is th e titl e Of th e accoun t t o b e
—
,

debite d whi ch will b e obse rve d late r for such case s Th e onl y .

p o ssible e xception is that Of failure of t h e work don e in paym en t ,

for th e wage s t o re plac e in th e fo rm Of ass e ts its c o st

,
S upp o s e .

t h e work d o n e was n o t succe ssful an d did n o t add t o t h e valu e

o f goo ds in p ro c e ss
- -

NO ass e t acc oun t c ould b e d ebite d wh e n

.

C ash is cre dite d fo r n on e e xists as a r e sult of t h e work

,
S ome .

th ing must b e debited when C ash is cre dited What has hap .

pe n e d ? Th e p rop rie tor s mo n ey o r a par t Of it h as b e en paid

’
, ,

ou t for n o r e turn : th e p rop ri e to r s ass e ts hav e b e e n r e duce d an d

’
,

h en c e hi s own e rshi p claim has b een reduce d S o his own er ship

-
.

Claim acco un t must b e r e duce d b ya d e bit S O h e re t oo wh e n t h e .

, ,

c redi t t o o n e a s se t acc o un t is n o t acc ompani e d by a d ebit t o an

o th e r it is acco mpan i e d by a d ebit t o an o wn e r ship claim acc ou n t
-
.
,

Los se s from Ba d De bt s L astly for th e e xamin ation Of debits .

, ,

le t us supp o se that a custom e r wh o owe s us go e s in to bank

r up t cy an d pays his c r edito r s o nly fif ty c e n ts o n t h e d ollar or $ 1 000 , ,
.

H is accoun t was debite d on o u r b oo ks wh en h e b e cam e in d ebt ed t o

us Of course W e must n ow credit it for th e
,
. paid an d this ,

l eave s a b al an c e un paid of $ 1 000 on th e debit side S in ce howeve r

,
.
, ,

w e cann o t coll e ct this it is n o lon ge r an ass e t an d it must b e can

, ,
”
c ell ed or writte n Off
,
Th e way t o can c e l a d ebit is t o make an
.

o ff se tti n g c redit t o th e sam e acc ou n t What shall w e debit when .

we cre dit his acco un t ? NO o th e r asse t acco un t c an b e debite d fo r ,

no asse t is cre at e d o r se cur e d in e xchan ge fo r his can c e ll e d d e bt .

Th e can c ellati on Of his d ebt simply re duce s th e asse ts of th e pro

i t d h c duc s his w n e r ship Claim H e n c e t h e pro
p r e or a n e n e r e e o -
.
,

pri e tors own ership claim acc ou n t is debited

’
-
.

T e mpor ary Unce rtain ty Po s sib l e We have so far gon e on t h e .

assump tion that we always know Wh e th e r t h e surre n d er Of an ass e t

4 0 U
TH E F ND AM ENTAL S OF A CC OUNTIN G
’
h as acquired a n ew ass e t or h as m e re ly depl e te d th e proprie tors
own er ship claim for exampl e wh e th e r th e paym e n t o f wage s
,

has re sulte d in ass e ts of at l e ast eq ual valu e or has b ee n in par t ex

t rav agan ce b e caus e th e wage s di d n o t re place th emse lve s A t th e .

tim e o f makin g an e n try h ow eve r w e d o n o t c omm o nly kno w th e

, ,

r esult of th e tr ansacti on ; for w e cann o t k e ep ou r in ve stigation s Of

such things always up t o th e m ome n t On occasion howeve r and .
, ,

always b efore a p e riodi c balan c e S he e t is tak en for de te rminin g

imp or tan t matters Of p olicy such thin gs are in ve stigated an d th e
,

appropriate adjust men t of th e b o oks t o th e facts is mad e .

S ummary of D e b it s Ev ery cas e w e have take n th erefore and

.
, ,

the se are typical shows us for eve ry de cre as e in an asse t an d credit

, ,

t o an asse t acco un t a c ompl e m en tar y d e bit which r ep r e s en ts e i t h e r

,

an o th er asse t acquired or s om e own e rship claim r e duc ed If th e -

compl em en ta ry e n try debits an asse t acc oun t th e asse t repre sen te d ,

by th e d ebite d acco un t is in cr ease d : if t h e d ebit is t o an own

ers hip claim acco un t t h e Claim re p re s en t e d by th e d e bit ed ac
-

c oun t is re duce d We have n ow examin e d all type s of debits aris

.

ing f rom d e cr e ase s in ass e ts i e all debits c omple m en tary t o cred

,
. .
,

its made t o asse t accoun ts Th e only o th e r origin for debits is

.

tran saction s in volvin g credi ts t o own ershi p claim accoun ts Th e se -

.

are simpl e fo r w e hav e on ly f our ki n ds o f o wn e rs hip claim credi ts

,
-

an d all th e s e Obvio usly inv o lv e e ith e r an in cr e ase in ass e ts o r a d e

cre ase in o wne rship claims Th e se kin ds are (1 ) investmen t by

-
.

proprie tors (an d this of cou rse involve s n ew ass e ts o r e lse th e in

ve stmen t was n ot made) (2) p rofits b elon gin g t o proprie tors (anc
'

if th e asse ts do n o t exist th e p rofits have n o t b een made) (3) b ox ,

rowin g (an d if b o rrowin g w as don e asse ts must have b ee n b or ,

rowed) and (4 ) e xchan g e of on e Claim fo r an o the r (or a de creas e in

,

on e claim off s e tting a Cl aim in c r e as e d) In th e fi rst three case s a.

n ew ass e t is in v o lv e d in th e t r an saction its elf an d in th e last case ,

an old o wn e r ship claim is r e duc ed by th e e stablishm en t of th e n e w

—

o n e ; S O that w e n ow fi nd that o ur ge n e r al state m e n t is tru e f or

debits arisin g from credi ts made t o o wne rship claim accoun ts as -

we ll as for tho se arisin g from cr edi ts made t o asse t acco un ts We .

n ow hav e our gener al pr in cipl e that de bits always m e an e ith e r in

,

cr e as e s in asse ts or de crease s in own e rship claims ; and sin ce the -

title of an account should indi cate whe th e r i t represents asse ts or

 TH E INTE RP RETATION OF D EB IT A ND C RE DIT 4 1

o w rship claims
ne -

,
t h e in te rpre tati on Of debits S hould be e asily

Examina tion of We have alre ady s e en tha t all cr edi ts

Cre dit s .

indicate e ithe r re duction in ass e ts or in cre ase in ownersh ip claims ~

.

Th e fo rm e r ar e suffi ci e n tly Obvious fo r th e y have b ee n amply ,

illustrated in conn e ction with th e debits t o whi ch the y are com

p le m e n t ary T h .e latt e r again so far as t h e y co nsist o f inv e stm e n t
, ,

by proprie tors an d l oan s by credito rs ar e Obvious C er tain o the r ,

.

type s Of cre dits howeve r are wo r th atte n ti on in thi s c onn e ction

, , .

T e mporary Own e r sh ip Claims S ome tim e s temp orary ow n e r

-
.

ship claims are e stab lish ed by th e sale t o o th er s of some thing t o b e

-

con sum e d in th e futu re Wh en a r ailro ad sells a mile age tick e t it

.

g e ts in re turn cash but t h e right t o ride s re pre se n ted by t h e ticke t

,

will n o t usually b e compl e tely e xhauste d at on ce H e nc e agai n st .

t h e ass e t r e ce iv e d ( c ash) must b e se t a claim of th e mil e age h older .

Whe n th e tick e t is sold th e e n try may b e a debit t o C ash an d a

c re dit t o M ile age H o lde r s Own e rship C laim Th en as t h e mile
’
-

age is c on sum ed as e vide n c e d by t h e c o n ductor s r e turn s M il e age

’
, ,

H olde r s Own e rship C laim is r e duc e d S imi lar o wne rshi p claims
’
- -
.

are e stablish e d wh e r e tick e ts are so ld in advan c e Of th e ir u se Un .

til an e quivale n t fo r th e c ash is p ro vide d th e give r Of th e cash has a ,

claim against th e asse ts of th e busin e ss .

Automatic Increas e s in Owne rsh ip Claims A busine ss some -

.

time s re ceive s intere st on mon ey it has loan e d outside o r has de

p o site d in its b ank Th e in te re st is paid in cash an d t h e cash Of
.
,

course must have a Claiman t (If t h e in te re st we re n o t actually

,
.

paid th e in cr e as e in asse ts would b e in th e form o f a claim fo r in

t e re s t again st th e p e r so n t o whom t h e mon e y was l o an e d ) Wh o .

is t h e claiman t for th e in cre as e in asse ts ? Obvi ously th e own e r s

of t h e busin e ss W e will the re for e c re dit an acc ou n t sh owin g th e
.

claim Of th e own ers thus in cre asin g th e Prop ri e to r s Profi t C laim ’

-

S om e tim e s t oo a busin e ss re c e ive s a commissio n for s ellin g goods

, ,

for o th e rs .Th e c ommission is p r e sumably paid in cash ( though

some o th er fo rm o f asse t would b e satisfactory) in cre asing th e ,

gen e r al asse ts an d th ere fore at t h e sam e time in cre asin g claims t o

ass e ts ; for all asse ts mu st have some Claiman t S in ce th e g ood s .

we re sold by t h e busine ss th e commission w as e arn e d by it an d th e

, ,

claim t o th e profit made is t h e proprie tor s A s in th e cas e of th e ’

.
4 2 U
TH E F ND AM ENTAL S OF A C COUNTING
in te rest rec eived w e may credit an accoun t indi ca tin g th e n a tur e of
,

t h e claim or Pr op ri e to r s Profi t C laim If again w e sh ould l e as e t o

’
-
.
, , ,

an o th e r busin e ss som e re al e state whi ch w e own w e sh ould re ce ive ,

ren t an d th e ren t would b e paid in c ash o r in so m e o th er asse t

,
.

Th e claim t o th e ass e t w o uld b e ou r ow n er ship claim A s in th e -

.

case Of t h e in te re st an d th e commission w e sh ould cre dit Prop ri e ,

to r s Profi t Claim In all m ercan t ile an d manuf actu ring busi

’
-
.

n e sse s of c ours e m o re impo rtan t than such items as th e s e is t h e

, ,

profit on m e rchan dise as illustr ate d in C hapt er II Wh en such

, .

profit is m ade th e as se t accoun t repre se n ting th e f o rm which th e

,

profit has tak e n (C ash A ccoun ts Re c e ivabl e o r No te s Re ce ivabl e)

, ,

is d ebite d an d Profi t C laim is credi te d

,
-
.

G e n e ral S ummary To summariz e : a d ebit always in di cate s an

.

in cr e as e in an ass e t o r a d e cr e as e in an o wn e rship claim ; an d a -

cr edit always in di cate s an in cre ase in an o wn er shi p claim or a d e -

cre ase in an asse t ; an d th ough tempo r aril y un ce r tain ty may arise

,

as t o whi ch has o ccurre d wh e n tim e h as b e e n given f or inv e stiga

,

tion of th e few doubtful case s (such as paymen ts Of wage s for

which e qual v alu e in re turn may or may n o t have b een s e cu re d)
conf usion sh ould n o t re sult ; for titl e s Of accoun ts S h ould indicate
cle arly whe the r th e figure s gath e re d in th em are co n cern ed with
asse ts or with own e r ship claims Th e onl y way in which con fusion -
.

is lik ely t o o ccur is thr ough th e carele ssn e ss Of comm on spe e ch It .

is comm on for e xampl e t o say W e have re ce iv e d in te re st on our

,
“
, ,
”
bank balan ce though what w e have re ally re c eived is cash in
, ,

cr e asin g b o th asse ts an d Propri e tor s Profi t C laim (sub division ’

-

In te re st) C are must b e tak e n in bookk e eping n ot t o all ow t h e

.

carel essne ss o f c ommon sp e e ch t o confuse th e t w o Change s .

N O TE Th e r eader f amil iar w ith o th er discu ssion s o f t h e th eory Of

.

accoun ts may b e puzzled b y t h e failu re her e t o mention what ar e com

Th e w hol e tr eatme n t ab o v e is
“
mo nly call ed n o min al accoun ts .

bas ed upo n t h e balan ce S hee t as if it w er e th e sole en d of accoun ting

,
.

Fr o m t h e po in t O f vie w O f this ch apt e r it is so Later ho w e v er at ,

.
, ,

t en tion is call ed t o t h e fact that statistical in formation con cern in g th e ,

n atur e O f co sts go in g in t o ass e ts an d t h e n atur e of t h e s ou rce s o f in come ,

is n eces sary for guidan ce in t h e con du ct of bu sin es s an d that separ ate ,

accoun ts ar e es tablish ed r epr es e ntin g th e elemen ts O f th e asse ts an d

O f o wn ership claims We sh all s ee th en ho w e v er that t h e S O Called
-
.
, ,
-

n omin al accoun ts actually r epr es ent ass e ts or claims an d that th ere ,

 TH E INTE RP RETATI ON OF D EB IT A ND C REDIT 43
fo re t h e th eory enun ciated h ere is n o t onl y pedagogically s oun d in
avoiding at t h is stage th e phi losophical distin ctio n be tw e en r e al and
,

n omin al an d mixed accoun ts but p ractically an d l o gically s ou n d as ,

w ell .

QUE S TION S
PROB LEM S A ND

1. In di cat e t o which groups O f accoun t s [ As se t D r Ass et Cr Own ership

C laim D r Own e r s hip Claim C r l e n tries for each of t h e f ollowing
, .
,
.

transact io n s s houl d b e made :

.
,
.

(a) B uy ing m e r chan di s e for cash

(b) Payin g wage s in cas h $ 8 73
,

(c) In ve s ting cas h

,

(d) B uyin g m erch an dise o n credi t

,

(e) P ayin g accoun t s payable

,

f hd w l f
,

() Wit r a by p p i t a o ro r e or

v
(g) Gi ing a t i p ym t f no e t payabl n a en o an acco un e,

T t t h q lity f d b it
es e e d
ua dit Th t t l d bit
o e s an cre s e o a e s are

f ll wi g d d th b k f a b i
.

2. Th t ae ti
r ns ac on s o o n ar e r eco r e on e oo s o us n e ss

R m mb i g t h t v y t i v lv ha g t t
.

e e er n ti a tw e er rans ac on n o es o c n es , s a e

wh th th p ti f a h t
e er e or ti i di at d b y it li b l w p
on o e c ran sac on n c e a cs e o re ~

t a h
res e n s g t b c ddi a t i
an e o w hip l im
e r e co r e n an sse or n an o n e rs -
C a

acco un t d wh t h an ha t i t b d b it d
e er s ucdit d Giv cco un s o e e e o r cre e e
d idi g y d i a h a
.
,

you r r eas onf or ec n as ou o n e c c se

( ) A d ti i g paid f
.

a ver s n or

(b) I p p id
ns u r ance re a

() C mmi i
C o a d by b t
s s on e t y t p id rn e us , u no e a

(d) G i l f q ip m t w d
a n on sa e o e u en o ne

() R t
e en d b ildi g w d
e arn e on u n s o ne

(f) D pr i tie b ildi g w d

ec a on o n u n s o ne

(g) R w m t i l l t b y fi
a a er a s os re

(h) I t t n eres d b d earn e on on s

(i) R y lti p id
o a m hi y es a on ac ne r

(j ) L g l d i p i d f
e a a v ce a or

(k) Gif t i ht mpl y

n cas o an e o ee

(l) S ppli p ha d
u a es t urc se on cco un

( ) T
In pai d i
axes ah n c s

( ) Th am
11 t e d g i t o un f i t t
accrue m yb w d a a ns us or n ere s on on e orr o e

wh t h g m t p vid f t h p ym t f i t t t t h
,

en e a re e en ro es or e a en o n e r es a e

d f en h i m th d t h m t h h v lap d
o ea c s x on s an re e on s a e e se

D i g th p
ur n f ma f t
e t h d ivi g b lt f a m hi
ro ces s o h n u ac ur e e r n e o ac ne as

b w
e en t It
o rn o u t i till i l d d i t h d b it t Pl t E q ip
s cos s s nc u e n e e o an u

th b k A mi g t h t th w hav t b
.

m t
en on e oo s d t s su n a e ear an ear e no e en

wa t f l h w h ld y d th b k th ha ti f it
.

s e u , o S ou ou r e cor on e oo s e ex us on o s
 CH A PTER V
TH E IN COM E S H EET

Recor d s Ne ce s s ary b e twe e n B alan ce S he e ts We have already .

s e en that virtually every trans acti on b ri n gs ab out a Change on th e

balan ce sh e e t This sugge sts that th e task Of providi n g info rma
.

ti on for a balan ce S h e e t that is tru e t o t h e m omen t re quir e s con

st an t vigilan ce and c on stan t r e cord In fact if w e w ere t o at
.
,

tempt actually t o k ee p t h e balan ce sh ee t at all tim e s fre sh w e ,

should have o ur han ds m ore than full an d t h e e xp e ns e Of attempt

,

ing it w ould b e far gr e ate r than t h e valu e of th e inf o rmation Oh

t ain e d . Few busin e ss h ous e s att empt t o l e arn e xactly th e ir p rofit
Ofte n er than ann ually This doe s n o t m e an h oweve r that th e y are
.
, ,

c on ten te d t o le t thi ngs go w ith out an y attempt t o mak e r ec o rds

u n til t h e expir ati on o f th e s e vari o us p e ri ods fo r th e re is n ee d o f ,

watching at fr e qu en t in tervals s ome Of t h e e l e m en ts in th e ope ra

tion s Of t h e busin e ss an d th e re fore t h e re cords must b e k ept up t o
,

time e ve n th ough th e y ar e n o t summariz e d an d put in to t h e fo rm

Of a d efinite statem e n t e xc e pt at c on side rable in te rvals Th e .

r e co r ds in dicatin g quickly m oving tan gibl e prop e r ty lik e cash an d ,

m e r chandi se an d th o s e indicatin g fix e d sums d u e by an d t o th e

,

busin e ss are usually ke pt day by day s o that e rror s can b e de

, ,

t ect e d paym e n ts an d c oll e ctio n s can b e mad e promptly an d daily

, ,

policy can b e d e te rmin e d in tellige n tly ; but accruin g items whi ch ,

are Chan gi n g f r om day t o day by m e r e laps e o f tim e lik e e xpir ati on ,

Of insur an c e prepaid or gr owin g liabili ty for in tere st o n mon ey

,

b orrowed ar e usually all ow e d t o run for a c onv enien t tim e with

,

ou t r e c o r d for t h e p o licy Of t h e busin e ss n e e d n o t b e f r e qu en tly

,

chan ge d by th e m an d ar e th e n r e co rded as Of a sp e cifie d day (de

,

t ermin e d by t h e cir cumstan c e s Of t h e cas e as in di cat ed lat er) ,

.

Knowle d ge Of Inbome n ot En ough It is n o t e n ough howeve r

.
, ,

for a busin e ss man t o kn o w wh e th e r his in c om e has in cr e as ed or

d e creas ed ove r a c e r tain pe ri od o r e ve n day by day ; fo r that kn owl
,

e dge th ough it may assist hi m t o k n ow wh e th e r h e is g e tting rich e r

,

or poore r and h e lp him t o kn ow wh e th er h e can afford t o spen d

,

m ore or le ss for his pe rs on al e xp ens e s e t c d o e s n o t h e lp him to

,
.
,

know from what cause s h e has go t p oor er o r rich e r an d th erefore ,

4 6 U
TH E F ND AM ENTAL S OF A C COUNTIN G

an e arning pe riod (for a m on th a half ye ar or a ye ar) an d th en , ,

c ons o lidate d in to t h e ge n er al accou n t for th e proprie tor s profi t ’

Claim . Thi s is t h e usual m e th od of double en try A s a matte r o f .

fact h oweve r t h e full n am e s in di cated ab ove sugg e stin g subd iv i

, , ,
’
si on s of th e proprie tor s acc oun t are neve r us ed fo r th e custo m Of
, ,

b usin e ss is t o re c o gniz e that such acc oun t s are subdi visio n s Of t h e

proprie tor s acco un t witho ut in dica tin g that fact in th e title s
’
.

C ompl e te S tat e m e nt of Pr ofi t s an d Loss e s We have alr e ady .

Obse rved that n o balan c e sh ee t can give any in fo rmation abo ut

a busin e ss exc e pt for a m ome n t Of time and t h e v e r y n ext ho ur ,

th e situatio n will have chan g ed It will hav e change d n o t m erely

.

b ecaus e po ssibly o n e asse t has b e en e xchang e d fo r an o th e r o r ,

b ecaus e s o me ass e t has b e en appli e d t o pay a d ebt but usually ,

b e caus e th e re has b e en som e in cre as e o r d e cr e as e in th e prop ri e to r

ship If th en as w e have alre ady s e en t h e pro prie to r is t o b e
.
, , ,

given inf o rmation ab out t h e c on duct of his busin e ss h e must kn ow ,

th o s e items which have chan ge d his prop ri e tor shi p n o t b e cause h e

has in ve ste d m ore in t h e busin e ss or tak e n an ythi n g ou t (of which ,

of co urs e h e is al re ady awar e) but b e cause of th o s e busine ss fo rc e s

, ,

causing gain or loss (of which h e may n ot b e c on stan tly aware) ,

an d h e r e qui re s this inf ormati o n n o t in is o lat e d bits but in a c om ,

p l e t e sta t e m en t o f cha n g e s in pr o p r i e t o r ship in v o lvin g b o th p r o fit

an d l o ss an d t h e n e t e ff e ct Of th e m all H e d e sir e s this state m e n t in
.

addi tion t o an d cle arly distin guished from t h e kin d of statem en t

, ,

p re vio usly discussed which give s th e status o f t h e busin e ss at an y

,

d efinite mom en t of tim e H ere we wish a statem en t of chan ge s

.

o v e r a c on sid e r abl e pe riod o f tim e r e sulting in t h e c o n diti on s sh own

,

o n t h e balan c e sh e e t at t h e e n d Of that tim e Usually t o o such a .

, ,

s t atem en t will S ho w what disp o si tio n Of p rofits was mad e e g . .

,

wh e th e r withd rawn o r l e ft in t h e busin ess S uch a state men t is com .

mouly call e d an in c om e sh e e t Th e foll owing is an illustra tion :

”
.

Profi t o n merchan di se $ 5 00
C o mmiss io n earn e d 4 00
Re n t earn e d 2 0°

In t e r e s t e arn e d 3 00
G ro ss in co m e

Lo s sf m b d d bt
ro a e s 2 00

N t ie m n co e

D w by p p i t
ra n ro r e or

B ala d aw
nce u n r n
 TH E IN COM E S H EET 47
Ne t Efi e ct Income S hee t Re fl e ct e d in B al an ce S h e e t It
of .

should b e n oted agai n at this po in t that th e balan c e sh ee t at an y

ti me S hows t h e c on diti on Of t h e busin e ss afte r t h e tr an saction s in
dica t ed by th e in com e she e t have b e en in c orpo r ate d o n t h e b ooks .

On th e in come she e t just sh own we fi nd that t h e gain has b een

an d th at th e pro p ri e tor has dr awn $ 200 A balan ce she e t .

tak en at this po in t th ere fore will sh ow as c ompar ed with that at

, , ,

t h e b e ginn in g of th e pe ri od an in cre as e o f pr o p ri e t o r ship claim o f

,
-

but th ough it must S h ow at l e ast on e o th e r e ff e ct th e de tail ,

o f that eff e ct will de pe n d upo n circumsta n c e s If all o th er c on di .

tion s exc ept th e profit are th e same as at t h e en d o f t h e pre ce ding

pe riod an d if th e profit is n ow in th e form of cash t h e balan ce
, ,

sh ee t w ill n ow appe a r (suppo sing th e balan ce sh e e t on page 8 t o

b e that of th e b eginn in g o f th e pe riod ) as follows :
Real E s ta t e Pro prie to r
Fix tu r es Accts Payable .

Me rchan dise 2

If, on th e
th e r hand th e un dr awn p rofits had b ee n applied as fast
o , ,

as made t o payin g d ebt th e balan c e sh e e t w ould n ow sh ow C ash

, ,

o nl y o r as it was o n ou r prior balan c e sh e e t an d A cc o u n ts ,

Payable w ould S h ow o nly Th e pr ofit h e r e th e n would , ,

li e in a re ducti on Of d ebt r a th e) than in an in cr e as e o f asse ts In .

o th e r w ords t h e in com e sh ee t d oe s n ot sh ow us in what fo rm th e

,

profit n ow stan ds n or what chan ge s in t h e form o f ass e ts an d lia

,

b ili t ie s have b ee n in vo lv e d in e arni n g th e s e pr ofits It doe s h ow .

,

e v e r sh ow us what Chan ge in pr o pri e tor s o wn er ship claim has

’
-

occu rre d and from what s or ts o f o pe ration s an d w e th ereby kn ow

, ,

h ow much chan ge th ere must b e in e ith e r t h e ass e ts o r t h e liab iliti e s

t o match th e cha n ge in pr opri e to r s own ershi p claim ; fo r n o on e has
’
-

mad e a profit at all unl ess h e has e ith er m or e ass e ts o r f e we r liab ili
ties Onl y a study o f b o th in c om e sh e e t an d balan c e sh e e t will te ll
.

t h e wh ol e story I n de e d t o te ll th e wh ole story w e n e e d t w o bal

.
, ,

an ce sh e e ts an d an in com e sh e e t t h e t w o bala n c e S h e e ts giv e t h e

te rmin als of t h e j ourne y (t h e start an d th e finish) an d t h e in c om e ,

S h ee t giv e s s om e of t h e d e tail s Of t h e j ourn e y its elf .

4 8 TH E F ND AM ENTAL S U OF A CCOUNTING

QUES TIONS A ND P ROB LEM S

1 S h oul d you exp ec t t o recor d day b y d ay all info rmation concerning
e ach o f t h e follo wing? S tate why you ans we r as you d o in each case
.

(a) Cas h
.

(b) D epre ciation

(c) A ccounts Payab le
(d) In teres t
(e) A ccoun ts Re ceivable
(f) In sur an ce P rep ai d
(g) No t e s Re ce i a le vb
Th e f ll w
o o in g is t h e alan ce b s h ee t o f A B CO on January 1
,
.
, 1 91 9
Re al E s t at e Prop rie t A or

C as h Proprie t o B r

M e rc an iseh d Accoun t s Payable

Ac co u n t s Re ce i a le vb No t es Pay ble a

In sur an ce rep ai P d 5 00 Wages Liability 5 00

In co me s h ee t on Jan uary 3 1 , 1 91 9, was as f ll w

o o s

m h di
P ro fi t o n e rc an se
R d e n t e arn e

I f d ’

n t e e s t e arn e

G i m ross n co e

L f mb dd b o ss ro a e ts 2 00

N i m et n co e

D w b p p i ra n h) y ro r e t o rs eac

B l v d w a an ce o er$ ra n 2 00

If t h h e re b a d ti Of
as ee n i A t Payabl re d f uc on n cco un s e , an o

i b th M n h di d A
o t R ivab l b t th
er c hav
an se an cco un s e ce e, u er e e

b th
ee n n o o h g t h bal
er c h t x pt t h ff t d b y
an es o n e an ce S ee e ce o se e ec e

th p fit
e rod it withd awal (
an b th i h) i t h f ll wi g b la
s r o n cas s e o o n a nce

h t f F b a y 9 9 i t t with t h bal h t d th
,

s ee or e ru r 1 1 1 co ns s e n e an ce s ee an e

m h t ab v ? If xplai ll ha g i t h d bala
, ,

i
n co e s ee o e so , e n a c n es n e s e co n n ce

s h t mpa d with th fi t d if it i t i t t h w why it

ee as co re e rs , an s no co n s s en S o

is no t .

Re al E s t at e Pr prie t or A
o

C as h P op rie t o B
r r

h d
M e rc an i se Ac o un ts Payable
c

A c co un ts Re ce i a le vb N o t e s P y ble a a

Ins uran ce re p ai P d Wage s Liabilit y

Fro m th f ll wi g i f m ti giv b y t h l dg
e o o n fa n or a on en e e e r as o t
cer ai n date
t tab l
co n s r u c h t f th t dat d i m h
a an ce s ee or a e an an n co e s eet for th e
pr e ce di g p i d p p i t
n er o l : t t ro r e or r ea es a e n o t es pay
 TH E IN COM E S H EET 49
ab le accounts payable r en t earn e d$ 1 5 00, accounts
v bl in t eres t earne d m ha di
,

r e ce i a e $ 5 00 er c n se p ro fi t
m ha di h withd aw l f p fi t b y th
,

on er c n se ca s r a s o ro s e

p p i t
ro d i g th p
r e or ur n e r e cedi ng pe rio d p fi t hav b a d
,
as ro s e ee n e rn e ,

Th bale h t fab an ce s ee o us in ess o n Janu r 1 1 1

ay 9 9 w f ll w
, , as as o o s

Ofli Eq i pm ce u en t Proprie t or
A R iv bl
ccoun t s e ce a e Wage s Liability 5 00
C 3 5 1]

On January 1 ,
1 9 0,
2 th e b a
al n ce s hee t was
Offi ce E qim
u p en t Proprie t or
Account s Receivable
C 3 3 1! 5 7 000

Fro m th e h t d f m th i f mati giv b l w

t w o b al an ce s ee s an ro e n or on en e o

t
co ns ru c t t h i m h t f th y a 9 9 C mmi i
e n co e s ee d or e e r 1 1 o ss o n earn e

f m v f m bad d b t w
.

w as ga i i wn ro l se r ces as o sses ro e s er e

S h ld y
ou d f g i da i d ti g a m f t g b i
ou n e e or u n ce n co n uc n an u ac un n u s n e ss

an y g al i f m t i ab t it Op ati
e ne r n or a xp ibl i d ll
on ou s er on s , e r es s e n o ar s

an d t t gi v
ce n s , n o t h bala h t th i m h t? If
en o n e n ce s ee or e nco e s ee so ,

what ? D O y y w y O f g tti g it b y b
o u se e an kk pi g m th d ? If
a e n oo ee n e o s

so, t ll b i fly b y wh t m th d
e r e a e o s.
 CH APTER VI
TH E OPERATIN G S TATEMENT UNDER
C O S T A CCOUNTIN G M ETH OD S
-

Knowle dge of S pe cifi c Co s ts an d of G ain We

S pe cifi c S our ce s .

have n ow s e e n h ow by a subdi vision of th e pro prie to r s o wnershi p ’

clairn acc o u n t w e can provid e him wi t h pe r i odic inf o rmati on ab o ut

t h e n atur e of t h e l o ss e s and e arn ings of hi s busin e ss Thi s is go od .

as far as it g oe s but it doe s n ot go far H e is lik ely t o wish to

,
.

kn ow fo r example h ow t h e profit on merchandis e was made up

, ,

h ow much of it aro s e f rom diff e re n c e b e twe en buying price o f me r

ch an dis e an d se lli n g p ric e an d h ow much o f that dif fe re n c e was
,

abso rb e d by wage s Of sal e smen by adv ertisin g by taxes by ren t by

, , , ,

light by freight charge s e t c In o rder t o d o things e c on omically

, ,
.
,

h e must kn ow wh e n h e mak e s a savin g an d wh en h e has an in cr e ase

c
of o t s s so,
that h e may imm e diat e ly s e e k f or t h e s o urc e Of th e sav~

ing an d duplica e it o r s e ek fo r t h e caus e Of th e in cr e as e in c o st and

g ,

av o id it in futur e NOb e tte r he lp t o succ e ssful con duc t Of busine ss

.

is foun d than kn owle dge of spe cific costs and spe cific s ou rce s Of gain .

Acc ounts f or S pe cific Inf ormation Our accounts as so far con .

S t ruct ed hav e n o t give n us much in f o rmati on of thi s s o r t We .

have sh own t h e co st Of raw mat erials an d Of th e va ri ous o th e r ,

ite ms g oin g in to goo ds in p ro c e ss ; but w e have n ot tr ac ed th e

- -

e l em en ts maki n g up th e e xc e s s c o st Of g oods in p r o c ess ov e r raw - -

mate rials or of finish e d goods over go ods in pro ce ss e t c E ve n if

,
- -

,
.

w e kn e w th e add e d c o sts t o b e e xc e ssive in an y ste p al on g th e way ,

w e sh ould n o t kn ow f rom our b ooks wh e re t o l ook to fi n d th em .

Obv i ously w e must m ake more care ful re c ord as w e go Of th e spe , ,

cifi c c o sts that go up on our raw mat e rial t o mak e up ou r go o ds in -

p roc e ss an d of tho se that go upo n our goods in proce ss t o mak e up

,
- -

ou r finish e d g oo ds S i n c e fo r ordin ary acc oun ting pu rpo s e s w e put

.

thin gs on our b ooks for what th ey co st us (any prop e r depar ture s

from that rul e will b e discuss ed late r) w e wish th e c ost of crea ting
,

ass e ts t o appe ar o n our b ooks as in cre asi ng th e valu e Of th e ass e ts ,

as w e have alre ady done in th e illustrations adding th e c ost of

man ufacturing wages to goods in pro ce ss e t c At th e sam e time
- -

,
.
,
 TH E OPERATING S TATEMENT 5 I

however ,
we that if w e are t o watch our wage s co st an d kn ow
se e

t h e e fl e ct o f a chan ge in th e rate Of wage s upo n o ur c o sts o f fini she d

goo ds w e must s eparate wage s co sts from o th er c osts g oin g in to our
,

goo ds—in pro ce ss In o th e r wo rds in ste ad Of d ebiting Goo ds in

-
.
,

Pr oces s di r e ctly as in th e ill u strative en tri e s giv e n w e may debit

, ,

Wages (a subdivision Of goods in proc e ss) o r as w e hav e al

- -

re ady don e with profits w e may omit t h e subtitle an d call it simply

, ,
“
Wage s ; but w e must rememb er that S in ce th e accoun t is onl y a
”

d e tail of our additio n t o goods in pro ce ss work don e for t h e wage s

- -

has in creas e d t h e valu e Of go ods in proc ess For th e purp os e of t h e

- -
.

ill ustrati on s fo ll owin g we will assum e that all c o sts in cu rr e d r e sult

,

in an in cr e as e in ass e ts for Of c ou rs e th e c o sts would n ot b e v olun

,

t arily in cr e as e d if that w ere n o t t h e cas e ( later w e will discuss

th ose thi ngs whi ch d o n o t r e sult in in cre ase of ass e ts but re duce
proprie tor s own er ship claims)
’
-

Wage s A Typical Cos t A ccount Th e cas e of wages just given .

is typical Of a larg e gr oup Of c o sts e n te rin g in to various ass e ts but ,

r e qui rin g in o rd e r that w e may study th e m an d judg e Of th eir

,

who le so me ne ss o r un wh ol es o m en e ss se par ate re c ord Le t us ex ,

.

amin e so me o th e r e l e me n ts n eedin g se par ate re c o rd .

Pow e r — It s Ele me nt s Ev e ry on e kn ows that p owe r is one Of

.

t h e c o sts Of man ufactu r in g by po w e r d rive n machin ery an d that if -

ste am give s th e p o wer and is gen e rate d in on e s own b o iler s fu el is a ’

c ost o f po w e r B e side s fu el m ore over th e c o st Of powe r in clude s

.
, ,

t h e co st Of lub ricatin g Oil for th e e n gin e r e pair s Of t h e e n gin e an d ,

b oil e r an d n um erous o the r items no t n e ce ssary t o sp e cify h e re

, .

Th e po we r goin g through t h e machin ery co nve r ts th e raw mate rial

or par tly fini sh ed p roduct in to goo ds in p r o ce ss o r fini sh e d goo ds - -

and so in cr e as e s t h e asse ts ; but in o r d e r t o dir e ct our fact o ry o pe ra

tion s succe ssfully w e must know m ore than th e to tal c ost of even
this small subdivision Of c o st of ass e ts We must b e able t o l earn .

whe th e r it is b e tte r t o u se ele ctric powe r than ste am t o us e fue l Oil ,

than c o al t o buy powe r than t o provide it o urselve s ; an d th e se

,

thi ngs re quir e that w e know th e elemen ts Of ou r powe r c ost We .

o ught t o k n ow fo r e xampl e wh e th e r o n e ki n d Of lub ricating Oil

, ,

is che ape r for u s than an o th e r no t m ere ly pe r barre l but per

uni t of h orse p ow e r p roduced This m e an s that w e must know
-

our c o st Of Oil as a s e parate part Of our p o w e r co st .

5 2 TH E F ND AM ENTAL S U OF A CCOUNTING

El eme n t s of G oo d s i n Pr oce s s Le t us tabul ate th e se items

- -
.

alr eady m en tion e d with assum e d co sts realizin g that the y mak e
, ,

but a small par t of th e to tal numb e r Of co sts t o b e watched and ,

”
coverin g th e o th ers by an item of o th e r c osts .

Raw Material
Wages

Goods in - -
Process Power

Oth er Costs

S e par ate Ac
ount f or Each El e me nt Th e b e st way t o r e cord
c .

th ese facts for re feren ce is in accoun ts S uch accoun ts represen t .

t h e vari ous e l em e n ts Of th e c o st of acquiring asse ts C are must b e .

tak e n n ot t o ge t any of th em on th e b oo ks an d on t h e balan ce sh e e t

twice for th e y w ould b e c oun ted twice if w e sh ould coun t th em
,

b o th as goods in p roc e ss and as wage s an d power or as b o th p owe r

- -

and fu e l S O th e y are e n te re d in th e first ins ta n c e as raw mate rial

.
,

wages fuel Oil r epair s an d as whateve r o th er th in gs th ey chan ce t o

, , ,

be an d th e n p r o t e cti on is p rovide d as w e shal l s e e lat er again st , ,

coun t ing th em again in th e accoun ts for con solidati on o f elem en ts .

Asse t s Ch an ging Form A n in teres tin g fact t o Obs e rve n ow is .

that though th e se kinds of costs are elemen ts Of goo ds in process - -

an d are d ebite d t o s e v e ral accou n ts r a th e r than t o t h e singl e acc ou n t

repre senting such go ods s om e of th es e accoun ts (such as wage s , ,

fu el oil re pair s) d o n ot lon g r epre sen t asse ts r e co gnizabl e un de r

, ,

t h e n am e s us e d in th e title s Of th e acco un ts : fu el c on sumed is no t

re cogn izable as an asse t in t h e fo rm of fu el for it has c e as ed t o b e ,

fue l virtu ally at th e momen t it se rve s its purpo s e ; oil c on sum ed

c e as e s t o b e oil ; an d by c on sumption in th e engine bo th Oil an d fu el
c on tribute t o ass e ts in th e form of go ods in p roce ss (on th e assump - -

ti on p revi ously mad e that p roduction is effi cien t) Fu el an d Oil .

c ons umed th en th ough th ey n o l onger con sist of fu el and Oil as

, ,

such c onstitute th e fu el and oil element s in goods in proc ess and

,
- -

h en c e constitute ass e ts as much as the y ever di d but ass e ts n o ,

longer r e co gnizable unde r th e n am e s used in t h e titl e s o f th e ir ac

c oun ts If th en w e w ere t o k ee p our books always up t o th e facts
.
, ,

of t h e minu te we Sh ould e ach m oment debit Goods i Process and

,
n — -
54 . TH E FUND AM ENTAL S OF A CCOUNTING

Though absolutely in t an gibl e and n ot repre senting th e value Of

an y sp e cific p r op e rty that th e S h oe manufactur e r s can call th e ir

o wn it is n e v e r th el e ss a c o st of man ufactu re d g oo ds an d is r e pre

,

s en ted in th e goods manuf actur e d b e cause it has re p roduced its elf

in t h e goo ds ( f or th e s e machin e s do t h e w ork Of man y han d labor
e rs an d th e re f ore c on t ribute t o t h e goo ds what t h e han d lab or e rs

wo uld con tribute) We might debit G oods in Proce ss or Finis h ed .

- -

G ood s an d c re dit C ash for ro yalty

,
This h owev er would n ot .
, ,

S h ow on our b o oks t h e statistical inf o rmati on ab out r oyaltie s paid ,

an d th e re fo r e it is f ar b e tt e r t o d ebit Ro yaltie s as a subdivision Of ,

o u r Goo ds in Pr o ce ss an d cr e dit C ash

— -
In n o way can th e r oyal
,
.

ti e s b e iden tifi e d in t h e p roduct but th e y are as truly th ere as is t h e ,

le ath e r which may c on c eivably b e trac ed back t o a par ticular sk in

b ought : pi e ce s of l e ath e r s ewe d toge th e r in a shoe are w or th m ore
than as l e ath e r an d th e co st of se win g th em toge the r is a co st r e
,

p roduc e d in th e ass e t ; h e n ce in e ve ry sh o e mad e is a bit o f th e roy

alty paid for t h e royalty h elp e d t o con ve rt t h e le ath er in to t h e
,

fi n ish e d S h oe Th e t o tal r oyalti e s paid for a p e ri od , th en c on sti

.
,

tute a par t of t h e c ost o f acquir in g ass e ts an d are in th e asse ts in t h e

form Of sh oe s Th e accoun t for r oyalti e s th e n b o th repre se n ts
.
, ,

asse ts an d giv e s us t h e statistical figure Of r oyalty co sts in curr ed .

Oth e r Illustration s Akin t o th e paym e n t o f r oyalti e s as jus t .

de scrib e d ar e paymen ts for in sur an c e tax e s in te r e st r en t h eat , , , , ,

light e t c whi ch s e rve th e ir e n ds in m akin g up t h e product and

,
.
,

h en c e ar e e l eme n ts o f p ro duct ; an d th e r e c ords Of th e s e are k e pt

fo r statistical pu rp o s e s but th e y ar e at t h e same tim e in r e ality ,

subdivisio n s o f Go ods in Pro c e ss o r Finish e d G o o ds t hough e ach - -

b e ar s t h e n am e o f th e kin d Of tr an sac ti on invo lve d In su ran c e ,

Taxe s In te r e st Re n t e t c
, , ,
.

G o o d s in Pr o c e s s
-
Ou r ass e ts in th e fo rm Of p roduct as we
-
.
,

hav e just b e e n s e e in g are fir st rep re se n te d in man y separate ,

accoun ts fo r de taile d e l eme n ts and as w e saw a fe w mom en ts ago , , ,

man y of th e se elem en ts ar e con sum ed in th eir origin al fo rm alm ost

as s oo n as th e y are acquire d (lab or s e rvic e s for in stan c e) Th eo , .

re tically w e sh ould daily d ebit G o ods in Pr o c e ss an d c r edit In s u r

,
- -

an ce Tax e s e t c for t h e day s tran sfo rmation s Th e n t h e d ebit

, ,
.
,
’
.

t o th e accoun ts re p re s e n ting th e e l em en ts go in g in t o ou r p ro duct

would give us our de sire d statistics an d th e tran sfer of th e se to ,
 OPERATIN G S TATEMENT
TH E 55
Goods -
in -

Pr o ce ss (xchang t a sacti s) w uld giv

e e us our c o sts
r n on o e

in vo lv e d in man uf acturin g S ome Of t h e e n tri e s in vo lve d in the se

.

tr an sfo rmati on s w e can con ve n ie n tly mak e an d d o mak e d ai ly ,

but fo r m o st Of th e m mo re b ookk e epin g lab or would b e re quire d

than w ould b e wo r th wh il e fo r t h e inf ormati on Obtai n e d an d he n c e ,

t h e e n t ri e s are mad e at in t e rvals o n ly Th e g oo ds in p r o c e ss in .

- -

tu rn soo n b e co m e finishe d go ods an d s o Goo ds in Pr o ce ss must

, ,
- -

b e c re dit e d an d Finish e d Goo ds mus t b e d ebite d fo r t h e c o st o f

all g oo ds s e n t from t h e S hop t o t h e ware house as comple te d Th e .

balan c e o f Go od s—in Pro c e ss when t h e b oo ks are k e pt up t o th e

-

tim e r e p re se n ts t h e co st Of go ods in t h e sho p u n comple te d .

Fin i sh e d G oo d s W e saw in th e last par ag raph that when

.

goods are fin ishe d in th e S hop th e y are tr an sfe rr ed t o th e warehouse

or sal es roo m and an en try is made d ebitin g Finish ed G o ods an d
,

cr e diti n g Goo ds in Pro c e ss fo r t h e co st o f t h e goo ds tran sfe rr e d

- -

This is simple if th e co sts o f th e goo ds are kn own as the y sh ould b e .

Fin di n g t h e c o st o f fini she d p ro duc t s day by day s o that w e can ,

d ebit Fini shed Goo ds an d c re dit Go o ds in Pro ce ss is n o t altoge the r - -

simpl e ; for w e cann o t usually id e n tify th e va ri ous e l em en ts of

co sts in th e p roduct o r witho ut p rohi bitiv e b ookk e epin g lab o r dis
tribute th e m daily on a c ompre he n sive plan C o n se qu en tly som e .

c o st fi n d in g m e th od (which n e e d n o t n ow b e d e scribe d) is adopte d

-

t o giv e t h e inf o rmati o n n e c e ssa ry fo r d e biti n g Fini sh e d Go ods .

Fi n all y whe n fini sh e d g o o ds ar e so ld S o ld Go o ds is d e bite d fo r

, ,

t h e c o st o f th e goods ( as pre viously d e bite d t o Fin ishe d G o o ds

an d c re dite d t o G oo ds in Pro c e ss ) an d Fi n ish e d Go o ds is c r e d
- -

it ed. Thi s it will b e Observed l e ave s Fini sh e d Go ods with a

, ,

d ebit balan c e e qual t o th e c o st Of th e goo ds finishe d an d n o t so ld

-
th e co st o f g o ods r e main in g in th e wa r e h o us e A ft e r th e c o st .

o f t h e g o o ds has o n c e b e e n o b tai ne d it is ca rr i e d al o n g t hr ough ,

Fi nish e d G oo ds t o t h e sal e with n o b o o kk e e pin g diffi culty .

S o l d G o od s A t t h e same time that S o ld Goo ds is debited and

.

Finishe d G oods is c re di t e d an o t h e r d e bit an d c redit are mad e t o

,

S h o w what w as go t fo r t h e goo ds s o ld as w e shall se e p r e s en tly ,

( pag e

S ummary W e fi nd then that at any particular m om en t t h e as

.
, ,

se ts se cu r e d fo r c onv e rsion pu rp o se s may app e a r in an y o f sev

e ral acc ou n ts on t h e b o o ks : acc ou n ts r e pre se n ting o rigi n al f o rm ,
5 6 TH E F ND AM ENTAL S U OF A C COUNTING

goods in pro c e s s fini sh e d go od s or sold goo ds M an y thin gs are

- -

, , .

all o w e d t o re main on t h e b o oks u n d e r th e ir o rigin al titl e s lon g

afte r th e y hav e b een con sum e d in their origin al form as fu el in su r ,

an c e p repaid e t c an d th en at conve ni e n t in te rvals th ey are tr an s

,
.
,

ferr e d on th e b ooks t o th e accoun ts rep re sen tin g t h e forms w hi ch th e y

hav e now tak en In o the r words for con sid e r abl e p e riods c e r tain
.
,

ass e ts appe ar o n th e b ooks n o t u n d e r n am e s re p re s e n tin g th e pre s

e n t f o rms of th o se asse ts but u n d e r n am e s r e p re s e n tin g old f orms

,

alr e ady supplan te d or consume d in acquir in g n ew fo rms Thi s d o e s .

n o harm h ow e ve r if it is ge n e r all y u n d er stoo d by all co n ce rn e d

, ,

with th e b o oks and re c or ds that th e titl e s n o l onge r r e pre se n t th e .

pr e se n t status A s a matter Of fact as al re ady in dicate d in m ost

.
, ,

busi n e ss e s s o man y tran saction s o ccur daily that it w ould b e a waste

o f tim e t o attempt t o S h ow all d e tails daily B e fo re a b al an c e sh e e t .

could b e dr awn up on Tu e sday m orni n g t o sh ow th e status on M on

day ni ght it would b e alre ady b e hin d th e tim e s S Obalan c e S h ee ts .

are dr awn up p e rio dically an d n o atte mpt is mad e t o k e e p all in fo r

,

mati on up t o th e tim e s b e tw e en t h e date s o f balan c e sh e e ts In .

th e m e an tim e? statistical in f o rmati o n o f e xtr e m e valu e is c ompil e d .

Pr ecauti on s Onl y t w o pre cautions are n e c e ssa ry Th e first is

. .

t o s e e that all titl e s t o acc oun ts are so Cl e a r that o n e k n ows what t o

d o with t h e acc ou n ts un de r th e m at t h e tim e t h e b ooks ar e b rought
up t o th e minute an d th e balan c e sh e e t is prepar e d Th e s e con d is .

t o s e e that w e r e alize that s om e o f th e c o sts in cu rre d may n o t ye t

hav e g on e altoge th e r in to th e g oo ds p ro duc e d We saw a fe w mo .

me n t s ago for e xampl e that wh e n w e buy r aw mat erial w e d e bit

’

, ,

t h e Raw M ate rial acc ou n t an d cr e dit C ash o r A cc o un ts Payable ,

an d that wh e n t h e r aw mate rial is issu e d t o t h e sh op t o b e us e d w e

d ebit G oods in Pro ce ss an d cr edit Raw Material It would b e

- -

a bad mistake t o d ebit Go ods—in Pro c e ss fo r all t h e raw mate rial -

b ought in any p eriod if much o f it w e re n ot us e d un til later p e riod s .

Th e same thi ng is tru e Of all o u r o th e r c o sts If w e pay r e n t in July .

for th r e e m on ths w e must n o t d e e m that r en t t o b e a c o n tributi on

,

t o t h e goo ds p r oduc e d in July o nly but t o t h e goo ds o f th re e ,

m on ths In o th e r words w e must always an alyz e t h e situation and

.
,

s e e what adjustm e n ts o r distribution s ar e t o b e mad e o f th e thin gs

which w e have given up in e xchange fo r n ew things No t all Of .

what is given up is n e ce ssarily e xchanged for imm e diate re t urn in

 TH E OPERATING S TATEMENT 57
n ew thi n gs but only so much of it as is cons um ed in ge ttin g th e
,

par ticular n ew thin gs now unde r con side r ation S o th ough our .

in suran ce is paid in July po ssibly o nly on e tw elf th Of that is ,

-

charge able t o t h e go ods p roduce d in July If we ke pt our b ooks .

always up t o th e time s w e sh ould daily debit Goods in Pro ce ss for

,
- -

t h e e xpi ration o f in sur an ce an d c re dit th e acco un t for p re paid in

su ran ce ; but th is is so much work that ordinarily it would b e done
no t m o re f re qu e n tly than mon thl y .

Illustrative Pr oble m Le t us illustrate this general plan Of keep

.

ing statistical subdivisions Of our asse t acc oun ts by a gr oup Of

t ran sactions Th e tran sactions are lis te d first an d t h e en trie s
.
,

foll ow Th e re ad e r is ad vise d t o obse rve th e first tran saction an d

.

th en b e fore l ookin g at t h e c or re sp onding en try in th e s e cond table

t o mak e up hi s min d what sh o uld b e d ebited an d what c re dited .

After a few trials Of that sor t h e is advise d t o reverse th e pro cess ,

an d de te rmi n e f rom th e en try in t h e se con d table what h e will fi n d

as a transaction in th e first .

(I ) v
We in es t in cas h
()2 W e p ay fo r raw aterial m
h f
,

(3) We iss u e o f r aw material t o th e s op for manu acture

(4 ) We pay ages w ,

5) We p ay insuran ce $ 300
f
,

(6 ) W e p ay for u el $ 3 5 0
m h
,

(7 ) We p ay o n t ly r ent $ 2 00
m h f
,

(8) We pay for ge neral ont l y actory e xpenses $ 4 5 0

h m h h
,

(9) We fi n d t at w e owe fo r royalty o n ac in e ry for t h e mont $ 2 80

d w h f m h hd h
,

(1 0) We se n t o t h e are ouse ro t h e s op fi nis e goods t at cost

(1 1 ) h d m h hv b
We fi nd t at uring t h e o nt w e a e urn ed $ 1 00 ort o f coal w h
(1 2 ) h x d
We fi nd t at $ 7 5 o f in s urance has e p ire

h
Cas ( ) P roprieto rship
1 -
Claim
R w Mat ial
a er (2 ) C as h
G d i P
oo s -
n -
rocess (3 ) Raw Material
Wages (4 ) C as h
Insurance Prepai d (5 ) C ash
Fu el (6) C as h
Re n t (7 ) Cas h
G e n eral E p e nses x (8) C as h
Royal t ies (9) Ro yal ty Lia ility b
hd
Fin is e G oo s d (1 0) d
Goo s in P ro cess
- -

d
Goo s in P rocess
- -

(1 1 ) Fu el
Goods in P rocess
- -

(1 2 ) In s uran ce P repaid
5 8 U
TH E F NDAM ENTALS OF A CC OUNTING
What are n ow our asse ts ? Le t us look at our in dividual accoun ts
an d se e what balan c e s th e y S h ow For c onv e ni en ce sin ce w e wish .
,

t o l ook at th e m in c ombinati on r ath e r than indi vidually w e will ,

e xamine th em as a list rath e r t han in l e dge r form .

Dr Cr
Dr C"
.

B alance B alance
C as h 3 00
Proprie torshi p Claim -

Raw Mate rial

G oo ds in P ro ces s
- -

Wages
In suran ce Prepaid
Fu el
Re n t
G e n e r al E p en ses x
Ro yalt ies
hd
Finis e Goo s d
Ro yalty Lia ili ty b

B ookkee pin g n ot C omple te This

at on c e disclo se s what would
.

b e an imp o ssible situation if ou r b oo ks we r e c omple te Th ough .

our debits e qual ou r cr edi ts as th e y must G oods in Proc e ss S h ows

, ,
- -

a c re di t balan c e A cr edi t t o an asse t accoun t m ean s that more

.

has b een given up than re c eive d Thi s is imp ossible of c ou r se .

, .

Thi s at on c e sugg e sts that our b ookke epin g is n ot comple te or ,

b e tter that w e have n o t ye t c ombin e d all t h e facts or e lem en ts of

, , ,

Goo ds in Pro c e ss in to th e accoun t Of that n am e s o as t o ge t th em

- -

toge the r E xamining th e en tri e s w e see that th ough Goods in

.
,
-

Pro c e ss has b e e n cr e dite d for th e fi nish ed goods se n t from th e sh op

t o th e wareh ous e it has n e ve r b e en d ebite d for s om e Of th e c o sts
,

which have en tere d in to b o th goods fin ish e d an d goo ds still in

proc e ss It has n o t b e en d ebite d for wage s or ren t or gen eral ex
.
, ,

p en s e s or royalti e s Th e titl e s of th e accoun ts in which th e se items

,
.

stan d sugge st that t h e accoun ts are subdivision s Of Goods in -

Pro ce ss re pre se n tin g c e rt ain e l em en ts which h ave en t ered in to our

,

product an d that th e y must n ow b e cons olidated wi th th e o th e r

,

items already in clud ed in Goods in Proce ss - -

.

Tran sf e r of A mounts to G oo d s in Proce s s This con solidati on - -

.

co nsists m erely in t ran sfe rrin g from th e statis tical subdi vision s Of
Go o ds in Pro ce ss Wage s Re n t G e n eral Expense s an d Royaltie s
- -

, , , , .
 TH E OPERATIN G S TATEM ENT 59
t o th e main accoun t Goods in Proce ss th e amoun ts in th e sub
,
- -

div isi onal acc oun ts Wh en w e h ave an item on th e debit side of

.

an acc oun t an d wish t o tran sfe r it t o ano th e r acc o un t so that th e ,

info rmation may b e fo un d o n t h e s e con d acco un t r ath e r than o n th e

first w e of c ours e d ebit it t o th e n ew accoun t (S in ce it was a d ebit
,

th at was tr an sfe rr ed ) an d c re dit it t o t h e Old accoun t (simply can

,

cellin g th e d ebit e n try t o th e Old acc oun t by an item on th e side

o ppo site t o t h e d ebit that has be en tr ans fe rr e d for w e d o n o t
subtr act o n books Of accoun t but add t o th e o th e r S ide by a debit ,

o r cre dit as e xplain e d o n page

,
Th e actual e n trie s follow :

Goods in - -
P rocess
d
Go o s in - -
P ro cess
d
G oo s in - -
P ro ce ss
Goods in - -
P ro cess
NOTr ans f e r Of Ele me nt s n ot ye t Us e d It will b e no ted also that .

w e have n o t at thi s tim e tr an sf e rr e d th e balan ce of Raw M ate rial ,

of In suran ce an d Of Fu el t o Goo ds in Pro ce ss We shoul d not d o

, ,
- -

so of co u r s e fo r n o t all t h e r aw mat e rial an d ins uran ce an d fu e l

, ,

have be e n con sum e d in p roducing goods ; and w e have a lre ady by ,

e n tri e s #3 £ 1 1 an d # 1 2 ab ov e t r an sf e rr e d t o Goo ds in Pro c e ss what

,
- -

h as b e e n con sum e d In o th e r word s w e d e t e rmin e what en trie s t o

.
,

make p repar ato ry t o th e dr awing up Of t h e balan ce shee t by in

spe cting e ach accoun t and ad justing it t o th e p re s en t situation if it
h as n o t already bee n adjusted S om e items will have b e en auto
.

mat ically adjusted b ecaus e curren t inf o rmation w as n e ed ed an d

, ,

o th e r s will b e awaiting adjustm e n t .

Balan ce s A t this p oin t w e may well Observe th e balances of our

.

accoun ts as the y stand .

Dr B alances
. Cr B alances
.

Cas h 3 00
P roprieto rs hip—C laim
Raw Mate rial
G oo ds in P roces s
- -

In su ran ce P repaid
Fu e l
Finis hdG d
e oo s
60 U
TH E F N DAM ENTAL S OF A CCOUNTIN G

What B alan ce s S how Le t us n o te th e me anin g Of th e figure s

. .

Th e p ropri e to r has in th e busin e ss an d th e o wne r s o f th e

machin e ry have a claim t o $ 2 80 or a total o f own ership claims o f

,
-

an d th o se claims ar e offs e t by th e ass e ts Th e s e asse ts .

,

h oweve r c on sist of tw o class e s : (I ) originally pu rchas ed in sur an c e

, ,

fu el and r aw mate rial which have u n dergon e n o con ve rsion but

, ,

s till remain in th eir o rigin al fo rm ; an d (2 ) c onve rted as se ts in what ,

are n ow par tly c ompl e te d an d wh o lly c ompl e ted g oo ds but w e re ,

no t l ong ago fu e l an d p r e paid in su r an c e an d s e rvic e s Of empl o ye e s ,

an d b e fo re that we re cash Th e stage s of c onv ersion o f thi s last

.

class have b een trace d along th e wh ole pro c e ss and r e cords have
b een pre se rve d sta tistically by th e way Th e only thi n g w e might.

have don e that w e have n o t d on e is t o k e ep th e re cord of conve r

si on day by day but this is no t w or th whil e Even ou r m on thly
,
.

subdivision al figu re s lik e wage s and ren t have di sapp eare d from
, ,

ou r fin al balan c e s but re main o n ou r l e dg e r with t h e t o tals Of

b o th side s equ al (an d h e n ce without balan c e s) for ou r statistical in

f o rmation If w e sh ould no w list t h e balan c e s in an o th er fo rm s epa
.
,

ratin g t h e n ames Of t h e acc o un ts in totwo lon g co lumn s on e for ,

th o se havin g d ebit balan c e s an d th e o th e r for tho se having c redi t bal

au c e s w e sh ould have a balan c e sh e e t In fact that is all a balan ce
, .

S h e e t is a state m e n t o f l e dge r balan ce s wh en th e b ooks have b een

b rought up t o th e tim e d e sign at ed as t h e date of th e balan ce sh ee t .

Re lation b e twee n Prin c ipal an d S ub div i s ional Account s Th e .

r elation b e tween our prin cipal asse t accoun ts and ou r sub di visional
accoun ts may n ow b e wis ely summarized Th e simple st me thod .

of e n try is t o d ebit Goods in Pro c e ss an d credit C ash for all costs

- -

o f p r oducin g goods supp osing w e pay cash outrigh t If w e n ee d .

mo re in formation howe ve r as w e do for a state m en t o f op erati on s

, , ,

w e may w e ll mak e th e r e c o r d in t w o p ro ce ss e s in st e ad of on e thus ,

()1 Wag e s d e bit e d an d C ash c r e dit ed ; ()

2 G oo ds in P r o c e ss d e bit e-
d -

an d W age s cr e di t e d Th e Wage s ite ms can ce l e ach o th e r an d le ave

.

n o balan c e but th e y r e mai n as to tals an d so giv e us ou r statistical

,

in fo rmation In similar fashi on goods in p roce ss ge t conve rted

.
- -

in to finish e d goods an d b e com e re cord ed on our b ooks .

Pr ofi t an d Lo s s Le t us n ow c on tinu e ou r t ran saction s and se ll

.

som e of ou r finish e d goo ds S uppo se we s ell goods which c o st us

.

The se finished goods have n ow be c om e so ld goo ds and so ,

62 TH E F ND AM ENTAL S U OF A CCOUNTING
usual for th e sak e Of savin g b ookk e e pin g lab or Obviously i t is not .

ne c e ssar y in c o nn e cti on with e ach sal e t o r e c or d imm e diat e ly on t h e

l edge r just h ow much p rofit that sale yielde d S uch inf ormati on .

should b e p re se rv e d in sub ordin ate re co rds r e ady for fin al in co r

e p rop ri e to r s profi t claim acc o u n t at such tim e s as
’

p o r a t i o n in t h -

t h e b o oks ar e t o b e b r o ught up t o a d e fini te dat e H en c e it is cus .

t omary n o t t o split sal e s in to th e ir tw o parts : that pa r t which r epre

s en ts an e xact e xchange of one asse t (finish e d goods) fo r an o th e r
( cash ,
o r acc o u n ts r e c e ivabl e ) at t h e sam e valu e a n d that part ,

which is p rofit C ust omar ily wh en a sale is mad e th e credit is t o

.

S old G oo ds o r S ale s (
,
as t h e acc oun t is m ore comm on ly called ) for ,

th e t o tal am oun t Of th e sal e Then th e cr e dit t o that accoun t

.

repr e s en ts par tly th e giving up of an asse t ( g oo ds s o ld ) an d pa r tly

propri e tor s p rofi t Claim Th eo re tically this doubl e asp e ct o f th e
’
-

accoun t is un fo r tu n at e for it doe s no t distin guish fundam en tally

,

differen t thin gs but pr actically it is d e sir abl e for it b o th give s a

, ,

savin g of lab or (S in c e by it man y profits may b e con solidate d an d

tran sferre d t o t h e p rofit acc oun t in o ne lum p sum) an d provid e s us ,

with th e statistical figure for t h e to tal vo lum e Of sale s at s ellin g

pric e Wh e n p rofits ar e carr ie d t o t h e p rofit accoun t dir ectly with
.
,

on ly t h e c o st p o r ti on o f sal e s passin g thr o ugh t h e sal e s acc o un t

(b o th d e bit e d an d c r e dit e d ) n o wh e r e will,t h e b oo ks S h o w th e t o tal

volum e of sal e s Th e sho rte r me thod p ro duc e s n o c on fusion ; for
.

th ough th e d ebit side re pre sen ts co sts o r asse ts at c o st an d th e , ,

credit side b o th givin g up o f ass e ts an d p rofits t h e diffe ren c e b e ,

twe en t h e tw o side s always re pre se n ts profits (o r l osse s if th e bal ,

an c e is on t h e d ebit side ) an d all that n e e ds t o b e don e t o c omple te

,

t h e b ookk e epin g is t o tran sf e r th e balan c e o f th e sal e s accoun t t o

t h e p rop ri e t o r s accou n t (
’
di stinguishing his profi t claim from his -

in ve stm en t acco un t by a s eparate titl e th ough th e t wo may b e

con solidate d afte r t h e figu re has b e e n o n c e e n te re d for re cord) .

Thus if goods c ostin g are sold for t h e e n tri e s inv olved

by t h e long m e th od would b e as foll ows :
D ebi ted
S o ld Go o ds h
Finis e d Goo d s

vabl d d
]
S ol G oo s
A ccts Recei
. e 4
Pro fi t Clai
-
m
Th e three en tri e s involved by th e S hort m e th od follow
 TH E OPERATIN G S TATEM ENT 63

dG d
So l oo s hd
Finis e Goo ds
A t R ivabl
cc s ec e e d
S o l G oo s d
S ld G d
.

o oo s 5 00 Pro fi t Claim
-

goo

Th e l ast e n tr y is m e re ly t o tran sfe r th e balan c e o f S old Goods t o

Profi t Claim
-

What is calle d th e sh or t way ab ove looks l onger for

.
,

it app e ars t o have m ore e n trie s ; but it sh oul d b e r em emb e re d that

t h e last pai r o f d e bits an d c r e dits is made onl y on c e f o r th e wh ole
pe riod wh e r e as all th e o th e r en tri e s are made fo r e ach sale If
, .

the re w e r e o n e hun dre d sal e s th ere fore th ere wo uld b e by t h e l ong

, ,

me th o d t w o hun dre d d ebits an d thre e hun d re d c re di ts or a to tal o f ,

fi v e hun dr e d but by th e sh o r t m e th od t w o hun d re d on e d ebits an d

,

t wo hun d re d o ne c re di ts o r a t o tal Of f ou r hu n d re d t w o ; an d e ach

,

c redi t t o Profi t C laim by t h e lon g me th od w ould have t o b e foun d

-

by p e rfo rmin g a subtraction of c o st from s ellin g price o r on e h un ,

d red subtr action s in all wh ere as by th e S ho r t me thod on e sub t rac

,

ti on (to tal c o st from t o tal s e lling p rice ) s ufli ce s This sh or t m e thod .

is con siste n t with o ur the ory Of debit an d c r e dit as e xp oun ded in ,

C hapt e r IV that all c r e dits in dicat e e i t h e r re ducti on in ass e ts o r

,

in cre ase in own e r ship claim ; for h e re ou r c r edi t t o sal e s is in par t

-

fo r re ducti on in ass e ts ( t h e co st Of th e go ods s o ld ) an d in par t fo r ,

in cre as e in own ership Claim (profits) ; or if a l o ss has b een suffe red

-

th e c r e dit t o S al e s is fo r l e ss than th e c o st an d h e n ce S al e s has a ,

d ebit balan c e (sin c e it was debited at th e c o st Of th e goods) an d ,

thi s debit balan c e n ow re p re s en ts a re duction in own e r ship—claim

( as o u r th eo r y o f d e bit an d c r e di t sh o ws us that a d e bit may d o) .

Th e Ope r atin g S tate me nt Le t us n ow s e e an op e r atin g state

.

m en t for this pe riod drawn f rom th e de tail e d acc oun ts an d n ot

,

from th e balan c e sh ee t Th e latter sh ows it will b e r em emb ere d

.
, ,

ou r status at th e e n d o f t h e tim e ; but t h e Op e r atin g statem e n t

S h ows chie fly h o w t h e chan g e in o u r p rop ri e to r shi p status as com ,

pare d with that Of th e p re c e din g p e ri o d was b rought ab out an d , ,

can b e go t f r om t h e l e dg e r acc ou n ts Fir st w e must n o t e that

.
,

what w e wish t o show is (1 ) th e c o st of all asse ts that hav e b e e n

c onve r te d from o rigin al fo rms in to o th e r forms an d (2) th e valu e ,

r e ce iv e d fro m th o se con v e r te d fo rms with (3) t h e n e t p rofit or ,

l o ss from t h e c o n v e r sio n A ll l edge r balan c e s n ow that t h e b o oks

.
,

hav e b ee n b ro ught up t o th e tim e b elon g o n th e balan c e S h e e t as

,

ass e ts or own e r ship claims but ma n y acc ou n ts with o ut p r e s en t

-

,
64 TH E F ND AMENTAL S U OF A CCOUNTING
bala n c e s an d he n c e n o t o n th e balan c e sh e e t at all giv e us in
, ,

f ormation re ga rdin g op e rati o n s an d figu re s fro m th em go up on

,

t h e o p e r ati n g state m e n t t o sh o w what it e ms o f c o n v e r t e d ass e ts

b rought in th e re tu rn s fro m c o nv e rsi on s what ite ms Of asse ts
in o rigi n al f o rm w e n t t o c r e at e by c o n ve r si on t h e ass e ts r e c e iv e d
f rom c o n v e r si on an d h e n c e are ultimate ly can c e ll e d on t h e b ooks
,

by tran sfe r t o o th e r acc ou n ts Th e pre s e n t to tals o f l e dg e r ac

.

c o un ts shown b e low are tak en b e fo re th e last en tr y tr an sfe r rin g

t o Pr op ri e to r s Pro fi t C laim t h e bala n c e o n S ale s f or o n t h e
’
-

o p e r ati n g stat e m e n t w e wish t o sh o w tha t profi t in c o nn e cti on

with t h e sal e s acc ou n t rath e r than with th e p ropri e tor s accoun t ’

.

Dr . Cr .

P ro prietorship Claim -

C as h
A ccou n t s Receivab le
Raw Mate rial
G oo ds in P rocess
- -

Wages
In surance P repaid
Fu el
0
Re nt
G e n e ral E pe nses x
Royalties
hd
Fini s e Goo ds
Ro yalty Lia ility b
S ales

Th e op erati ng statem en t giv en by th e s e figu re s fo llows .

Merchandis e Operating S tatement

S ales
Raw Material cons u med
Wages
Re n t
G e n e ral Expenses
Ro y alties
Fu el
In su ran ce
Co st O fm f
an u actu ring

d
G oo s in P ro cess at e nd
- -

hd d
Finis e Goo s at e nd
P ro d t ld
uc u nso

C os t f g d ld
o oo s so

Ne t P ro fi t
 TH E OPERATING S TATEM ENT 65

Le t u s n ow trac e th e o rigin o f e ach figu re on th e op e rating state

m e n t Th e sal e s ite m is t h e c r e di t t o S al e s ; raw mate rial con
.

sum e d is th e c re di t t o Raw M ate rial whi ch w as mad e whe n ,

Goo ds in Pro c e ss was d ebite d for mat e rial c o nv e r te d ; th e wage s

- -

item is th e cre dit t o W age s (an d as t h e to tal d ebit t o wag e s w as

cha rge abl e t o manufactu rin g co sts th e tran sfe r wip e s ou t t h e ac
,

c oun t) ; th e r en t ite m is t h e c re dit t o Re n t (which is n ow wipe d

o u t ) ; S imila rly t h e it e ms fo r g e n e r al e xp e n s e s ro yalti e s fu e l an d
, , , ,

in suran c e are th e c r e dits t o G e n e ral E xpe n se s Ro yalti e s Fu e l

, , , ,

an d In su r an c e Pr e paid r e sp e ctiv e ly f or th e s e c r e dits S h o w h o w

, ,

much Of th e va ri o us d e bits w e r e foun d charge able t o man ufac

tu rin g p ro c e sse s (an d th e balan c e s o n Fu e l an d In su ran c e Pr epaid
re p re se n t valu e s n o t ye t c o n v e r te d an d h e n c e n o w on t h e balan c e
she e t) ; th e c o st Of man ufactu ri n g is t h e to tal Of t h e e l em en ts
S h o wn an d it is p ro v e d by its agr e e m e n t with th e d e bit t o G o o ds
,

in Pr o ce s s o n t h e l e dge r ; th e g o ods in p ro c e ss at t h e e n d is t h e
~

bala n c e o n G o ods in Pro c e ss in agr e e m e n t with t h e balan c e

- -

sh e e t ; t h e fi nishe d goo ds at t h e e n d is t h e balan c e in agr e em en t

with th e balan c e sh e e t ; t h e p roduct un sold is t h e sum o f t h e t w o
pre c e din g ite ms ; t h e co st Of go ods so ld is t h e d iff e r e n c e b e tw ee n
man ufactu ri ng co st an d p roduct u n so ld an d it is p rov e d by its ,

agr e e m en t with t h e d e bit t o S al e s ; t h e n e t p rofit is t h e difl e r e n ce

b e tw e e n t h e co st o f go o ds so ld an d sal e s an d it is p rove d by its ,

agre e m e n t with t h e balan c e o f S ale s whi ch is t o b e tran sferre d ,

ultimat e ly as p ro p ri e to r s p r ofi t claim
’
-
.

Compari son with In c om e S h ee t A c ompa rison of thi s op eratin g

.

s tatem e n t with th e in c om e S h e e t on page 4 6 shows by h ow much

w e have ca rr i e d o ur an alysis b e yon d t h e fi r st stage s On th e in .

com e S h e e t w e have only on e ite m fo r p rofit on m e rchan dis e $ 5 00

, , .

H e re that $ 5 00 is mad e up of thi r te e n d e tails H ow much m ore .

valuable th e late r sta tem en t is than t h e e arli er for gui dan ce in con
ductin g t h e busin e ss is suffi cie n tly Obvious To ge t a c ompl e te .

o pe r atin g stat e m e n t o f c ou r s e t h e o th e r it e ms Of in c om e an d lo ss
, ,

given o n th e e ar lie r in come sh e e t S hould b e adde d t o t h e me r

ch an d ise o pe r ating stat e m e n t so that it wo uld b e id e n tical with th e
,

i n c ome she e t give n o n page 4 6 e xc e pt fo r th e substituti on o f th e

“
me rchan di se o pe rating stateme n t ab ove fo r th e sin gl e item Profit
Th e practic e of dis tin guishin g b e tween an in
”
o n m e r cha n dis e .
66 U
TH E F NDAM ENTAL S OF A CCOUNTIN G

c o m e sh e e t and an op e ratin g stat em en t as in di cate d ab ov e is n o t

, ,

u n ive r sal but in g en e r al a r ep o r t o f in c ome in b ri e f form as first

, ,
”
S h o wn is call e d an
,
in come sh ee t wh er e as on ly th e full e r fo rm
,

sho ul d b e call e d an op e r a tin g s tatem e n t ”

.

W h e n En tri e s ar e M a d e We hav e Obs e rv ed that man y ac

.

c ou n ts ar e n o t k ept up t o th e tim e s fo r th ey d o n o t n ee d fre qu e n t

,

o bs e r va ti o n an d t o k e ep th e m up t o t h e tim e s w o uld m e an much

u nn e c e ssary b o o kk e e pin g lab o r Qu es ti on a t o n c e a ris es as t o

.

wh e n en tri e s sh ould b e mad e Unl e ss w e hav e s om e d e fini te plan

.
,

w e may omit o r r e p e at it ems We saw o n page 3 7 that if w e in cur

.

a liabili ty for an ass e t w e may e ith e r en t e r t h e tr an sacti on immedi

ately d ebitin g t h e ass e t an d c re ditin g t h e liability o r w e may p o st
, ,

p on e e n t ry u n til th e d e bt is paid wh e n w e d ebit th e ass e t an d

,

c redit cash Which of th e s e w e shall d o d e p e n ds on th e tim e lin e ss

.

that w e r e qui re Of ou r r e co r ds : if w e wish th e ass e t t o S h ow at on ce ,

w e must mak e t h e e n try at t h e tim e o f purchas e wh e th e r w e car e ,

ab out t h e imm e diat e sh owin g of th e liability o r n o t ; an d if w e wish

t h e liability t o S h ow at on c e w e must mak e t h e e n try at o n c e ev e n
,

th o ugh we h av ep n o imm edi ate n e e d fo r t h e asse t ; but if w e care

ab o ut n eith e r cu r ren tly (b e caus e th e ite ms are small o r t h e liabili ty ,

is n o t d u e for a l on g tim e or t h e asse ts d o n o t n ee d watchin g) w e

, ,

may p o stp on e e n t ry u n til paym e n t is mad e In p r eparin g t h e .

b o oks for t h e in com e S h e e t an d th e balan c e sh e e t h owe v e r ca r e , ,

must b e tak en that en trie s are mad e t o b rin g e v e rythi n g up t o th e

tim e s fo r n o t on ly ass e ts an d liabiliti e s but c o sts and e arn in gs must
,

n o w b e i n c o rp o r at e d o n t h e b ooks Thi s m e an s s om e tim e s th a t

.

t h e b ookk e ep e r must l ook back an d s e e wh e n c e r tain it ems w e r e

last b r ought up t o th e tim e s Th e date Of t h e last en t ry mo r e ov e r
.
, ,

is n o t n e c e ssa rily t h e dat e Of th e last adjustm e n t ; fo r c e r tain t ran s

acti o n s may r e qui r e e n t ry at c e r tain tim e s e v en th ough e a rli e r
it ems hav e n o t y e t b ee n e n t ered an d d o n o t n e e d en try A go od .

illust r atio n o f thi s is in tere st on b o rr ow e d m on e y S uppo s e w e .

ow e o n t w o n o t e s an d in t e r e st o n # 1 falls d u e M a r ch 1 an d S e
, p
t emb e r I an d on # 2 falls d u e M ay 1 an d No v emb e r 1 Wh en w e
, .

pay i n te r e st o n # 1 o n S ept emb e r 1 in t e re st has al re ady acc ru e d on

,

f 2 sin c e M ay I ; but w e d o n o t nee d t o e n t e r t h e in te r e st on # 2 o n

that day unl e ss w e are b rin gn our b ooks up t o t h e tim e s on that
day t h o ugh w e must en te r th e in te r e st on # 1 in o rd e r t o S h ow wha t
,
 TH E OPERATING S TATEM ENT 67
has happe ne d t o o u r cash On Nov emb e r 1 m o re ov er wh en w e .
, ,

pay in te r e st on # 2 in te r e st has accru e d o n # 1 sin ce S eptemb e r I ;

,

but w e d o n o t n e ed t o e n te r it un l e ss for so m e sp e cial r e as o n In .

o th e r w o r ds if an acc o u n t is n o t of a s o r t t o b e i n e vitably k e pt
,

cu rr e n tly o nl y an e xamin ati o n o f th e items will S how wh e t h e r it

,

is cu rr e n t at an y par ticula r tim e Wh en th e n S h ould en t ri e s b e .

, ,

made ? A s a rul e wh e n ev e r tran sacti on s culmi n at e i e wh en

, . .
,

e v e r a n atu r al p e ri o d has b e e n r e ach e d such as a d e fin it e d e alin g o r ,

s e ttl em en t C l o sin g a fin an cial p e ri o d is o f c o u rs e such a culmi

.
, ,

n ati o n as ar e paym e n ts an d adjustm e n ts

, Oth er matt e r s such as .
,

accruals n o t paid d ep re ciati o n expi r ati on of in sur an c e e t c must

, , ,
.
,

b e e n t e r e d acc o r di n g t o t h e n e ed o f t h e ca se an d such a n e e d al

ways a ris e s fr om som e s or t o f culmin ati on o f ci r cumstan c e s such ,

as wishin g in formati on of s om e typ e c ompl e te t o a c er tai n p oin t .

QUE S TIONS A ND P ROB LEM S

1 A S man ager O f a b u sin e ss S h ould you b e p ri marily in t e re s t e d in t h e
o pe ratin g s tat e m e n t o r in t h e in co m e S h e e t ? Wh y ? In which s t at e
.

ment S hould you b e primarily in t eres ted if you we re a stockholder in

the b u sin es s , an d why ?
2. I t h as b
d t h t ma y a t k pt f l m t f g d i
e e n s ai a n ccoun s are e or e e en s o oo s -
n

p d that th gh t h
ro ce s s , an l m t l t h i id
ou t ity t h e e e en s soo n ose e r en e ac

k pt if th a t whi h th y p t w i h i igi
,

t
coun s ar e e as e s se s c e re r e s en e re n t e r or

na lf m ort h t w m y hav t h
so t t i ti l
a e d f th i xi t
a e e s a s ca r e co r o e r e s e n ce

Wh t i m d d wh t i it v l ?
.
,

a t b y tati ti l
s e an
“
s s ca r e co r
”
an a s s a ue

I n 19 9 th 1 tp t f b ie ou u a i l f i gl t yp
o
'

a us n es s w as rt c es o a s n e e,

t h fa t y p y
e c or ll w a d th ro v g py as an e a e ra e a w as an

nu a lly I 9 t h tp t
n 1 w 20 t i l t h
e ou f y p y u ll as ar c es , e ac t o r a ro

v g p yw diti f p
.

w as th e ad h e ra e a as an t e con on s o ro

d ti i h p t w
uc on n ot ha g d ( ) W t h l b m
er r es ec s ere u n c n e a as e a or o r e or

b l t ly i p iv f p y i 9 ? (b) W t h l
.

les s e mi c en t a so u e rres e ct e o a n 1 20 as e a

l m t f tlw high p it f p d i ? () If i
, ,

b or e e en o cos o e r or er e r un o ro u ct o n c n

1 9 th
20 v g w g ha d b
e a era e th t t l p y
a es ll d th t e en e o a a ro an e o

t l a tp t m i i g
ou u h g d what w ld y
re a n n un c w hv b an e ou o u r an s e rs a e ee n

a) d (b ) ? (d) If i 9 t h p d i h d b
,

t ( o an n 1 ti 20 e ro u ct o n a ee n ar

l
c es , t h av e
g p y e ra d t h t te l p y
a ll t ill wh t an e o a a ro s a

w ld y
ou w hv b ?
o ur an s e rs a e ee n

If a t k pt b y t h t
c co un s ar e t i g m th d d
e ib d i t h ie co s -
accou n n e o es cr e n s

c h pt a d p ti g h
e r , an b mpl t d wh t i p
os n as d b y the e n co e e a s re r e sen t e e

bl h f t h f ll wi g t () b f
,

a an ce of e ac o e h o t o n acco un s 1 e or e t e acco u n s are

adj d t th tim d ( ) aft t h y

us t e o e dj t d ?
e , an 2 er e ar e so a us e

(a) R w M t i l a (d) G d i P
a er a oo s -
n -
r o ce ss

(b) F l ue () I P id e n s ur an ce rep a

() Fi i h d G d
c n s e oo s
68 U
TH E F N D AM ENTAL S OF A CCOUNTING
A b us iness b y ma u s ny Of th e p arts of its fi n is h dp e r o du c t f ro mth e r
o

m f t
an u ac u re r s an d th en co mb ines t h e parts n e w raw with mat erial
Co n s t ru ct e n t ries fo r t h e tr an saction s follo win g an d carry t h e fi n al
.

d h
,

p ro fi t t o t h e p r o p ri e t o r R e c o r p r o fi t o n s ales b y t h e s o r t cu t -

me t ho d [ Th e profi t is
.

Th e b alan ce s h e et at t h e b eginn ing of t h e p e riod is

.

C ash Proprie t or
Plant 1 000 Acco un ts Payable 2

Raw m ha d f a h
at e rials ar e purc d fi i h d pa t
se or c s , an n s e r s on

a cco un t
f ma fa t t h f ll wi g xp d
,

I th p
n e ro ce s s o nu i
c ur e e o o n e ens es ar e n cu rr e

w g p id i h $ 5 ; i
a es a n cas p a i d $ ; t00 x db t t
ns uran ce , 1 00 a e s , accru e u no

d b h d
, ,

p i
a $ 3 ; p p li 0 g t
su t
es ,$ ; p ou i t i f l t $5
o n accou n
p 10 e re c a on o an 0

R w m t i l h a d pa t q i it i d
, , , .

a a er a s , d p an u rc se r s, ar e re u s on e

f m t h t h f ma fa t
ro e s o re ouse or nu c ure .

Th g d e oo w f d t b m pl t d d
s ar e n o o un ld f o e co e e an ar e s o or

ah i f dt b
,

c s t on Th i acco un e n s u ran ce s o un o e ex

xh d h b
, ,

p i red d t h an pp li t b a
e su t d t es o lia ili
e eti tus e an e re ar e no es no

h w th b k
, ,

S o n on e oo s

S h w t h l dg d fi al b ala h t f th b i i
.

o e t e e r accoun s an n n ce s ee or e u s n ess n

p bl m
ro e

Th f ll wi g fi g
e o o nf d th a u r es ar e t fab i o un wh ll on e ccoun s o us n ess en a

th adj tm t
e us t i x pt t h l t hav b m d
en en r e
s e ce e as e ee n a e

(a) S h w wh t h ld b d b it d d what dit d p pa at y t

.

o a S ou e e e an c re e re r or o

d awi g p th b la h t
r n u e a n ce s ee

f m ma ag
.

(b ) C t t m
o n s ru ct h fi g t h t rot t f et h ures e s a e en s or e n er .

Proprie t or
Accoun t s Rece ivable
Accoun t s Payable
Real E s t at e
h
C as

Pw o er

Fu e l
R aw Mat e rial
Ot h
Co s t s
er

d P
G oo s in r oc ess
hd d
- -

Fin is e Goo s
S ales
7 0 TH E F NDAM ENTAL S U OF A C COUNTING

in proce ss is made
-
for only by aid o f tha t valua ti on can on e
l e arn th e c o st of fini sh e d goods and of sold goods If th e valuation .

put on th e goo ds at t h e e nd is t oo high t h e profit will b e ove rstate d , ,

fo r by th e sam e am oun t th e cost of t h e goo ds fin ish e d an d s old will

b e state d t oo low Y e t goods in pro c e ss ar e pe culiarly ha rd t o
.
- -

valu e H ow S hall w e kn ow wh e th e r th e man ufacturing is half

.

done or th re e eighths don e ? Inde e d e valuati on usually invo lves

-

reaso nin g in a circle E ven if on e co uld know m or e ove r h ow can

.
, ,

on e fi n d th e c o st for i n stan c e o f a bicycl e half fin ish e d wh en t h e

, ,

c os t of a finish ed bicycl e is unkn own an d t h e c o st Of o n e half fin

ish ed is its e lf a m e an s of l e a rnin g th e c o st o f on e fin ish e d ? H e n ce
th e m e th od whi ch k eeps c o sts item by it em up t o th e fini sh is th e
onl y satisfactory me th od S in c e it is no t always p racticable h ow
.
,

e ve r b e caus e exp e n sive we must b e satisfi ed in man y cas e s with

, ,

th e crud e m e th o d o f fin ding only to tal c o sts at th e en d Of lo ng pe

riods rath er than individual item c o sts at th e en d of sh o rt pe ri ods
-

Th e C o s t s Now le t us s e e h ow this is d one We have se en tha t

. .

w e cann o t b e caus e in f ormati on is lackin g in such cas e s pe riodically

, ,

charge Goods in Proce ss or Finishe d G oo ds 01 S old Go ods th e

- -

, , ,

e xact c o sts : w e must charge th em if at all at ra th er l on g in te rval s , ,

on th e stre ngth la rge ly o f e s timate s of t h e valu e of unfin ish ed go ods

a t th e tim e B y th e cost accoun tin g m e thod it will b e rem em

.
-

be red w e charge d firs t th e e l em en ts of goods in pro ce ss and th en

,
- -

G oods in Pro c e ss an d Fin ish ed Goods and S o ld Goods all at ac

— -

, , ,

curately known figure s ; an d as a part of this proc e ss th e original , ,

el em en ts of which ou r n ew asse ts we re mad e up w e r e tran sfe rr ed on

our b ooks from tim e t o tim e as w e wen t along l e aving no balan ce s , ,

though th e to tals pres erved our s ta tistics Now however th e at .

, ,

tempt t o follow through all th e steps in th e pro ce ss with only e sti

mate d or approximate figure s would b e ra th e r ridicul ous I t is .

wiser as w e canno t now kn ow the de tails of th e s teps to give up th e

, ,

attemp t t o re cord th ose steps and come m e re ly t o final r e sults We .

shall b e l e ss likely t o e rr if w e look a t our condition at th e end of th e

journey than if w e try to think back an d es timate and re cord our
c ondi tion at each ste p al ong th e way We know our o rigin al s tart .

ing po i n t ( ou r balan c e sh e e t at t h e b e ginn ing) w e kn ow what asse ts ,

w e have give n up o r acquir ed by th e way and what t ran sactions

they en tered in to an d we can by examina tion Of th e pre sen t condi
,
 TH E OPERATING STATEMENT 7 !

tion of spe cific accoun ts fi nd our ge ne ral c on dition at th e end We .

will o t
n att e mpt t o r e c o r d all cha n g e s in G oo d s in —
Pr oc e ss from ,

o ur acc oun ts re pre s e n tin g t h e e le m e n ts o f t h e go ods n o r in Fin ,

ish e d Go o ds from Go o ds in Pr oc e ss n o r in S old Goo ds fr om Finish e d

- -

Goo ds fo r w e kn ow that t h e figure s are n ow t oo late t o have an y

,

practical Significan ce We will sho r t cut th e whole thin g and con

.
-

solidate t h e accoun ts re pre s en tin g th e e l em en ts of our goods ex ,

ce pt for th e balan c e s still on han d dir e ctly in final acc ou n ts as if

,

there had b e en no inte rmedi ate stage s Th e first step is t o se e .

what is now on han d o f various type s of ass e ts an d th en t o se e that ,

that amoun t on han d is on th e accoun ts repre se nting tho se ass ets

le ft th ere if alre ady the re or put th e re if n o t n ow ther e ; an d finally
,

we tran sfe r t o S old Go ods all balan ce s o n ass e t acc oun ts no t r epre
se n te d by asse ts actually remaining on han d ; for th e se are th e cos ts
of man ufacturing an d se lling th e goo ds .

Illustr ation Le t us try this meth od for th e situation given in

.

t h e last chapt e r an d th e n c ompar e t h e re sult with that of th e

,

oth e r m e th od S inc e by this m e th od we hav e n o t c e rtain info rma

.

tion that was available unde r the o th er m e thod we shall have ,

origin al en trie s slightly diffe ren t from th ose on page 5 7 T ran s .

action s 3 1 0 1 1 an d 1 2 are no t n ow kn own t o us : in ste ad o f th em

, , ,

w e S hall learn by taking accoun t of sto ck that

,
o f raw
,

mate rial is on han d an d $ 2 5 0 of fu el is on h an d and w e shall l e arn , ,

as b e fo r e that of th e in suran c e $ 7 5 has e xpir e d and $ 2 2 5 r emains

,
.

Th e en tri e s that w e S hall mak e du ring th e p e ri od from t h e inf or

, ,

mation ga th e re d durin g th e pe riod are as follows :

Debited
Proprietorship -
Claim

Wages
Insurance Prepaid 3 00
Fuel 3 5 0 Cas h
Ren t 2 00 Cas h
G en eral Expenses 4 50 Cas h
2 80 Royalty Liab ili ty
We mus t now prepare th e books for th e balanc e sh ee t and th e ope r
ating state m e n t C ash of $ 300 is alre ady on t h e b oo ks at t h e right
.

figure an d he n ce ne eds n o atte n tion : as it is still on han d it has no t

,

b een consumed or c onve r te d in produ cin g goo ds Our l edger now .

7 2 TH E F NDAMENTAL S U OF A C COUNTIN G
shows us Raw M ate rial an d w e wish t o re duc e this t o $
35 00 ,

for t h e pre sen t status S o w e must cre di t Raw M ate rial $ 1 5 00

.
, ,

f or this is th e am oun t conv er te d S in c e w e do no t kn ow h ow much .

of this wen t t o sold goo ds h ow much t o finish e d go ods no t s old and

, ,

h ow much t o goo ds still in pro ce ss w e do n o t know h ow much to ,

debit t o e ach of th e acco un ts re p re sen tin g the se thin gs A s w e are .

in suspe n s e on this matt e r w e may as a matt e r of fact s e t up an

,

acc o un t t emp o ra rily fo r such it ems o f susp e n d e d in fo rma ti on an d

call it C onver te d A ss e ts
“ ”
We kn ow that th e raw mate rial wen t
.

in to som e goods (supposing n on e was lo st or stol en) an d w e may ,

temporarily debit Converted A sse ts an d credit Raw M aterial for

t h e am oun t . Th e sam e s ort of thing is tru e o f $ 1 00 for fu el ( for
though o ur books S h ow $3 5 0 w e fi nd only $ 2 5 0 wor th on hand , ,

an d kn o w that $ 1 00 wo r th has b e e n c onv e rt e d ) an d of $ 7 5 f or in

su ran ce : th e se hav e gon e in to u nid en tifi e d asse ts S o w e may also .

d e bit C on v er te d A ss e ts $ 1 7 5 an d cre dit Fu e l $ 1 00 an d In suran c e

,

Pr e paid $ 7 5 . In additi on fin ally w e must c ov e r t h e c o sts wh olly

, ,

con sum e d that is all th e co sts o f wage s re n t g en e ral e xp en s e s

, , , ,

an d ro yalti e s p Th e s e may b e e n t e re d gr o upin g all e n tri e s in t h e ,

co n v e rt e d ass e ts acco un t as f o ll o ws : ,

D ebited
Raw Material
Ins uran ce Prepaid
Convert ed Assets Wages
Re n t
x
G en eral E pe nses

S Omuch fo r c o s ts . x t st e p is t o fi n d th e inven to ri e s n o t al
Th e ne

ready kno wn for goo ds in pr o ce ss an d fin ish e d go ods We fi nd

- -

on e xamin in g th e goo ds in p ro c e ss an d t h e fin ish ed g oo ds that w e

- -

have $ 2 205 of go ods in proce ss on han d an d $ 600 of finish e d go ods

,
- -

Th es e last t w o figure s are ob t ained n o t fro m th e b ooks for th e ,

books hav e n o such figure s but from obse rvatio n an d e stimate ; and
,

as alre ady in dicate d th e y ar e har d t o ge t an d lik e ly t o err ; but fo r

t h e sak e of comparin g m e th ods w e will h e re assum e that w e ge t th e

sam e figu re s as w e re sh own on t h e b o oks by th e o th e r m e thod .

Un d e r this m e thod we d o n o t kn ow from jus t what sp e cific expen

,

dit ure s th e s e ass e ts cam e from just wha t raw material or fu el ,

 OPERATING S TATEMENT
TH E 73
fo r xampl
e W d k w h w v r that th y with th g ds
e . e o no ,
o e e ,
e e oo

so ld mak up t h t tal f
e e oass ts c v t d by ma ufactu i g
o o ur e on e r e n r n

p roc e sse s in to n e w fo rms from th e Old In d e e d th e y mak e up o ur .

,

C o n v e rt e d A ss e ts Kn o win g as w e d o fro m th e figur e s f oun d

.
,

ab o ve that t h e to tal c onv e r te d asse ts c o st

,
an d kn o wi n g as

w e d o f ro m ou r in v e n to ri e s that t h e goods in p ro c e ss an d fi nish e d - -

goo ds un so ld tog e th e r am o un t t o w e n o w kn ow that t h e

c o st Of goo ds sold is or mi n us W e wish
n ow t o S h ow o n o u r b oo ks t h e c o st o f go o ds in p ro c e ss fin ish e d - -

goo ds an d so ld g oods ; an d sin c e w e hav e co mbin e d t h e to tal o f th e

,

e l em e n ts Of c o st of all o f th e m as a d e bit t o C o n v e r te d A s se ts w e ,

S h o uld n o w that w e k n o w th e fin al r e sult t r a n sf e r that to tal to

, ,

t h e va ri o us acco un ts r e pr e se n tin g t h e n e w ass e ts takin g th e plac e

o f t h e o ld This is don e by tran sf e r e n tri e s similar in na tur e t o th e
.

tran sf e r e n tri e s sh o wn p re vi ously thus : ,

D ebi ted
Goo ds in P ro cess
- -

hd
Fin is e G oo ds Con v e rt ed Asse ts
d
S ol G oo s d
Now , o f c ou r s e C onve r e d ,
t A ss
ts sta n ds d ebi ted an d c redited fo r th e
e

sam e figu re an d is without balan ce in th e end In dee d it is quite as if .

,

it h ad had n o e n tri e s at all ; fo r w e have debited it for all th e co sts an d

cr edi ted it for th e conve rsion at th e sam e figur e of tho se same co sts
‘ , , ,

an d t h e n e t r e sult is t h e sam e as if w e had d ebite d ou r fin al ass e t

accoun ts an d c redi ted our co st accoun ts in t h e first in stan ce Th e .

o nl y re as on w e us e d this acc o un t was t o S h o w that un d e r thi s m e th od

w e c ould n o t asc rib e c e r tain sp e cific c o sts t o c e r tain spe cific ass e ts
but must se t Off all c o sts toge th e r again st all th e produc ed asse ts t o
ge th er Ou r C onve rted A ss e ts n ow stan ds as fo ll ows on th e ledge r
.

th e ite ms on t h e l e ft sh o win g t h e d e tails fo r whi ch it was debit ed ,

and th o s e on th e righ t sh owing t h e d e tails f or whi ch it was c r edite d

C ONVERTED AS S ETS
Raw Material Goo ds in P ro ce ss - -

Fu el 1 00 Fini s h dG e oo d s
Ins urance P repaid 75 S ol dG oods

R en t 2 00

Ge ne ral E pe ns es x 4 50
2 80
74 . UTH E F ND AMENTA S L OF A C COUNTING
Th e P ofi t and Lo s
r d r th e c st accoun ting m e thod of
s. Un e o -

h an dlin g sold goods as de scrib ed on page s 6 2 63 as will b e re

,
-

memb e red S old G oods is d ebited cu rr en tly for t h e cost of goo ds

,

sold (for th e co st is kn own an d carri ed thr ough t o t h e sale) ; and

t h e c r e dit f or sal e s is n o t di v id e d f or e ach sal e b e twe e n that par t
which is c onv er sion of an o ld ass e t at c o st an d that par t which is
profit but th e to tal s e llin g pric e is cr e dite d t o S old Goo ds an d only
,

at t h e en d of a p e ri o d is th e divisi on mad e b e t we en that pa r t whi ch

is c o st:(as show n by th e d ebit sid e o f th e acc ou n t) an d that whi ch
is p rofit Und e r t h e inv en to ry m e th od ho w e v e r sin c e th e c o st of
.
, ,

in dividual sal e s is n o t kn o wn S o ld G oo ds o r S ale s cann o t b e d eb

,

i t ed cu rr e n tly f o r t h e c o st o f g oo ds sold n o r can th e gain b e d e ,

t ermin e d fo r e ach it e m o f sal e s e v e n if tha t is d e sire d H e n ce .

un d er this m e t h o d th e onl y way o f han dlin g ite ms o f sale s is to

cr e dit S ale s for th e s e lling p ric e Th en a c omparison o f th e .

c o sts d ebite d t o S al e s in to tal as f ou n d by t h e m e tho d sh own

,

o n pag e 73 an d t h e t o tal c re dits f o r s e lli n g p ric e s giv e s th e

,

pro fit o r th e lo ss o n go ods so ld ; in o th e r words t h e balan c e o f ,

this accoun t 1 3 t h e profit o r lo ss and it may b e tran sfe rr ed t o th e

0
,

p rop rie t o r s acc o un t by tran sf e r e n tri e s similar to th o se alre ady

’

discuss e d .

Th e Oper ating S tate m e nt We n ow have all th e figu r es av aila

.

b le for ou r o p e rati ng stat em e n t an d th e y are id en tical with tho se

,

fou nd by t h e c o st acco un ting m e th od Th e re c e ipts f rom sal e s are

-

foun d on t h e cre di t Side of S al e s as b e for e th e d e tail ed co sts are

, ,

foun d o n th e l e dg e r an d in t h e c on solidati o n o f e le m en ts Of c o st ,

pag e 7 2 an d t h e distributi on o f th e s e c o sts is fou n d in th e r e co rd

,

of tran sfe r Of th e s e c o n solidate d co sts pag e 7 3 ,

.

C ompari so n of M e th od s Though ou r ultimate re sults ar e th e

.

s am e in t h e t w o case s w e must n o t fail t o Obs e rv e t h e diff e ren c e in

,

t h e wo rking of t h e t w o m e th ods Th e inven to ry m e th od d ep en ds

.

S O much upo n t h e ra r e accuracy an d g oo d judgm e n t of t h e p e rso n s

making th e inv en torie s o f goods in pro ce ss that w e may say it - -

h in ge s upon th e m an d as w e h av e s ee n th e in ve n to ry its e lf is
, ,

b ase d upo n t h e v ery c o sts th at it is us ed t o fi nd ; wh e re as th e c o st

acc oun tin g m e th od fin ds c o sts first a n d fr om th em l e arn s inv en to

ri e s . Th e in ve n to ry m e th od re quire s th e takin g o f inven to ri e s as

Of ten as a s tatem e n t is d e sired , and as takin g inven torie s is labori
 TH E OPERATING STATEMENT 75
ous th e accoun ts are e o s ld m brough t to th c rr
e u en t pe riod and

the refore balan ce shee ts are inf requen tly drawn up ; whe re as by th e
cost acc oun ting m e thod bal an ce sh e e ts may b e dr awn up with out
-

t h e lab or o f takin g acco un t Of stock E ven un de r t h e c o st accou nt .

-

ing m e th od h owe ve r it is n ece ssary o ccasion ally t o tak e actual

, ,

inven tori e s for compar is on with book invent orie s for only s o can ,

t h e accu r acy o f t h e b oo k figure s b e te ste d Th e in ve n to ry m e thod .

finds c o sts only in to tals and only at th e e nd of e ach pe riod ;

,

wh ereas th e o ther m e th od fin ds co sts of sp e cific ar ticle s and finds

them curr en tly Th e inven tory me thod can fi nd p rofits only in
.

to tals an d o nly at t h e e nd of e ach pe riod ; where as th e o th er has all

,

t h e figu re s f or S h owin g th e p r ofit on e ach it em and can r e c ord i t ,

imm edia tely if it is d e sir ed Th e value o f knowing co sts and profits

.

o r l os s e s p romptly an d in d e tail as c ompare d wi t h kn owin g th em in

,

to tals (lo sse s hi dde n b ehin d gain s) an d only at long in tervals n e eds ,

n o c o mm e n t Th e fact is h o weve r that in man y busin e ss e s th e

.
, ,

inve n to ry m e th od is t h e o nl y on e fe asib l e or th ought to b e fe asible , ,

an d h e n ce o ft e n must b e use d .

C onve rt e d Ass e ts Account It is i nt ere sting n ow t o go back t o

.

our conve rt e d ass e ts acco un t as d esc ribe d on page 7 2 and s e e , ,

h ow far w e c an mak e o th e r u se Of it W e have s e en that Con .

verte d A ss e ts may b e d ebited for all original asse ts or c o sts in

cu rr ed irr e spe ctive of th e form in which the y n ow stan d and may
, ,

b e c redi te d fo r t h e n e w ass e ts re sul ting from t h e c on ve r si on of th e

o ld irr es p ectiv e of th e pa r ticular asse ts in to which th e se c o sts w e r e
,

in t h e fir st in stan c e c on ve rt e d In o th er wor ds S in c e w e canno t

.
,

unde r thi s in compl e te accoun ting m e thod trace c o sts and c onver
sion ite m by item w e b ring all items of c o sts in to t h e sam e accoun t
,

with th e items r epr e se n tin g t h e ultimate form which th o se c osts

have tak e n at th e e nd of th e pe riod Ind e e d w e l e arn e d th e cost of .
,

th e go o ds so ld for c omparis on with se llin g pric e by se e ing h ow

, ,

much Of t h e to tal debit t o C onve rted A ss e ts was n o t accoun te d for

by t h e Goo ds in Proce ss an d Fin ished G oods for w e had n o o the r
- -

way of fin ding that co s t A s a matte r Of fact howe ve r for th e

.
, ,

purpo se of findin g profits we do n o t n e e d t o S how th e se lling c ost on

o ur b ooks at all but can go dire c t t o p rofits if w e wish
,
We have .

alre ady s e en that at th e time sal es are mad e a d ebit is made un de r ,

t h e inven to ry m e th od t o C ash or A cc o un ts Re c eivabl e and a

, , ,
7 6 TH E F ND AM ENTALS U OF A C COUNTING
credit is m ade t o S old Goods or S al e s for th e full se lling pric e , a

conve rsion o f on e asse t in to an othe r at an in c re as e in valu e Th e .

e xc e ss o f cre dit t o S old Go ods ove r t h e d e bit t o S old G oo ds is pr o

p r i e t o r
’
s p r o fi t Claim
-
N ow supp .o s e w e d o n o t th o ugh w e did ,

b efore make an y de bit t o S old Goo ds (credi ting C onve r ted A ss e ts)
, ,

for th e c o st o f goods s old but t r an sfe r t o C on ve r te d A sse ts at th e

,

e n d o f t h e p e ri o d all t hat has b e e n c r e di t e d t o S o ld G o ods : i n st e ad

of tran sfe rrin g t h e c o st o f so ld g oo ds fro m C o nv e r te d A sse ts t o

S old Go o ds w e tr an sfe r th e yi e ld f rom sold go ods f ro m S old
,

G oo ds t o C o n v e r te d A sse ts S o w e d e b it S Old Go o ds t o can

.
'

c e l th e c r e dits an d c r e di t C o n v e r t e d A ss e ts
,
C on v e rte d A s .

s e ts as w e hav e alre ady seen is al re ady c r e dite d for Go ods in

, ,
-

Pro c e ss an d Fini sh e d Goods C on v e r t e d A ss e ts n ow app e ars as

.

fo ll ows :
CONVERTED AS S ETS
Raw Mate rial Goo ds in P roc es s - -

Fue l 1 00 Fin is h dGe oo ds

In surance P repai d 75 S old Goods

Wages
Re n t 2 00

G e ne ral Expe nses 4 50

Royalties 2 80

It is no t now in balance Apparen tly m ore asse ts have b ee n given

.

up than acqui re d for th e credits e xc e ed t h e debits We kn ow thi s

,
.

t o b e impo ssibl e an d th ere f ore it is o bvi ous that our b oo ks have

,

n o t b e e n adjuste d t o t h e full facts Th e unr e corde d fact is Ob v i .

o usly that a part o f ou r sal e s w e re n o t m e re e xchan g e s o f asse ts

d ollar fo r dollar but brough t m ore valu e t o us than they took

,

from us an d h en ce in crease d proprie to r s owne r ship Claim We

,
’
-
.

n ow r e c o gni z e that fact o n t h e b oo ks by t r an sf e rrin g f rom C on

ver te d A sse ts its cre dit balan c e t o Prop ri e to r s Profi t C laim ’

-

d ebiting C o nv er te d A sse ts fo r $ 5 00 t o ge t t h e amo un t o ff tha t

acco un t an d cre ditin g Propri e to r s Profi t C lai m We hav e thus ’
-
.

t h e sam e r e sult as by t h e c o s t acc o un tin g m e th o d We have n o t

-
.

n yw h e re o n t h e b oo ks cl e arly d e sign ate d t h e c o s t o f go ods sold

a ,

t o b e sure but w e can ge t it fo r t h e purp o se s o f t h e o p e r ati n g

,

state m e n t by subtracti n g fro m th e to tal d e bits t o C on v e r te d A S

s e ts t h e sum o f Goods in Proce ss an d Fin ish e d G oods as th e y ar e
- -
7 8 U
TH E F ND AMENTAL S OF A CCOUNTING

Th e t
rms n omin al and re al ar e almo s t unive rsally us ed in
e

b ooks on accoun tin g and play an impo rtan t part in t h e discussion

, .

We have avoided t he m h ere b e cause th ey are c onfusin g t o novic es

, .

S i n c e th e t e rms ar e in c o mm on u s e w e must b e c om e familiar

wi th th em an d th eir c on te n t Roughly w e may say that a re al .

acc ou n t is o n e o f whi ch th e bal an c e r ep re sen ts ass e ts o r own er

shi p claims r ec ogn izabl e at t h e tim e t h e balan c e is tak e n u n d e r
-

, ,

t h e n am e us e d in t h e ti tl e o f t h e acc ou n t as cash cov e re d by

C a sh m e rchan dise c ov e re d by M e rchandise accou n ts r e c eivabl e
, ,

cover ed by A cc ou n ts Re c eivabl e accoun ts payabl e cov e re d by ,

A ccoun ts Payable ; a no min al accoun t on th e o th er hand is , ,

o n e o f which t h e balan c e doe s n o t at th e tim e t h e balan c e is

tak en re p re s en t asse ts an d o wn e rship claims r e co gnizabl e u nd e r -

th e n am e us e d in t h e titl e Of t h e acc o u n t th ough usually th e ac ,

coun t has pre viously re p re se n te d some such asse t or Claim which

has si n c e b e en actually c onv e r te d in to so m e o th e r fo rm n o t sti g
ge ste d by t h e title of t h e accou n t fo r t h e bo oks are n o t k ept up ,

t o t h e tim e s e xc e pt at i n t e rvals as fu e l which has gon e i n to

goo ds in p ro c e ss o r fi nish e d go ods still on th e b ooks as fu e l o r
- -

, ,

i n su ran c e still o n t h e b o oks as in su ran c e tho ugh actually n ow an

,

in te gr al part o f th e valu e o f go ods in pro c e ss o r wag e s paid still - -

, ,

on t h e b ooks as wag e s th ough t h e cash giv e n as wag e s has actu ~

ally r e plac e d its e lf in t h e go ods produc e d o r a bala n c e o n t h e ,

cre dit sid e o f S o ld Go ods or S al e s which repre sen ts prop ri e to r s

, ,
’

D is ti ti nc on be tw e en Re alo t It will b e s e en
an d Nominal A cc un s .

that th e diff eren ce b etwe en nomin al and re al accoun ts li e s in thi s :

if t h e n ame of th e acc ou n t in dicate s th e thin g as th e t hing n ow
stands th e accoun t i s re al ; if th e thing n ow e xists no t in th e form
,

in dicate d by t h e n ame o f t h e acc ou n t in which it still stan ds but

in some o th e r f o rm as goo ds in p r o c es s still charge d t o Wage s o r
,
- -

t o Re n t o r prop ri e to r s p ro fi t cl ai m still c r e dit e d t o S o ld Goo ds

’
-

, ,

or if t h e t hin g d o e s n o t e xist at all b e caus e it has b e e n e xhaust ed

witho ut r e tu rn o r if it has b e e n co n v e r ted an d is n ow re co rd e d

,

un d er its n e w n am e so that it is o n th e b ooks twic e t h e acc oun t

, ,

is n omin al If c on v e r si on has o ccu rr e d in par t but n o t wh olly

.
,

t h e acco u n t is pa r tly re al an d par tly n o mi n al Obvio usly wh e n .

th e boo ks are pr epare d for t h e bala nc e S h ee t car e must b e tak en ,

 TH E OPERATING S TATE M EN T 79
'

t h at adjustm en t s shall b e made in all acc oun ts re quirin g adjust

m en t so that all it e ms shall b e c ov e r ed by acco un ts with n am e s
,

that sugge st th e act ual facts at th e date of th e balan ce shee t .

S in c e a bala n c e sh e e t is always a re c or d of status at a d efini te

m om en t th e tas k of b rin ging th e books up t o t h e tim e s an d thus
, ,

prep aring th em for th e balan ce sh ee t an d t h e ope rat ing statem en t ,

is t o s e e that all ass e ts an d own e rship claims ar e on th e books un de r

-

accoun ts with n am e s that p rope rly id en tif y th e m an d with am oun ts

that prop erly repre sen t them In o ther wor ds balan ce she e t items
.
,

ar e r e al This m e an s that all n omin al items disappe ar must dis

.
,

appe ar ; fo r t h e v ery e ss en c e of nomin al items is th at th e n am e s of

accoun ts n o longer r epre se n t t h e facts T r an sfe r t o C on ve rt ed
.

Assets as w e have s een causes them t o di sappe ar This may b e

, ,
.

put in an o th e r way : wh e n ass e ts an d o wn e rship claims have b ee n -

tak en up o n t h e b ooks un d e r n am e s in dicating that th e y ar e as

se ts o r ow n er ship Claims (that is in r e al acco un ts) th e n om in al
-

, ,

accou n ts lo s e all signi fican c e as r e p re se n tin g asse ts an d o wn e r

S hip Claims an d b e c o m e pur e ly statistical an d t h e n e t balan c e o f
-

all n omi n al acc oun ts ( all that is l eft afte r can c e llati on s) will e x
ac tly e qual t h e n e t ass e ts o r o wn e rship claims tak e n up o n t h e-

b o oks in th ei r place : fo r ass e ts an d o wn er ship—claims can n o t b e o n

t h e b o oks in b o th re al an d n o min al acco u n ts at t h e sam e tim e ,

an d man y Of th e m ar e n e ed ed in statistical f o rm durin g t h e o p e r

ating p e ri od for guidan c e but in r e al fo rm on t h e balan c e sh e e t at

, ,

its clo s e .

M ixe d Account s Wh en an accoun t repre se nts value s tha t

.

have b e en wh olly c onv e r ted into o th e r fo rms it is usually call ed a ,

”
pur e n omin al acco un t : but wh e n par t o f th e value r em ain s as ,

wi th Fu e l an d In suran c e in ou r illustrati o n s ab ove it is com ,

”
m ouly called mix e d t h e part which has b e e n c o n sum ed is
n o min al an d th e par t r e main in g as an ass e t o r a liabili ty is r e al
, .

W e k e pt t h e un co n sum ed po r tion s on o u r b o oks un d e r th e ir old

title s and S h ow ed th em on t h e b al an ce she e t but tr an sferr ed th e ,

c o n su m e d p o r ti ons t o th e acco un ts r ep re s e n tin g t h e n e w ass e ts

d e rive d f rom t h e o ld W age s Ren t an d Royalty o n th e o th e
.
, , ,
r

han d w e r e pur e n omin al acc o un ts an d s o n o thin g of th em r e

, ,

main ed o n t h e boo ks o r w e n t t o t h e balan c e sh e e t but th e y w e re

wh olly tr an sf er r ed as c osts Of t h e n ew ass e ts H er e afte r w e S hall .
 0 U
TH E F ND AM ENTALS OF A CCO UNTING
use th e t
rms r e al acco u n ts and no minal acc o un t s and
e ,
“
,
“ ”
mix e d accoun ts with t h e m e an in gs attach ed t o th e m ab o ve
, ,

wh e n e ve r conv e ni e n ce will b e s e rv e d by th e ir u se .

Th e U s e of No min al Acco unts A new fact should n ow b e oh

.

s e rve d : by t h e in ve n to ry m e thod of fin ding profits an d of d r awin g

up o p e r atin g state m e n ts th e p rofit o r lo ss at th e e n d o f a p e riod
,

can b e f o un d di re ctly f ro m t h e n o min al acc o u n ts as th e y s tan d

b e fore th e y are tr an sfe rr e d t o C o nve r ted A ss e ts o r Profit an d

L o ss if o nly allowan ce is mad e for inve n to ries It will n ow b e
,
.

rem e mb e re d that o u r C o n ve rted A ss e ts accou n t is a d e vic e fo r

gath e r in g o ur n omin al ac co un ts so that w e may fi n d th e n e t r e
sult o f t h e tr an sacti on s re lating t o th e m all which is ou r pro fi t o r ,

lo ss On th e d ebit side o f o u r C on ve rte d A ss e ts on pag e 7 6 w e

.

gath e re d all th e items o f c o s ts that h ad b e e n c on ve r te d It will .

b e r e m e mb e re d that of t h e o r igin al Fu e l and In suran c e Pr e paid

w e t oo k o nly s o much as h ad b ee n c o nve rt e d fo r w e subt r act ed ,

t h e un c on ve rt e d po rtio n s o r pre s e n t in ve n t o ri e s f ro m th e t o tals

, ,

b e fore d e te rmin in g t h e am oun ts t o b e tran sfe rr ed t o C onve rt e d

Asse ts that is f we tran sferr e d th e n omin al p or tions o nly : but w e
,
’

c ould n o t subtrac t t h e inven tori e s o f g oo ds in p ro c e ss and fi n - -

i sh ed go ods f r o m an y pa r ticular c o s t s fo r in t h e fi rst plac e th e y

, , ,

hav e re sulte d f rom ac t ual co nv e rsion an d in t h e s e co n d plac e , , ,

w e d o n o t kn o w o f what particular c o sts th e s e in v e n to ri e s are

m ad e up ; so in makin g e n tri e s t o C o n v er te d A sse ts for th e s e in
v e n t o ri e s w e mad e all o wa n c e n o t by d e ductin g f ro m t h e d e bi t

sid e but by addi ng t o t h e cre dit sid e

,
as sh own by th e c re di t
ite ms in C o n v e rte d A sse ts for Good s in Pro c e ss and Finish e d
, ,
- -

G o o ds In d r awing up o u r o p e ra ti n g state m e n t h ow e v e r si n c e
.
, ,

the se t w o ite ms have no t ye t b e en carri e d th rough th e sale s stage

o f c o n v e r si o n an d th e r e fo r e cann o t ye t S h o w a p rofit th e y ar e ,

subtr acte d fro m co sts o f c onve r sion r ath e r than add e d t o yi e ld

f ro m con ve r si on : th e y are re al accou n ts ca n c e llin g e qual valu e ,

in n omi n al acc ou n ts We may n ow list ou r no min al ite ms as

.

s h o wn b e l o w In o bs e rving th e m h owe ve r w e sh o uld r e m e mb e r

.
, ,

that all th e items e xc e pt t h e tw o inven to ri e s (subtract e d b e cau se

the y are no t no min al) actually are nomin al an d the n observ e ,

that the y are iden tical with th e i tems on th e op e ratin g stateme nt

on pag e 6 4 .
 TH E OPERATING STATEMENT 81

S ol dG
oods

Wages
R en t
G en eral Expens es
Royalties
Fu el co ns umed

PI Ofi t
‘

$ 5 00

On e way o f fin ding profits th e re fore is simply t o list all t h e n omi

, ,

n al ite ms d e bit an d cre dit fi rst making sur e that all n e c e ssary
, ,

adjustm e n ts hav e b e en mad e t o carry actual p re se n t ass e ts an d

o wn er ship claims t o r e al acc o un ts
-

an d th e n fi n d t h e diff e r e n c e
, .

If th e d ebits exc eed t h e credi t s t h e re sult is a d e cre ase in pro

,

i t r s hi p a l ss if t h c dits i xc ss t h sult is
p r e o o ; e r e a r e n e e e r e an

in cre ase in p r op ri e to rship a gain This is n atu ral t oo for p ro f

.
, ,

its an d lo sse s are n eve r mad e e xcept by conve rtin g thin gs

'
as
l o n g as a thin g is un chan ged it in volves n o gain o r lo ss ; an d our
n omi n al acc o u n ts r e p r e se n t t h e t w o sid e s Of o u r c on v e r si on s c o st ,

and z y i e ld ; an d si n c e n o part o f profi t o r l o ss has b e e n tra n sf e rr e d on

t h e b oo ks du ri n g t h e ye ar f rom t h e n o min al acc o un ts t o t h e pro

i d i i m i
’
p r e t o r s acc o u n t all p r o fits, a n l o ss e s a r e st ll n t h e n o n al a c

coun ts at t h e e n d o f th e ye ar re ady for th e fin al e n tri e s pr epar a

tory t o t h e balan ce sh e e t an d t h e op erating stateme n t This .
,

howe ver is o n ly an o th e r way of sayin g that p r ofit o r lo ss can b e

,

fo und from t h e c onv e rt ed asse ts acco un t o r t h e p ro fit an d l o ss ,

acco un t ; fo r th e s e acc ou n ts con sist und e r t h e in ve n t ory m e th od

m e re ly of t h e ite ms tr ansfe rr ed fr om n omin al acc oun ts in th e
e fl ort t o Cl e a r t h e b oo ks Of all n omin al it e ms an d l e av e o nly re al

items or asse ts an d o wn e rship claims un d e r p ro pe rly di stin ctive

,
-

n am e s on t h e b oo ks
, Oth e r illustration s of th e se various m e th
.

o d s with p r actic e in th e ir u se will b e obs e rv ed in c onn e cti on wi th

, ,

d e taile d b ookke eping m e thod late r .

82 U
TH E F ND AM ENTAL S OF A C COUNTIN G

QUE S TIONS A ND P ROB LEM S

1 S h o w th e fun dame n tal dis tin cti on so f ar as th e r e is any b etw e en t h e
co st acco un tin g m e th o d an d t h e in v en to ry meth o d with res pe ct t o
.

(a) fi n din g in ven to ry O f in suran ce

(b ) fi n d i n g in v e n to ry o f fini s h e d g oo d s

()c s tat is ti ca l in f o rm ati o n

(d) fi nal p rofi t o n s ales

2 Jus t what is t h e relations hip be twe en th e operat ing s tatement and th e
co n verte d as se ts accoun t ? Fro m t h e co nvert e d as se ts accoun t co uld
.

y o u c o n s tr uc t a n o p e rat i n g s ta t e m e n t? Fro m t h e following fi gu res

S ho w as m uch as you can of bo th t h e co n v er t e d ass e t s accoun t an d th e
,

o p e rat in g s tate m e n t .

A t begin D ebits
n i ng of du r i n g
year year

1 2 , 000

d
Goo s in —p roc e ss
hd d
-

Finis e goo s
Wage s
In s uran c
eJ
Ta es x "

Re n t
S ales

3 The
. f ll wi
o o ng b alances ar e on th e accounts of a b usiness .

Proprie t o r
No t e s Payable
Accoun t s Payable
Re al E s t at e
N o t es Rece i a le vb
C as h
Fu el
Re nt
In s uran ce Prepai d
Ge n e ral E pe ns e s x
h
Pur c ases of Me rc an ise h d
S ale s
In t e res t
Co mm
is sio n
Acco un ts Recei a le vb
$1

Th ere is a liability for general expenses amoun tin g t o $ 7 5 0 w

Follo ing
are t h e in ventories at th e e nd : merch an dis e vb
.

interes t recei a le
 TH E OPERATING S TATEMENT 83

accrued $ 3 0 in sur a n cep p ai d

re $ 5 M k ll22 a e a n e cess ry a b
de its an d

di t m
.
,

cr e s r
p ep ar at o r y t t
o h t e t s a et d t en s , an co n s ru c t th e Op eratin g
s tat m
e en t f or the p i
er od d t
anh bala h t t it
e n ce s ee a s Clo s e .

4 Th e le ger d of Jon es 8 S mit h wh

1 q l pa t o are e ua r n e rs , is on Janu
f ll w
.
,

ary 31 as o o s:

RE AL E S TATE
I 2 , 000

NO TE S RE CEIVAB LE ACCO
UNTS RE CEIVA B LE MERCH ANDIS E PURCH A S ES
I I I
ME RCH AND IS E S ALES CAS H INS URA NCE PRE PA ID
I I I
ACCOUNTS PAY AB LE NOTE S PAY AB LE INTE RES T
I 2 60 I
TA XES RE NT
I I
JONE S
I
Inventories are f o un d to b e
M e rc h dian se

In s ur an ce Prepaid
Wages ar e accru e dt o p ay , $1 5 0 an d r e n t is accrue d in t heir a or, fv
dp q m
,

$ 5 00 . Th e re al es tate has e r eci ated by an d e uip en t b y

$ 2 00
Mak e
.

t
ad just th e acco un t s to t h e time using a loss and gain
e n rie s to
P os t t h e entries t o th e le dger an d dr aw up a fi nal b alance
,

acco un t

s heet [ Th e to t als O f t h e balan ce S h eet are

.

D r aw u p an O pe rat in g s tat e m e n t fo r Jo n es S mit h of P rob lem 4

.

Which of t h e follo wing accounts shoul d you e xpe ct t o b e real and

.
,

which nominal b efore adjus ting the accounts t o th e time ? Why?

C as h
Wages
Wages Lia bility
Inte res t
Ins uran ce Pr ep ai d
G eneral Expe nses
Rent
Notes Payable

P roprietor
Real Es tate
7 Can y ou con ce i e conv di ti on s un er d whi h c h
e ac of th e f ll wi
o o ng so
d la t mi gh t b ah
.

calle re a cco un s eco me mixed c s re al es tate accoun ts

ivab l ? E plai
, ,

rece e x n.
 CH AP TER VIII
TH E C NTENTO OF C OMMON ACCOUNTS
Fixing th e C on te nt of A ccount s . N thi g
o imp o rta nt
b m
n can e ore

in acc o un ti ng than a r e alizati o n o f what t h e to tals an d balan c e s Of

various acc ou n ts stan d f or D e tail ed e xplan ati on s are n o t usu
.

ally sh own o u a l e dg e r an d c ould n o t b e sh own with out v e ry

,

gr e at lab o r ; h e n c e sin c e l ed g e r figu re s must b e tak en in summar y

,

fo r all r e p o r ts lik e balan c e sh ee ts and in c om e sh e e ts th e y must

, ,

b e classifie d so that all o f a kin d can b e plac ed t og e th e r an d in

fe re n ce s can b e d r awn b o th f r om th e ir t o tals an d f r om t h e diff e r
cnces b e twe e n c o n tr ary t o t als C ons e qu e n tly in layin g o u t a
.

plan fo r l e dg e r acc o un ts car e ful provision must b e mad e that all

ite ms which ar e t o b e us e d for o n e pur pose in d r awing i nf e re n c e s
b e ca r ri e d t o t h e sam e accou n t an d that n o o th e r it ems b e car ri e d
,

thithe r Th e title s of acc oun ts should b e chos en so as t o indi cat e

.

a t a glan c e (01 Gas n e arly s o as is f e asibl e with o ut u n wi e ldi ne ss)

what items ar e t o b e ca r ri e d t o th e m that is their con ten t , .

Th e b e st way t o acc omplish this is t o fix in min d c e r tain g en e r al

typ e s o f c o n t en t subdivide th e s e in acc o rdan c e with t h e i nforma
,

tion de sire d and th en pro vide an accoun t for e ach subdivision

,
.

Wh e n classified i nf o rmati on is re qui re d in gr e at d e tail many ac ,

c oun ts must b e k e pt : wh en in fo rmation in m ore or le ss summ ary

form is all that is n e ed e d a fe w acc ou n ts will su fli ce
,
.

G r o ups of Acco unt s Re v ie we d We have al r e ady had t wo

.

cl assificati on s of acc ou n ts : t h e first give s us ass e t acc ou n ts an d

o wn e rship claim acc o un ts b o th o f which app e a r o n t h e balan c e
-

sh e e t ; th e s ec on d giv e s us r e al acc ou n ts which in clud e b o th asse t

,

acc o u n ts an d o w n e r ship Claim acc o u n ts an d n omi n al acc o u n ts

-

, ,

which d o n o t app e a r on t h e balan c e sh e e t but furnish in formatio n

for th e o pe r atin g stat em e n t Nomi n al accoun ts as w e have s e en
.
, ,

are k e pt p rimarily f o r statistical purpos e s an d th o ugh th e y r ep , ,

r e se n t ass e ts o r o wn e r ship claims at t h e tim e o f e n tr y th ey are

-

n o t k e pt up t o t h e lat e r tim e s in that pa r ticular but accumula t e

s t a tistical in f o rmati on which may or may n o t at an y m o m e n t

re pre se n t e xactly ( 01 at all) asse ts or owne rship claims at that -

86 TH E F ND AM ENTAL SU OF A CCOUNTIN G
th r f r h ere discuss first balan ce sh ee t acc oun ts th en n omi nal
e e o e -

a cc ou n ts an d th e n cl e arin g acc o un ts
,
.

Oth e r Clas s ifi cation s Fo r vari o us purp o s e s acc oun ts ar e

.
,

often classifi e d in o th e r ways t han th o se m en ti o n e d ab ove S om e .

o f th e s e classificati on s m e r e ly add subdivisio n s o f th e class e s giv e n

ab ov e an d s om e add en ti re ly n ew gr oupings (such as pe rs on al

,

an d imp e r s on al o f which t h e fi r st re f e r s t o acc o u n ts with pe r s on s

, ,

partn e r ships o r c orp o ration s an d t h e s e c on d t o acc ou n ts o f all

, ,

o th e r sorts) Th e diffi culty with attempting t o give a classifie d

.

list Of acc o un ts is that th e v a rio us classifi catio n s c r o ss o n e an

oth e r Fo r e xampl e ass e ts are divide d in to f ou r gro ups wi th
.
,

re spe c t t o availability o r char act e r o f use fuln e ss thus : capi tal ,

( th o s e which ar e n o t e xp e ct e d to b e e x haust e d with o n e u s e lik e ,

buildin gs machin ery,

cur re n t o r w o rkin g (n e c e ssary t o day
,

b y day c on duct o f busin e ss and e xp e c te d t o b e quickly c on v e r t e d

-

lik e cash suppli e s acc oun ts re c e ivabl e) d e f e rr e d o r p r e paid (

, ,
lik e ,

advan c e paym e n ts fo r g oo ds t o b e d e live re d late r an d p repaid ,

i n suran c e) and accru e d (p rop e rly b e l onging t o t h e busin e ss bu t

,

n o t ye t d u e i an d n o t ye t cha rg e d t o t h e p e r s o n s wh o S h ould ulti

mate ly pay lik e claims for in te re st alr e ady e arn e d but n o t ye t

,

d eman dable ) A sse ts are also classifi e d on t h e en tire ly diff ere n t

.

basis of e xte rn al Characte r thus : tangibl e prop e r ty (in which th e ,

valu e inh e re s in t h e thin g its e lf lik e re al e state cash suppli e s) , , , ,

i n ta ngibl e p rop e r ty (in which th e valu e lie s in c e rtain rights an d

e xp e ct e d r e tu rn f rom th o s e rights lik e c opyrights pat en ts an d , , ,

goo d will) an d Claims again st o the rs (o f which s om e may b e ev i

,

d eu c e d by c e r tain tangibl e do cum en t s lik e n o te s r e c e ivabl e an d

b onds t h e valu e lying n o t in trin sically in th e d o cum en t but in th e
,

claim which it e vid en c e s an d o th e r s may b e with out f o rmal

a ckn owl e dgm e n t as r e n t accru e d acc o un ts re c e ivabl e co mmis

, , ,

sion accru e d) To classify accoun ts c ompl e te ly would r e quire

.
,

fo r e xampl e that u n d e r vi r tu ally e ach gro up of t h e first Class ifi ca

,

tion should b e thre e sub di visions to cove r th e thre e groups Of t h e

s e c on d classification In t h e f ollowing discussi on th er e fo re n o
.
, ,

att e mpt will b e mad e t o attach t o e ach acc ou n t t h e vari o us labe ls

that might b e applied as for e xample imp er son al accru ed“

, , , , ,
”
cl aim t o sums ultimat e ly c oll ec tible but n o t ye t d u e for s e rvices
in se llin g a h ous e o n c ommission in t h e acc ou n t C ommissio n A c ,
 O
TH E C NTENT OF C OMMON A C COUNTS 87

cru ed . ach case such d e sc riptio n will b e give n of t h e usual

In e

c on te n t Of th e acc o un t that its plac e in an y sch em e o f Clas sifi ca

ti on sh ould b e e viden t Th e g ene ral plan o f class ification fo r th e
.

paragr aphs fo ll owin g may b e tabulate d briefly :

Ass e t Accounts (Th e di s cussi on will in clude such commen t on

ach as w ill make cl ear th e r elation betw e en

e

t h e ass e t acc o un t an d th e op eratin g or n omin al

accounts with whi ch it is natur ally conn ect ed )
Con tra Accoun ts (Th e dis cussi on will Sh o w th e purpo se an d u s e
o f cer tain accoun ts that r epr e s e n t d eduction s

fr om as sets b u t ar e commonly r eport ed o n th e

,

o wn er ship claim S ide o f t h e balan ce sh ee t in

-

spite Of t h e f act that they do n ot repre sen t

Claims o f an y s ort an d vi ce oers a)
,

Ow n ershi p Cla im Accoun ts (tr e ated similarly t o asse t accoun ts )

-

Nominal Accoun ts (r e vi e w in g t h e n ominal acco un ts alr eady dis

cus sed in conn e ctio n w ith asse ts an d o wn er
S h ip claims an d addin g such f u rth er discus
-

S i on o f th em as is n e c essary t o Sh ow th eir

c o n ten t an d tr eatmen t)
C learing Accoun ts ( s h o w in g th eir r elation t o b o th r e al an d n omi

n al accoun ts)

A ccou n ts p rimarily for co r po r a ti on s are no t discuss ed h ere but in

C hapt e r XVI fo r it is dee m ed wis e fo r th e r e ad e r t o b e com e thor
,

o ughly fami lia r with routin e matte r s applicabl e t o vi r tually all

busin e sse s b e fo re h e invite s c onfusion by studyin g spe cial ac

c o un ts .

Fle xib ili ty of Le dge r Title s In asmuch as t h e n ame s we have

.

so far us e d as titl e s o f acc o un ts have b e e n ch o s e n larg ely t o pro

vid e cleam es s o f e xpo sitio n th ey have no t always b een in acco rd

,

with titl e s c omm on ly u s ed in busin e ss If w e are t o b e abl e to

.

in te rp re t fin an cial state me n ts o f busin e ss e s o th e r than our ow n ,

we must kn ow th e c o mm on titl e s of busin e ss and t h e significan c e

o f t h e acc o un ts t o which th e y ar e attache d N0 t w o busin e ss e s
.

can e ve r b e in all d e tails e xactly alik e h ow e v e r

, S in c e busin e ss e s
.

d ep end la rg ely f or p o licy up on acc ou n tin g info rmati on n o two ,

busine ss e s can have id en tical acc oun tin g ne e ds C a re le ss ch o ic e

.

o f acc ou n ts an d ca r e l e ss han dlin g o f t h e c o n t e n t Of th e m yi e ld

e ith e r vagu e o r misl e ading s ta t em e n ts an d s om e tim e s ov e rem

,
88 TH E F ND AMENTALS U OF A C COUNTIN G

h i i n sign ifican t facts an d min imiz e vital facts T h e r e fore

p as z e .

t h e s e l e cti o n an d t h e d e t e rmin ation of t h e c on t e n t o f acc ou n ts is a

s e ri ous matt e r t o b e m e ticul ously p e rf o rm e d by e ach busin e ss e n
t e rp r ise ; an dth o ugh wid e d epar tur e from g e n e ral p r actic e in t h e
c o n te n t of c omm on am ou n ts is lik e ly t o l e ad s oon e r o r late r to
misu n d e r stan di n g d e tails an d titl e s fo r particular n e e ds may have
,

gr e at fl e xibility NO attempt is mad e h e re t o c ov e r a larg e vari

.

e t y o f alt e rn ativ e s in t h e ch o ic e o f titl e s o r t h e s e l e ctio n Of c on t e n t

fo r acc ou n ts . Y e t c e r tain p rin cipl e s o f Classificati on are s o im

p o r tan t that th e y sh ould b e illustr at e d with t h e gr e ate st care and ,

wh en t h e b e st illustra t i on s are f oun d in acco un ts that ar e n o t

altog e th e r c omm on such acco u n ts are us ed f or illustr ati on he re .

In t h e pag e s f oll owin g fo r e xampl e six acc ou n ts ar e discuss ed

, ,

f o r i n t e r e st al on e : I n t e r e st A cc ru e d In t e r e st Pr e paid I n t er e s t
, ,

E a rn e d In t er e st A ccru e d L iability I n te r e st U n e arn e d I n te r e st

, , ,

C ha rg e s ; e ach has its imp o rtan c e as an illustrati o n o f a p rin cipl e ,

its u s e in actual busin e ss an d its plac e on a balan c e S h e e t or an

,

in c om e sh e e t ; but f ew busi n e ss h ous e s w ould ke e p th em all at

o n c e o r malf e e n t r i e s t o m o st o f th e m e xc e pt at t h e tim e s o f ad

j usting t h e b ooks fo r S h ort cut m e tho ds are availabl e S in ce t h e

,
-
.

shor t cut acc ou n ts are m o re di ffi cult t o u n de rstan d than th e ac

-

c o u n ts n am e d ab o ve h ow e v e r th e y will n o t b e di scuss e d un til

, ,

C hapt e r XIV wh e r e th e y will S how again t h e fl exibility o f book

,

k e e pin g m e th ods .

AS S ET AC COUNTS
Th e Impe rmane nc e of A ss e t s In n o tin g a s tat e m e n t of wha t
.

an acc oun t is m e an t t o c o n tain on e S h o uld always re m e mb e r that

,

fe w thin gs in this wo rld ar e pe rman e n t that n o busin e ss pr ope rty

re mains lon g in on e physical c onditi o n o r of o ne value Th e m e re .

laps e of tim e cause s change s in c on di tion b e caus e o f we ar an d

te ar of mo th an d rust o f we ath e rin g of chan ge s of fashi on o r
,
” “ ”
, ,

custom which affe ct e ith er it o r t h e pro duct o r se rvice s which it

h e lps t o provide of n e ce ssary compe n sation for waitin g t o co ll e ct
,

o n e s du e s
’
Onl y con stan t en try for th e effe ct Of th e s e ch ange s as
.
,

we ll as e n try for tran sacti on s with o th e r pe opl e co uld k e e p ac ,

c oun ts tru e t o t h e c on diti on s which th ey are m e an t to re cor d A ny .

state men t ab out th e con ten t of an accoun t th e re fore is subj ec t to , ,

90 TH E F ND AMENTALS U OF A CCOUNTING

go od s h eld by th e busine ss t o b e s old for some on e e ls e on consign

m en t for title t o t h e ass e ts doe s n o t the n ve st in th e busin e ss and
,

t h e asse ts sh ould n o t appe ar o n its balan c e sh ee t Pu r chas es of .

raw mate rial and supplie s in ten ded for man ufacture ev en th ough ,

in tended for ul tim ate sal e should n o t b e carried in this accoun t It

, .

may includ e go ods man ufacture d by th e busine ss but th e se are ,

pre fe rably carrie d in an accoun t with a more e xpre ssive titl e lik e ,

Fi nish e d G o ods
”
or
“
M anufactured G oods
,
”
es pec ially if

t h e busine ss als o s ells s o me go ods that it buys re ady fo r sal e Th e .

”
usual rul e fo r valuation is c o st o r mark e t which e ve r is lower , .

Th e r e aso n fo r thi s is discuss e d on pag e 2 8 5 In any case o ne.

S h o uld r e aliz e that t h e bill ed p ric e o r qu o te d p ric e is Often n o t th e

cost for o ften disc o un ts are offe re d fo r e a rly paym e n t Of bills

, .

Th e n atural p ric e o f goo ds is th e price afte r all offe r ed disco un ts

have b e en d e ducte d for that is what th e go ods can b e b ought fo r
, .

Wh e th e r th e disc oun ts have actually b e en tak en o r no t th e amo un t ,

o f Off e r e d disc o un t sh o uld b e d educt e d from t h e gr o ss inv en to ry ;

o th e rwis e t h e busin e ss with in ade quat e capital un abl e t o tak e its ,

discoun ts will have th e highe st invento ry for id en tical goods an d

, ,

thi s is absurd .

Me rch andi se A S M ixe d Account In coun ting house s in .

which littl e u s e is mad e of accoun ts exce pt fo r occasion al kn owle dge

of asse ts o f liabiliti e s an d Of profits M erchan di s e is car ri ed as a
, , ,

mixed acc oun t It b e gins th e pe riod with a d ebit of th e b al anc e

.

b rought ove r from th e pe riod b e fore th e ope nin g inven to ry men

,

tion ed ab ove Wh en e ve r purchas e s are made it is d ebited a t c ost

.
,

and wh en an y sal e s ar e mad e it is cr edit e d fo r th e sal e pric e Th e .

balan ce o f th e acco un t th en has no particular S ignifican ce ; for

, ,

it d oe s n ot rep re s e n t me r chan dise on han d but r ath e r m erch andise

,

o n han d plus o r minus t h e l os s o r profit r e sp e ctiv e ly on what has

alr e ady b e e n so ld If for e xample w e b e gin th e ye ar with an in

.
, ,

v en t ory o f buy mer chan di se for an d mak e sal e s

Of s ome of that m er chan dis e fo r t h e balan c e on t h e ac

c oun t is It may happe n that th e inve n to ry of m e r chan
di s e at t h e e n d o f th e pe riod is n o t but In tha t
cas e what w e sold c o st onl y $ 1 1
, an d t h e tran sactio n yi e lde d a

profit Of as S hown b elow in a convenien t fo rm fo r re po r ting

s u ch i tems .
 TH E C NTENT O OF C OMMON A C COUNTS 91

Inven t ory at b e ginning of year

Pu rch ases
C ost O f goo ds han dled
In ven t ory at end o f year
C o s t o f goo ds so ld
G ross profi t on sales

If on e is ager fo r s tatis tical info rmation ab out on e s busine ss

not e
’
,

this mixed m er chan dise accoun t will se rve for it produce s corre ct ,

results ; but if some sale s an d purchase s we re re turn ed th e ledge r ,

could n o t distinguis h b e tween sales and re turn ed purchas e s fo r ,

b o th would b e credited t o Me rchandis e o r b e twe en pu rchas e s an d,

re turn ed sale s fo r b o th wo uld b e d ebited an d statistics compil ed

, ,

from th e accoun t might b e worse than use le ss Fo r thi s re ason a .

be tte r way is t o cut up M er chandi se in to s everal acco un ts and th en

combine th em in to a cle aring accoun t as w ill b e dis cuss e d on page
,

1 31 . Th e balan c e whi ch it shows as a balan ce she e t o r as a mixe d -

acc ou n t is id en tical with t h e figure fo r in ve n tory c on tain e d in it as

a cl e aring accoun t Th e me thod of handl ing the mixed m erchan

.

dis e acc oun t so that it will Sh ow gross profit or lo ss on th e le dge r

acc oun t its e lf is discusse d in Chapte r XIV .

S h ipm e n ts W he n w e shi p goods ou t t o b e sold on commi ssion

.
,

w e h o ld th e c on sign ee r e sp on sibl e f or t h e ca r e of th e pro p e r ty ,

but h e is n o t re spo n sibl e for its m on e y valu e that is h e is n ot ,

actually in d ebt t o us S o wh e n goods ar e shipp ed a d ebit S ho uld

.

b e made n o t t o A cco un ts Re ce ivabl e but t o a shipm e n t acc ou n t

,

for all th e c o sts o f th e shipm ent with a c re dit t o me r chan dise

for t h e c ost of th e goo ds S hipp e d t o cash for cash exp e n se s in
,
.

cur re d e t c Th e t o tal d ebits th en r e pr es en t co sts in curr ed fo r

,
.

goods shipp ed fo r sal e o n c onsignmen t Th e n wh en t h e com .

missi on ag en t r e po rts t h e g oo ds s old a c re dit is made t o t h e,

shi pme n t accou n t with a d e bit t o A ccoun ts Re c e ivable or C ash

, .

Th e bala n ce on t h e shipm e n t acc o un t wh en all th e g o o ds have

be en sold is th e gain or l o ss .

Note s Re ce ivab le Wh en fo rmal acknowl e dgm en t of e arly

.

maturin g d ebt is de sired a p romiss ory n o te is r e qu este d or a

,

draft is d rawn S in ce b oth n ote s and drafts are n e go tiable t h e

.
,

posse ssion of such formal acknowledgm en t en able s on e to re alize

92 TH E FUNDAM ENTAL S OF A CCOUNTING

on C laims with out waiting for th e ir matu rity fo r th e y can b e sold ,

.

Th ey sh oul d th e re f ore b e carrie d in an accou n t s epar ate from o th e r

claims Th e p o sse sso r carri e s th e m in N o te s Re c e ivable o r B ill s
.
-

Re c e ivabl e N o t e s ar e promis e s t o pay an d drafts are o rd e rs

.

t o pay ; but wh e n dr afts are acce pte d th e y b e c om e also promise s

t o pay . Th e disti n cti on b e tw e e n th em an d t h e d e tails of tran s
,

acti on s with th em are matte rs of busin e ss ro utin e an d n o t o f ac

,

c o un ting ; but the y must b e un d e rstoo d by an y on e wh o is t o

handl e t h e acco un ts for th em 1
Wh en n o t e s or drafts which con
.

s t it u t e claims again s t o th e r s ar e re c e ive d No t e s R e c e ivabl e or , ,

B ills Re c e ivabl e is d ebite d ; wh en such n o t e s or dr afts are paid in

, ,

wh o le or in par t th e part paid is credi te d t o thi s accoun t If a

,
.

d raft o rd erin g s om e on e e lse t o pay us is se n t t o us an d th e d rawee ,

acc e pts it w e d ebit No te s Re ce ivable an d cr e dit t h e se n d er ; if th e

,

d raw e e r e fus e s t o acc ept it i t is waste pape r an d n o en try is in

,

volv e d If w e dr aw a d raft in our own fav or an d t h e dr aw ee ac

.

cep t s it w e d e bit No t e s R e c e ivabl e an d c r e dit t h e drawee

,
If h e .

doe s n o t accept it w e n e e d no e n try D r afts that w e draw on

,
.

o th e r s in favo r o f third par ti e s ar e n o t N o te s Re c e ivable t o us fo r ,

th ey are n o t colle ctible by us If th ey are accepted we d ebi t.

,

t h e payee an d cr e di t t h e d r aw e e D rafts that w e acc e pt are

.

tre ate d un d e r No te s Payable C ar e must b e tak en n o t t o include

.

in adve r te n tly in thi s acc oun t thin gs which it is n ot m e an t t o

“
c ov e r Though it is ofte n call e d B ills Re c e ivable from t h e
.
,

fact that t h e titl e o rigin ated in t h e d ays whe n drafts we re call ed

“ ”
bills in thi s co un try as in En glan d it is n ot usually me an t to ,

c ov e r sums r ec e ivable on bills for m e rchan dise s old on charge

accoun t unl e ss a promisso ry n o te o r dr aft is given It is no t com .

m oul y in ten d e d t o cove r in te re s t on in ter e st b e arin g n o te s or -

drafts but face o nl y On e obj e ctio n t o in c o rp o r ating in thi s

,
“ ”
.

acco un t t h e i n te re st accru e d is that t h e am o un t o f in tere st is

daily chan gin g o f c ourse an d id e n tification of an en try wi t h th e
, ,

n o t e is difficult wh e n t h e e n try d o e s n o t tally with an y figu r e ap

pe arin g o n th e n o te itse lf ; h en c e t h e fac e on ly o r that p orti on of ,

t h e fac e whi ch is paid is carried t o this acco un t an d th e accru ed

, a ,

in tere st is ca r ri e d t o an accou n t provide d sp e cifically fo r in te re st .

h
For t h e ass is t ance o f t ose not a iliar wit finan cialfm h d ocu ments a b i f di
r e scus
d f w
sion of ra ts ill b e oun in ppen di f d A
, page 4 1 1 xA .
94 U
TH E F ND AMENTAL S OF A C COUNTIN G

ti g t liability
n en his co n ting e n t claim o n t h e n o te are e n de d and
an d

th y h uld
e S o n o l o n g e r sta n d o n t h e b ook s H e will n ow d ebi t
‘

No t e s R e ce ivabl e D iscou n t e d an d cr edi t No te s Re c e ivabl e thus ,

r em o vi n g b o th H e will kn ow that his liability has e n d e d for

.
,

u nd e r th e law Of e n do rs em e n t an en do r s e r is re l e as e d fr om liability
“ ”
if h e is n o t imm edi ate ly n o tified by fo rmal n o tic e o f p r o te st, ,

of t h e failu re o f t h e mak e r o f a n o te to pay S o if h e he ars no .

w o rd afte r a re as on abl e tim e fo r no tification h e kn ows that e ith e r ,

th e n o t e was paid o r his liability has e n d e d by laps e .

Not e s Re c e ivabl e D o ub tf ul Wh e n n o t e s an d d r afts p r e vi o usly

.

disc oun te d hav e b e e n t ak e n up b e cause o f liability o n e n d o rs e

,

m e n t th e y are p r e sumably Of doubtful valu e

,
e ls e t h e paye rs

wo uld n o t hav e d e faulte d in paym en t S in ce this puts th em at .

o n c e in to a diffe re n t cate gory from n o te s which hav e n o t ye t b e

c om e d ue it is we ll t o tr an sfe r th em from No te s Re c e ivable to
,

No t e s Re c e ivabl e D oubtful This is acc omplish e d by c r e di tin g

.

t h e f o rm e r an d d ebiti n g t h e latt e r as s oon as t h e n o te s are tak e n

up that is at t h e sam e tim e wi t h th e en try d e bitin g No t e s Re
, ,

ce iv ab le D isc oun t e d an d c re ditin g C ash If such n o te s ar e fin ally

.

paid No te s Re c e ivabl e D oubtful will b e cre dite d If n o t paid

,
.
,

t h e am o un t will b e Cha rg e d t o L o ss e s fr o m B ad D e bts an d c r ed

it e d t o this acc oun t En d or s ed n o t e s which hav e n o t b e e n s o ld
.

or disc ou n t e d if th e y prov e un c o lle ctibl e wi ll b e p r o te st e d by th e

, ,

busin e ss o f c ou rs e (s o as t o h old t h e e n d ors e r s liable ) Th e y

, .

sho uld similarly b e tr an sfe rr ed t o this acc ou n t N o te s with out .

e n d o r s e r s t o o wh en pro v e d u n c o ll e c tibl e sh ould b e t r a n sf e rr ed

, ,

to this accou n t un l e ss h op e o f c oll e c tin g th em is at o n c e aban

d on ed in which cas e th e y S h ould b e writte n Off an d a d e bit sh ould
,

b e made t o L o ss f ro m B ad D eb ts .

M ortgage Note s Re ce ivable Wh en a no te is s e cured by th e .

pl e dg e of r e al e state s o that if t h e no te is n o t paid t h e p ro p e rty

,

may b e tak e n an d s o ld t o supply t h e n e c e ssary m on e y f o r pay

m e n t t h e n o te s may b e ca r ri ed in a spe cial acc ou n t fo r that pur
,

p o s e It is d e sir able t o ca r ry th em in such an acc ou n t f or usu

.
,

ally such n o t e s hav e a l on g te rm pe rhaps s e v e r al ye ar s an d , ,

h en c e are no t s o quickly c on ve rte d (unl e ss by sal e ) as o rdin ary

comm e rcial no t e s and d rafts Th e mortgag e its e lf d o e s n o t n e e d
.

re co rding on t h e b o oks of th e hold e r in any acc ou n t f or it is ,

 O
TH E C NTENT OF C OMM ON ACCOUNTS 95
wh o lly con ting e n t an d t h e c on tinge n cy is suffici e n tly in dicate d
in t h e title o f M o r tgage No te s Re c e ivabl e If on t h e o th e r han d
.
, ,

t h e m o r tgag e is f or e cl o s e d an d t h e p ro pe r ty is tak e n t h e p r o pe r ty ,

must b e en t e re d o f co urse This may in vo lve trus t acco un ts which

, .
,

we n ee d n o t di scuss h e r e .

A cco unt s Re ce ivabl e A ccoun ts Rec e ivable is usually in ten ded

.

to cove r claims t o paym en t for m e r chandi se o nly Whe n goods .

ar e s o ld o n acc o un t A ccoun ts Re ce ivable is debited f or th e

,

am o un t o f t h e sale ; an d wh e n paym e n t is mad e t h e acc o un t is ,

cr edi te d If a n o te o r a d raft is give n as ackn owl edgm e n t of th e

.

d ebt th e acc o un t is paid ; that is tho ugh t h e d eb t remain s it is

, , ,

n ow r e gist ere d in a n o th er acc o un t N o t e s R e c e ivabl e an d sh o uld

, ,

b e can ce ll e d h e r e Th e e n try d e bits N o t e s Re c e ivabl e an d c r e dits

.

A cco un ts Re ce ivable A S a matte r Of fact all acc oun ts r e ceivable

.
,

ar e in d e x e d un d e r custom e r s n am e s as w e S hall s e e lat e r an d all

’
, ,

sal e s items which w e wish in d ex ed sh o uld go thr o ugh this acc o un t

f o r r e c or d. S O if w e wish t h e ac co un t t o give us maximum in
formation w e may en te r t o A cco un ts Re c e ivable n o t onl y am o un ts
d u e on acc o un t but c e r tain sal e s t o custom e r s fo r g o ods which
,

th ey imm ediate ly pay for in cash th ough of cou rse w e must , , ,

cre dit t h e acc o un ts als o fo r th e paym en ts Oth e rwise w e shall .

n o t hav e i n d e x e d r e c o r d o f th o se t o wh om w e make c ash sal e s ,

p e rhaps o ur b e st custom er s an d h e n c e th o se with wh om w e wish

,

t o stimulate sal e s . C o mm onl y t h e amou n t sh own as a balan c e o n

A cco un ts Re c e ivable is an ove rstat emen t of t h e am oun t actually
r e ce ivabl e fo r in m an y busin e ss e s disc oun ts are off e red fo r e arly
,

paym e n t Of bills an d such di sc ou n ts are wide ly tak en Th e ac .

c oun tin g me th od Of sh owin g re c o gn iti on of this fact is di scu sse d

in c onn e cti o n with c on tra acc o un ts late r in this chapt e r Wh en .

such disc o un ts are give n A ccou n ts Re ce ivabl e is credi te d fo r th e m

as w e ll as fo r t h e cash f o r t h e am oun t is n o l on g e r an asse t
,
AC .

Cou n ts may b e o pe n ed similar t o A cc o un t s Re c e ivable for

, ,

am o un ts ow e d fo r se rvic e s S uch an acc oun t may b e call ed

.

“ ” “
Re c e ivabl e f r om C li e n ts o r m e r e ly
, C li e n ts .

Account s Re ce iv able D oubtful A cr edit man age r watche s wi th

.

gr e at care t h e c o ll e cti on o f acco un ts r e c e ivabl e an d t o facilitate ,

this often wishe s t o se gr egate accoun ts re ceivable which have run

for a sp e cifi e d t h e o r for any one of man y re ason s ar e de em ed
96 TH E F ND AM ENTAL S U OF A CCOUNTING

of doubtful co lle ctibility S uch an acc oun t is A cc o u nt s Receiv

.

abl e D oubtful To S hift an item from A cc ou n ts Re c eivable t o

.

A ccoun ts Re c e ivable D oubtful t h e latter is debite d and t h e for

,

mer is c r edi te d If a d oubtful acc o un t is fin a lly giv en up as bad

.
,

A ccoun ts Re c eivable D oubtful is cr edi ted an d Lo sse s from B ad

D ebts is d e bite d If t h e acc ou n t is paid aft e r it has b een writte n
.

Off as bad jus tic e t o th e cust o me r r e qui r e s tha t th e acc o un t b e

,

put back o n A cco u n ts Re ce ivabl e wh e n c e it was o rigi n ally tak en

, ,

S O that th e r e t h e r e c o rd may sh o w that it was fin ally paid .

G oo d s in Pr oce s s
- -
A s w e have alre ady found in Chapte r VI
.
,

all th e c o sts of manufactu rin g goods fo r sale can b e ca r ri ed through

G oo ds in Pr o c e ss
- -
This acc ou n t h owe v e r u n lik e th o s e just dis
.
, ,

cuss e d in this chapte r d o e s n o t hav e e n trie s mad e t o it wh en eve r

,

an y chan g e tak e s plac e in t h e status o f what it r e p r e s e n ts fo r ,

chan ge s in goo ds in pr oc e ss tak e place in an y larg e facto ry n o t

- -

o n ly e v e ry m in ute but in a hun dr e d plac e s a t o n c e It is d ebit e d .

f o r t h e c o sts that have go ne in to t h e pr oduct ; bu t th o s e d e bits are

made on ly at c on veni en t o r n e c e ssary in te rvals It follows th e re .
,

fo re that e xc ept wh en t h e b ooks have b e en adj usted fo r t h e bal

,

a n c e sh e e t t h e d ebits t o this acc ou n t may or may n o t re pre s e n t

,

all t h e c o sts Th e acc ou n t is cre dite d as w e saw in C hapter VI

.
, ,

f o r th e c o st o f fi nish e d go ods s e n t from t h e sh o p o r fact or y t o t h e

wareh o use o r sal e srooms Wh en t h e accoun t is adjuste d
. that
is is c omple te t o t h e tim e
,
its balan ce r e pre s en ts t h e c o s t of
go ods at pr e s en t in th e sh o p o r facto ry un c ompl e ted that is , ,

t h e man ufactur e d c o s t o f th e ir un c ompl e t e d stat e In C hapte r .

XXII w e S hall s ee bri e fly h ow th e s e figure s are Obtain ed We .

sh all s e e also late r in this chapte r that G o ods in Pr oc e ss is a cl e ar - -

ing acc ou n t an d that th e balan c e which it shows as a balan c e

,

sh ee t accouii t is d e rive d from it as a cle aring acc ou n t .

Raw M ate rial To Raw M ate rial go all purchas e s of pri n cipal
.

mate rials fo r man ufacturing B y t h e c o s t accoun ti ng m e thod

.
-

wh e n mat e rials are re quisi ti on ed for imm ediate u s e in manu fac

turin g this acc oun t is credi te d and Goo ds in Pro c e ss is d ebite d
,
- -

fo r t h e c ost o f wha t is r e quisiti on e d ; th e b alan c e o f th e acc o un t

indi cates t h e co s t o f raw ma te rial in t h e s to re roo m S eparate .

r e c o rds sh ould b e k e pt fo r r e ce ipts and issue s o f e ach typ e o f raw

mate rial so tha t quan ti ti e s bou gh t, consum ed , an d on han d may
, ,
98 U
TH E F NDA MENTA LS OF A CCOUNTING

should b e watch ed c ar e full y ; this so me tim e s in vo lv e s a s epara te

accoun t fo r e ach vari e ty Of suppli es M an y kin ds o f supp lie s .
,

th ough o fte n n o t th ought o f as suppli e s are commonl y s o tre ated , .

Amon g acc oun ts for the s e are Fu el Po stage S tatione ry an d Prin t , ,

in g an d W r appin g Pap e r an d Twin e

,
B y t h e c o st acco un tin g .
-

m e tho d S uppli e s sh ould b e credi te d f or con sump tion ; an d t h e

,

acc oun ts r e p re se n tin g th e valu e s in to which suppli e s hav e b e en

c on ve r te d (like G o o ds in Pr o c e ss Fin ish e d G o o ds S old Go ods)
- -

, . ,

s h o uld b e d e bit e d ; but this wo uld in v o lv e so much d e tail e d re c o rd

k e e pin g that it is vir tually n e ve r don e exce pt for man ufacturi n g
suppli e s an d t h e in ve n to ry m e th o d is use d E ithe r o f tw o ways
, .

Of l ookin g at t h e acc o un t may b e ad opte d f or th e y c om e t o t h e ,

sam e thi n g in t h e e n d : all d ebits t o S upplie s may b e th ought o f

as re p r e s e n tin g ass e ts o r balan c e sh e e t ite ms but n e e din g ad
,
-

justm e n t at t h e e n d Of t h e p e ri od for con sum ed suppli e s which is ,

p ro vid e d by d e bitin g Go ods in Pro c es s S old Go ods C onv er te d

- -

, ,

A sse ts o r what n o t and creditin g this accoun t ; o r all debits may

, ,

b e t h o ught o f as c o sts o r l o ss e s d epl e ti o n s Of p rop ri e to rship bu t

, ,

adjustabl e at th e e n d of th e pe rio d f or un c on sum e d it ems th e ih ,

v en t o ry Th e latte r is t h e c omm on e r m e th od an d tr e ats all

.
,

supply acco un ts as n omin al .

Furn itur e an d Fixt ur e s NO un if o rmity o f prac tic e is f oun d

.

in n am e s appli e d t o acco un ts r e pre s en tin g asse ts in ten d e d for l on g

co n tin u e d u s e o v e r se v e ral e arn in g p e ri o ds
,
In man ufacturin g .

e stablis h m e n ts Furn itu re an d Fixture s usually c ov e r s Offic e fur

,

ni t u re such as d e sks saf e s tabl e s chairs cabin e ts e t c

, , ,
but n o , , ,
.
,

man ufacturin g e quipm e n t In m e rcan tile e stablishm en ts it may

.
,

in clud e c o un t e r s S h ow c as es sh ow win d ow attachm e n ts e t c

, ,
-

, .

i e s e lli n g as we ll as Office faciliti e s

. .
, In go o d acc o un tin g dis .
,

tin ction sho uld b e made be twe en thin gs which s e rv e o ffi ce pur

p o se s an d tho se which se rve manuf actu rin g or se llin g pu rpo s e s .

It may b e w or th whil e th e re fore t o subdivid e this accou n t ac

, ,

c o rdin g t o t h e kin ds Of s e rvic e ren de red In an y cas e th e acco un t .

,

1
is d ebite d f or pu r chases and is credi te d for d e p re ciation f or
, ,

ab an do nm e n t Of w o rn o u t furn iture an d fixtu re s for r e cov e rie s

-

o f in su r a n c e o n p ro p e r ty d e st ro y e d an d f o r sal e s ( in n o cas e a t ,

m o r e than t h e valu e at which th e prop e r ty c on c ern e d stands on

1
A substitute for this credi t is dis cussed on page 1 07 .
 TH E C NTENT O OF C OMM ON A CCOUNTS 99
th e b ooks at t h e tim e) Th e balan c e of t h e acc o un t wh en it h as
.

be en adjust e d t o t h e tim e is t h e balan ce sh ee t ite m -

.

Eq uipme n t Wh en me chan ical faciliti e s are p ro vid ed for any

.

part o f a busin e ss o th e r than man ufactu rin g th e ir valu e is usually ,

ca rri e d in E quipm en t S uch are typ e write r s addi n g machin es

.
, ,

an d dictatin g machin e s in an Offi c e sh o e re pair machi n e s in a

, ,
-

sho e store scal e s an d tru cks in a st ore room an d h ors e s an d

, ,

wagon s or m o tor trucks in th e d e liv e ry d epartm en t S om e tim e s .

,

how ev e r this acco un t ov e rlaps what w e hav e t r e ate d ab ove as in

,

Furn itu r e an d Fixtur e s an d b e l ow as in M achin e ry Th e acc oun t .

is d e bite d fo r pu r chase s an d is c re dite d for d ep r e ciation f or 1

,

aban do nm e n t an d f or sal e s similarly t o Fu rni tur e an d Fixtur e s

, , .

M achin e ry T oo ls machine t ools an d machin e s are com

.
, , ,

monly ca r ri e d toge th e r in on e acco un t M achin e ry th ough it is , ,

w ell t o s epar ate th em b e cause Of th e diff e ren t in e vitable rat e s of

d ep re ciatio n t o which th ey are subj e ct B eltin g shaftin g pul .
, ,

le ys e t c are of t en in clud ed in thi s acc oun t th ough p r op e rly th ey

,
.
, ,

should b e car ri ed se para tely Th e acco un t is han dl e d S imi la rly.

t o Fu rn itu r e an d Fixture s an d t o E quipm e n t ; b e cause o f t h e

,

c omm o n magn itud e of th e valu e s in volv e d h ow ev e r th e proper , ,

han dlin g o f d e p re ciati on is ev en m ore impor tan t D epr e ciation .

f o rms t h e subj e ct o f C hapt e r XVIII .

Pow e r Pla n t S in c e t h e p r oducti on o f po w e r is a fun ction

.

which th ough conn e ct e d wi th machin e ry may often b e op er ate d

, ,

in d e pe n d e n tly ( t o ru n o th e r machin e ry than that fo r which i t

was p rima rily install ed ) an d sin c e p ow e r may Often b e engag ed
,

from o utside so u rc e s of supply acco un ts S h ould mak e po ssibl e th e ,

de te rmin atio n o f c o sts o f po w e r Thi s in v olv e s a kn owl edge o f .

what is tie d up in po w e r plan t S O th e e quipm en t of t h e p ow e r .

plan t sh ould b e carried in a s eparate accou n t Powe r Plan t o r in , ,

t w o acco un ts E n gin e s and B o il e rs

,
It is treate d Similarly t o th e
,
.

acc o un t just d iscuss e d .

Plan t .Wh en various kin ds of p e rman ent facilitie s are no t dif

f e r en tiat e d but ar e ca rr i e d in o n e g en e r al accoun t Pla n t se rv e s ,

thi s pur p o s e S om e tim e s ev en fur th e r c on solidati on tak e s place

.
,

an d w e fi nd R e al E stat e an d Plan t as o n e acc o un t .

Re al E stat e S in c e re al e state c on s ists Of lan d an d buildin gs

.
,

1
A sub stitute for this credit is discusse d on page 1 07
'

.
1 00 TH E F ND AM ENTALS U OF A CCOUNTING
with th e ir appur ten an c e s and of n o thin g e lse it pr op e rly sh ould
, ,

b e car ri e d in an acc o u n t di sti n c t fr om all o th e rs ; f o r t h e e co n o mic

laws aff e ctin g valu es in cludin g th o s e o f de pre ciation an d appre
,

ciat io n affe ct this fi e ld s om e what di ffe r en tly f r o m o th e r s

,
S om e .

tim e s land an d buildi ngs are carri ed separately from e ach o the r :
lan d may app re ciate whil e t h e buildings depre ciate U sually a .

s epar ate acc o u n t is k e pt for e ach par c e l o f r e al e state Re al .

E stat e is d ebit e d fo r purcha s e s at c o st an d is c r edi te d fo r d e pre

ciat ion
1
f or r e c ov e ri e s Of in sura n c e o n pro p e rty d e str oy e d an d
, ,

f or sal e s C a r e must b e tak e n h ow e ve r wh e n sal e s ar e mad e

.
, , ,

tha t credit is n o t given t o this accoun t for m ore than t h e am oun t

‘

at whi ch t h e p rop e r ty s old stan ds on th e b o oks at t h e tim e Of sal e ;

for if this is d on e t h e balan ce o f t h e accoun t which is supp o s e d
, , ,

t o re pr e s e n t t h e valu e Of what re main s will b e r e duc e d e rr on e ,

o u sly by t h e am o u n t Of th e pro fit : if o n e half o f p r op e r ty o n t h e -

books at is s old fo r t h e p r ofit is an d t h e

balan ce of r e al e state is but if t h e s ale is cre dited t o Re al

E s t at e at t h e balan c e Of t h e acco un t will b e o nl y
Th e c o r re ct e nt ry will c r e dit Re al E stat e o nly an d p ro

p r ie t or sh ip in s o m e acc o u n t t o b e discuss e d in C hapt e r

XVII .

B on d s Own e d S i n c e b on ds which are in p r in cipl e o nly in

.
,

t ere s t b e arin g n o t e s o f c o rp o r ati on s are m o re f o rmal than n o t e s

-

, ,

a re b e t t e r p r o t e ct e d fro m f o rg e r y an d c o u n t e rf e it ru n usually f o r ,

l on ge r te rms an d are c omm on ly m o re r e adily salable (b e cause

,

the ir value is b e tte r kn own through th e publication Of marke t

sal e s) th e y S h ould b e carri e d in a s e par ate acc oun t S in ce th e
,
.

fac e valu e s are o f stan dard vari e ti e s (usually multipl e s Of

an d t h e p ric e paid f o r b on ds b ought is lik e ly t o b e e ith e r m o re o r

l e ss than t h e fac e (f or re as on s t o b e discuss ed late r) it is usual ,

t o d ebit B o n ds f o r t h e pric e paid r ath e r than f o r t h e par o r fac e

valu e Th e acco un t is cr e dite d for sal e s at t h e b o ok valu e Of th e
.

b on ds s old (as d e scrib ed for r e al e state ab ov e) Th e d e tailed .

han dlin g of t h e b on d acc ou n t in volv e s in t e re stin g mathematics

that n ee d m o re discussion than can b e given in this Chapte r and ,

will b e f ou n d in c onn e c ti on with o th e r similar an d impo r tan t

,

thin gs in C hapte r XX I S uffi ci en t for our pu rp o se s here is a

,
.

1 A b
su s ti t ut e h
for t is cre di i di
t s s cussed on page 1 07 .
1 02 U
TH E F ND AM ENTAL S OF A C COUNTING
“
row ed on th e b on ds Th e te rm fun d sh ould no t b e care le ssly
.

us ed : it is p re f e rably us e d o n ly f or p rop e rty se t asid e for a sp e cial

purp o s e A fun d acco un t is d e bited fo r p rop e rty pu t in to t h e
.

fu n d an d c re dite d for p rop e rty tak en ou t It is w e ll t o S h ow by .

t h e titl e o f t h e acc o un t t h e n atu r e Of t h e p r o p e r ty in t h e fun d as ,

w it h S in k in g F u n d C ash or S in kin g Fun d B on ds

, .

“
In te r e s t A ccrue d A numb e r of c omm on busin e ss tran saction s
are r e cu rren t o r e v en c on tin u ous in th e i r n atur e rath e r than OC ,

cas iO n al a
,
n d re qu ir e as w e hav e s e e n sp e cial p r ovisi on
, , In te re s t .

give n as c omp e n sati on f or t h e u se of m on e y is an ill ustr ati on It .

is always de te rmi n e d by applyin g a r ate o r p er c e n tage t o a p

cip al sum f or t h e tim e o f t h e l o an ; an d so it is c on stan t an d u n

varyin g day by day as l ong as t h e te rms of t h e l oan r emain un

chang e d ev e n th ough it may b e paid on ly on o ccasion
,
at th e
b eginn in g Of t h e t e rm of b orr owi n g at t h e en d or o ccasion ally, ,

du rin g t h e t e rm B o th th e s tatus of t h e busin e ss as sh own by t h e

.
,

balan c e sh e e t an d t h e e arn in gs an d e xp en se s as S h own by th e op

, ,

c rati n g stat e m e n t ar e a ffe ct e d by t h e accrual Of in t e r e st w h e th e r

,

t h e i n t e re st Has actually b een paid o r no t If w e l en d . on

D e c e mb e r 1 6 at o n D e c e mb e r 3 1 accru e d in t e r e s t t o t h e

amou n t Of will have accru e d in ou r favo r e v e n though t h e

l
,

lo an may ru n six m o n ths and in te re st o n it may n o t b e d ue o r b e

p aid u n til t h e d e bt matu r e s O u r claim t o that am o u n t is an as
.

s e t ; an d if w e adjust o u r b ooks t o that day w e may d e bit In t e re st

A ccru ed an d cre dit In te re st E arn ed (a subdi vision of proprie tor s ’

gain ) It sh ould b e no t e d that In te re st A ccru e d repre s en ts t h e

.

as se t an d In te re st E arn e d re pre se n ts t h e o wn e r ship of that ass e t

, .

Wh en t h e i n te r e st accru e d is paid In t e re st A ccru ed is c re di te d

,

an d C ash is d e bit ed Of c o urs e ,

B y t h e tim e paym en t is mad e
.
,

how e ve r m o re in te re st is like ly t o hav e accru e d Fo r this accrual

,
.

an o th e r e n try may b e made ; o r t o save lab o r t h e new accru al

, ,

may b e o mitte d an d wh en C ash is d e bite d a cre dit may b e made

,

t o I n t e r e st A cc ru e d fo r th e po rti on alr e ady e n t e re d and t o I n t e r

e s t E a rn e d for t h e n e w porti on Thus we ge t b o th th e asse t at
.

t h e tim e o f t h e balan c e sh e e t an d th e m e asure o f in t e re st e a rn e d

fo r th e p e ri o d .In te re st accru e d is co n s tan tly growing la rg e r
u n t il paid In te re st accru e d is n o t always e arn e d howeve r : i t
.

i Information about interest is given in Appendix B

,

.
 TH E C NTENT O OF C OMMON A C COUNTS 1 03

may b e bo ught If w e buy a b on on n e I

. d Ju
e that b ars i
n t e r e st

payabl e J an uary 1 an d July I w e buy fi v e m on t h s accru e d inte r

,
’

e s t an d w e must d e bit I n t er e st A cc ru e d an d c r e dit C ash

,
The n .

o f t h e in t e r e st paym e n t o n July I o n ly t h e i n t e r e st fo r Ju n e will

b e e a rn e d .On July 1 w e can d e bit In te re s t A ccru e d an d c re dit

In te re st E arn e d fo r t h e Jun e in te re st an d the n d ebit C ash an d ,

c re dit In t e r e st A cc ru e d fo r th e S ix mo n ths in te r e st ; o r w e can ’

d ebit C ash fo r t h e S ix m on ths in te re st an d c re di t In te re st A o

’
,

c ru e d fo r t h e fi v e m o n ths in t e re st an d In t e re st E arn e d fo r th e
’

Jun e in te re st S tatistically t h e fo rm er is b e tte r an d mo re sys

.
,

t emat ic but th e latt e r is S h o r t e r

,
if on e d oe s n o t fo rg e t what
is what an d mak e a blu n d e r .

In ter e st Pr e pai d A kin t o In te re st A ccru ed th ough in som e

.
,

s en se s rev e r se d is In te re st Pre paid This acc o un t re pre s en ts n o t

,
.

an ass e t t o c om e in as ( p re sumably) cash but a right o r privil e g e ,

for which ( p re sumably) cash has g on e ou t Wh ere as i n te re st .

accru ed gr ows c on stan tly large r un til paid in te r e st p r epaid grow s ,

c on stan tly small e r un til e xpire d Th e ass e t which it r e pr e s en ts is

.

t h e right t o u s e o th e r p e o pl e s m o n e y t emp or a r ily in ou r e n t e r

’

p ris e s an d th e fact that w e ar e willin g t o pay f o r t h e u s e o f th e

,

m on e y S h ows that w e d e em ed that r ight t o hav e valu e else

why sh ould w e hav e giv en a p e r f e ctly goo d asse t cash in ex , ,

change fo r it ? In d e e d e v e n if w e mak e f o olish u s e o f th e b o r

,

r ow ed mon ey an d e a rn n o thin g with it that fact d o e s n o t d e stro y ,

t h e right as an ass e t ; for t h e right whi ch w e hav e paid f o r is t o u s e

t h e m on e y an d such right has a un iv e rsally r e c o gni z e d ma rke t
,

valu e an d t o squan de r that p rivil e ge lat e r is a l o ss Of th e late r

,

p eri od but cann o t w ork r e tr oactiv e ly an d de str oy t h e value of th e

right in its e lf at th e tim e wh en it was p r e paid Pr epaid in t e r e st .

is of t w o so r ts that which is paid in advan c e an d in addi tion to

th e am o un t writt en in th e fac e Of t h e n o t e dr aft or o th e r e v i , ,

d en c e of debt an d that which is d e ducte d f rom th e fac e Of th e

,

n o t e o r o th e r e vid e n c e o f d ebt an d n e v e r l o an e d
, , Th e last is .

calle d disc oun t but is iden tical in n atur e with i n tere st an d is car
,

r i e d in t h e sam e acc o un t If a n o te f or
. d o e s n o t b ear in
t e r e s t an d is d u e t w o m on ths fro m to d ay o u r bank will giv e us ,

for it if w e di s c ou n t it n o t but l e ss th e in t e re st (at

say on for two m on ths o r $ 990 We are in effe ct , .
,
1 04 U
TH E F ND AM ENTAL S OF A C COUNTIN G

th en payin g in te re st in advan ce $ 1 0 for th e us e of $990 for two

, ,

m on ths Our e n try will b e p rope r ly a debit t o C ash for $ 990 t o

.
,

In te re st Pre paid for $ 1 0 an d a cr edi t t o N o t e s Re c e ivabl e D is

,

co un te d (o r No te s Payabl e if th e n o te is o n e o f ou r own mak

in g) for A s tim e go e s by t h e p repaym e n t e xpire s an d , ,

wh e re as it was $ 1 0 at th e b e ginn in g at t h e e n d o f on e mon th it is ,

o nl y $ 5 . Thi s e xpir ati on is o f c our s e th e re sult o f c on v er sion o f

ass e ts ; and In te re st C harge s (on e statistical subdivision Of C on
v e rted A ss e ts o r Go o ds in Pro c e ss or L o ss an d G ain) is d ebite d
,
- -

an d In t e re st P r e paid is c r e dit e d .

Re n t Accru e d Wh en re n t has accru e d in favo r o f a busin e ss a t

.

t h e tim e o f a balan c e sh e e t it must S h ow as Ren t A cc ru e d

, At .

th e tim e of d e biting this acc ou n t R en tal E a rn e d ( a subdi vision o f

,

p rop ri e tor s gain ) is c redi te d Wh en r en t p re viously en te re d as

’
.

R e n t A ccru e d is paid thi s acc ou n t is c r e di t e d ; but wh e n r e n ts

,

n o t d e bite d t o this acc o un t ar e paid this acc o un t is n o t n e e d e d , ,

unl e ss for statistical c o mpl e ten e ss fo r t h e en try is simply a d ebi t ,

t o C ash an d a c r e dit t o R e n tal E arn e d .

Re n t Pre pfiid W e hav e just s e en tha t Ren t A ccru ed is h an

.

dled similarly t o In t e r e st A ccru e d with Re n tal E a rn e d alli e d t o it

,

an d t o In t e r e st E arn e d Th e sam e par all e lism appli e s t o Ren t

.

Pr e paid an d In t e re st Pre paid an d t o Re n tal C harge s an d In te res t

,

C ha rg e s .

C ommi s s ion Accru e d Wh en on e busin e ss s e lls goo ds on b e

.

half Oi an o th e r it is giv en usually a p e rc e n tag e Of t h e s e llin g pri c e

as c omp e n sation If such c omp e n sati on has b e en e arn e d but n o t
.

r e c e iv e d it sh o uld app e ar on t h e balan c e sh e e t as C ommission

,

A ccru ed Th e credi t is t o Commission E arn ed When commi s

. .

sion e n te re d as C ommission A cc ru e d is paid this accoun t is c re d ,

i t e d ; but paym e n t mad e t o t h e busin e ss with out p re vi ous e n try

o f acc rual is c r edite d di re ctly t o C o mmissi on E arn e d .

In s uran ce Pr e pai d In su ran c e is usually paid in advan c e for a

.

t e rm l on ge r than a sin gl e e arn ing p e ri od an d th e re fo re wh en paid ,

it is usu ally d ebited t o In suran ce Prepaid A s it e xpire s this ac .

c oun t is cr e dite d and In suran c e C harg e s (a subdivisi on of C on

v e rt e d A ss e ts or L O S S an d G ain ) is debite d
, .

W age s Pr e pai d Th e accou n t fo r pre paid wage s is aki n t o th e

.

o the r a cc oun ts for prepaym en ts A s t h e prepaym en ts expir e t h e

.
,
1 06 U
TH E F ND AM ENTAL S OF A C COUNTIN G

a sourc e of in com e and an asse t Wha t is paid for th e right (th e

.

c o st Of o btain ing th e pate n t o r i ts pu r chas e p ric e if b ought f ro m

,

an o th e r) is acc ordi ngly d ebite d t o Pat e n t Rights G ood acco un t .

in g p r ac tic e f o r re ason s t o b e giv e n lat e r d o e s n o t san cti o n d e bit

, ,

ing t h e acc ou n t f o r m or e than c o st Th e acc o un t is c redi t e d f o r

.

sh rinkage s in valu e f r om g radual e xpi rati on o f t h e pat en t ,

from d e cli n e o f e arni n g f rom it o r f rom discov ery of ov e rv alu a

,

tio n ; an d con se rvatism is t h e par t of wisd om Th e math e matical .

m e th o d Of findi n g t h e valu e of a pat en t is discuss e d in C hapte r

XXI S imilar t o pat en t rights ar e c opyrights l e as eh o lds tr ad e
.
, ,

ma rks r oyalty rights fran chis e s an d go o d will Th ey will b e

, , , .

discuss e d m or e fully in C hapt e r XXI .

S us pe n s e Accounts Occasion ally it happ e n s that a busin e ss

.

cann o t at on c e d e te rmin e t h e di sp o siti on Of s om e p rop e r ty ac

qui re d an d dislik e s t o giv e it ev e n temp orarily a w ron g n am e ; ye t
it is d e si rabl e for th e acquisiti on t o b e in s om e way re co r de d on
t h e b o oks . For thi s pu rp o s e S usp en s e A cc ou n t d e sign atin g un ,

c e r tain dis p o siti on is s er vic e abl e This may o ccu r on t en tativ e

,
.

balan c e sh e e t g but wh en p o ssibl e fin al disp o siti on sh oul d b e d e

, ,

te rmin e d an d e n te re d b e fo re fin al balan c e S h e e ts ar e p repare d A .

qualifyin g te rm may w ell b e add e d t o t h e titl e o f th e acc o un t as ,

in Re al E stat e S usp en s e S uch an accou n t is Oft e n use d als o for

.

d oubtful r e c e ivabl e s b o th n o te s an d b ook acc ou n ts

, .

C on tin g e nt As s e t s It is n o t u n c omm o n in busin e ss t o su r ren

.

d e r p r ope r ty t o an o th e r as a pl e dge fo r t h e p e r f o rman c e o f an act .

R e sumpti on of such pr op e r ty is c on tin g e n t on t h e p e rf o rman c e of

t h e act f or in cas e of failu r e Of p e r f o rman c e t h e p r op e r ty is sub
,

j e c t t o f o rf e itu r e
. It is imp o r tan t that c on tin g en t ite ms b e dis

t in guish e d f ro m o th e r s t o whi ch titl e is cl e a r ; for o th e rwis e w e

may thi nk that w e hav e availabl e m or e p r op er ty than w e actually
hav e o r w e may n o t in f o rmulating o u r p olicy suffi ci en tly re co g
,

n iz e t h e p o ssibility o f f o rf e itur e . A m on g such c o n ti n ge n t ass e ts

ar e n o t e s r e c e ivabl e al r e ady disc o u n t e d as m e n ti on e d o n pag e
,

93 ; but in that cas e t h e c o n ti n g e ncy is i n dicat e d by t h e liability

acco un t r ath e r than by t h e ass e t acc ou n t A n o the r e xampl e is .

cash d ep o sit e d with a city t re asu r er by a c on tr actor as a pl e dge

f o r fulfillm e n t o f his c on tr act t o build a b ridge withi n a c e rtain
time covere d by C ash D ep o sited as Pledge on Contrac ts
, .
 O
TH E C NTEN T OF C OMM ON ACCOUN TS 1 07

AC COUNTS
CONTRA

All owa nce f or D e pre ciati on In con n e ction with s ev e ral ass e t
.

acc o u n ts w e n o t e d that d e p re ciati on o f th e p r op e r ty r e quir ed a

r educti on of t h e valu e as sh own by th e boo ks S tatistically this.

may o r may n o t b e advan tageous S om e tim e s w e ar e con c e rn e d

.

n o t onl y with t h e p re s e n t valu e or t h e p o r ti o n o f o rigin al c o st still

,

remain in g but with t h e actual o rigin al co st an d w e wish that

, ,

o rigin al c o st t o r e main o n ou r b ooks with o ut cha n g e W e at th e

.

sam e tim e wish t o S h ow t h e e xhausti on of that valu e by u s e o r

di sc on tin uan c e .B o th pu rp o s e s can b e s e rv e d by e stablishin g a
n ew acco u n t t o m e asu r e th e e xhausti o n o f o rigin al valu e an d by ,

rem emb e rin g that t h e sto ry Of t h e p rop er ty is n ow to ld in t w o

accoun ts in ste ad o f on e an d that th e r emain in g valu e li e s in th e
diff eren c e b e tw e e n t h e tw o accou n ts S uch an acco un t is A ll ow
.

an ce fo r D e p re ciati on Of B uildin gs (som e tim e s call e d R e s e rv e

for D e p re ciati on o f B u ildin gs) This A ll owan c e for D ep r e cia
.

tion of B uildi n gs though it has a cre di t balan ce d oe s n o t repre

, ,

se n t an own e r ship claim but m e r ely m e asu re s t h e ov e rvaluati on

-

of ass e ts To u s e a h om e ly figu r e of spe e ch t h e ass e t acc oun t

.
,

may b e said t o m e asu r e t h e diam e te r o f a doughn ut an d t h e al ,

l owan c e acc ou n t t o m e asu re t h e di am e te r o f t h e h o l e ; s o that t h e

substan c e o f t h e doughn ut is in dicate d by t h e diffe r e n ce b e tw e en
t h e tw o. A n all o wan c e acco u n t m e asure s a hol e in an ass e t wh en
fo r statistical r e aso n s w e d e sire t o S h ow b o t h t h e o ri gi n al wh o l e
an d t h e p r e s e n t h o l e S uppo s e a pi e c e o f r e al e state c o st
.

a y e ar ago an d w e wish n ow t o S how d ep r e ciatio n fo r t h e year

,

am oun tin g t o W e may d ebit D e p re ciati on an d

c re di t Re al E stat e l e avin g Re al E state at an d

ca rryin g fro m D e p re ciati on t o C o nv er te d A ss e ts ; o r w e

may d ebit D e p re ciation as b e fore an d cr e dit A ll ow an ce fo r
D e p r e ciati on o f B uildi n gs in which cas e w e shall have
n o t o n ly fo r R e al E stat e on t h e balan c e sh e e t but also an ,

item Of A llowan ce f or D e p r e ciation Of B uildin gs on t h e

(
o th e r sid e o f o u r balan c e sh e e t as if it w e re an o wn e r shi p claim) -

Th e titl e o f t h e all owan c e acc o u n t h ow e v e r mak e s cl e ar that it is

, ,

n e ith er a liabili ty n o r a p r o p ri e t o r shi p it e m but m e r e ly a d e d u c

,

t ion ( o r n e gativ e ) fo r an it e m on t h e o th e r sid e o f th e S h e e t By .

1 08 TH E F ND AM EN TAL SU OF A C CO UNTIN G
this m e th od w e av oid all dan g e r o f buryin g b e yon d r e surr e cti on
( th r o ugh va r i o us d e p r e ciati o n e n tri e s ) t h e actual c o st of th e p rop
e r t y an impo r ta n t hist or ical fact
,
Th e o n ly dan g e r is that s om e
.

o n e will o bs e rv e t h e fo r r e al e stat e o n t h e balan c e sh e e t

o r o n t h e b o o ks an d failin g t o s e e t h e
,
A llowan ce for D e
p re ciation Of B uil di n gs b e d e ce ive d On t h e balan ce sh e e t th e
,
.

dan ger of this is som e time s av oide d by sh owin g th e all ow

an c e as a subtr acti on f r o m t h e re al e s t ate it e m o f thus
Real E s tate
L ess Allo wa n ce for D epreciation

This can n o t b e do n e o n th e l e dge r for t o d o so w ould b e t o d e stroy

,

j ust what w e are tryin g t o pr e s e rv e ; but p e rs on s u nfamili ar with

accoun ts should n o t t ry t o in te rp re t l e dge r s S imilar all owan ce .

acc o u n ts can b e p ro vid e d for d e p r e ciati on o f mach in e ry o f e quip ,

m en t an d Of an y o th e r kin d o f p ro pe r ty subj e ct t o d ep r e ciation

, .

Th e ultimate disp o siti on o f th e all owan c e acc o un t is di scuss ed in

C hapt e r XVII I .

Allowan ce f or B ad D e bts Akin in n ature but som ewhat dif

.
,

fe r e n t in d e tail is A ll owan c e f or B ad D e bts (

,
s ome tim e s call ed
Re s e rv e f o r B ad D e bts) Fe w busin e ss e s e scap e with out o cca
.

s io n al l o ss e s f r o m u n c o ll e ctibl e it e ms Th e se l o ss e s h owev e r b e
.
, ,

l on g p ro p er ly n o t t o th e pe ri o d in which t h e badn e ss o f t h e d ebts

is disco v e r e d but t o th e pe rio d in which t h e d ebts w e r e in curr ed
, .

This m e an s that at t h e e n d o f an y e arn in g p e ri o d all owan c e mus t

b e mad e for th e u n co lle ct ib ili t y Of acco un ts an d n o t e s r e c e ivabl e .

S O f ar as t h e am o un ts ar e n o t ye t d u e w e d o n o t kn ow h ow ,

man y ar e bad o r which are bad We kn ow o n ly that in all p rob

,
.

ability a c e r tain p e r c e n tage (e s t imM ed fr o m gen e ral e xp eri en c e)

will ultimat ely p ro ve bad an d o n e of t h e c o sts of makin g t h e
,

sale s (o r b e tte r of c oll e ctin g what w e d o co lle ct o n th e goo d

, ,

sale s) is t h e risk w e tak e an d l o ss w e suff e r on t h e bad sale s Th e .

r isk w e tak e is o n e o f t h e thin gs that p r o duc e s sal e s an d p r o fits ,

an d h e n c e t h e l o ss e s which are t h e m e asu r e o f t h e r isk c o n stitut e

, ,

o n e Of th e e l e m en ts that w e hav e put i n t o sal e s ( lik e c o st Of goo ds ,

s e lli n g wag e s e t c ) an d must b e c o un t e d as am o n g t h e c on ve r t ed

,
.

ass e ts r e tu rn e d in th e pric e of goo ds succ e ssfully s old

, We must .
,
1 10 U
TH E F NDAMENTALS OF A C COUNTING

le ctib ility , t h e allowan ce is probably deficien t an d be tter provi

,

si on sh ould b e mad e in th e future .

A l l o w a n ce f or D i s co un t O fi e r e
. d It is c omm o n in ma n y li n es

of busin e ss t o Offe r a re duction in th e am o un t of a bill if it is paid

e arly e g
. .
3%
,
if paid withi n I O days 2 %,
if paid withi n 3 0
“
days an d n e t (re gular) t e rms 60 d ays Th e se ar e call ed cash
,
.

”
disco un ts . Though thi s is a con c e ssion to th e custom e r it ha s ,

s om e advan tage t o th e s e ll e r : h e ge ts his pay soon e r an d can thus

turn ov e r his capital m or e rapidly an d sav e in t er e st an d h e ge ts ,

rid of s o much risk o f lo ss by failure t o c o lle ct (t o trust a cust om e r

s ixty days m e an s just six tim e s th e risk o th e r thin gs b e i n g e qual
, ,

in v olv e d in trustin g him t e n days) Th e la t te r is th e re as on w h y

.

cash discoun t r ate s are so much hi gh e r than in te re st rate s A .

rate of 3 % disc o un t f or paym en t in 1 0 days as con tr aste d with a

,

paym en t n e t in 60 days is 3 % for paym en t 5 0 days e ar ly o r at

, ,

t h e r at e o f app roximat e ly 2 2 % a y e ar . S o far as paym en ts are

e ar ly l e ss than t h e fac e Of b ills will b e re c e iv e d o n acc o un ts r e
,

ce iv ab le an d h e n c e if th e y ar e put o n t h e balan c e sh e e t wi t h
,

o u t p r o visi on f o r disc o u n ts ass e ts an d p ro fits will b e o v e r stat ed .

Y e t w e can n o t w e ll r e duc e t h e figu r e on t h e l e dg e r f o r w e d o n o t

,

kn ow which custom e rs will tak e th e ir disc oun ts Off e re d an d w e ,

wish our l edge r accoun t t o tally with t h e total o f t h e in dividual

ite ms re co rd e d as re c e ivabl e We acc o rdin gly se t up an all o w
.

an c e accou n t t o sh ow t h e ov e rvalua tio n o f accou n ts re c e ivable ,

cre di ti ng All owa n ce fo r D i sc ou n ts Th e c omple me n ta ry de bit is

.

ultimate ly tra n sfe rred t o Co n ve rte d A sse ts or Lo ss an d G ai n o r

, ,

o th e r similar acc o u n t a n d will b e di scu sse d late r in this chap te r

,

in c on n e ctio n with di sc ou n t s . In t h e subse qu e n t p e ri od A llo w

a n ce fo r D iscou n t Off e re d will b e d e bite d fo r actual discou n ts
given o n Old bills Th e c omple m e n ta ry c re dit will b e t o A ccou n ts
.

Re c e ivable ; thus A cco u n ts Re c e i vabl e is c re d ite d f o r t h e disc ou n t

p or ti on of old bill s paid alon g with t h e cre dit fo r t h e cash po r
,

ti on o f such bills .

A ll owan ce f or D is count Avail ab l e . Th e co n ve r se o f A ll owan c e

fo r D isc ou n t Offe r e d is A llo wan c e for D iscou n t A vailable Ou r
.

accoun ts payable ar e l e ss s e ri ous by t h e am ou n t o f discou n t

Off e r e d us an d sin c e w e ca n n o t w e ll write do wn t h e payabl e s n ow
,

( e lse th e y wi ll n o t tally with th e bills) w e may s e t up a c on tr a

,
 TH E C NTENT O OF C OMM ON A CCOUNTS III

accoun t This is d e bite d for t h e disco un t availabl e at t h e tim e o f

.

adjustin g t h e b oo ks Th e co mpl e m en ta ry cr e dit is ultimate ly

.

t ran sfe rable t o C on v e rt e d A ss e ts (o r o th e r simi lar acco un t) an d ,

is discusse d in c onn e ction with n o min al acco un ts .

Pr ovi s ion f or H azar d Ev e ry busin e ss h ouse tak e s c e r tain

.

r isks of misch an c e an d ye t t h e mischan c e may n e v e r in a l on g

,

ca ree r o ccu r A goo d illustr ation o f this is fi re l o sse s fo r mo d

.

e rn fi r e in suran c e t e n ds t o fo r c e t h e in su r e d t o b e ar a pa r t Of t h e

risk an d the re fo re n o t t h e wh ol e of th e bu rd en can b e c ove re d by

,

in sur an c e p o lici e s This m e an s that ev e ry ye ar in which n o fi re

.

lo ss o ccu r s a busin e ss h ous e sh ould accumulat e s om e thin g as thi s

ye ar s shar e of th e bu r den o f l o ss that in s om e d e gre e o f p rob ab il
’

ity wi ll happ en s om e tim e To l e av e th e l o ss t o b e suff e r e d wh o lly

.

by t h e ye ar in which th e fi r e chan c e s t o fall w ould b e u nfair t o

that y e ar f o r t h e r isk o f l o ss b e l on gs t o all t h e ye ar s H e n c e at .

t h e cl o se of e v e ry p e ri o d r e c o gn iti o n sh ould b e giv en t o t h e fact

that som e o f th e ass e ts th ough still in tact are in a s en se d oom e d
, ,

t o disapp e ar an c e by mis chan c e an d that a p or ti on o f th e l o ss in

volv e d b e l ongs t o t h e past p e ri od Th e subs e qu en t p e ri o ds m o re
.
,

o ve r th ough th e y in h e rit t h e ass e ts in tact sh o uld in h e r it a c e r

, ,

tain margin for sh rin kage o r l o ss which will n o t b e h e ld charg e abl e

t o th em if t h e l o ss o ccu r s durin g th e ir t e rm Pr o visi on f or Fi r e .

H azard is an illustr ati on of this s o rt o f thin g Th e e n try w o uld .

debit In su r an c e C harge s an d c re di t Provisi on fo r Fi re H azard .

Th e fo rm e r as w e hav e alr e ady s e e n is tr an sf e rr e d t o C on v e r te d

, ,

A sse ts o r Goods in Pro ce ss (or a substitute for on e of th em) ; and

,
- -

th e latte r is a balan c e sh e e t it e m which r e p r e s e n ts n eith e r pro

-

p r i e t o r s hi p n o r liability but in di cat e s

,
that th o ugh t h e asse ts a r e

n o t ye t impair e d by fi r e th e y must n o t b e c o u n t e d on fo r th e fu

ture t o re alize th e b ook valu e A pu r chase r would giv e le ss for .

a v e ss e l which a submarin e t o rp e d o was kn own t o b e app ro ach

ing e ve n th ough t h e e xc ell e n c e o f th e aim w er e p robl ematical

, ,

than for a v e sse l o utside th e dan ge r z on e Th e v e ss e l is still in .

tact but t h e appr o ach of th e p robabl e m om e n t o f impact aff e cts

,

its valu e Th e Provision fo r Fi re H azard th ough it m e asu r e s a

.
,

much l e ss s e rious p robabil ity of l o ss than t h e to rp e do rep re se n ts ,

n ev e r th e l ess t h e supp o se d d e gr e e o f app ro ach o f t h e fin al mis

chan c e which will b e obse rv e d only as a S ingl e an d m omen tary

1 12 TH E FUND AM ENTAL S OF A CCOUNTING

ev en t This pro vision fo r fi re h azard sh o uld b e accumula te d

.

o v e r a s e ri e s Of ye a r s t o a sum suffi ci e n t t o c o v e r t h e chan c e of l o ss

o n t h e u n i n su r abl e ma r gin o f valu e Of all p r o p e r ty subj e ct t o t h e

risk Its tre atm e n t wh en t h e l o ss p r e c e de s th e accumulati on of

.

th e p rovisi on is di scuss e d in C hapt e r XVII .

OWNERS H IP CLA IM AC COUNTS-

Pr opri e t o r s Inve stme nt U sually t h e in v e stm en t of propri

’
.

e t o r s is k e pt in a s e parate acc o u n t f o r e ach p r o p ri e t o r by n am e as ,

“
John D o e Inve stmen t o r J o hn D o e C apital Th e par t
,
”
,
“ ”
, .

n e r sh ip ag r e e m e n t will o f c o u r s e sh o w what i n v e stm e n t is t o b e

main tain e d by e ach par tn e r an d h ow profit an d l o ss is t o b e

sha r e d by e ach ; an d this acc oun t is t o sh o w h ow cl o s e ly t h e part
n e r sh ip ag re e m e n t is f o ll ow e d in r e sp e ct t o in v e s t m e n t an d wh e n ,

t h e di visio n o f p r o fit or l o ss is t o b e a ff e ct e d by in v e stm e n t this

acc ou n t will b e r e quired for inf o rmation in that co nn e ction also .

In cas e o f diss o lutio n t h e in v e stm e n t Of par t n e r s is imp o rtan t

,

for d e te rmi ni n g t h e divisi o n of n e t ass e ts o r t h e r e spo n sibili ty for

n e t liabiliti e s Th o ugh t h e in v e stm en t acc ou n ts ar e c r e dited fo r
9

sums in truste d t o t h e busin e ss as call e d for by th e agr e e m e n t th e y ,

ar e n o t c r e dit e d fo r l o an s mad e t o t h e busin e ss by p r op ri e t o rs .

Th e y are d ebite d fo r re duction o f in v e stm en t by withd rawal In .

t h e cas e o f sin gl e pro pri e t o rship p ro fits an d with d rawal o f p r ofits

,

o ft e n are ca r ri e d t o t h e acc oun t with in v e stm e n t Thi s sac rific e s .

s om e statistical in fo rmati on but o th e rwis e do e s n o ha rm In

, .

par tn e r ships this sho uld no t b e don e un l e ss all pa r tn e r s always a t

t h e sam e tim e mak e such withd r awals Of pro fits as may b e mutu
ally ag re e d up on b e fore han d U sually withd rawals Oi p rofits are
.

fixe d by t h e par tn er ship agr e em e n t an d s epar ate accou n ts should

,

b e k e pt t o i n di cate h ow cl o s e ly t h e ag ree m e n t is f o ll ow ed .

Pr opr ie tor s D rawings

’
In o r d e r t o disti nguish statistically
.

b e tw een capital inv e sted profits e arn e d capital withd rawn pro f
, , ,

its withd rawn an d p ro fits accumulat e d in th e busin e ss an ac

, ,

c o un t is usually k e pt for e ach p ro p ri e to r t o cov e r items n o t in

v e ste d This may b e calle d fo r e xampl e J ohn D oe D rawing s
.
,
“
,
”
, ,

or
“
John D oe Pe rson al To it are cre dited th e followin g pro
,
”
.
,

v id e d by t h e par tn e r ship agr e e m e n t : salary in t e r e st o n in v e st ,

m en t an d profi ts To i t are debi ted dr awings for p ers on al u se ,

, .
1 14 U
TH E F ND AMENTAL S OF A CCOUNTIN G

promi se s Of t h e busin e ss on wh o s e books t h e acc o un t stan ds t o

, ,

pay cash ; an d this appli e s t o acc eptance s of d rafts as w ell as to

1
p romisso ry n o te s ; an d it do e s n o t usually in clud e in te re st on
such n o te s e v e n wh en t h e n o te s b e ar in te re st fo r n o te s are m o re
, ,

e asil y id e n tifi e d o n t h e b o oks wh e n e n t e r e d at fac e valu e an d th e ,

in te re st is m o re con v eni e n tly han dl e d in a s e par ate acco un t .

T h is accoun t is cr edite d wh e n n o te s ar e issu e d or giv en an d wh en

drafts are acc epte d an d it is d ebite d wh en th e n o te s o r d r afts are
,
“ ”
paid e ith er in full o r in pa r t It is also call e d B ills Payabl e
. .

M o rtgage Note s Payable Just as one rep orts m o rtgage notes

.

h eld as M o r tgage N o te s R e c eivabl e o n e S h ould re p o r t such n o te s

,

issu e d as M o r tgage N o te s P ayabl e In de e d it is m o re imp ortan t

.
,

o n thi s S id e o f t h e balan c e sh e e t than o n t h e o th e r that th e s e n o t e s

b e s e parat e ly r e p o rt e d fo r in cas e Of in s olv en cy th e y w ould co n

,

s t i t u t e a claim t o spe cific asse ts an d pro bably b e fully paid thus ,

reducin g t h e shar e o f asse ts remain in g fo r partial paym en t Of re

maini n g li ab ilitie s S om e tim e s th e y are r ep ort e d on t h e balan ce
.

sh ee t by d e duction from th e ass e t side rath e r than as liabiliti e s to ,

S h ow t h e e quit y in t h e mor tgag e d prop e rty ra th e r than its gr o ss ,

valu e thus :
,

Re al E state
Le ss Mortgage Notes Payab le

This mak e s cl e ar e r t h e situa ti on with re sp e c t to s olve n cy o r abil ,

ity t o pay d e bts but it is n o t so satisfactory for gen e ral purp o s es ;

,

fo r it d e tr acts f rom t h e valu e o f t h e balan c e sh e e t as a cl e a r sum

mary state m en t o f t h e prope rty c ont rolle d and us e d by th e busi
n e ss in e a rn in g its in c o m e .

Account s Payabl e L iabili ty for merch an dis e for raw ma te

.
,

rial an d for manufac turing suppli e s (that is for p rin cipal pu r chase
, ,

o f tan gibl e t hings t o b e quickly c on v e rt e d an d dispo s e d o f) is

c omm o n ly cre dite d t o A cc oun ts P ayabl e This acc o un t is d ebited

.

for paym e n ts o n such acc o un ts an d fo r cash disc oun ts whi ch re

duc e t h e amo un t requi re d t o b e paid wh en paym en t is mad e
e a rly . Its balan c e usually sh ows a liability gr e ate r than th e
actual for discoun ts off e re d can c omm onl y r educ e th e paymen ts
, .

In such c as e s a c on tra acc oun t A ll owan c e fo r D isc o un t A vailabl e

, , ,
 TH E C NTEN TO OF C OMM ON A CCOUNTS I I5

can be stablish ed as discuss ed e a rli e r in thi s chapt e r on page 1 1 0

e , .

M isce llan e ous liabilitie s no t for prin cipal pu rchase s o f quickly

c onv e r tibl e ass e ts are n o t c redi te d t o A ccoun ts P ayabl e but t o on e
of t h e acc ou n ts discuss ed in t h e n e xt pa r agr aph .

Oth e r Payabl e s Liability for wage s fo r commission s for

.
, ,

gen eral e xp en se s an d se rvic e s (like lightin g an d t e l eph on e c onn e c

ti on s) for suppli e s for e quipm en t an d fo r simila r items n o t e n te r
, ,

ing i n t o sal e s exc ept rem o t e ly is c r e dit e d c omm on ly t o V ouch e r s ,

Payabl e by a b ookk e epin g d e vice t o b e d es c rib ed in C hapt e r

,

XIII o r t o sp e cial acc ou n ts lik e W age s L iability Re n t Liability

, , , ,

et c
. Th e c ompl em e n tary d ebit is t o t h e app r op riate n omin al
acc ou n t lik e W age s C ommission C ha rge s Light T e l ephon e and
, , , ,

T e l egraph Re n tal Taxe s an d G en e ral Exp e n se s or t o th e appro

, , , ,

p ri at e re al acc o un t lik e S uppli e s an d

,
E quipm e nt W h e n pay , .

m en t is mad e t h e liability acc oun t is d e bite d

, .

Accr u e d Liab ilitie s Just as asse ts may b e con s tan tly accruing
.

with m ere lapse Of tim e lik e claims for in t ere st for re n tal an d fo r
, , ,

r o yalti e s liabiliti e s o f t h e sam e s o r t may b e accruin g again st t h e

,

busin e ss We may w e ll illust rate this with a cas e in vo lvin g in te r

.

est . If w e b orrow o n D e c e mb e r 1 6 o n a n o te b e arin g in ,

t e r es t at an d payabl e in 60 days day by day this in t e re st is ,

accruin g again st us an d on D e cemb e r 3 1 ou r balan c e she e t must

S h ow I n t e r e st A ccru e d L iability fo r Th e d ebit which will
s e rv e as a compl em en t t o this cr edit is In te re st Charge s A co r .

re sp o n d in g m e th od is used fo r Re n tal A ccru e d L iabi lity Tax e s ,

A ccru ed Liability e t c ,
.

Liab ility on Pr e paym e nts Just as asse ts may con sis t Of items .

pr epaid but imm ediate ly th e re afte r subj e ct t o e xhausti on by

m er e lapse of tim e so liability may con sist Of liability on acc oun t
,

Of pr epaym en ts t o us by o th e rs This liability may b e loo k e d at .

in e ith e r o f t w o ways : it is liability t o p e rf orm s e rvic e as t o all ow ,

t h e u se o f m on ey f or which in t e r e st has b een paid in advan c e o r

t h e u se o f a buildi n g fo r which r en tal has b e en paid in advan c e ; o r
it is fi n an cial re sp on sibi lity for m on e y d e liv e re d in advan c e of t h e
p erf o rman c e o f th e s e rvice We may again tak e a case of in te re st .

fo r illustr ati o n If w e l end m on ey on a

. n o t e n o t h e arin g ,

i n te re st an d du e in t w o m on ths w e shall l en d if w e disco un t at , ,

$ 990 We shall d ebi t Not es Re ce ivabl e

. shall cr edi t
1 16 TH E F ND AM ENTALS U OF A CCOUNTIN G
C ash $990 , must cr e di t In te re s t Un e arn e d
an d This last
ite m is a liability : w e hav e co ll e cte d t h e i n te re st b e fo re w e have
r en d er e d t h e s e rvic e D ay by day h ow ev e r th e s e rvic e is r en
.
, ,

d e re d by a ll owin g t h e u s e o f th e m o n e y an d th e liability is re ,

d u ce d Th e e n tr y fo r adjustin g t h e b o oks is a d ebit t o In te re st

.

Un e arn e d and a c re dit t o In te re st E arn e d A corre spon ding .

m e th o d is us ed for Re n tals Une arn e d e t c A par ticular ly goo d , .

illustrati on o f a liability on pre paym en ts is that o f lon g te rm sub -

s crip t io n s t o magazin e s .

Un div i d e d Pr ofi t s an d S urplu s e s In c o rp o rati o n s m o re th an .

in u ni n c orp o r ate d busin e ss e s it is c omm on t o accumulat e s om e o f

t h e p r o fits rath e r than di s tribut e all Of th e m o r e v en all o cate
them t o t h e accoun ts o f propri e tor s In an u nin corpo r ate d busi .

n e ss a su rplus w o uld b e simply an un divid e d c r e dit t o partn e rs

, ,

l eft u n divid e d as an in dication tha t a par t of t h e ass e ts arisin g

from pr ofits w e re n o t in ten d e d t o b e withdrawn but accumulat ed
for e m e rge n cie s o r for a sp e cial pu r po s e B e caus e S u rplus is m o r e .

co mm on in con n e cti on with co rp o ration s it is discuss e d m or e ,

fully in C hapt er XVI What is said th e re appli e s mu tati s ma .

,

tandi s t o pa r tn e r ships
,
.

C on tinge n t Liab il itie s It is n o t un comm on t o in cur a liability

.

con tin ge n t on t h e failu re Of ours e lve s or o f o th e rs t o comply with

c ondi ti on s agre e d up on M o s t comm on o f such liabiliti e s are .

e n d or s e m en ts o f n o te s Of o th e rs as w e saw in c o nn e cti on wi th ,

No t e s Re c e ivabl e un d e r No te s Re c eivabl e D isco u n t e d

, S ome .

time s howev er n o te s are e n dorsed fo r m e r e accomm o dation

, , ,

with o ut imm ediat e fin an cial in te re st S uch are en d o r s e m en ts o r .

guar an te e s by c on tro llin g railr o ads Of t h e n o te s an d b on ds of con

troll ed r o ads M an y busine sse s act as b ondsm e n for employee s
.

wh o ge t in to t h e p o lic e c o urts ( fo r th e valu e Of a tr ain ed w o rkman

is gr e at) givin g n o t actual prop e rty as a b on d but a promise o f
, ,

Le st t h e e de m y think we are multiplying int ermin ably t h e acco unts for

r a r a

difi e re n t aspe ct s o f w ll h
in t e re s t , an d s i mil bar us in ess f o rces , it may b e e t o no t e t at
( ) ll h
1 a t i () h vi i m h m k ly g p h
e se a cco un t s are n u se , 2 t e no ce s uc o re li e to ras t e
si ifign f h v ican ce o
p f i if h h
t e f h p
ar o u s as e ct s o n t e res t e as an acco u n t or eac as ect ,
an 3) wh
d ( h i ffi i l dv d k p h i h d ily h gh ll h
en e s su c en t y a an ce to ee s ea eas t rou a t e as

p i
e e ts h will b h w i gl
n o ne ac co u n t , f h h i g i Ch p
e e s o n a s n e account or su c t n s n a t er
XIV S h i l uc mm i h ld d y f b kk pi g b i
a S ng e acco un t was co on n t e o a s o oo ee n ut t
i m mpli d i h y h h m m d i g d vi
.
,

s o re co cat e nf pt eo r t an t e ore o ern acco un t n e ce o se arat e

accoun ts .
 18 U
TH E F ND AM ENTAL S OF A CCOUNTING

C harge s , is tre a te d in on e accou n t In t e re st If th e busine ss is

1
, .

a lmo st exclusiv ely a b o rrowe r o r a len d er th e S in gl e w ord in th e

, ,

title is ade quate but if it has activity in b o th di re cti on s t h e valu e

,

Of statistical figur e s in e ach dir e ction is like ly t o b e app r e ciabl e

an d t w o acc oun ts sh o uld b e k e pt Th e t w o sid e s of t h e sam e
.

acc ou n t d e bits for in te re s t Char ge s an d c re di ts for in te re s t

,

e a rni n gs w ould su ffi c e if n o c o r re cti o n e n t ri e s w e re e v e r mad e ;

,

but so Oft en are chang e s an d adjus tm en ts mad e b e caus e of e r ,

t o rs o r misun d e rstan din gs that t o assum e that all d e bits are fo r

,

charg e s an d all credi ts are for e arn in gs w o uld impair th e valu e o f

statistics drawn f rom th e l e dg e r Th e on ly su re way is t o hav e an
.

accou n t f or e ach and ca rry t o th e app ropriat e acco un t all c o rr e o

,

t i on s an d adjustm en ts so tha t th e b al an c e an d t h e t o tal Of tha t

,

acc oun t can m e an onl y on e kin d of thin g Th e sam e thin g is tru e .

o f r en tal an d o f c ommissio n discuss e d ab ov e o f di sc o u n ts t o b e ,

discuss e d b e l ow an d of an y o th e r typ e o f se rvic e which w e b o th

,

r e c eive an d r en d e r We ar e ab out t o apply it also t o m e r chan dis e

. .

S al e s
. Fo r t h e sam e r e as o n that t w o acco un ts are d e sir abl e
fo r i n te re st ifi man y cas e s as give n in t h e p re c e di n g pa r agr aph
, ,

s ev eral acc ou n ts are d e sirabl e fo r m e rchan dise We n e e d t o kn o w .

statistically e ight le adin g facts ab o ut m er chan di se : in v en to ry a t

th e b e gi nn i n g pu r chase s r e tu rn e d pu r chas e s di sco u n t take n
, , , ,

sale s r e tu rn e d sal e s discou n t give n in ve n to ry at t h e e n d ; t h e re a

, , ,

s o n fo r kn o wi n g e ach is n o t e d in c o n n e cti o n with e ach W e also .

sh ould kn ow discoun t availabl e an d disc o u n t o ff e re d On e o f t h e .

m o st imp o r tan t facts w e can kn ow ab out an y busin e ss is th e per

c en tage of various e xp e n se s t o th e volume o f busin e ss so that bad ,

e c on omy wast e a
,
n d e xtravaga n c e c an b e st opp e d
, We canno t
, .

fi n d p e r c e n tage s unl e ss w e k n ow sal e s Th er ef ore sal e s must b e .

se gregate d in an accou n t S al e s This must b e c r e dite d fo r sal e s

,
.

made an d d ebite d fo r o v e rcha rge s by e rro r Re turn s of g o ods .

s old but fou nd un satisfacto ry must n o t go t o this acc ou n t an d

r e duc e this figur e o f sal e s f o r e xp e n s e s o f s e lli n g ar e vi r tually as
,

gr e at for g oo ds that c om e back as for g oo ds that stay s o ld Th e .

fin al c redit t o S al e s S h ould S h ow t h e to tal sal e s mad e th e

gro ss r e tu rn from t h e c onv e rsi on of o th e r asse ts in to s old g oo ds .

We shall b rin g thi s gro ss re tu rn in to conn e ctio n with d e ducti on s

1
Th e t er m h “
c arges
”
means “
b d
ur en,
” “
cost ,
” “
xp
e en se .
”
 TH E C NTEN T O OF C OMM ON A CCOUNTS 19

f rom it and co sts o f g e ttin g it as S h own by th e o th e r acc oun ts,

,

in t h e last pa r t o f this chapte r un d e r a cl e a rin g acco u n t

,
.

Re turn e d S al e s Th ough th e e xp e n se o f se lli n g goo ds is virtu

.

ally as gr e at fo r th o se that come back as fo r th o se that stay so ld ,

t h e g oo ds th ems e lve s hav e n o t b e e n c on v e rt e d an d w e must ,

r e c o gnize th e re turn o f th e goo ds in fin di ng p rofit or l o ss We .

also n e e d statistics of th e p rop or tio n o f r e turn ed g oods If this .

.

run s un duly o r in creasin gly hi gh o ur sal e s po licy may n e e d revi

,

si o n Re tu rn ed S al e s is d e bite d fo r re tu rn e d sal e s We shall

. .

b rin g thi s in to con jun cti on with th e o th er m erchan dise accoun ts

in t h e Cl e a rin g acc o u n t .

Pur ch a se s Th e r e v e rse o f S al e s is Purchase s

. It is use d n o t.

o n ly fo r findi n g t h e o rigin al c o st o f g oo ds g o in g in t o sal e s but also ,

fo r fin din g th e p er c e n tage of buyin g e xp e n se t o pu r ch ase s It is o f .

cou r se d ebited fo r pu r chase s m ad e an d c r edited fo r ov e r charg e s

, ,

but n o t fo r re turn e d purch ase s It is fin ally tran sf erred t o th e

.

cl e arin g acc oun t .

Re t urn e d Pu r ch a se s Wh e n goo ds pu r chased ar e re turn ed by

.

t h e busin e ss R e turn e d Pu r chase s is c r e dite d

,
It is fin ally tr an s
.

fe rre d t o th e cl e arin g acco un t .

Fre igh t an d C artag e on S al e s If th e busin e ss se lls its goods

.

d e liv e red de live ry is on e o f th e c o sts o f c on ve r tin g good s in t o

,

cash an d acc ou n ts r e c eivable A n acco un t S h o uld b e k e pt f or

.

that co st . If d e liv e ry e quipm en t is k ept se parate acc oun ts ,

S h o u ld b e k ept fo r th e e quipm en t itse lf ( a b alan ce sh e e t acco un t) -

an d f o r t h e va ri ous e xp e n se s c o nn e ct e d with ru nn in g it Th e .

co sts Of d e live ry sh o uld b e distin gui sh e d f rom o th e r c o sts If .

'

se rvice o f lo cal d e liv e ry is e xte n sive w h e th e r e ngage d from ou t

,

side o r n o t it should b e d e bite d di re ctly t o D e liv e ry If d e

,
.

live ry is o nl y o ccasi on al and in cid e n tal it may b e c ombin e d with

,

freight in Fre ight an d C ar tage o n S al e s o r Ou tward Fre ight

, ,

an d C artage .This go e s ultimate ly to th e cl earin g accoun t for

m erchan dise .

Fr e igh t an d Car tage o n Pur ch a se s This has a pu rp o se for

.

pur chase s simila r t o that o f t h e accou n t ab ov e for sal e s an d sh ould ,

b e han dl e d in a simi lar fashi on d ebite d fo r all co sts an d tr an s ,

fe rre d ultimate ly t o t h e cl e arin g acco un t .

Di s coun t G ive n We have s e en that so m e acc oun t must b e

.
1 20 U
TH E F ND AMENTAL S OF A CCOUNTING

de bit ed for th e diff e ren c e b e tw e en th e face o f A cco un t s Re ceiv a

b le an d t h e cash paym e n t wh e n custo m e r s ar e giv e n a di sc oun t
o n payin g p r omptly Th e n atural acc o un t t o d e bit is D isco un t
.

Give n . If paym en ts on whi ch di sc oun ts ar e all owe d w e r e always

made in t h e y e ar wh en t h e sal e s w e re mad e this wo uld b e simpl e ;
,

but as w e have s e en th e fi r st paym e n ts in an y p e ri od are on ac

, ,

c oun t of sal e s o f th e p re vi ous p e riod and th e s e sh ould hav e b e en

,

tak en in to accoun t at th e time of adjustin g th e b o oks at th e en d

Of that p e ri o d .Th e disco u n ts t o b e actually given h ow e v e r , ,

c ould n o t b e k n own at that tim e an d th e r e fo re t h e figure us ed in

,

adjustin g t h e b o oks will hardly e v e r tally with th e actual fin al

figu r e fo r th e bil ls con c e rn e d If o n e is par ticular ab out statistics
.

o n t h e Op e r atin g stat e m e n t th e d e bit at t h e e n d o f a p e ri od f o r

, ,

di sco u n ts o ff e re d an d acc o mpani e d by a c r e dit f o r t h e allo wan c e ,

may w ell b e carr ie d in an accou n t se pa rate from that fo r disco un ts

actually giv en Thi s may w e ll b e Un e xpired D iscoun t Off e re d
.
,

so that at t h e tim e o f adjustin g t h e b o oks fo r th e balan c e sh e e t th e

e n t ry is a d e bit t o U n e xpi r e d D isc o u n t O ff e re d an d a c r e di t t o A l

l owan c e i of D iscoun t Off e red Th e fo rm e r is a n omin al accou n t
.
,

an d t h e latt e r is r e al In t h e subs e qu e n t p e ri od di sco un ts actu

.
,

ally give n on Old sal e s may b e d ebited t o A llowan c e for D iscou n t

Off e r e d (fo r th e di scoun t al ready tak en in to c on sid e r ation in th e
p re ce di n g p e riod but t o b e gi v e n in this p e ri o d if at all) an d dis
, ,

c oun ts on n ew busin e ss sh ould b e d ebite d t o D iscou n t Giv en .

B o th D isc ou n t G iv e n ( r e p r e s e n tin g disco u n ts giv en duri n g t h e

p e ri od on busin e ss of t h e p e ri od) an d Un expire d D isc oun t Off e red

( r e p r e s e n tin g disc o u n ts o ff e r e d at t h e e n d Of t h e p e r i od o n busi
n e ss Of t h e pe ri o d ) sh o uld b e d ebite d t o t h e cl e a rin g acc o un t fo r

m e r chan di s e Th e tre atm e n t of th e s e accou n ts may b e tabulate d

.

as f o ll ows :

E n t er in g at th e e n d Of a p eri o d di scoun ts ofi er ed on sal es made

durin g th e pe riod but n o t ye t du e :
Un exp ir e d D iscoun t Off er e d D r All o w an ce f or D iscoun t Off ered Cr
, .
,
.

(Thi s is a charge again st t h e pe riod of sal e ) .

Actually gi vin g dis coun ts o n sal es of th e pre ceding p eriod

Allo w ance for D iscoun t Ofl e red D r Accounts Re ce ivab l e
, . ,
Cr .

(This merely can cels t h e All o w an ce alr eady made an d is n o t n ow

a charge against any period ) .

I 22 U
TH E F NDAM ENTAL S OF A CCOUNTIN G

tak e tha t adva n tage an d h e n c e an y d e bit balan c e on A llowan ce

,

fo r D isc o un t A vailabl e aft e r all disco un t date s have g on e by

sh ould b e ca r ri e d t o L o ss an d G ain as an e xpi re d (wast e d ) ass e t .

Th e acc ou n t can n o t hav e a c re di t balan c e A n y c r e dit balan ce

.

o n A ll o wa n c e f or D isc o u n t O ff e re d on t h e o th e r han d sh ould b e

, ,

carri e d t o L o ss an d G ain as a gai n a risin g f rom t h e fact that cus

t ome r s hav e paid m o r e o n th e ir b ills than t h e min imum r e qui re d .

This is fu r th e r discu ss e d in th e n e xt pa r ag r aph .

Ca s h D i s coun t s For f e it e d . C u ri ously man y busin e ss me n hav e

e n ti r e ly misun d e r st o o d t h e statistical valu e o f figu r e s fo r cash

di scou n ts W e n ee d t o Obs e rv e n o t on ly h ow much l e ss valuabl e

.

are ou r acc o u n ts r e c e ivabl e an d h ow much l e ss s e r i o us ar e o u r

acc oun ts payabl e b e caus e o f th e se disc ou n ts but also what guid ,

an c e t h e figu re s can giv e us f or t h e c on duct o f ou r busin e ss If .

w e hav e t h e right t o tak e in disco un ts by payin g ou r bill s

p romptly it is t h e h e ight of f oolish n e ss n o t t o pay p r o mptly
,

p ro vid e d w e can r aise t h e m on e y an d w e have al re ady s e en tha t

,

t h e r at e Of cash disc o u n t is usually much high e r than t h e in t e r

e s t rat e fo r b o rrow e d m on e y an d so it pays t o b o rr o w
, What .
,

th e n d o e s a man n e e d r e ally t o k n ow ab out his di sc ou n ts ? Tw o

,

things t h e discoun ts that h e might tak e an d thos e that h e doe s ,

tak e H e cann o t a ff o rd t o s e t off discou n ts giv e n again st dis

.

c ou n ts tak e n an d say that h e is l o sin g n o thi n g if only h e tak e s as

'

man y di scou n ts as h e give s ; fo r t h e discou n ts t ake n b y his cus

t ome rs hav e n o thin g t o d o with t h e disc o u n ts which h e tak e s If .

cu stom e r s pay sl owly the y may fo r c e him t o b o rr ow in o r de r t o

,

t ak e his di scoun ts t o b e su re but such cu stom ers pay him an

, ,

e xt r a p ric e f o r d e lay t h e full bill e d p ric e f o r go o ds wh e n t h e y

might pay a small e r p ric e ) an d this e xtra p ric e is much m o re than
,

t h e in t e r e st which h e will hav e t o pay if h e b o rr ows as a m e an s o f

m e e ting his ow n bills an d takin g t h e disc ou n ts off e re d him S O .

h e sh o uld tak e all disc ou n ts Off e re d him an d h e n e e ds t o b e warn e d

,

at on c e wh e n any discoun t is fo rf e ite d In d e e d h e stan ds m o re in

.
,

n e e d o f inf o rmati o n ab o ut di sc ou n ts n o t tak e n by hims e lf than

ab out th o s e actually tak en by e ith e r hims e lf o r his custo m e rs .

D isco u n ts n o t tak e n by him are a l o ss o f all that th e y am o u n t t o

ab ov e t h e in t e r e st on t h e m o n e y an d th e y c o n stitut e a l o ss with
,

o ut an y re turn provide d h e has or can borr ow th e m ean s of

 TH E C NTENT O OF O MM ON A CCOUNTS
C 1 23

p aym e nt D
. isc o un ts giv e n t o his custom e r s o n t h e o th e r h an d , ,

ar e n o t l o sse s th e y are m er e co rr e ctions in th e p rice o f go ods ;

f o r pric e s ar e qu o t ed on th e assumpti o n that cust om e rs will pay
la t e that th e y must pay m o re f or d e laye d paym en t an d risk an d
, ,

h en c e wh en th e y pay e a rly th e y are en titl e d t o an allowan ce for

t h e p rivil e ge ( Cha rg e d in t h e bill ) which th e y di d n o t u s e What .

a cco un ts sh o uld S h o w f o r pu r chas e s th e r e f o re is a n e t d e bit to

, ,

M erch an dis e o f th e lowe st cash p rice Off ered whe the r discoun ts ,

ar e actually tak e n o r n o t Th e difi ere n ce b e tw e e n t h e dis

.

c o un ts actu al ly tak e n o n th e pu rchas e s of th e curre n t p e riod and

tho se available o n th e pur chas e s Of that p e riod should b e charged
t o D isc oun t L o st whi ch is n o t a c o st o f m e r chan di se but Of p oo r
,

man agem e n t o r bad cr e d it S imilarly s al e s S h ould hav e a n e t

.

credi t of t h e low e st cash price o n ly wh e th e r discoun ts are tak en ,

or n o t .Th e di ff e r e n c e b e tw e e n t h e Offe re d an d t h e giv e n sh ould

b e cr e di te d t o D isc o un t C o ll e ct e d — an e arn i n g from capital risk e d

in slow accoun ts re c e ivabl e Fo rf eited disc ou n ts o n Old busin e ss

.

ar e au tomatically car e d f o r by t h e all o wa n c e acc o un t alr e ady

d e sc rib ed Th e id e al han dlin g o f paym e n t by th e firm of a bill

.

f or pu r chas e s o f t h e cu rr e n t y e a r f o ll ows
b
D r A ccoun ts Paya le for th e ace of t he b ill f
h m
.

C r Cas for th e n e t a oun t

k d k
.

C r Dis coun t Ta e n for th e isco unt ta en

h d d
.

C r M e rc an ise fo r th e iscoun t los t

d
.

D r D is coun t Los t fo r th e is co un t lo st
.

Th e disc ou n t tak e n is in an y cas e clos e d t o t h e summary accoun t

f o r m e rchan dis e at t h e e n d o f t h e pe ri o d an d thus al on g with , ,

D isc oun t L ost mak e s th e c o rr e cti on in th e b ill e d c o st of t h e goods ;

,

but wh e re as di sco un t tak en re duce s t h e c o st o f t h e go ods in re al

ity an d c o sts n o thing exc ept a lo ss of in t er e st discoun t l ost c o sts ,

cash an d b rings n o re turn It is feas ib le t o p rovid e spe cial col

'

umn s in a cash bo o k ( o ne e xt r a c o lumn will se rv e if t h e to tals are

p rope rly han dl e d) t o give this impo rtan t inf o rmati on In th e .

illustr ati on s fo ll owin g it is no t d on e how ev e r for a w ell c on ducte d

, ,

busin e ss will n o t l ose disco u n ts an d h en c e n e e ds no such p rovi

sion It is n o t S O impo rtan t t o di stin guish D isc oun t C oll ecte d ;
.

f or t h e item is n o t c on tr o llabl e an d t h e profit is in M e r chan di se

,
.

Re ntal Ch arge s an d Re ntal Earne d If a buildin g occupied .

1 24 U
TH E F NDAMENTALS OF A CCOUNTING
is n o t o wn e d an d a buildin g own e d is let th e distin ction b e twee n
, ,

t h e t w o asp e cts o f r e n t sh o uld b e main tain e d th ro ugh out ; for th e

re n tal o f t h e buildin g o ccupie d is an e xp en s e o f d o in g busin e ss an d
th e re fo re a d e sire d statistical figu re an d t h e buildi n g o wn e d is
,

in depe n de n t o f t h e busi n e ss con duct e d in t h e hi re d buil din g an d

h en ce figu r e s fo r it sh o uld n o t b e c on s o lidate d with figu re s of t h e
o th e r busi n e ss t o t h e c o n f u si o n o f b o th s e ts When t h e t e n
.

an t pays wat e r cha rg e s in su r a n c e tax e s e t c

, , , h e should charge
.
,

such ite ms t o R e n tal C harg e s ; f or h e is c on c e rn e d with t h e t o tal

c o st t o him o f t h e p remise s hire d an d has n o n e e d o f statistical
i nf o rmati o n that might b e o f h e lp t o t h e own e r Th e o wn e r on .
,

t h e o th e r han d if h e has man y p ro p e r ti e s will n e e d inf o rmatio n

, ,

fo r guidan c e an d sh ould n o t di r e ctly can c e l e xp e n s e s o f p ro p

,

e r t y again st in c o m e but sh ould e n te r t o R e n tal E a rn e d o n ly

,

i n c om e (an d c o rre ction e n tri e s) an d ca rry e xp e n s e s t o s epar ate

acc ou n ts for th e m ; but th e o wne r Of a sin gle p rop e r ty lik e t h e t en ,

an t,
c o uld carr y b o th in com e an d e xp e n s e s t o Re n tal E arn ed ,

c re ditin g it f or t h e f o rm e r an d d e bitin g it f o r t h e latte r fo r with ,

f ew e n t ri e s th e d e si r e d ite ms o f in fo rmati on can b e m o re e asily

pick e d ou t Of a sin gl e acc o un t t han han dl e d in vari o us acc o un ts .

Lo ss f r om B ad D e bt s Th e n atu re Of lo sse s f rom bad de bts

.

an d t h e m e th o d o f in dicating pro babl e u n co lle c t ib ili t y hav e al

ready b e en discuss e d in this chapt e r in c o nn e cti on with A ll owan c e

for B ad D e bts Th e co mm on acco un t t o r e pr e s e n t t h e Op e r at

.

ing d ebit f or t h e p e r i o d b e caus e o f bad d ebts is L o ss fr om B ad

D ebts . All debts w ritten Off as bad during t h e p e riod in which
th ey w e re in cu rr e d ar e d ebite d t o L o ss f rom B ad D e bts an d cre d
it ed t o A cc o u n ts R e c e ivabl e . Th en L o ss f rom B ad D ebts is an
Offs e t t o S al e s sh owin g t h e r e ducti on in actual as c ompar e d with
,

supp o s ed r e c e ipts f ro m sal e s but k e pt in a sp e cial acc ou n t for

,

statistical pu rp o se s Th e s e are n o t all t h e l o ss e s h ow e v e r for

.
, ,

sal e s made lat e in a p e ri o d ca nn o t b e du e u n til th e n e xt p e ri o d and

h en ce t h e u n c o ll e ctibl e items can n o t b e kn own t o b e bad un til
later ; so in o rd e r t o fi n d o ur pr ofit for t h e p e ri o d w e e stimate th e
u n c oll e ctibl e acc ou n ts r e c e ivable at t h e e n d o f th e p e ri od an d add
t h e figu r e t o th e l o ss e s al r e ady w ritt e n Off A S imple en try is t o
.

d ebit L o ss f rom B ad D e bts an d cr e dit A llowan c e fo r B ad D eb ts .

This is sa tisfactory e xc e pt to those who say that an e s timate d loss

1 26 U
TH E F ND AM ENTAL S OF A CCOUNTIN G

cre di t o f t o s e t it right ; an e n try d e bitin g D e b t L o ss

E stimat e d an d c re ditin g A ll owan c e f o r B ad D e bts will accom
p lis h this re sult B o th
. L o ss f ro m B ad D e bts an d D e bt L o ss E s

timate d are carri e d t o t h e p ro p e r summary acc o un t (p e rhaps L o ss

an d G ain ) : f o r t h e fi r st ye a r ( suppo sin g n o acc o un ts we re wr itten
Ofi du rin g t h e y e a r) t h e am o u n t t ran sf e rre d t o that acc o un t w as
$ 1 5 00 (D ebt L o ss E stimat e d onl y) ; but f or t h e s e co n d y e a r it is
,

o f L o ss f ro m B ad D e bts w r itt e n o ff du r in g t h e ye ar ,

an d o f D e bt L O S S E stimat e d o n u n paid bi lls at t h e e n d o f

t h e y e a r) This is o n t h e assumption that a pa r t o f t h e d eb ts

.

in cu rr e d th e fir st ye ar ar e still o utstan d ing an d n o t w ritten off at

t h e e n d o f t h e s e c o n d an d that $ 2 00 is still d e e m e d n e c e ssary for
,

them : if all t h e Old d ebts are cl e an ed up o r Cle an e d Off howeve r

, , ,

t h e balan c e o f $ 2 00 o n t h e Old all owan c e is u n n e c e ssa ry t h e ,

charge t h e fi rst y e ar was e xc e ssiv e an d t h e $ 2 00 may b e tr an s

,

f e rr ed from t h e A ll owan c e fo r B ad D eb ts t o Prop ri e to rship (to

, ,

c o rre ct an o rigin al e xc e ssiv e Char ge fo r e stimat e d sh r inkage of

asse ts) ; an d in that cas e t h e n e w D e bt L o ss E stimat e d must b e
d ebite d th e vgh o le n ow n e c e ssa ry t o c ov e r e stimat e d bad

d ebts o f t h e busin e ss Of th e se c on d ye ar an d t h e A ll owan c e fo r

,

B ad D e bts will b e c r e di t e d t h e sam e am o un t Th e r e ve r s e w o uld

.

b e t h e c as e if t h e all owan c e had b e en d e fici e n t .

D e pr e ciati o n an d M ainte n an ce . Th e ge n e r al subj e ct Of d e

pre ciati on is s o imp or tan t an d so man y kin ds o f tre atm en t are
p o ssibl e for it that it re quire s di scussio n in a chapte r by its elf .

For o ur imm edi at e pu rp o s e in this chapt e r w e n e e d t o n o te o nly

a f ew facts Th e fi r st is that so cl o s e ly alli e d t o d e p r e ciati o n is
.

main te n an c e that t h e t w o subj e cts can hardl y b e s eparate ly dis

cuss e d D e p re ciatio n in t h e acco un ting p o in t of vi ew is sh rin k
.

age in t h e valu e o f p r o p e r ty with r e sp e ct t o t h e pu r p o s e t o which

it is applie d If t h e p ro p e rt y is appli e d t o man ufactu rin g pur

.

po se s a l o ss in its valu e for that purpos e d u e t o sh ri nkage in p ro

, ,

d u ctiv it y t o d e t e ri o r ati on s o that t h e c o st o f ru nn in g is in cre as e d

, ,

o r t o g r adual app r o ach o f t h e e n d o f its us e f ul n e ss is d e p r e c ia

,

tion ; alli ed t o this an d usually in clude d in t h e same accoun t is

, ,

o bso l e sc e n c e t h e shrin kag e in valu e o f p ro p e r ty n o t b e cause o f

,

an y Ch an g e s in it but b e caus e o f chan ge s o utsid e o f it whi ch re n

de r i t l e ss valu abl e for its own purpos es — e ch an ge s in fas hion or

 TH E C NTENTO OF C OMM ON A C COUNTS 1 27

custom which d es tro y d eman d for its pr oduct an d n ew inv en ti o n s ,

an d n e w d eman ds which r e l e gat e t h e pro pe r ty t o a disca r d e d or

se mi disca r d e d class L o ss o f valu e in o th er r e sp e cts than that

-
.

t o whi ch t h e p r o pe r ty is appli e d d oe s n o t c o n stitut e d e p r e ciati on :

a fall o f mark e t p rice f o r a machi n e that is t o b e use d an d n o t s old ,

wh en that fall in p rice is du e n o t t o chan ge s in t h e in trin sic de

s irab ilit y of th e machin e its e lf ( lik e obs ol e sc en c e Of it) but appli es
t o similar n ew machin es has no thin g t o do with its value in u se
,

for t h e ow n e r wh o b ought un d e r th e o ld p rice an d h e n c e d o e s ,

n o t c on stitut e d e p r e ciati o n Pr o pe r ty h e ld f o r sale h ow e ve r is

.
, ,

prop e rly said t o b e d ep re ciate d wh en t h e mark e t valu e falls for ,

t h e us e fuln e ss of such p r op er ty is mark e t us e ful n e ss o n ly M ain .

t en an ce o n th e o th e r han d is t h e c o st o f o v e rc oming o r f o re stall

, ,

ing d e p r e ciati on thro ugh r epai r s an d re place m e n ts In t h e case s

,
.

in which main t e n an c e du rin g a pe ri od wh olly ofi s e ts d e pre ciati on

du rin g that p e ri o d f or t h e pe ri od as a wh ol e th e r e has b e e n n o
,

de pre ciati on but o n ly main te n an c e ; in t h e cas e s in which n o r e

,

pairs o r re plac eme n ts have b ee n mad e th e re has b een n o main ,

t e nan ce but onl y d e p r e ciati o n

, C omm only r e pai r s an d re plac e
.

m en ts cann o t altoge th e r Ofi se t d e pre ciati on an d h e n c e b o th are ,

suff e red as c o sts Th ey should b e di stin guis h e d fo r statistical

.

pu rp os e s th ough as c o sts th e re is n o diff ere n ce b e tw e e n th e m : for

,

d ep re ciati on con sists in a sh rinkage of p ro pe rt y an d main ten an ce ,

c on sists in a r e ducti o n o f cas h t o avoid shrin kage of o th er p r op

e r t y ; but b o th ar e c o sts o f p ro duct Th e y ar e discuss e d m o r e
.

fully in Chapte r XVIII .

Oth e r Nominal Accoun t s Of t h e o th e r n omin al accoun ts t h e

.

title s are usually sufficien tly sugge stive A few comm e n ts onl y .

are n e c e ssary h e r e Th e classifi cati o n o f e xpe n s e it ems in to

.

gr oups S hould always co n side r t h e statistical in fo rmatio n d e si r e d ,

for t h e s ol e pur po s e of main tai nin g s e pa r at e acc o un ts for di ff e re n t

s or ts o f exp e n s e s is t o ge t statistical inf ormati on A busin e ss ad .

v e r tis in g wid e ly f or e xampl e may n e e d t o kn o w t h e co mpa r a

, ,

tive value of adve rt isin g by newspapers by magazin e s by cir , ,

culars ; an d h e n c e it may n e e d thr e e acc oun ts f o r adv e r tisin g on e ,

for e ach s or t in o rd e r that fo r e ach it may compare t h e r e turn with

,

t h e c o st
. M o st busin e ss hous e s on th e o th e r hand ne ed only on e
, ,

adve r tising accoun t This ma tte r Of cl assifi cation of expe nses is

.
1 28 U
TH E F NDAM ENTALS OF A CCOUNTIN G

di scuss e d m or e fully in C hapt e r XXII Th e onl y cauti ons par

.

“ ”
t icu lar ly n e c e ssa r y h e r e are t h e f o ll owin g : cash di sco un t for
e ar ly paym e n t Of bills must n o t b e c o nf us e d with dis c ou n t whi ch

is p r e pa ym e n t of in te re st fo r th e fo rm e r sh ould go t o on e of th e
,

acco un ts di scuss e d o n page s 1 1 9 1 2 2 an d t h e latte r t o In te re st

—
,

C ha r g e s o r t o I n te r e st E arn e d ; suppli e s sh o uld h e usually sub

divid e d no t o nl y as in di cat e d ab o ve but Offi c e supplie s sho uld
,

b e fu r th e r subdivid e d as S tati o n e ry an d P rin tin g Po stage e t c ; , , .

G en e ra l E xp e n s e s must n o t b e a c ove r f o r all s o r ts o f e xp e n s e s that

o ught t o b e watch e d i n div idually lik e t r av e lin g e xpe n s e h e at
, , ,

light an d in sur an c e but sh ould tak e ite ms o f inf re qu e n t o ccur

, ,

ren c e n o t a par t o f ro uti n e Op e r atio n lik e au di to r s f e e s an d o c

,
’

casio n al l e gal f e e s n o t c o nn e ct e d dir e ctly with an y pa r ticular

d epa r tm en t activity ; wh en d e pa r tm e n ts are main tain ed m o st ex ,

p e n se s e ith e r sh o uld b e k e pt se parate f rom th e star t lik e wage s , ,

light h e at stati on e ry e t c fo r e ach d e par tm en t o r sh ould b e dis

, , ,
.
, ,

t ribute d am on g de par tm e n ts on an e quitabl e basis wh en th e b oo ks

ar e adjust e d ; all sh ri nkag e in asse ts an d in c r e as e in o wn e r ship

claims wh e w n o t t h e r e sult o f a di re ct exchan ge (of an item

re co gn izable o n t h e b oo ks u nd e r its own n am e for an o the r so
re co gni zabl e ) in v o lve s a c on ve r sion o r in dir e ct e xchan ge and ,

som e n omin al acco u n t is i n te n d ed t o re po r t just that so rt Of con

v e rsi on an d h e n ce s om e n omin al acc ou n t must b e d ebit e d as In
, ,

su ran c e Cha rge s fo r e xpirati on s o f In su r an c e Pre paid an d Ren t ,

fo r Re n t L iability ; an d all i n c r e as e in ass e ts an d d e cr e as e in

o wn e r ship claims wh e n n o t t h e r e sult o f a di r e ct e xcha n g e in
-

v olv e s a c o n ve r si o n and som e n omin al acc oun t in te nd e d to

, ,

repo r t just that s or t o f c onv e r sion must b e c redi te d as C ommis

, ,

si on E arn e d fo r an in c re ase in C omm issi o n A cc ru e d an d In te re st ,

E arn e d fo r a d e c re as e in I n te re st U n e a rn e d Th e s e last t w o po in ts
.

are s o imp o rtan t that th e y may w e ll b e illustrat e d a n e w in sum

mary fo rm as in t h e fo ll owin g paragr aph

, .

I Int e re st Accou n t s as Typical . Th e b e st way t o summarize th e

r elation b e twe en r e al and n omi n al acco un ts is t o tak e a se ri e s Of
tran sacti on s re lated t o a single busine ss force and se e th e re cord
of th e vari ous asp e cts o f that for ce Fo r this in te re st is t h e m os t
.
,

se rvic e abl e an d as w e hav e n owh e re had t h e in t e r e st acc ou n ts

,

tr eate d compre h ensively in th e ir rel ation to one ano th e r, i t is

1 30 U
TH E F ND AMENTAL S OF A CCOUNTING

Wh en th e s e items pos te d our six int e re s t accoun ts will gi ve

are

us th e fo ll owin g balan ce s :

A d
In t eres t ccrue
P d
In t e res t re p ai
h
In t e re s t C arges
A d Li bili y
In t e re s t ccr ue a t
d
In t e re s t Un earne
d
In t eres t Earne

Our ass e ts of in te re st are (accru e d and prepaid) our , ,

charge s ar e ou r liabiliti e s (accru e d again st us an d p repaid ,

t o us) ar e an d ou r e a rni n gs ar e Thi s m e an s n e t as

s e ts (ass e ts l e ss liabiliti e s) Of an d n e t Cha r ge s ( charge s l e ss
e arn in gs ) o f Obse rvation of t h e n o te acco un ts an d C ash
will p rov e t h e co rre ctn e ss o f th e s e figure s : w e hav e re ce ive d
m ore cash than w e hav e give n up an d w e have given up ,

m o re n o t e s th an w e hav e re c eive d o r a S h rin kage o f asse ts

,

in th e s e re sp e cts o f but ou r n e t ass e ts of in te re st are $ 1 8 5 0 .

,

s o that ou r fin al shrink age o f ass e ts is o n ly Wh y have

w e l o st of ass e ts in re al acc o un ts ? B e caus e ou r n e t in te res t
charge s as w e hav e just s e en are
, , an d th e s e hav e go n e in to

c onv e r sion s : In te re st C har ge s an d In te re st E arn e d are t h e n om

in al acc oun ts an d th e o th e r i n te re st acco un ts ar e re al In te re s t
,
.

C ha rge s and In te re st E arn e d go up on t h e o p e r atin g stat em en t as

c onv e rsi on s an d yi e ld fro m con v e rsion s resp e ctive ly th e fin al re ,

sult o f all c on v er sion s sh owin g as p r ofit o r l o ss ; an d t h e o t h e r o r ,

r eal in te re st acco un ts go on th e balan c e sh ee t t o r ep re se n t th e

,

ass e ts o r liabiliti e s which hav e r e sult e d from t h e o p e ra ti ons .

CLEARIN G ACCOUNTS
Th e Natur e of Cl e arin g Account s Oft en w e d e si re in fo rma tion
.

n o t only r e ga rdi ng th e d e tails o f o pe rati on an d t h e fin al n e t r e sul t

o f all o p e r ati on s as a si n gl e g r oup but r e gardin g c e r tain sub

,

division al groups o f d e tail that is w e wish t o see no t o nly in

,

dividual tre e s an d th e fo re st as a whole but ce r tain s e ction s of t h e

,

f o re st as e n titie s C l e arin g accou n ts p e rf o rm thi s fu n ction b rin g

.
,

in g to ge th e r in dividual acco un ts t o fo rm a group an d car ryin g on ,

t h e n e t figu re of th e gr oup t o a still larg e r group or to th e fin al ac

 TH E C NTENT O OF C OMM ON A CCOUN TS 3 1

c oun t for C o n v e r te d A sse ts or L o ss an d G ain o r what n o t Wh en

, , .

“ ”
th ey d o this th e y may b e call ed summary Cl e arin g acco un ts .

Of ten t oo in o rd e r t o make admini s trative d e cisi on s w e mus t

, , ,

gath e r ce r tain g ro up in f o rmation fo r in sp e cti on in on e asp e ct as ,

t o tal c o st o f po w er an d th e n o bs e rv e it f rom a n ew an gl e in its

,

e ffe ct on d e pa r tm e n t c o sts as distribut e d t o d e partm e n ts o n an

,

e quitabl e basis .C l e arin g acco un ts p e rf o rm thi s fu n cti on an d ,

“
wh en th ey d o this may b e c all e d di stributive cl e arin g acco un ts .

One acco un t fo r e xampl e Powe r gath e r s all t h e e l em en ts of

, , ,

p ow e r co st lik e fu e l oil wate r d ep re ciati on an d po we r wag e s

, , , , , ,

an d dis t r ibut e s t h e t o tal t o d e par tm e n t acc o u n ts so that w e ,

may form c on clusio n s re gar din g n o t only fu e l e t c in di vidually ,

.
, ,

an d p ow e r as a wh o l e but also op e r ati on s o f in dividual d e part

,

m e n ts .

Cle arin g Ac count f or M e r ch an dis e It is common t o brin g to .

ge th e r all items c onn e cte d with dir e c t sal e s an d dire ct cost o f

sal e s s o as t o sh o w t h e gro ss p r ofit on m e r chan dise in T r adin g
, , ,

o r M er chan dis e This is don e by t r an sfe rr in g t o this accoun t th e

.

balan c e s o f t h e acc oun ts con ce rn e d Thi s cl e arin g acco un t will b e

.

d ebite d for t h e op e nin g in v en to ry for pu r cha se s fo r freight an d, ,

cartage in war d fo r freight an d ca r tage o utwar d for r e tu rn ed

, ,

sal e s for disc ou n t give n on sal e s an d fo r u n e xpi re d disc ou n t

, ,

Offe re d It will b e cre di te d for sal e s fo r r e turn e d pu r cha se s for

.
, ,

disco un t tak en o n pu r chas e s f or available discou n t an d for t h e

, ,

Cl o sin g in v e n t o ry L o ss from bad d ebts is n o t usually carri ed

.

t o this acc oun t fo r such l o ss is a matt e r n o t so much o f sal e s as o f

,

c oll e cti on s (tho ugh o f c ou r s e th e t wo thin gs ar e cl o s e ly c onn e cte d ,

fo r an y o n e can se ll g oo ds t o p e opl e w h o w o n t pay) an d w e wish

’
,

t o c ompa r e g ro ss p r o fits with se lli n g c o sts Th e fin al balan c e o f .

t h e cl e a rin g acc oun t is ca rr i e d t o t h e acc ou n t w hich tak e s t h e ex

p en se s o f t radi n g Th is may b e L o ss an d G ain if th e re ar e n o
.
,

o th e r so u r c e s o f in c om e wh e r e it is c o mpa r e d with t h e e xp e n s e s
,

o f s e llin g g oo ds : o r it may b e a sp e cial o r n e w cl e arin g acc o un t fo r

gath e rin g all e xp e n se s for se llin g in to o n e place with gr o ss profi t

but apar t f rom p r ofits f ro m o th e r s ou r ce s In t h e illustration .

f oll owin g it is assum e d tha t th e gro ss pr ofit is carri e d t o a s e cond

cle arin g acco un t Trading , .
1 32 U
TH E F NDAM ENTALS OF A CCOUNTING

M ERCH ANDIS E
In v en to ry , S ales
Pur chase s dP h
Re t urn e u r c ases

Frt an d Cart In ar w d k
D is co un t Ta e n
d x d Av ailable
. .

Re t u rn e S al e s Un e p ire D isco un t
Fr t an d C art Ou t ar w d v
In en t o ry , 1 1 2 2 //
v
. .

D is co un t G i e n
x d
U n e p ir e D isco un t Off ere d
d b
Tra in g [ al ance]
6 2 7 1 000 62

Th e p en in g in ve n to ry is b r ought from th e accoun t which w as

o

us e d fo r th e balan c e sh e e t at th e b e ginni n g of th e p e ri od by what ,

e v e r n am e call e d Th e clo sin g inv e n to ry will n o t have b e en

.

p revi o usly on th e b o oks but will b e put o n t h e b ooks by th e p ro c

,

e s s o f s e tti n g up this cl e arin g acc o un t Th e cl e arin g acc oun t

.

will b e c redi te d as shown an d t h e n ew accoun t for th e balan c e

,

sh e e t (which may b e use d dire c tly as t h e o p enin g item fo r n ex t

ye a r s cle arin g acco u n t) will b e d e bited
’
.

C ash D i s co u n ts as Pr ofi t or Lo s s D iff e re n ce o f p r actic e is

.

f oun d in th eo t r e at me n t of cash disco un ts B e fo re p eople b egan .

t o a n alyz e busi n e ss t r a n sacti on s wh e n th e y w e r e sat isfie d with

,

m ere b ookk e e pin g r e c o rds o f Obvi ous fact th e comm on p ractic e ,

was t o tr e at disco un ts giv en t o custome rs as co sts o f busin e ss ,

just like wage s an d t o tr e at di sc o un ts tak en on pu r chase s as e arn

,

in gs This p ractic e has con tin u e d in man y busin e ss e s an d even

.
,

is re cogniz e d as satisfacto ry by s om e gov e rn m e n t bu re aus o n

r ep o r ts mad e t o th e m It n e gl e cts t h e fact that though it is cus
.

t om ar y t o all o w a lib e r al ma r gin o f time fo r t h e paym e n t o f bills ,

t h e p ric e fix e d o n go o ds always tak e s thi s in to acc oun t : th e qu o t ed

pric e always in clude s (usually consci ously on th e par t o f t h e se lle r)
t w o e l e m e n ts t h e n atu r al (
cash) p ric e of t h e g oo ds an d an ad ,

di t io n al sum as c omp e n sati o n f or waitin g fo r paym e n t ( in vo lvin g

in t e re st an d risk) Wh en th e n paym en t is mad e e ar ly s o that
.
, , ,

in t ere st an d risk ar e sav e d t h e discou n t given th e custom e r is no t a

,

co st : it is m e re ly t h e r e duction in charge t o him fo r a s e rvic e which

h e di d n o t ge t H e was o ri gin ally charge d fo r d e lay in paym e n t :
.

h e is n ow c redi te d t o can c e l t h e cha rge fo r what h e did n o t u s e .

Th e d ebit f or di sc ou n ts giv en is th e n re ally a c o rr e ctio n o f t h e

exc essiv e p ric e at which th e g o ods w e re bill e d an d is th e re fore ,
1 34 TH E F ND AM ENTALS U OF A C COUNTING

Tradin g ab ove an d as n o o the r ti tl e is so e xpre ssive o f this tha t

, ,

fact is su ffi cie n t re a son fo r this u se of it T hi s illustra te s th e flexi

.

b ili t y o f t e rms ; but in in te rp r e tin g th e acc o u n ts o f o th e r s w e S h ould

n o t assum e wi t ho u t fu r t h e r inf o rma ti on that Tr ading has o n e or

th e o th e r c on te n t .

G oo d s in Pr oce s s , C o nve rt e d As s e t s , Manuf acturing We hav e

- -
.

al r e ady s e en in C hapt e r VI that w e can ca rr y o u r var i o us ex

pe n se s of man ufactu rin g t o Goo ds in Pro c e ss an d th en carry - -

th em ou t t o Fin ishe d G oods as t h e man ufactu re is comple t ed .

This mak e s G oods in Pro c e ss a cl e a rin g acc o un t

- -

W e saw in .

C hapte r VII that t o C on ve rt e d A ss e ts w e r e carri ed all c o sts o f

c on ve r sion a t th e e n d Of t h e p e rio d an d that th e se co sts w e re th en
,

tr an sfe rr ed to t h e app r op riate accou n ts t o sh ow th e ir yi e ld This .

mak e s C on ve r te d A sse ts (though th e titl e use d h ere was d e sign e d

for th e purpose of illustration an d is n o t o ften foun d in busin e ss )
a Clea rin g ac coun t S om e tim e s in ste ad of Goo ds in Proce ss an d
.
- -

C on ve r te d As se ts w e fin d M an ufacturin g but s e rv in g t h e sam e ,

purpo se and handl e d in th e sam e way as on e o r th e oth e r of

th em .

In come Lo s s an d G ain , Undivi d e d Pr ofi ts Th e fin al figu re o f

, .

profit for an y p eri o d is usually foun d in a cl e arin g acc ou n t that

groups th e vari ous ki n ds o f p rofit an d ki n ds of l o ss b e lon gin g t o
t h e p e r i o d in qu e sti o n such as p r o fit fro m t r adin g e arn in gs f r o m
, ,

c ommissi on , l o ss on r eal e state op er ati on s e t c In com e o r L o ss ,

.
,

an d G ain ,
or Un divid e d Pro fits (in t h e cas e o f corp or ati on s) ,

s e rv e s this purp o s e On e may e ven d e sir e t o accomplish this e n d

.

by in stallm en ts an d hav e s ev er al such cl e arin g acco un ts S om e

, .

tim e s w e hav e Op e r atin g E xp e n s e s to gath e r all e xp en se s Of prin

,

cip al busin e ss i n to o n e acc o u n t an d O p e ra ting E arn in gs t o gath e r

,

all kin ds Of p ri n cipal i n co m e an d Ne t E arni n gs t o c ombin e th e se

,

as a fin al figur e fo r pri n cipal busi ne ss an d fin ally Ne t In com e as a

,

fin al figur e for all kin ds o f in com e re ady for disp o siti on Wh e th er .

’
on e shall main tain all th e s e acc o un ts or n o t is d e t e rmi n e d by o n e s
fi

in te re st in sh owin g on t h e l e dger in p e rman en t form various

busin e ss re la ti on s tha t should b e shown on sta tem en ts in an y

Dis trib uti e Cl ri g Av t In fac t ri s

ea d i d part
n ccoun s . o e an n e

me n t s tores a matt r of much import a c is t h e dis tributi

e of n e on
 TH E C NTENTO OF C OMM ON A CCOUNTS 1 35

space costs amon g de par tm en ts so , e that ach shall b

e a r its fair

S ha re . Th e boo kk eep ing r e cor d o f distributi on is mad e pr efe r

ably through a distributive cle ar in g ac co un t Often distribution .

o f all such c o sts is mad e o n a st r aight pe r c en tage basis an d o ft en ,

o n b ase s which apply diff e r e n t pe r ce n tage s t o diff e re n t kin ds o f

c o st Th e m e th ods o f fin din g a fai r shar e will b e bri e fly discusse d

.

in C hapte r XXII Whate ve r th e m e t hod h owev e r t h e task o f

.
, ,

tr an sf e rr ing man y s e pa rate e xp e n s e acco un ts t o man y s eparat e

d e par tm e n t acc o un ts is much simplifi ed by t ran sfe rr in g n e t ex
pe ns e s t o o n e acco un t an d th e n th e t o tal pie c e meal t o th e se ve ral
d e partm en ts r ath e r than t r an sf err in g t h e to tal o f e ach o f man y
,

exp e n s e acc o un ts pi e c e m e al t o man y d e par tm e n t acc o un ts An .

Illustr ation Of such a Cl e a rin g acc o u n t is giv e n b e l ow .

S PA CE C OS T
Re nt D ep art ment A
Fuel B
Ligh t C
Janito r Wages D
Janitor S uppli es 5 00 E
Elevator P ow e r 3 00
Elev ato r Wages

This pr in ciple may b e appli e d t o man y accoun ts r e cording a vast ,

de al o f statistical in fo rmati on witho ut de stroyin g or confusin g

inf ormatio n n e e d ed f o r t h e balan c e sh e e t .

Cl e ar ing Acco un t s Re al or No mi n al It will have b e en n o te d

.

th at cl e arin g acco un ts gath er inf ormati on bo th fo r t h e balan c e

sh ee t an d for t h e o pe ratin g stat em en t Goo ds in Proc e ss was
.
- -

d ebite d for all th e co sts in vo lv ed in man ufacturing was c re dite d ,

fo r th o se that n e e d e d re co r d in a n o th e r accoun t Finish ed Go o ds , ,

an d had as a balan ce t h e valu e o f goods still in p r o c e ss ; so it is a

r e al acco un t S pace C o st on t h e o the r han d is us ed onl y at tim e

.
, ,

o f adjustm e n t Of t h e b o oks is th e n d e bit e d o nly for thi n gs that

,

hav e alre ady l o st th e ir id en tity as ass e ts un d e r t h e n am es us e d for

t h e acc o u n ts an d is cr e dit e d o n ly for t r an sf e rs o f th o s e unr e al
,

(bec ause alr e ady c on ve r te d ) thin gs t o o th e r acco un ts ; so it is

pu re ly nomi n al : it can have no b al anc e for it is m e re ly a t r an sfer
,

age n t .
1 36 TH E F UNDAM ENTALS OF A C COUNTING

QUES TIONS A ND P ROB LEM S

AS S ET ACCOUNTS
1 In what accoun t o r acco un ts s h oul d y o u carry each of th e f ll wi
o o ng
as se ts acquire d b y a m an uf acturing co n ce rn ?
.

()
a Offi d k d h i ce es s an c a rs

b A fi d lla b ill f d i a h d aw
() ve -
o r ou n n cas r er

(C) A t fJ h J no e o b i g i t t at 6 % d t d tw m th g
o n o n es e ar n n e r es a e o on s a o
d A m tg g t
() or iv d a e n o e r e ce e

(e ) N w addi g m hi
e n ac n es

f M illi g m hi
() n ac nes

(g) Fiv h d d t f al
e un re on s o co

h R t p i d f tw m t h i dva
() en a or o on s n a n ce

(i) A t d d by y
n o e en t p id at m t ity (
o rs e aw k g ) ou , n o a a ur ee a o on
whi h y hav iv d
,

c ou i fp t t e r e ce e n o n o t ce o ro es

(j ) B d on t a id w t b
s se v il bl f l wh w wi h a h
s e no o e a a a e o r sa e en e s c s
f th or xt i f tiviti f th f t y
e e e n s on o ac es o e ac o r

(k) Fi i h d g d l im d b y a
n s e t m w h i i g y f th i
oo s C a e cu s o er o s su n ou or e r

p i
o ss es s o n

(1) R l t t w
ea e s a e th p l d g d t t h E
or m l
p y A i ti e e o e o e es
’
sso c a on

di i that th mpl y
o n co n t on b ib e e o ees su s cr e

(m) A t iv bl th
cco u n s r e ce y Old if y a t m e 6 day ree e ars o ur er s ar e 0 s

S h w t h g d b it dit f th t ti f ll wi g (A m
,

2 o d the s an e cre s or e r ans ac ons o o n ssu e

t th wi p ifi d t b
. .

i t
n e r es t if no o t er se s ec e o e a

(a) A b i d aw a ight d ft f
, ,

u s n ess r sD A g wh
s ra or on un n us o

w it t ivabl i f v fB w
’
o e o n acco un s r e ce S CO e n a or o ro n s o ns

f m wh m it h p ha d g d Th d ft i p id
.

ro o as ur c se oo s e ra s a

t f paym t a t f dat d i
. .

(b ) W p e r es e n or f J St en no e or o on e , e n ne

m th g b i g i t giv x ha g
.

on s a o, t at St ear n i n e r es on e e s us n e c n e

a t f R W d d t d ay d a h f t h i t t a
no e o . oo ue d o , an c s or e n e res ccru e

hi
on w t s o n no e

t $ 5 i adva t S Ma bl wh l d
.

() W p y i t
c e a n e r es 0 n f tw n ce o r e o en s us or o

m th
.

on at s

At t h d f t w m th w a Ma b a ’
e en p yo S lo l on s e re r e s o n.

S h w t h d b it dit t t h app p iat a t f t h

.

o e d th e s an e cre s o e ro r e cco un s or e
ta
r nsac ti f ll wi g
o ns o o n

Ab i iv i paym t f ivabl
.

J an 1 us n e ss re ce t t
es n en o acco un s rece e n o es

f ll w f m R S imp i p ym t f hi bill d t d y a t
. .

as o o s: ro so n n a en o s ue o -
a no e

b m h f m w h f m
.

for pa y a l t t d a y i
e o net i t t on ro o n ere s ro

H F t f oo e hi b ill d or F b y a s t f ue payabl with t

e ru ar 1 no e or e ou

m t h ; f m R G ld i paym t f hi bill d t d ay
.

i t
n e res ti n on e on ro ou n en o s ue o
a t f $ 5 payab l i i day with i t t
.

no e or 00, e n s x s n er e s

J an 7 Th t f R G ld i p e no e o t d f paym t b t i out s res e n e or en u s no

p i d S imp t i di t d at t h b k
. . .

’
a so n s n o e s s co u n e e an

G ld wh h f dit
. .

F b e F t pay hi
1 t
oo e s b s no e ou o as ee n or ce n o

ba k pt y pay fi fty t t h d lla hi t d th i

. . .
,

n ru c , s ce n s o n e o r on s n o e an on e n
t eres t t o d ate S impson t is p aid
’
. s no e .
1 38 TH E FUNDAM ENTAL S OF A CCOUNTING
th e b alan ce of Accoun ts Recei a le o n th e 3 o t h is In May vb
$ 4 00 of A ccounts Rec ei a le p ro e a , an d th e alance at t h e e nd of vb v bd b
May is In Jun e $ 200 o f A ccoun ts Rece i a le is ound b ad , vb f
an d at t h e en d of th e mon t t h e alance is h b
OW NE RS H I P CLAIM ACCO UNTS
-

8 (a) A b usiness dis cou n ts fo r mpl y a i t t b a i g t an e o ee non -

n e res e rn no e

m h m h f da t d m th g
.

of S it S it , ace d d e one on a o an ue

5 day h
1 What h ld b d b it d d wh t di t d ?
s e n ce s ou e e e an a cr e e

(b ) O adj ti g it b k D 3 it fi d t hat it h
.

n us 9 n s oo tt d s, ec 1 V1 21 n s as o u s an

i g t h f ll wi g t payab l 5 64 8 b a i g i t t at 6 % dat d
.
,

n e o o n n o es e: 4 e r n n e res e
7

; # 6 4 9 with t i t t dat d
,

D 9 d
ec 1 F b 9 1 £9 $ 5
21 ue e 1 1 2 2, 1 00 ou n e r es e

b ai gi
. .
, , , , ,

N 3 9ov d J 3 0, 1
9 f 21 d i 65
ue an 0, 1 2 2, or an 2, e r n n

dat d D 7 9 5 day f
. .
,

t t at e r es d d i e ec 1 1 21 an ue n 1 s, or

What d bit dit h ll it m ak t b i g t h h k p t th

.
, ,

d e s an cre s s a e o r n e oo s u o e

tim wit h p t t th e t ( t with p t t th p p i t

re s ec o ese n o es no r es ec o e ro r e o rs
’

gai l a n or t )? o ss cco un s

() Th
c t f S mith S mit h m t i d i (a) ab v i paid What
e no e o en one n o e s

i d b it d d what dit d ?
.

s e e an cre e

(d) Y l d m y t A th B w
ou en hi
on e t f $ payabl i
o r ur ro n on s no e or 2 00 e n

m t h H pay y th i t t i a h i adva
one on e dy s ou e n e res n c s n n ce , an ou

giv him a h k f $ What d bit dit h ld b mad ?

.

e c ecd or 2 00 e s an cre s s ou e e

ith
.

9 I t p t
n er f re y as pa at ly
ar as i j ti th
o u can , e e r se r e or n co n un c on , e

ta d it m t h f ll wi g b ala h t tifi d i a da
.

s rre e s on e o o n n ce s ee cer e as n ccor n ce

with b k f a oo s o t whi h h av b adj t d t dat

ccoun c e e en us e o e

Real E s ta t e A p Part n er Ca i tal

FIt lI CS p Part ner B Ca i tal
Py
'

M e rch an di se M ort g age Not es a able"

No t es Rec ei v ab le“ No t es ay ab le P
Acco un ts Receivab le“ No t es D is co un t ed‘
Bo n ds' Ac c o un ts P y
a a ble

All w o a nce for D e p r eciat ion of Real Es tate‘

All w for B ad D eb ts"I

p ym
o an ce

S ur lus Reserv ed for M ort gage Pa en t‘

U n di v i d ed Pro i ts”f

A maga i whi h iv z ne tw d th c y a b ipti

r ece es one o an ree -
e r s u scr ons

wi h t k w m t hly (a) w b ipti (b)

s es o no on t xpi ati ne su scr o ns , curre n e r on

o f b ipti () li bility
su s cr b ipt i
on s , xpi d f thi d
c a o n su scr o n s un e re or s an

f h f t h y a f whi h b ipti hav b

o r e ac o e e rs iv d What
or c su s cr ons e ee n r e ce e

h ld th mag i k p f thi p p ?
.

a t
cco u n s s ou e az n e ee or s ur o se
Th f ll wi g th
e o p v
o i i m n d i t h ag m t f a pa t
r ee ro s o n s ar e a e n e r ee en o r n er

s hip wh fi l y a i t h al da y a
o se s ca e r s e c en r e r.

( ) Pa t1 B i t hav at ll t im
r ner i v tm t q al t t w
s o e a es an n es en e u o o
t hi d i v tm t ; i a f d f lt B hall b h a g d
’
f A r s o s n es en n c se o e au s e c r e

i t t 6% th d fi i
n e res y on e e c e nc

h d q d
.

( ) P 2 fi t e t b
ro ally d
s ar i t d t pa t
o a e s are e u an c re e o r n ers nnu

ally M thly d awi g b y p t. on m y b mad b y A $ 7 r n s a r n ers a e e, 00,

 TH E C NTE NT O
OMMON AC COUNTS 1 39 OF C

by B $5 b t th h ll b d m d t b a ti ipati f
00, u es e s a e ee e o e n c on o

p fi t ro d h ll t b
s , an di t d t sp t a l noi e cr e e o ar n e rs as sa ar es

h
.

(3) If p t a f t h
ar n e r s s
p fi t f
’
t h y i i ffi
ar e o i t t e ro s or e ear s ns u c en o co v e r

hi d wi g t h i s ra ffi i yi t b
n s, h g d t hi pi l
e ns u t c enc s o e c ar e o s ca ta acco un

l un e
ps s fi t f t h p v i
ro y h v t b wi thd w
s o e re ou s ear a e no ee n ra n

t h a bal Of
.

O D n A ecapital 1
’
s c B pit l
acco u n as an ce
’
s ca a

d wi g t h d bit f
.

a cco u nt f o A
’
s B ra n acco un as e s o
’
s

d wi g
ra n t h d bi f
acco u n d as di f e ts o an cr e ts o

Wh t a a t h l d y d bit d what dit t

cco u n s s ou d th f lou e an cr e o r eco r e o

() O D
1 n A withd aw ec 1 0 d B al wit hd aw r (I s an so r s s

d wi th t h p t hip g m t? )
.

t hi i s n acco r an ce e ar n e rs a re e en

() O D
2 3 A
n d B wi t hd w t h i m
ec 1 anhly ll w ra e r on t a o an ces

f d
. .

(3 ) T h p fi t e f t h yroa s o t b e e r ar e oun o e

(4 ) B withd aw hi p fi t r s s ro s .

NOMI NAL ACCOUNTS

f
B alances are o un d on a le dge r as ollo s Lis t s eparately t o se i ch f w h wh
db h wh h d b h
.

are e it an d t ose i c are cre it alances ( Th e t o t al o f eac s e t

b
.

of alan ces is

vb bf
Notes Re ce i a le D o u t ul, $ 1 ,000 ; P ro is io n for Fir e H azar , ; v dM
d
G o o s in P r o ces s ,
- -
S ale s , C as , D ep re cia h
t ion , S u pp ll e s , $ 2 0 ; Insu ran ce P r e pai , Le as e h o lds , d W
b w w v
mm
1 2 00 ; Wage s L ia ility , P o er P lant , r o n , In e s t
$ B
h
; P e t t y Ca s , $5 0; Re pairs S us pe ns e , $1 5 0 ; Allo an ce w
fo r D e p re ciat io n , $ 0 0 ; M or t gage No t es P aya le ,
5 2 D e t Lo ss b b
m d
E s t i at e , , 000 ; M o r tgage No t es Rece i a le , P urc ases , vb h
S toc s , k M
; A cco un t s P aya le , MaEhine ry , $ 1 0 000 ; b '

In t e r e s t E arn e , d
D is co un t G i e n , $ 1 5 0 ; Re n t al E arn e , v d
Wages , $ IQ, QQ0 ; Allo ance fo r B ad D e ts , w G e n e ral E p e n s es b x
b h d v
.

N o t e s Paya le , M e rc an ise In ento ry, Real

E s tate , $ 1 2 000 ; Raw Ma f é ri al, B on s ,
' '

d
hw é
S o t h e d bIt s an d cr e dit s u n e r e ac o f t h e t w o as s u p t ion s a e fo r d h m md
t h e t r an s ac t io n s di s cu ss e in t h e p ar agr ap e n t it le d “
Allo an ce fO h d w
b d
B ad D e t s Illus t r at e
”
(p an d S o a r o u g le g e r f o r all t hehw h d
d
.

a t
cco un s co n cern e

S h w d b it dit f t h f ll wi g
.

o d e s an cr e s or e o o n

( ) A ll w
a i m d
na o an ce s a e at th l f h y f
e c o se o t im t d b d d b t
t e ear o r e s a e a e s
t t di g i A
o u s an n n cco u n s t R iv bl ec el f th y
a e on s a es o e e ar ,

(b ) J h D o m
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o s e ac co u n w i l d d i or 00 as nc u e n
A t R iv b l
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e c os e o giv a t f e ear , es us no e or

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() W di
, .

t f $9
’
0 t D e s co un oe s n o e or 00

(d) D f il t p y h i d w t k it p f
.

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() W w i t fi thi i d b t d gai t t h all wa

.

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b d d b t m d p vi
a lye s a e re ou s

(f) Tw y a lat J h D p y hi d b t with i t

.

o e rs t er, o n oe a s s e , n e res ,
140 TH E F ND AM ENTAL S U OF A CCOUNTIN G
h
(g) T is gi v
d ma gi f p im t i
e s us an u n e xpe c e t r n o r an e x e r en n
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er s n f it t fi i h i g Off a
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,

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, ,

d th
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.

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t lly
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F m t h f ll wi g i f m ti ab t p h
.

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on ou u rc ases an sa es or sc

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.

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’
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All wo an ce for D epreciat ion

S urp lu s
Accounts Receivable

f w b d d hv b k
Th e ollo ing a e no t ye t ee n a j us te o n t h e oo s : interes t lia
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b ili ty , $ 5 00 ; ins u ran ce un e pire , $ 600 ; commiss ion earn e , $ 4 00 ; ages
b vb
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v m h d
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f w b h w h h
.

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C h as C pi l S k a ta t oc
M h dierc an se A P bl cco un t s aya e
A R iv bl
cco u n t s e ce N P bl a e o t es ay a e

R l Eea s t at e A d Li bili i ccru e a t es

I P p id
ns uran ce reAll w a f D p i i o an ce or e rec at on
C mmi i
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ccru e ur us

M
 CH APTER IX
U
TH E F NDAM ENTAL P RIN CIPLES OF B OOKKEEPING
M ETH OD
Ori ginal Entri e s We hav e s een that s om e d evic e is n e c e ssar y for
.

c onv en ie n t e n try t o t h e many acc oun ts affe ct ed by t h e innumer

abl e tr an sacti on s of m ode rn busin e ss S om e tim e s a single tr an s
.

action n ee ds r e c ord on half a d oz e n acco un ts o r m o re an d if any

- -

o f th e s e is n e gl e ct e d n o t o nly is that acc o un t fals e f rom that p oin t

o n but t h e g ene r al sch e m e o f thin gs is ups e t A m e tho d is n e e de d

.

that no t on ly will assure us that e ve rythin g r e quire d for an y ac

co un t actually ge t s ca r ri e d t o that acc o u n t but will en abl e us if ,

anything go e s wr on g t o tr ac e t h e e rro r back t o its s o u rc e Un de r .

ad e quat e b ookk e epin g m e th o ds th e re fo re n o items are e n tere d

, ,

di re ctly t o t h e l e dge r with out a pr e limi n ary r e c or d of some s ort as

a basis fo r t h e l e dge r it em Th e s e p re liminary r e co rds are calle d
.

“ ” “
o r igi n al e n t ri e s
, an d t h e it e ms in th e l e dge r ar e call e d p o st
ings . Th e o rigi n al e n try may b e in a b ou n d b o ok a l oo s e l e af ,
-

b ook o r in a d o cum en t k e pt in an o rd e rly fil e ; but it must b e avail

,

able fo r r efe re nc e t o supp o r t an d e xpl ai n th e p o stin g made f rom

it an d it must in dicate t h e accou n ts t o which p o stin g was made
,

from it Th e p o stin g t oo must i ndi cate t h e o rigi n al e n try from

.
, ,

which it w as made Th e p o sting o r l e dg e r ite m is v e ry bri ef

.
, , ,

usually witho ut de tail o r e xplan ati on but t h e o rigin al e n try is

,

e ith e r c ompl e t e in d e tail or giv e s r e fe r e n c e s t o r e c o r ds o r d ocu

m en ts in which c ompl e te d e tails may b e fou n d Th e Ob se rv .

an c e o f this is imp o rtan t f o r o n e must r e aliz e that t h e l e dge r

,

is in ten de d t o give summary in fo rmation o nl y t o tals o r balan ce s , ,

wh e re as fo r man y busin e ss tr an saction s g re at d e tail o f r e c or d is

n e c e ssar y an d sh o uld n o t b e sc rimp e d S in c e t o o t h e l e dge r
.
, ,

b rings to ge th e r al l ite ms re latin g t o on e asp e ct of t h e busin e ss it ,

s e rv e s as an in de x t o t h e d e tails Of t h e busin e ss ; for as w e have ,

s ee n e ach l e dge r Ite m shows wh e re t h e o rigin al e n try can b e

,

foun d In o th e r w o rds th e re are t w o r e c ords o f e ve ry t ran sac

.
,

ti on on e of o rigin al en try in de tail with a refe rence t o t h e sum

, ,

mary re co rd so tha t w e can trac e t h e cfi ec t of th e tran sac tion in to

 P RINCIPLES OF B OO KKEEPIN G METH OD 143

t he total an d t h e balan ce o f e ach acco un t con c e rn e d and t h e ,

oth e r in t h e l e dge r aff e ctin g t h e balan ce s an d t h e t o tals of t h e

,

acco un ts c on c ern ed with a r e f er en c e t o th e o rigin al e n try from

,

which the se posti n gs w e re mad e ; an d th e n in cas e o f e rr or o r sus ,

t e d e rr o r i t is possibl e t o ch e ck o n e again st t h e o th e r an d sat

p ec ,

isfy o n e s s e lf what is right

’
.

Le dge r Form M an y forms o f ledger are in u se b u t t h e S im

.
,

p le s t a n d m o st c o mm o n has t h e pag e divid e d in to similar halve s ,

with rul e d spac e in each half fo r fo ur thi ngs : date b ri e f explan a ,

tio n re fe re n ce t o origin al e n try am o un t Thus if o n A pril 2 9 w e

, ,
.
,

s old A r thu r G ordon s om e goo ds fo r an d t h e o rigi n al r e c

o rd was o n page 2 4 an d o n J uly 1 h e paid ,

o f t h e am oun t

an d t h e o rigi n al r e c o r d was o n page 8 8 t h e l e dg e r fo r his acc o u n t

,

w ould app e ar as foll ows :

ARTH UR E G ORD ON .

1 92 0

A p ril 2 9 Merc h di
an se 1 Cas h 88 75 00

H e re is full summary in fo rmatio n r e gar din g his re lati on s with th e

busin e ss with f ull re f ere n c e t o t h e re c or d of d e tails If on e is
, .

tempte d t o ask why t h e d e tails are n o t shown h e re thus e limin at ,

ing t h e n e e d o f t h e o rigin al e n t ri e s a su ffi ci e n t an sw e r is that al

,

ways a tr an sactio n in volve s t w o acc ou n ts as w e have se e n and , ,

o ft e n m o re than t w o an d that th e r e f o r e t h e pla n o f p o stin g d e

, , ,

tails in to t h e l e dge r would i n vo lve writin g th e m at l e ast twic e ,

wh e re as by this m e th od o n e writin g o f d e tails s e rv e s all pur

p o se s h ow e ve r man y may b e t h e acc oun ts c on c e rn e d M an )
, .

b ookk e e p e r s d o n o t u se t h e explan ati o n c o lum n at all A con .

v e nie n t m e th od which mak e s littl e w o rk an d giv e s much i nf o rma

,
“ ”
ti on is t o u s e for e xplan a ti o n t h e n am e of t h e o th er acco u n t
,

con ce rn e d in t h e tr an sacti on that is o f t h e acco u n t c re dite d wh e n

, ,

this acc ou n t was d ebite d or vic e ve r sa U sually all tran sactions

, .

o n t h e sam e sid e ar e simila r an d h e n c e aft e r an acc o un t is star t e d

,

di tto marks s e rv e for explan ati o n Of m o st ite ms but e xc e ption al ,

items (an d tho s e are m o st lik e ly t o n e e d late r re fe re n ce ) will stan d

o u t c o n spicu o usly as t h e y sh o uld That is t h e fo rm o f l e dge r
.

used chi e fly in this b ook th ough o th e r fo rms will b e r e fe rre d t o

,

la te r A s much spac e will b e p rovided fo r e ach accoun t as th e

.
14 4 U
TH E F ND AM ENTAL S OF A CCOUNTING
b ookke ep e r e stimat e s is n e c e ssar y t o acco mm odate th e p robabl e
p o sti ngs fo r a lo ng p e ri od a page half a page o r what n o t
, , , .

Le dge r B alan ce s We have alre ady Obs erve d that for ou r b al

.

a n ce sh e e t w e wish t o u s e l e dge r balan c e s o r n e t figure s an d for

, ,

sta tistical inf o rmation w e may wish t o u s e l e dge r t o tals Wh en .

w e d e si r e t o tals h ow e v e r w e usually wish th e m for a d e fini t e

, ,

p e rio d an d w e wish t o e xclude t o tals o f e ar lie r p e riods We n ee d .

a d e vic e th en that wi ll e n abl e us t o ge t e asily b o th to tals f o r any

, ,

p e ri o d an d balan c e s as of any day This is supplie d by th e com .

“ “
mon m e th od Of balan ci n g an acc ou n t To balan c e an ac.

”
c oun t is t o sh ow o n t h e acc ou n t its e lf as a spe cific figure th e bal
an c e at th e tim e o f balan ci n g o r t o sh ow that th e acc ou n t has no
,

b alan c e at that tim e Th e m e th od is n o t subtracti on but additi on ;

.

it c on sists n o t in subtracti n g t h e small e r sid e f rom t h e lar ge r for ,

w e d o n o t wish t o mi n gl e subt r acti o n s an d ad di ti o n s o n ou r l e dge r ,

but t o add t o th e small e r sid e e n o ugh t o mak e it e qual t o th e

large r an d in that way i n dicate h ow much la rge r is t h e large r side
, .

“ ”
Th e m e th o d is lik e that c o mm o nl y use d in c ou n ti ng chan g e ;
in c ou n ti n g ou t t h e chan ge t o give a cu stom e r wh o has r e n d e r ed a
d ollar bill for a pu r chase o f sixty on e c e n ts t h e cashi er doe s n o t
-

subtr act sixty o n e f r om on e hun dre d an d th e n c oun t ou t thi r ty

-

ni n e ; s h e adds t o sixty o n e e n o ugh t o mak e o n e hun dre d as f o ur

-

t o sixty o n e t o mak e sixty fi v e t e n m o r e t o mak e s e ve n ty fi v e

- -

,
-

an d th e n tw e n ty fi v e m o r e t o mak e o n e hu n d re d th o ugh s h e may

-

p r ove h e r wo rk by subtr actin g an d s e e in g that t h e chan ge e quals

th e dIfl e r e n ce S O in balan cin g an acc o u n t say C ash if t h e c r e dit
.
, ,

S id e is an d t h e d e bit sid e is is en te re d
o n t h e c r edi t sid e t o mak e that sid e as lar g e as t h e d e bit an d that ,

ite m p r e s e rv e s t h e balan c e as o f t h e day o f balan cin g T hi s h ow .

,

e v e r is Obvi o usly n o t all that is t o b e d o n e f or t h e acc o u n t is n ow

, ,

n o t in dicative o f t h e status Of this asp e ct o f t h e busin e ss u n l e ss

w e hav e cl e a r in dicatio n that t h e balan cin g ite m o f $ 1 03 05 is n o t .

a n ew ite m but is o nl y an o th e r e xp r e ssion fo r t h e items al re ady o n

t h e l e dge r that is that it e xp r e ss e s in fin al summary o r n e t
, ,

re sult all that t h e o th e r figu r e s have al re ady e xp r esse d We

, .

must make cl e ar that t h e acc o un t is n o t n ow without balan c e as ,

it app e ar s t o b e with d e bits an d cre dits e qual but has a balan c e ,

of and we mus t m ak e s ure tha t this amoun t no t o nl y ge ts

146 U
TH E F ND AM ENTAL S OF A CCOUNTING

b e gin s h e re an d he n c e additi on will ne ve r again go above this

p oin t If on e wish e d t h e to tal o f s e ve r al p e riods for a statistical
.

figu r e on e wo uld tak e th e sum of to tals fo r th os e p e ri o ds an d dis

,

re gard in dividual ite ms B alan cin g may b e d on e when eve r con

.

v e n ie n t o f c o urs e ; but wh e n statistical figu r e s o f t o tals for d e fi

,

n it e p e ri o ds are d e sir e d co n v en i e n c e may r e quir e that balan cin g

,

b e n o t d on e e xc e pt at t h e e n d o f e ach p e riod .

Fo rm of Or iginal Entr ie s Po stin g (

. e n t e rin g in t h e l e dg e r)

fro m o rigin al e n tri e s is an imp or t an t part of a b ookk e e p er s wo rk ’

,

fo r fi n al c on clusi ons ab o ut t h e busin es s ar e always d r awn f ro m

figu r e s o f to tal s or balan c e s an d as th e s e are take n f rom t h e
,

le dge r t h e p o stin gs sho uld b e absolut ely accurat e Th e task of .

t h e b o okk e e p e r in makin g postin gs must th e r ef o re b e made as , ,

e asy as p o ssibl e e ls e erro rs will cr e e p in

,
In d ee d pos ting sho uld
.
,

b e mad e automatic an d m e chan ical as far as p o ssibl e If th ought .

an d a n alysis an d care ful re c o r d are giv en in o rigin al e n tri e s no ,

n e e d r emai n s fo r an ythin g but sp e e d an d accu r acy in po stin g .

H en ce t h e o rigin al e n t ry sh ould b e s o arran ge d that t h e b o ok

k e e p e r can s eg at a glan c e just what is t o b e p o st ed and t o what ,

accoun ts p o stin g is t o b e mad e E xcept that t h e re c ord must b e

.

e xp r e ss e d cl e ar ly e n o ugh t o b e i n t e lligibl e t o a c ompe t e n t r e ade r ,

thi s is t h e o n ly re qui re m en t Of origin al e n try fo rm Th e simpl e st

-

fo rm Of re co rd is t hat of a diary o r day b oo k in whi ch th e tr an s

, ,

acti on is d e scrib e d with all t h e d e tail that any on e is lik e ly e ve r

t o wish t o kn ow ab out it such as qu an titie s r at e s n umb e r o f
, , ,

fre ight car in whi ch shipm en t was made p e rson s c on ce rn ed e t c , , .

To p o st from such a re co rd h owe v er pickin g ou t t h e am oun t t o

, ,

b e p o ste d t o e ach o f va r i ous acc ou n ts and makin g su r e n o t o nl y

that n o n e is fo rgott en and n on e is p o ste d twic e but als o th at all
i n te n d e d t o b e p o st e d are actually p o st ed is difli cu lt A de vic e ,
.

fo r listi n g all ite ms t o b e post ed with t h e n am e s o f t h e acc o un ts

,

an d t h e am o u n ts an d a p r ovisi on f or ch e ckin g t h e it e ms wh en
,

po stin g is compl e t ed b e com e s alm o st a n e c e ssity

,
at l e ast if
o n e is t o w o rk r apidly an d trac e e rro r s wh e n th e y o ccur as th e
y ,

d o o cc asi o n ally in e v e ry Ofli ce Th e tim e sp en t in listin g th e

.

po stings t o b e made an d ch e ckin g t h e items on t h e list wh en made

is far l e ss than th e tim e that w ould b e required to an alyze th e
re co rd again if any que s tion should aris e and to hun t for omi tted
 PRIN CIPLES OF B OO KKEEPING METH OD 47
po s tin gs an d fi n d duplicated p ostin gs if n o ch e ck list we re ke pt .

A ccordi ngly e very re cord in a b oo k of o rigin al e n try has provision

for such a ch e ck list which is usually call e d t h e j o u m aliz at ion
”
.
,

J o urn alizati on S uppo se fo r e xampl e a partn er c ome s in t o a

.
, ,

busin e ss an d as his c on tribution t o its capital t ran sfe r s t o it a

buil di ng wo r th Th e di ar y o r day b oo k p o r tion of t h e -

e ntry w ould r e ad s o m e what as f o ll o ws

April I 1 923 ,

J ame s Munroe e n ter ed th e fi r m t o day as a part ner under th e co -

p a rt n e r shi a
p g r ee m e n t o f th is dat e in v e stin g r eal e stat
,
e O f a v alu e of

as p er d e ed r e co r ded at t h e ofli ce of t h e Re gist er o f D e e d s ,

Middles ex C ounty V olume 6 1 5 Folio 2 7 1

, , .

Th e j ou rn alizati on would usually b e written in dire ct c onn e cti on

with th e diary re co rd e ith e r above it be low it o r alongsid e it in
, , , ,

form so m e what lik e this

0
Re al E s t at e
m
To Ja es Munroe

Th e J ournal .Wh en t h e d e taile d porti on o f th e en try an d t h e

J o u m aliz a t io n ar e c o mbin e d in this f ashi o n t h e bo o k Of o rigi n al ,
“ ”
e n t ry is usually call e d t h e j ourn al Th e amoun ts d e bit e d are .

usually w ritte n in th e l e ft c olumn an d t h e am oun ts c re dit e d in ,

t h e r ight . Th e acc o un t o r acc ou n ts to b e d ebite d are usually

n am e d first f oll ow e d by th e n am e s of an y acc ou n ts t o b e c r e dit e d ;
,

th e se last are usually indented and are oft en p refixed by To as “

a sp e cial i n dication of th e fact that e ach ite m is a c re di t This .

a r ran gem en t is n o t n e ce ssary h oweve r for g re at fl exibility is

, ,

foun d A n y o th e r fo rm wi ll do if it is conv e nie n t fo r rapid an d

.

accu rate po stin g an d this m e an s that it must cl early sh ow th ree

,

things : what accoun ts ar e t o have p o stings wha t amoun ts are to ,

b e po st e d t o e ach an d wh e th e r t h e p o stin gs are t o b e d ebits o r

,

cr edi ts A s w e go on t o lab o r savin g d e vice s w e shall s e e that

.
-

inn um erabl e variation s o f this fo rm are n o t only acce ptabl e bu t

de si rabl e Th e form give n ab ov e is simply t h e stan da rd fo rm
.

r e qui ri n g n o lab e ls o n an y it e m wh e re as variati o n s f rom this f o rm

,

may r equire lab els attach e d t o e ach item s o that t h e b oo kk e ep e r

may no t b e come conf use d Th e c olumn b e fore th e n am e s of th e
.

acco un ts is for th e postin g ch e ck t o i ndi cate that t h e posting has

,

or h as not actually b een made C ommonly th e ledge r page num

.
14 8 U
TH E F NDAM ENTALS OF A CCOUNTING
‘

b er of th e acco un t t o which postin g is mad e is us ed as a ch e ck

“ ”
mark (an d t h e c o lumn is call e d t h e l e dge r fo li o column -

an d it must n e ve r b e ch e ck ed un til t h e po stin g has actually b ee n

made as in te r rupti on o f th e b oo kke e p e r just p rior t o postin g may

,

caus e t h e ite m t o b e omitt e d altoge th e r from t h e l e dge r .

C ompl e te Re cor d Th e three r e co rds S O f ar discuss e d give us a

.

c ompl e t e b ookk eepin g sto ry an d n o variation s can satisfacto rily

,

d o l e ss than this n o r can th e y d o m o re

,
e xc e pt t o giv e auxilia ry

in fo rmation o f a statistical n atu re n o t con te mplate d usually u nd e r

th e h e ad o f b o okk e e pin g We have e ith e r t h e full d e tail e d stor y
.

o r a re f e r e n c e t o a d o cum e n tary re c o r d in th e o rigin al e n try ; w e

have a summary of it in j ourn alization fo rm with i ndi cati o n o f ,

just what am oun ts hav e b een post ed t o e ach acco un t c on ce rn e d ;

an d in t h e l e dg e r w e hav e th e tr a n sacti on split up in t o its parts ,

so t o sp e ak an d e ach pa r t carri e d t o a n e w plac e wh e r e it will j oin

,

o th e r similar pa r ts f rom o th e r tran sacti on s an d sh ow t h e n e t e ff e ct

an d t h e t o tal e ff e ct o f all such pa r ts o n e ach pa r ticular phas e or

asp e ct o f t h e busin e ss In t h e b ooks o f o rigin al en try t ran sac

.

ti on s are r e c ord e d chron ol ogically an d th e par ts are k e pt to ge th e r

as un its o r e nt itie s an d e ach t r an sacti on is re c or d e d without r e
,

lation t o any o th e r tran sacti on ; but in t h e l e dg e r t h e par ts of

e ach t r an saction are di st ribut e d an d plac e d n o t with o th e r par ts

o f th e sam e t r an sacti on but with t h e par ts o f o th e r t r an sac ti on s

,

that hav e t o d e al with t h e sam e ge n e r al phas e or aspe ct o f th e

busin e ss If twe n ty tr an saction s hav e t o d o with pu r chase s fo r
.

cash an d tw en ty with sal e s on acc oun t for ty o rigi n al re cords

,

will b e r e qui re d as fo rty e n titie s on t h e b ooks of o rigin al e n try ;

but on t h e le dge r only three acc o un ts will b e c on ce rn e d C ash , ,

M erchan dise an d A ccoun ts Re ceivable an d th e postings t o th e se

, ,

three accoun ts will cove r t h e whole ledge r sto ry There will b e .

tw e n ty d ebits t o M e rchan di se twen ty c re dits t o Me r chan dis e

, ,

t we n ty c re dits t o C ash an d tw e n ty d e bits t o A cco u n ts Re c e ivabl e

, .

In o th e r w o rds t h e o rigi n al e n try mak e s a u n it o f classificati o n o f

,

e ach tran sacti on but t h e l e dg e r mak e s a u n it Of classificatio n o f

,

e ach phas e o r asp e ct o f th e busin e ss ; an d t h e o rigi n al e n tri e s may

hav e man y u n its whil e t h e l edger has few o r t h e o rigin al en t ri e s

,

may hav e few whil e t h e l e dge r (if th e o rigi n al en tri e s inv olve
man y varyin g par ts) may hav e many In an y cas e h ow ev e r .
, ,
150 TH E F ND AM EN TALS U OF A CCOUNTING
JOURNAL (continued) [ page 1 9]
6

6 Insurance Prepaid
3 To Cas h
Po licy

8 Re nt
3 h
To C as
m h fJ
Fo r ont o uly

9 G l Exp
e nera en ses !
T C h
o as
d
8 fo r sun ry pay ents ma m d e

h b x
.

b y hi m, all c argea le t o gener al e p ens e .

20

To Ro yalty ia ility L b
Royalt y accr ue o n use d of m hiac nes , b
paya le A u
gu s t 1 5

1 2 Accou n t s Re ceivable
1 3 To S ales
d
S ale s t o at e , pe r S ales B oo k
31
L o ss Gain
To Raw at e rial M
W ages
In sur an ce repai P d
Fu el
Re n t
Ge neral E pe nses x
Royalt ies
To f
t ran s e r all cost s for th e m h ont to Lo ss 81
d P
G oo s in roc ess
hd d
- -

Fin is e Goo s
To Lo ss G ain
d
To cr e it t h e latt er accoun t for in v en tories

S ale s
To o ssL Gain
To t ran s e r f sales

Loss 81 Gain
To Jo n S h mi h t Perso nal
f p fi
,

To t ran s er ro t t o p rop rie t or

 PRIN CIPLES OF B OOKKEEPIN G METH OD 1 5 1

LED G ER
JOH N S MITH , C APITAL

JOH N SMI TH PE RS ONAL ,

II
C AS H
y
J ul 1 J ohn S mi th July 2
6
Raw
W ag es
Material
8 In surance Prepaid
8 Fu el

10
9
iii32m m
-
B alance

A ug . 1

RA W MATE RIAL
1uly 2 31 Lom & Gain
B alance

A ug . 1 B alance

WAGES

INS URA NCE PREPAID

1uly 8 3 00 1 Lo ss & Gain
B alance

A ug . 1 Balance

1uly 8 31 Loss & Gain

B alance

A ug . 1

RE NT
y
J ul 9 Cash
I] = I”
2 00 00 J uly 31
l
Loss & Gain

G ENER AL EXPE NS ES

l m
m
J uly ro
l
Cash
us ea .
“ e e “

J uly zo
I
Roy alty I- iability 2 80

lg ” J uly 31
I
Loss Gain

ROY ALTY LIAB ILITY

W
II I III
ACC OUNTS RECEIVAB LE
,

II III I
15 2 U
TH E F ND AM ENTALS OF A C COUNTING

LED G ER (continued)

J ul y ! 31 Loss & Gain

H __
00

G OO D S
S

m
-
I £S

Jl
rN -
u y

PROC ES S
25

I
A cco un ts Receiv ab le

Jul y 31
ll HI I
FINIS H ED G OODS [ page 1 5
J ul y 31
II II I
Los s 8: G AI N
uly S un d ries uly 31
31
uly 3 1 J S , ersonal
. . P uly 3 1 Sales

If w e n ow tak e our balan ce sh ee t w e ge t t h e f ollowing which , ,

it will b e Obse rv e d has id en tical ite ms with that on page 6 1 Th e

,

o rde r in which t h e items appe ar is so m e what diff e ren t b e caus e ,

w e hav e h e r e f o ll ow e d t h e in v e n to ry m e th o d wh e re as t h e o th e r
was Ob tai n e d by t h e c o st acco un tin g m e th o d an d h e n c e t h e o rd e r
-

o f e n tri e s was s om e what diff e r en t an d in n e ith e r cas e hav e w e ,

o
atte mpte d t o r e arr an ge ou r ite ms in any way but hav e l e ft th e m
as th e y chan c e d t o c om e f r om t h e e n t ri e s .

B alan ce S heat

C as h John S mit h
Raw Material John S mit h
In surance P repaid
Fu el
A ccoun t s Rec ei vab l e

G oo d i P
s -
n -
ro cess

Fin i h d G
s e ood s

t
C o rr e c ing E rr or s igin al en trie s are n ext t o o rigin al
. S in ce or ,

do cum en ts th e b e st e vid e n c e o f a tran sacti on ca re sh ould b e

, ,

take n n o t t o invalidate that e vid en ce by er asure s ; for n o on e

kn ows what was e r ase d an d h e n c e n o on e can t e ll wh e th er th e
,

chan ge was inn o c en t o r fr audul e n t A n o rigin al en try should .

n ev e r b e e r as e d in a vital par t i e n am e s n umb e r s ite ms ,

. .
, , , ,

am oun ts ; but o f c ou rs e p o stin g Ch e ck n umb e r s e t c wh en onl y -

,
.
,

o n e c ould p o ssibly b e c o rr e ct are n o t vital Th e m e an s of cor , .

1 54 TH E FUND AM ENTAL S OF A CCOUNTING

l e ssn e ss may e scap e de te c ti on S ub o rdin ate b oo kkeep e rs sho uld .

n o t mak e c o rr e cti o n e n tri e s with o ut t h e app r oval Of th e ir s u

pe rl o r s .

L oo se -
L e af B ooks . Th e
bo oks d e scrib ed ar e n o t e ss en tially
diff e re n t wh e th e r p e rm an e n tly b o un d o r in loo se l e af fo rm Th e -
.

lo o se l e af fo rm mak e s p o ssibl e t h e tr an sfer t o a fil e o f all i n activ e

-

re c o r ds thus r e ducin g th e bulk t o b e han dl e d curre n tly C a rds

,
.

substitute d for any typ e o f b ook s e rv e t h e sam e pu r po s e Th e .

limitati on s o n th e us e ful n e ss o f th e s e de vice s are t h e awkwar dn e ss

o f havin g r e c o rds scatt e r e d an d t h e dan g e r o f f o rge r y by su b s t i
,

Fur th e r com
“ ”
t u tion o f a fak e d f or a ge n uin e o r igin al e n try .

m en t o n t h e latte r is made at t h e e n d of C hapte r XI .

QUE STI ON S A N D P ROB LE M S

1 . Th e following account is foun d on t h e ledger o f a b usiness .

C AS H

92 0
I86 5
1
July 1 diS un r es 2 00 I O

H w h ld y
o p d t g t f ll i f m ti
s ou ou ro cee o e u n or a on ab out t he meanin g
t h it m ?
e e

2 . What i f mati d t h f ll wi g l dg
n or a on o es e o o n e er ccoun t give ?
S UPPLIE S
1 92 0 1 92 0
J an 1 B alance June 3 1 v dA
Con e rt e sse ts
h
.

Fe b . 1 C as B alan ce
Mar 1

di
.

A pr 1 S un r es

h
.

June 1 C as

July 1 B alan ce

w m h
If you e r e t o lo se t h e er c an di s e account rom a loose l ea ledger , h ow f -
f
h d
s oul y o u r eco ns tru ct i t ? H o w s oul h d
y ou te s t th e accuracy o f y o ur
w k
or ?

h w
On Marc 1 , 1 92 0, B ro n an d Gre en en t e r into a part ners ip agree e n t h m
d m
un e r t h e ter s of wh h h h
i c t ey ar e t o s ar e all p ro fi ts an d loss es e u ally q
w v h v h
.

B ro n in es ts in cas ; an d G ree n in es ts in cas , an d a

n o te o f t h e Natio n al O m
il C o pan y d ue t at day an d n o t ear h b
in g in te r es t, an d in an d Y s t oc s X k
f m m
.

M ar 1 Th e partn e rs rent a s t ore ro Th e Real ty Co p an y fo r o n e

h h
. .

mont for $ 2 00, an d pay t he r en t in cas Th e no te o f th e National .

m
Oil Co pany is paid M erc an dise is purchased rom Jones Co for
. h f .
 P RINCIPLE S OF B OOKKEEPING M ETH OD 155

i paid a t sE q ipm t i b gh t f on ah
cco un u en s ou or c s

b gh t f a h b t h f m J da
.
,

d fi t ti g —
$5 00, an n s are ou or c s , o ro or n
CO
M h di i ld f a h t S mith B th
.

M ar 2 e rc an se s so or c s o ro e rs ,

b ght f a h $ 7 5
. .

S ppliu es ar e ou or c s

M 4 M ha di i ld
.
,

ar e rc a nt t J T yl
se s so f on cco un o a or, or
h b gh t $
. . .
,

cas P tag d tati os y e an s on e r ar e ou 1 00

M ha di i b ght f m S t v
.
, ,

M 6 ar . e rc n se S s a ou t ro e e ns o n on ccoun

i p id h f Ma h A xp bill
.
,

th p s a on e ur c as e o rc 1 n e r ess

$ 7 i p id t t h N ti l E xp
.

f or 0 s a o C e a on a ress o

M k b v t a ti d p t th m t th l dg
.

t i
a f th
e e n r es or e a o e r n s ac o n s an os e o e e er .

I vi w f t h f t th t
n e o ti e f w
ac ld f hi
a d mix d
e n r es ar e e us e an o -
as on e e

t f m ha di [ Th t t l d bit a d t h t t l dit b th i
,

a cco un or e rc n s e. e o a e s n
'

e o a cr e s o n

th j e l d i t h l dg
o u rn a an $6 n e e e r ar e

5 B wro G n p p i t r ee n ,f t h b iro f P b l
r e o rs m 4 d i d o t e us n e s s o ro e ec e o

admit Wh it t t h p t hip d th f it i ayt bi g

,
.

e o e ar n e rs an e re o re s n e ces s r o r n

th b k p t th tim t h w t h t t f t h b i
,

e oo s u o e e o s o e s a us o e u s n es s

Th b kk p fi d t hat t w v b d q
.

e oo ee er
h n ms T h ip o e rr ors a e e en a e e e u

m t b ght M h w h df mM hB f
.

en ou on lly p ar c 1 as r e a ur c as e ro ars ro s or

J d C w O M h 4 m ha di dd
.
,

or an ly ag t
o e re o n en s n arc e rc n se r e co r e

ld t w l t i t h d y pai d f b y a t (p yabl
. .

as so o n acco u n as a er n e a or no e a e

on d m d) C t th
e an o rr ec e s e e rr ors .

Th i v t y f m h di i f t h f th t h
.

e n en o r o er c an se s o ne -
ou r o e re n as

xp i d ; $ 7 5 w t h f tati y d p t g i h d ; 5 w th f
e re or o s on e r an os a e s on an 0 or o

ppli
su es ha d b t i addi ti t th
ar e on n igi ally p
u ha d
n on o ose o r n u rc se

5 w th h v b b ght d iv d b t hav t y t b paid

,

0 or a e ee n ou an r e ce e u e no e e en

b d th b k
,

f or or t e en e n e r e on e oo s

t h l dg h m d w
.

B l a an ce p p a at
e y t
e W i t
er a d i ire d r p
or a o e s
’
ss on , an ra u

bl h t
a an ce s ee

th bala h t fJ h P t w hw blw
.

6 O M y
. n a 1 e n ce s ee o o ns e ers as as s o n e o

Fix t u re s J Jh o ns

M h di I v
.

e rc an y se n P P
e nt or e t e rs

iv bl P bl
.

A R
cco un t s e ce a N e o t es aya e

S pli
up es A P bl 2 00 cco u n t s ay a e
C mmi i
o A d
ss o n 7
ccrue R Li bili y 00 ent a t 2 00

C has

S e t up t h e le ge r ro d
f m wh h h b h w
i c t is alan ce s e e t w as d ra n Fo r t h e
f w f d mk
.

o llo in g tr an s actio n s o f t h e fi r s t o u r ays o f M ay a e t h e o riginal

d h
e n t rie s , po s t , lis t t h e le ger to t als o f e ac h
acco un t , an d t e n add all

d h h db q d
le ger t o t als t o ge t e r an d s ee t at t h e e its e u al t h e cr e i ts Us e s ep
h d h
.

ar ate accou n t s for pur c as es , s ale s , r e t urn e pu rc ases , an d return ed

h d
s ales , an d u s e M e rc an ise as a cle aring acco u n t

h b h m h d
.

M ay 1 J o n s 81 P e t e rs oug t e rc an is e f or p ay i n g
h db
.

cas for an d ge t t in g in t o e t for t h e r e s t

h mm m
.

May 2 Jo n s Pe t e rs colle ct $ 5 00 o f t h e co i ss ion oney

h d h d
.

earne d b y t em in t h e p rece ing p e rio d T ey sell goo s for A A n . .

1 5 6 TH E FUN D AM ENTAL S OF A CCO UN TING
dr ew ll ti g a h
s , co ec f whi h
n c s b l g t A d w d o c e on s o n re s an

the bala th y n ce titl d t k p t h i mmi i

e ar e e n Th y p y
e o ee as e r co ss o n e a

wag $3
.

es 00
M y 3 Th y ll th i w m h a di f ll w
.

a e se e r o t M n e rc n s e as o o s: o

Math w a h (t M Ma k ) d
. .

e a t
s on f cco un f or c s o r s an o r an

t b i g t dat d M y 3 f th E ka C mpa y Th y
.
, ,

i t
n e res -
ear n no e , e a o e u re o n e

5 w th f t h a h p ha d g t th m
, .

t
re ur n 0 or fM y
o e c s y ur c s es o a I an e e on e

M y 4 Th y p y A d w t f t h E ka
.

a e d ll t h
a n re s an se e no e o e ure

C mp a y f Math w t w th O f t h g d ld
.

o n or $ e s re u rns 1 00 or e oo s so

him M y 3 Th y ll t
on a a t
e ivab l
co ec on cco u n s r ece e

v i g f M y 4 d t h pa t hip i th b y
. .

P t di
e ers th es o n e e en n o a an e r n e rs s e re

lv d d th b k m t b b ght p t t h tim
,

di sso e an e oo s Wag us e rou u o e e es are

d t t h am t f $ t p y d t $ 5 t p y ; th fi xt
, .

accrue o e o un o 2 00 o a an re n 21 o a e ur es

are w th or th t k f m ha di e s oc d th ppli o erc n se an e su es

$ 85 A ll th it m
1 o h w th b k C mpl t th
er e s are as s o n on e oo s o e e e eu

a y t i di at ll fa t ady f t h divi i
. .

ti
r e s n ecess r o n c f p fit
e a c s re or e s on o ro s
b tw
e th
een vivi g pa t
e s ur d th tat f t h d
n d pa t
r n e r an e es e o e ecease r ner ,

an d h w th b ala
s o h t f th l f b i M y 4
e nce s ee as o e c os e o us ness a .
1 5 8 U
TH E F ND AM ENTA L S OF A CCOUNTING
prove t o b e du e t o a doz en e rrors in t h e b ooks for fi v e e rro rs on ,

t h e d ebit sid e may am o u n t t o omissi on s o f fi v e th ousan d d o llar s ,

an d s e v en e rr o rs o n t h e c r e dit sid e to o missi on s o f fi v e thousan d

d ollar s an d on e c e n t an d ye t t h e n e t re sult will b e a discrepan cy

,

Of on e c en t o n ly Th e trial balan c e tells n o m or e th an that e rror

.

is th e re It does no t h e lp e xc e p t by givin g clu e s t o th o se w h o

.
,

ar e e xp e ri en c e d in fi n din g t h e ac tual e rr o r s
, S in ce t h e n umb e r
.

o f e rr o r s an d t h e t o tal am o un t o f e rr o r is n o t di scl o s e d by t h e

t rial balan ce it is obviously Of t h e utm o st imp or tan ce that i rr e

, ,

s p e c t iv e of t h e am o un t Of discre pan cy wh e n t h e t rial balan c e

,

di scl o s e s e rr o r t h e e rro r sh oul d b e f oun d To n e gl e ct th e dis

.

crep an cy b e caus e it happ en s t o b e small is t o walk in t h e dark

from that p o in t on .

Limitation s of th e Trial B alance Y e t w e must not ge t th e

.

imp re ssion that a trial balan c e sh owin g e qual de bits an d c re dits

in dicate s that th e b o o ks are right No t on ly may m an y e rro r s b e
.

made with out di stu rbin g t h e e quality of t h e t w o sid e s o f t h e trial

b alan ce but man y kin ds o f e rro rs may b e so mad e
,
if th e y hap
p e n t o fall j u !t right Y e t .a trial bala n c e is d e cid e dly w o rth
whil e fo r t h e chan c e s ar e slight tha t t h e e rro r s will fall j ust right
,

t o e scap e d e t e cti o n Only o n e e r ro r is like ly b o th t o b e mad e

.

an d t o e scape d e t e cti on th r o ugh t h e t rial bala n c e : if an it em is o f

t h e c o r r e ct am o u n t an d on t h e c o rr e c t sid e o f t h e acc ou n t un d e r
which it stan ds but chan c e s to b e un d e r t h e wr ong accoun t th e
, ,

e rr o r may e scap e n o tic e for as it e n t e r s in t o t h e t o tal just th e

,

sam e wh e th e r it is un d e r on e acc oun t o r u n d er an o th e r t h e only ,

e fl ect on t h e trial bala n c e is its app e aran c e ( al on e o r in c ombin a

tion with o th e r items) un der a wrong titl e an d th e b o okk eep er ,

is unlik ely t o kn ow o r t o rem emb e r what t h e am oun t of an y ac

c o un t ought t o b e S o a trial balan c e that is satisfactory in ap
.

p e ar a n c e t e lls n o th in g ab o ut t h e c o rr e c tn e ss o f t h e r e p o r t e d con

di ti on o f t h e in di vidual acc ou n ts on it ; it m e r e ly t e lls that un l e ss

an e rr o r has b e e n mad e in carryin g an it e m to a wro ng acc o u n t ,

t h e proba bi li ty is that t h e bo oks ar e c o rr e c t .

T otal s 01 B alan ce s S o far as t h e tri al balan c e i ts elf is co n

.

c ern e d it is e qually s e rvice abl e wh e th e r it co n sists Of a list o f

,

l edge r to t als or o f l e dge r bal an c e s Th e th e ory of t h e trial bal

.

an c e is th at we te st e qu ali ty of d ebi ts an d cr e dits on th e l edge r as

 TH E TRIAL B ALANCE 15 9
a conv eni en t way o f fi n din g p robability of e rro r an d th e re fore ,

all l e dg e r figu re s are in vo lv e d In re ality h ow ev er n o t all l e dge r

.
, ,

figu r e s n e e d t o b e us e d fo r man y o f th e m hav e alr e ady on c e b e en

,

subj e ct t o that t e st an d may b e e limin at e d f rom an y subs e qu en t

t e st A n acc ou n t which has b e en cl o s e d which n ow has n o bal
.
,

an c e must hav e in its e lf e quality o f d e bits an d c re dits (or it w ould

,

have a balan c e ) an d h e n c e may b e omitte d fr om all futu re trial

,

balan ce s (u n til r e op e n e d Of c ou rs e) ; for puttin g it on t h e trial

,

balan c e w ould m e r e ly add t h e sam e am o u n t t o b o th sid e s o f t h e

trial balan c e an d p roduce n o e ffe ct on t h e t e st o f e quali ty S imi .

larly if w e u se fo r an y acc ou n t t h e balan c e r ath er tha n t h e t o tal

, ,

o f e ach sid e w e are s e rvin g t h e pu rp o s e o f t h e t rial balan c e e qually

,

w ell fo r t h e omitte d p or ti on o f t h e t w o sid e s must b e t h e sam e (o r

,

e ls e t h e balan c e us e d is n o t t h e t ru e bala n c e ) that is if an aC ,

c o un t has d ebits o f $ 300 an d cr e dits o f $ 2 00 usin g $ 1 00 o n t h e d ebit ,

sid e o n ly is as goo d as usin g t h e to tal o f e ach S id e for t h e po r tion ,

o mitte d is $ 2 00 f r o m e ach side an d h en c e t h e omi ssi on d o e s n o t

,

afl e ct t h e t e st o f e quality Of d e bit an d cre di t A s t h e trial balan ce .

is Ofte n k e pt for r e fe re n c e b e caus e it sh ows t h e re c ord e d status o f

,

all t h e accoun ts as o f its dat e it may in s om e cas e s m ore con

,

v e nien t ly S h o w balan c e s an d in o th e r s S h o w t o tals o r f or s om e ,

accoun ts it may S h ow balan ce s an d fo r o th e rs to tals .

Plac e s of E rr o r Le t us n ow e xamin e t h e type s o f e rr o r that

.

ar e like ly t o b e mad e an d s e e fo r which o f th e m t h e trial balan c e

‘

will de te ct that an e rr or has b e en mad e an d h ow It sh ould b e ,

.

r e alize d at t h e star t that an e rro r may b e mad e in any o r all of

four pr o ce ss e s : in makin g an o rigin al en try in p o stin g an o rigin al ,

e n tr y in figu rin g t h e balan c e o r t h e t o tal o f t h e l e dge r acc o un t in

, ,
“ ”
drawin g up t h e trial balan c e S O far as g e ttin g a t rial ba lan ce
.

(that is fi n
,
di n g e quality o f d e bit an d c r e dit o n t h e trial bal an c e )
is c on ce rn e d an e r ro r in o n e o f the se pro c e sse s is as bad as in
,

an othe r an d t h e trial balan c e will de te ct that it e xists as we ll if it

,

is mad e in on e as if it we re made in an o th e r Th e s e e rror s are no t .

e qually s e ri o us in th e ms e lv e s h o w e v e r f o r so m e o f th em hav e
, ,

o th e r d e t e cto rs than t h e t rial balan c e an d th e r e f o r e might n o t go

,

p erman en tly u ndi scove re d if th e trial balan ce did n o t discl os e

them Th e most se rious e rro rs Of cours e are in o riginal en trie s
.
, , ,

for th e s e will stan d un l e ss chall en ge d from o uts id e that is they ,

1 60 U
TH E F ND AM ENTALS OF A CCOUNTING

have no in te rn al corre cto r on th e b oo ks th ems e lve s N ex t mos t .

s eri ous are e rro rs in po stin g for th e y will stan d unl e ss chall en g e d
,

from o u tsid e o r by compar is on with t h e o rigin al en tri e s th ough

th ey have a c or re cto r in th e o rigin al en tri e s if any o n e ch an ce s t o
c ompar e the m with t h e o rigin al e n tri e s L e ss s e r io us are e r ro r s
.

in figu ri n g t o tals o r balan ce s o n t h e l e dg e r f o r e vid e n c e o f th e ir

,

in c orre ctn e ss is imme di at e ly at han d in t h e figu re s w hich we r e

adde d or subt racte d an d th e y are also subj e ct t o c omparison s
,

with t h e origin al e n tri e s an d t o chall e n g e from o utsid e L e ast

, .

s e ri ous ar e e rr o rs in dr awin g up t h e trial balan ce its e lf (an d th e s e

e rr or s ar e m o r e n um e r ous tha n t h e u n i nitiate d w o uld susp e ct) ,

f or th e y f o rm n o par t o f t h e p e rman e n t re c o r d on t h e b oo ks an d ,

are als o subj e ct t o th e th r e e d e t e cto r s al r e ady m e n ti one d com

parison with t h e l edg e r f rom which th e y w e r e taken c omparis on ,

with o rigin al e n tri e s an d chall e n g e f rom o utside

, .

Ad dition an d S ub tra cti on Perhaps th e common e s t e rro r is

.

in addi ti on o r subtr acti on If an o rigin al en t ry con sists Of se v e r al

.

ite ms on e ith e r S id e an d on e o r more on t h e o th e r sid e t o e qual a

group on t h e fi fi t S ide an d th e n an e rr o r is made in addi n g th e
,

ite ms of t h e gr oup t h e de bits will n o t e qual t h e c r edi ts In th e

, .

simpl e typ e o f b o okk e e pin g s o far discusse d this ought n o t to

o ccu r f or with t h e d e bits an d c r e di ts c o n tigu o us t h e di scr epan cy
,

sh o uld b e Obse rv e d by additio n of t h e t w o c olumn s o f t h e j ourn al

b e fore p ostin g is made ; but u n d e r highly d e ve l op e d systems t h e
de tail e d ite ms may b e p o ste d f rom s e ve r al b o oks on man y o cca
si on s an d t h e to tal f rom still a di ff e ren t b ook If an e rro r is made .

in findi n g t h e to tal or bala n c e o f t h e l e dge r t oo th ough t h e p o st

, ,

ings th ems e lve s may b e co rre ct t h e figu re us e d in t h e trial balan c e

,

( tak e n f r o m such t o tal o r balan c e ) will b e wr o n g an d thr ow ou t th e

e quality o f d ebit and cre dit Fin ally if all t h e figure s o n t h e b o oks
.
,

are c o rre ct but t h e c o lumn s o f t h e trial bal an c e are imp ro pe rly

add e d th e e quality o f d e bit an d cr e di t is d e stroyed In case of

,
.

e r r or in additi o n or subtracti on t h e trial balan ce sh ould discl o se

e rr o r but it w on t o f c ou r s e sh ow what t h e e rro r is o r e ven

’
, , ,

o f what type it is . Th e on ly cas e in which disclosur e of e rro r

wo uld n ot b e m ade is that in which two or m ore e r ro rs e xactly
off s e t e ach o th e r
. Obviously th e off se t ting e rror n ee d no t b e of
t h e sam e type ; for a $ 5 0 omi tte d pos ting f ro m ei th e r side would
1 62 TH E F NDAM ENTA S U L OF A CCOUNTING
Conf u sing A
unt s If an e
cco . e o i t m is carri d t a wr
on g acc o un t

in an o rigin al e n try t h e cha n c e s o f d e te cti o n ar e fe w exc e pt from

,

caus e s o utsid e the b o oks as s om e o n e s Obs e rv ing that t h e re c o rd ’

d oe s n o t agr e e with t h e facts fo r t h e trial balan c e e quali ty o f

,
-

debit an d c re di t is n o t aff e c te d an d th e re are n o pre vi ous b ook ,

r e c o r ds .Vi r tually t h e sam e thi n g is tru e o f a co nfusi on b e tween

acc ou n ts in p o stin g : h ere a chan c e (o r in t e n tion al) c omparison
with t h e o rigin al e n try w ould sho w t h e e r ro r th ough t h e trial ,

b alan c e wo uld n o t A c onfusion b e twe en acc ou n ts on t h e trial

.

balan c e its e lf (attachin g t h e wr on g n ame t o an am o un t) w ould

d o n o harm s o far as t h e trial balan c e its e lf is c o n c e rn e d for e qu al ,

ity of de bits an d c re di ts is n o t affe ct e d ; but if t h e trial balan c e w e re

u s e d f o r r e f e re n c e t o S h ow h ow c e r tai n acc ou n ts st o o d at a ce r
,

tai n tim e it might d o much harm H en c e all thin gs c on sid er ed

,
.
, ,

t h e g r e ate st ca r e mus t b e tak e n t o s e e that e n tri e s d o n o t ge t mad e

t o w ro n g acc o un ts fo r d e t e ctio n is improbabl e through o r din ary
,

r o utin e b ookk e e pin g pro c e dure .

Fin din g Err or s A s alre ady in dicate d t h e trial balan ce gives

.
,

i ndi cati on o f m o st e rro rs but giv e s n o i ndica tio n Of t h e n umb e r

,

o f e r ro r s t h e ki n d o f e r ro rs t h e am o un t o f t h e e rro r s o r t h e
, , ,

acc oun ts which are w r on g To fi n d e r r or s is Often th e m o st difli

.

cult task Of a b ookk e ep e r Of c ours e t h e Obvi ous thing is t o go

.

o v e r all th e w o rk again th ough p e r haps r e v e rsi n g t h e o rd e r Of

,

pro ce dure ad di ng t h e t rial balan ce c ompar in g t h e trial balan c e ,

with t h e le dge r t o tals or balan c e s r efi gu ring l e dge r to tals o r bal ,

au c e s ch e cki n g all t h e p o stin gs e xamin in g all t h e o rigin al en

, ,

tri e s This h ow e v e r is n o t t h e usual p ro c e du re ; fo r ce r tain e r

.
, ,

r o rs are m o r e p r o babl e than o th e r s an d might b e l o o k e d f o r wi th

l e ss w ork than o th e r s so that l e ss w ork is wast e d if t h e e rr o r is

,

n o t o f that s o r t Th e o r d e r o f p r o c e du r e will th e r ef o r e d e p e n d o n
.

ci r cumstan c e s an d n e e d no t b e discusse d in d e tail h e re A few

,
.

ge n e r al cu e s fo r l o okin g for e rro r are sugge stiv e h owev e r S om e ,

.

tim e s me re in sp e ction o f t h e trial balan ce will show that s om e ac

c ou n t has b e en plac e d as a c re dit wh e n it cl e arly must b e a d ebit ,

o r that t h e am o un t is imp o ssibly la rg e o r small If t h e di ffe re n c e .

b e tw e en t h e d ebits an d t h e cre di ts o f t h e trial balan ce is o n e digi t

o n ly as D r
,
. an d C r th er e is a probability
.

that th e e rror is due to carel e ssne ss somewhere in addition or sub

 TH E TRIAL B ALAN CE 1 63

tracti on If it is divisibl e by t w o it may b e due to car ryi ng Som e

.
,

ite m t o th e wrong side (for that mak e s on e side t oo sm all an d also

t h e o the r t o o la rg e by t h e sam e am o un t an d so d o ubl e s t h e dis
,
~

cre p an cy) th ough it must b e re me mb e re d that half o f all con

ce iv ab le n umb e r s ar e divisibl e by t wo If t h e di scr e pan cy is
.

divisibl e by n in e th e re is a p r obability that th e e rro r is due t o car e

,

l ess u s e o f th e de cimal p o in t as with ,

fo r $ 1 1 0 o r t r an sposi
,

tion of figur e s as with $ 1 5 3 fo r,

.
5 o r o mitti n
,
g o r in s e r tin g
ciph er s as with,
f or o r vice vers a Y e t h owe v e r man y
.

hi n ts on e ge ts of wh e re t h e e rro r may b e all may b e de c eptiv e an d

,

a l on g s e ar ch may disclo s e an u nusual s o r t o f e rr o r S om e tim e s .

discre pan cy p e r sists e ve n afte r Ch e ckin g ove r all t h e w ork care

fully an d makin g su re that n o e rror s hav e b e e n made Th e n at .

u ral c on clusio n is that this m on th s e n tri e s an d p o stin gs (as

’

s u min g that a t r ial balan c e is tak e n m on thly) are c o r r e ct but that

t w o e rr o r s mad e last m on th O ffs e t e ach o th e r an d h e n c e w e r e n o t

d e te cte d an d that on this m on th s tr ial balan c e on e o f the m was
,
’

n o t r e p e at e d an d c o n s e qu e n tly t h e o th e r was l e ft u n mat e d an d

di scl o s e d Th en t h e e rro r in l ast m on th s b ooks must b e foun d

.
’
.

A n e r ror o n t h e b o oks offs e t by an e rro r o n t h e t rial balan c e is

thus le ss s e ri ous than on e Off s e t by an o the r e r ro r on t h e b ooks ; for
t h e f o rm e r will b e fo u n d s o on e r o r late r wh en a t rial balan c e o n
whi ch th e offs e ttin g e rro r is n o t mad e will sh ow that s om e thing is
wr on g whe re as t h e latt e r may n eve r b e discov e red
,
.

QUES TIONS A ND PROB LEM S

1 Ass uming that each b alan ce on t h e following trial balance is t
en ered

t o t h e right accoun t fi n d t h e actual and th e p ro b ab le e rror s hw

.

and S o
t h e pre s umably corre ct trial b alan ce
, ,

C as h
P rt ner A (Inve tment )
a s

Part n e r B (Inves tment )

In t e re s t
q m
E uip e n t
Adv e rt is ing

m
C o m i ss io n
h d
Me rc an ise
Real E s t at e
A vable
c co un t s Re ce i

Acco un ts Payable
1 64 U
TH E F ND AM ENTAL S OF A C COUNTING

2 w w h
If you e re t h e manage r of a b u sin ess an d is e d t o see th e trial b alan ce
d b h d w h
in o rder t o ete rmin e your usin ess policy , s oul yo u is t h e trial
b al an ce t o b e m d d b
ade up all o f le ger to tal s , all o f le ge r alances , o r in
p a rt o f le d ge r t o ta ls f d b
an d in p ar th O lew h
g e r ala n ces ? S ou ld y o u i s

e n te r e d b
o n t h e trial wh h
alance totals o f accoun ts i c at t h e time of
k b hv b
ta i ng t h e trial alan ce a e no alances ? Why o r wh y not ?
d b h
Y o u fi n d a i s crep an cy in your trial alan ce Y o u t en again add
m h d
.

all po stin gs o f t h e curr en t on t t o th e le ge r to tals at th e e n d o f t h e

p re v
i o u s m ho n t h
a w
n d fi nd t at t h e n e w to tals are in agr e eme n t i th
y o u r t ri alb
-
a la nc e fix gu h k
res N e t w h
y ou c ec all po s tin gs it t h e o ri g
m h x
.

in al e ntries for t he on t , b u t fin d no e rr o r Las tly you e amine

m h hm
.

t h e o rigin al e n tries fo r t h e on t , an d fi n d t e t o b e co rr e ct
h d b d h d f wh
.

S oul you a an on your un t fo r t h e is cr epancy ? I no t , at

h d
s o ul y o u d o ? h d b d h
If you s oul a an o n t h e se arc for t h e discr epan cy
h k
h ow s ould you p ut th e b oo s again in b alan ce ?
1 66 U
TH E F ND AM EN TAL S OF A C COUNTING

of labo r t o skip ab out on th e j ourn al in po stin g an d whil e on e h as

,

page 3 f or in stan ce Of th e l e dge r op e n t o po st all items b el on gin g

, , ,

o n page 3 an d th e n Ch e ck th e m in t h e j ou rn al as p o st e d
, Th e .

c on fusi on of skipp e d space s is avoid e d by usin g a bla nk ch e ck

t o in dica te that th o ugh posti n g of t his in dividual ite m is n o t made ,

its po stin g is provid ed for e ls ewh e re as h e re by t h e p o sting Of th e

total of th e column Then th e eye of th e b ookk ee p er is able t o see
.

at a glan c e wh e th e r all it e ms t o b e po st e d hav e b e e n p rovid e d fo r .

Wi de Appli cab ility In th e t ran sac ti on s of C hapte r IX whi ch

.
,

we hav e just us ed fo r ill ust r ation th e disbu r s em en t o f c ash hap

,

pe n s t o b e t h e only kin d of tran sacti on o ccu r rin g Often en ough t o

mak e a sp e ci al c olumn w or th whil e In re ali ty h ow e ver t h e ex
.
, ,

p e n se s an d sal e s w ould usually e ach compris e man y ite ms in ste ad

o f one an d th e re f o re e ach c o uld w e ll b e giv en a spe cial c olumn
, .

To se e furth e r use of th e spe cial co lumn le t us suppose that w e

,

have a large numb e r of tran sacti on s within a short p eriod of ,

which man y are of a kin d lik e e xp en se s paid in cash pu r chas e s

, ,

for cash sal e s on accou n t an d c o ll e cti on s Of acco un ts

, , S impli
.

fying t h e e n tri e s by omittin g th e d e tail e d or e xplan a ti on po r ti on s

an d sh owin g th e j o urn aliz ati o n o nl y w e may ge t th e fo ll owin g :
,

$ 13 5 0 00
 TH E P RIN CIPLES OF LAB OR S AVIN G -
V
D E I C ES 1 67

It will b e obse rve d fi rst that h ow ever many en tri e s th e re migh t

, ,

b e e ve n s e ve r al hun d red n o m ore po stin gs w o uld b e r e quir e d if

, ,

all t h e addi tional items w e re t o b e e n te r e d in t h e spe cial c olumn s

already prov id e d ; fo r though th e to tals would b e in cre ase d in
siz e n o m o re t o tals would n e e d po stin g It will b e obs erv e d
,
.
,

se c on dl y that o n e c olumn is n o t p o ste d in to tal fo r it is n o t a

, ,
“
sp e ci al c olumn ; i e it is ma rk e d sun dri e s an d is t o tak e mis
. .
, ,

ce llan eo us it e ms t oo in f r e qu e n t t o b e wo rth th e tr o ubl e (

o r spac e )

of pr o vidin g with sp e cial c o lumn s Items in that c o lumn cann o t

.

b e po ste d in to tal for th e y are dissimilar t o b e po ste d t o diff e re n t

, ,

acco un ts an d h e n ce must b e po ste d indi vidually as in ou r o rigin al

,

j ou rn al sh own o n page 1 5 0 No rmally wh e n this b ook call e d a

.
,
“ ”
sp e cial column j ourn al is used a sun dri es c o lum n would b e
-

, ,

p rovid ed on th e d ebit side also ; but our tran sacti on s in th is cas e

did n o t re qui re it Th e placin g of t h e jou rn alization (an d ex
.

plan ati on s o f de tail) in t h e mid dl e of t h e page is pu re ly for con

v eni e n ce Th e fo rm has utm o st fl e xibility
. If s o man y colu mn s .

are us e d that t oo much S pac e is tak e n at t h e e n d in summa riz in g

th em as shown ab ov e all th e to tals may b e tak e n on th e sam e

, ,

line ; an d th e p o stin g from e ach may b e mad e dire ctly with ou t

lab e l with th e le dge r f oli o for p o stin g Ch e ck written b e n e ath e ach
,

to t al (usually e n cl os e d in a ci rcle or oval t o dis tingui sh it f rom

fin an cial figu re s) Th e to tal o f all co lumns of e ach sid e S hould b e
.

taken an d shown s omewh e re howeve r t o give assuran ce (by , ,

p roo f) that th e d ebits e qual t h e c redits

. .

Ext e n sion of th e P rin cipl e Th e fo rm j ust shown may e asily

.

b e com e v ery cumb e rsom e if s o man y accou n ts have fre qu en t

items that man y sp e cial column s are w or th whil e It is n o tabl e .

that m o st tran sac ti o n s fall within c e rtain w ell d e fin e d groups and ,

c ertain comb in ation s of d e bits an d cre dits vi r tually n e ve r o ccur .

E xp en s e acc o un ts ar e vi r tually n ev e r di r e ctly c o nn e c te d in t h e

sam e tran sacti on with pu r ch ase s an d sal e s for in stan c e Wh e n ,
.

o u r c o lumn ar j ourn al is in dan ge r of b e c o min g t o o cumb e rs om e ,

th e refo re w e may split it an d put in s eparate vo lum e s ce rtain

,

co lumn s that c o mm only are us e d tog e th e r It is comm on fo r ex .

,

ampl e t o put in to s eparat e books all cash tran sacti ons (in to what
,
“ ” “
is call e d t h e cash j ourn al o r c ash all purch as e it ems
(in to what is called t h e purchase j ourn al or invoice
“ ” “
1 68 U
TH E F ND AMENTALS OF A C COUNTING

an d all sal e s (in to wha t is call e d t h e sal e s j ourn al o r sal es “ “

Th en in e ach may b e put such sp e cial c olumn s as are

like ly t o b e us eful an d in e ach may b e a su n dri e s co lumn that
,

will take care of items which must b e p o ste d indi vidually b e caus e
th ey are too infre quen t t o have sp e cial column s for posting in
to tal .

Th e C ash B ook Th e cash b ook sh ould hav e in it all cash

.

items fo r th ough o f course cash items may pe rf e c tly we ll b e

, ,

p o sted from o the r s ource s it is de si rabl e t o kn ow that all cash

,

items ar e in on e plac e n o t only in summary (as in th e l e dger) but

in d e tail f or in spe cti on an d r e f e r e n c e an d re ady for fi n di n g in ,

s t an t ly t h e c ash balan c e In o rd e r t o k e ep th e d e bit an d c r e dit

.

S id e s in juxtap o siti on f or e as e in fin din g t h e balan c e at an y tim e

, ,

e n t ri e s in v o lvin g d e bits t o cash ar e usuall y writt e n on t h e l e ft

sid e (as th e b ook li e s o pe n) of t h e cash b ook an d cr edi t e n tri e s o n ,

t h e right ; an d wh e n e v e r t h e balan c e is e n t e r ed in fashion similar ,

t o that o f balan cin g a l e dge r acc oun t as shown on page 1 4 5 a ,

fre sh start is made on t h e t w o pag e s side by side o n c orre sp ondi n g

lin e s It will b e no t ed that by t h e ve ry th eory of t h e b ook all
.

items in this b ook are cash ite ms H en c e it is unn e ce ssar y t o pro .

vid e in it any co lumn s for C ash f or th e l e ft sid e o f t h e b o ok is ,

its e lf a wh ole pag e o f C ash d e bits an d t h e right side is a whol e ,

page of C ash cre di ts We hav e th e re fore e limi n at e d n o t onl y t w o

.

c olum n s but th e writing Of all items tha t w ould go in to such col

,

umu s if cash ite ms w e r e e n te r e d in t h e c olumn ar j ourn al as pr e vi

ou s ly sh own Le t us obs e rv e an illus tra ti on usin g th e sam e
.
,

i tems as on page 1 6 6 .

Rcc blc
’
mis s ion

April 30 Co mmission o n sales for G JCo .

A
. .

ccoun t s Receiv able H K P 1 pd d Inv 00

k
. . . .

I t
n eres t o n b an b alan ces 5 0 oo
Accoun ts Receiv able t o tal for mon t h 00 00
Co mmission a u u 8 00

Cash D r
, . n 00

May 1 B alance 908 00

1 It is usu ally d es irable to bandle such items indiv iduany as wd l es in total. and this wfll b e discuu ed
in the next chap ter .
1 70 U
TH E F ND AM ENTALS OF A C COUNTING

as a d ebit t o C ash . To i n dicat e this t h e last line

,
for M ay might
re ad as fo ll ows :
I l
9 h Cas ,
D 13 t o 1305 t
[I I I II l
7 , 908 00

Thi s in c onv eni en ce o f a rran gem en t is avoide d wh en t h e cash b o ok

is use d its e lf as a l edge r acc o u n t as man y b o okk e ep e rs u s e it an d
, ,

n o c ash is k e pt in t h e l e dge r S in c e t h e pu rp o se of th e l e dg e r is t o
.

classify ite ms so that w e may ge t t o tals an d balan ce s an d sin ce ,

t h e cash b ook has al r e ady go t t o tals an d balan c e s n o thi n g m o re ,

is n e ce ssary for cash re co r d Th e o n ly advan tage o f havin g a

.

le dger accou n t fo r cash is that th e n th e le dger is comple te an d t h e

ite m o f c ash is l e ss like ly t o b e f org o tten in dr awi n g up a balan ce
sh e e t or trial balan c e ; an d th e lab o r Of p o stin g cash m on thly (it
is s e ldo m p o ste d Oft en e r) is n e gli gibl e Wh e th e r on e shall carry .

a l e dger acco un t f or cash in addition t o a cash b ook is the n a mat , ,

t e r o f tast e an d n o t o f p rin cipl e .

C ash B ook Ruli n g

-
It is as w e hav e s e en d e sir able t o have
.
, ,

b o t h side s rul e d up on c or re sp ondi n g li n e s fo r sin ce usually th e ,

n umb e r o f r e c e ipt ite ms d oe s n o t cl o s e ly f o ll o w t h e n umb e r o f di s

b u r s emen t ite ms t h e cu r re n t p o siti on fo r o n e sid e is c on stan tly

runni n g ah e ad o f th e p o sition for t h e o th e r side an d it is in con ,

v e nie n t in fin din g balan c e s t o hav e t h e p o siti on s far apar t This .

m e an s that on o n e sid e o r th e o th e r wh en t h e balan ce is en te re d

an d t h e t o tals f or e quality ar e sh o wn blank lin e s ar e l e ft o n t h e
, , ,

sid e with th e f ewe r it ems Th e se hav e s om e tim e s p r ov e d te mpt

.

in g t o disho n e st b ookk ee p e rs or cashi er s w h o hav e in se r te d fi c ,

t i t iou s en tri e s an d th er e by hi dd e n tamp e ring with cash M an y .

b o okk ee pe rs rul e diagon al re d li n e s ac ro ss such blank spac e s t o

can ce l th e m S uch lin e s wh en th e y ru n at vari o us an gle s as th e y
.
,

usually d o ar e un sightly A substitute is t o tak e t h e to tal Of

,
.

e ach sid e of t h e cash b ook o n th e fi r st li n e availabl e r e gar dl e ss o f ,

t h e r e lativ e p o siti o n o f t h e t w o side s thus Cl o si n g e ach sid e fr o m

,

n e w e n tri e s an d th e n o n t h e sid e with t h e blank spac e re p e at t h e

,

to tal on th e lin e Oppo site t h e to tal o f t h e o th e r side Th en n o in .

s e r t io n s can b e mad e with out adv e r tisi n g t h e fact that th e y w e re

mad e afte r t h e to tal was tak e n .

Th e Pu r ch a s e B o ok It is customary similarly t o k e ep a s ep
.

arate b oo k fo r purchase s o f m e rchandise , for such tran sac tions

 TH E PRINCIPLES OF LAB OR SAVIN G -
DE VICES 171

i n vo lv e lmo st con stan t se t of re lati ons that are n o t usually in

an a

v olve d in o th e r t r an sacti on s chi efly d e bits t o Pu r chase s an d

c re di ts t o A cc o un ts Payabl e In d e e d t h e pu r chas e b o ok as a .
,

who l e is vi r tually on e e n try e quival e n t t o a sin gl e j o urn al en try :

,

Pur chase s
To Acco un ts Payabl e

So far as purch ase s are o f this n o r mal type Obvi ously t h e pur ch ase ,

b o ok ca n consist m e r ely of a list o f pu r chas e s summar iz e d at ,

th e e n d of t h e pe ri o d in t o a sin gl e e n tr y as in dicat e d ab o ve an d ,

that en try can b e po st e d from t h e pu rchase b o ok o r e n te r e d in t h e

j ou rn al an d poste d the n c e as o n e may p re fe r A s a matte r o f , .

fact h owe v er so me tim e s o the r kin ds o f purchas e s are made as

, , ,

fo r cas h or for n o t e s payable an d th e r e fo r e t h e pu r chas e b o ok ,

must pr o vide fo r cr edi ts t o o th er acc o un ts than A cco un ts P ayabl e .

Thi s is m o st c on v en i en tly accomplish e d by pro vidin g for t w o

column s o n e fo r A cco un ts Payabl e t h e t o tal t o b e p ost ed t o th e
, ,

c redi t o f that acc oun t an d t h e o th e r fo r su n d ri e s which will b e

, ,

in dividually po sted Th e sum o f t h e t w o co lumn s will th e n b e

.

p o st e d t o t h e d ebit o f Pur chase s Th e m e th od of han d lin g t h e .

po stin gs is in di cated by t h e f o rm b e l ow whi ch illustr at e s on ly a ,

f ew typical it ems .

A pr 29 V A cco un ts Py a ab le S mith 1 Inv orce

A t P y
.

V cco un s a ab le J ones 1
32 N o tes P y bl
a a e

30 26 A ccou n s t P y a ab le to tal
21

1 Th e h a n dling o f th e it e ms o f J S mi t h
w
fo r w e ar e h e re c o n ce rn e d i th cco un t s A
. an d
P ay a Jl
. Jo nes in di v idually will b e d iscu ssed in t h e n e xt ch a
e as a wh o le an d n o t Wi t h t h e In di v i d ua l d e ta ils of
pw t er .
hich
o ur d e b t s ar e ma d e u p .

If th e busin e ss is divide d in to de par tm e n ts a sp e cial c o lumn (an d ,

se para te accou nt ) is p ro vid e d fo r t h e pu r chas e s o f e ach depar t

me n t i n c re asi n g t h e n umb e r o f d e bits but n o t aff e cti n g th e c r e dits
,
.

Th e S al e s B ook Absolute ly t h e sam e pr in ciple app li e s t o

.

S al e s Th e y ar e i nvo lv ed in but fe w kinds o f tran sacti on s an d t h e

.
,

items i nvo lve d ar e n o t usually in v olv e d in o th er t r an sacti on s : so

sal e s may w ell b e han dl e d in a s epar ate b ook re all y a subdivision ,

o f th e j o u rn al s om e tim e s call e d t h e S al e s J o u rn al Th e han dlin g .

is iden tical w rt h that o f t h e pu r chase b o ok e xc e pt o f c ou r se , ,

that thi ngs are r eve rs e d i e A ccoun ts Re ce ivable is debited and

,
. .
,
1 72 TH E F ND U AMENTALS OF A C CO UNTING
S al e s is cre dite d wh e r eas in t h e purchas e b o ok A ccou n ts Payabl e
,

is cr e di te d an d Pu r chase s is d ebite d D e pa r tm en t sal e s may b e

.

cr e di ted s e pa r ate ly o f co urs e for e ach d epa r tm e n t

, , .

D ivis ion of En tr i e s No w that w e hav e o u r o rigin al j o urn al

.

cut up in to s ev e r al j ourn als a p o licy with re gar d t o t h e di sp o siti on

,

of e n tri e s b e c om e s n e c e ssary o r on e may n o t kn ow wh e re t o lo ok

,

to fi n d a par ticular e n tr y S in c e w e d e sire all cash items t o b e in

.

t h e cash b oo k s o that w e can t e st cash balan ce s e asily o u r p o licy ,

wi th r e ga rd t o that b o ok is cl e ar S in c e t oo t h e maximum lab o r

.
, ,

savin g is accomplish e d by puttin g e n tri e s in sp e cial b ooks like ,

t h e cash b ook t h e pu r ch as e b ook an d th e sal e s b ook b e caus e in

, , ,

th em on e side of t h e e n try is aut omatically r e c or de d m e r e ly by th e

fact that t h e e n tr y is plac e d in a c e r tain b oo k it is d e sir able al ,

ways t o u se t h e sp e cial j ou rn als r ath e r th an t h e ge n e r al j ournal

when e v e r th e re is n o sp e cial re as on for t h e o th e r c our s e Occa .

s io n ally th e re is r e as o n f o r splittin g an ite m b e tw e e n b ooks S up .

p o se a par tn e r is tak e n i n t o a busin e ss an d h e c on tribut e s as hi s

,

i nv e stm en t in cash a sto ck o f m e r chan di s e w o r th

,

an d re al e s t at ezw o r t h 3 52 Norm ally t h e cash w ould b e e n

t e re d in th e cash b ook th e m e rchan dis e in t h e pu r chas e b ook an d
, ,

t h e re al e stat e in t h e j o u r n al ; an d this w o uld s e rv e all purp o se s

but on e : it w ould n o t giv e us in on e place a c ompl e te story o f th e
par tn e r s in v e stme n t We can by usin g pro pe r car e provid e
’
.
, ,

such a c ompl e te sto ry in t h e j ourn al an d still hav e th e spe cial

parts o f t h e tran sactio n app e ar in t h e vari ous sp e cial j ou rn als and ,

all without duplicate p o stin gs We saw in c on n e cti on with our

.

fi r st study o f sp e cial colum n s that a blank p o stin g ch e ck may b e

use d t o in dicate that p ostin g is n o t mad e fro m th e e n try t o whi ch
it is attach e d but is e ls e wh e re pro vide d fo r We may u s e that .

d evic e h e re t o h e ad off d oubl e po stin gs : i e w e may e n t er t h e . .

,

tran saction as man y tim e s as con venien t and h e ad off t h e po stin g

of duplicate ite ms by in se r tin g t h e blank po stin g ch e ck at t h e
time any duplicate e n try is made In this cas e we wish to pro~ .
,

duce th e e ff e ct o f th e f o ll owing en t ry
C ash
Pu r chas es
Real E stat e
To J B rown
.
1 74 U
TH E F ND AM ENTAL S or A C COUNTING
of futur e re fe ren c e t o this ite m on e w ould n aturally b e l o okin g to
ide n tify it by t h e am o un t o f th e bill u nl e ss on e chan ce d t o re ,

m e mb e r that pa r t paym en t was mad e in cash ; but t h e amou n t o f

t h e bill wo uld n o t b e t h e am oun t o f t h e cha r g e S imply as a mat .

t e r o f c on v en i e n c e th e re fo r e it is b e st t o le t t h e l e dg e r S h o w t h e
, ,

n atu r al u n it o r t h e full bi ll as a cha r g e an d t h e paym e n t as a

, , ,

paym en t on t h e charge r ath e r than as a p ayme n t o n a cash pur

chas e S irn ilarly if w e customarily hav e pu r chas e s charg e d but
.

o ccasi o n ally giv e a n o t e payabl e at t h e tim e o f pu r chas e it is wis e ,

t o e n te r t h e t r a n sactio n as t w o a charge pu r chase an d t h e giv ,

in g o f a n o t e in s e ttl e m e n t o f th e cha rg e r ath e r than as a S impl e

pu r chas e fo r a n o te This assure s us that t h e t r an sacti on will ge t

.

carri e d thr ough t h e sub ordin ate l e dge r fo r o u r c re ditor b e en ,

t e re d un d e r his n am e an d h e n c e b e t r ac e abl e in futu r e

,
In d e e d .
,

whe n e v e r it will b e advan tageous t o hav e an ite m i n d ex ed u n de r

t h e n am e o f a cust o m e r o r a c r e dit or it is w e ll t o ru n it wh o lly
,

th rough his acc ou n t b o th d ebit e d an d cre dit e d e ve n th ough cash

, ,

is paid r ath er than sh o r t cu t it a rou n d his acc ou n t as a cash it e m

,
-

Abuse of Lab or S avin g Th e In o de rn passion fo r sh o rt cuts

-
.
-

must n o t b e carr i e d s o far that t h e d efi ni t e n es s o f t h e d e tail e d

p or tion o f an en tr y S hall b e sacrifice d On e illustr ati on will suf .

fi ce . S upp o s e a man tak e s in s e ttl e m e n t o f an acc o un t his

, ,

de bto r s half in te re st in a
’
-
pie ce of r e al e stat e th e refo re ,

w or th an d tak e s cash fo r t h e balan c e o f t h e d e bt say ,

S uppo s e n ow t h e man buys f ro m s om e on e e ls e t h e titl e

t o t h e r e main de r o f that pie c e of r e al e stat e fo r using in
par t t h e cash re ce iv e d from his debt or which pays for on e half ,
-

o f what h e buys o r o n e fo u r th o f t h e wh ol e p r o p e r ty
,
-
H e w o uld .

b e v e ry f o o lish t o re c o rd that h e had r e c e ive d th r e e f ou r ths o f -

that p rop e r ty f rom his d ebto r (th ough h e di d re c e iv e on e half an d -

cash e n o ugh t o buy an o th e r fou r th ) an d had b ought t h e o th e r on e

f ou r th fro m t h e o th e r o wn e r S uch abb r e viati on w ould sav e on e
.

e n t r y but it w o uld falsify t h e r e c o rd

,
If t h e de e ds sh ould b e l o st
.

b e for e th e y w e r e re c o rd e d an d it w e re sh o wn that th e d ebto r

,

n e v e r o wn e d m o r e than o n e half o f t h e p r o p e r ty in qu e sti on t h e

-

buye r s b ooks w ould militate again st him in his claim t o t h e whol e

’

p rop e r ty Th e y w ould in dicate that h e had b ought fr om t h e

.

las t se lle r bu t on e quar te r o f th e prop erty and from his de b tor

-
 TH E PRIN CIPLES OF LAB OR S AVIN G -
DE VI CES 1 75

th r ee -
quarte rs m ore than t h e d e btor o wn e d T r an sactio n s
,
or .

which are for an y r e as on distin ct must no t b e combin e d in a way

that will de stroy the ir iden tity .

Loo s e Le af B ooks It is obvi ous that th e u se o f loo se l e af

-
.
-

b oo ks pa r ticularly with carb on r e p roduction s an d addi n g ma

,
-

chi n e S lips may much s h plify b ookk e e pin g lab or If fo r e x

,
.
,

ampl e all bills fo r custom e r s ar e m ad e o n a type writin g machin e

,

with an addin g attach m en t an d ca rb on c opi e s ar e mad e on e , ,

writin g will p rovid e b o th t h e bill an d t h e l oo s e l eaf e n try S h e e t -

say thi g fu th r c o pi e s fo r t h e shippin g r o om an d

( t o n o n o f r e ,

th en an addin g machin e slip wi ll give t h e to tal sal e s o f t h e day

-

for th e summa ry r e co r d t h e d e bit t o A cc o un ts R e c e ivabl e an d

th e cre dit t o S al e s Th e n t h e addin g machin e slip may b e pe r
.
-

man e n t ly file d as t h e suppo r tin g d o cum e n t fo r a j ou rn al e n try

c ove rin g t h e summary o f t h e day s sal e s ; o r if sal e s of man y d e ’

p a r t m e n t s ar e distin guish e d a sal e s b oo k with a S in gl e e n try a ,

day can S h ow t h e sal e s o f e ach day fo r e ach d e par tm e n t in a

S p e cial c o lumn an d t h e t o tal o f t h e c olum n s c an s e rv e as a sum
,

mary e n try fo r p o stin g daily we ekly o r m on thly as desi red , , ,

.

It is p ref e rabl e t o hav e such summary e n t ri e s in b o un d b o oks for ,

th e n t h e l o o s e l e af b o oks ar e ti e d up with a b oo k so much m o re

-

p e rman e n t that th e da n ger o f f o rg e ry o r suspici on o f forg er y is , ,

m o re r em o t e .

QUES TIONS A ND P ROB LEM S

1 Enter th e fo llo wing trans act io ns in a s pe cial column j ournal -
us in g
s pe cial co lumn s wh e r e v e r i t se e ms d esi rab le
.
,
1
Pos t t h e en tries t o the
le dge r an d t ak e a trial b alan ce
.

Th e proprie to r in ves ts worth of merchan dise and

.

in

d
Re n t is pai , $ 2 00 ; po stage , $ 1 2 0; s tat io n e ry , S5 0
d d ah
.

Goo s are so l t o B ay , t G ay , $ 800 ; Way , o c s cus

t m o ers ,

W g p i d $ a es ar e a 2 00

Ca h i iv d f m B y
.
,

s G y $8 ; W y
s r e ce e ro a a 00 a

wit hd aw $ f hi p al
, , ,

Th p p i t e ro r e or r s 1 00 or s e rso n us e

t h f ll wi g t a a ti i app p iat b k p t d t ak
.

E t
2. n er e o o n r ns c o ns n ro r e oo s, os an e
a t ial b la
,

r l
a n ce .

Si b f i m
nc e iv
ut f h p p
ew f hi p bl m ll i m
te f s are g e n o r t e ur o se s o t s ro e a te s o
h ld b mbi d i xp
,

em en se s ou e co ne nt o one e e nse acco un t .

1 76 U TH E F ND AM ENTALSOF A CCOUNTING

J H m a lawy a d t y p b li ta t ffi t a y hi
e r an n o ar u c, s r s an o ce o c rr on s
f v h
.
,

p i
ro e s s o n .H i t i a e n es s n c s

Offi q ipm t i b ght f

.

ce e u ppli
en f $3 d l w s ou or su es or 00, an a
b k f
oo s or ll f h a o r cas

N ta y f
.

o r ll t d $ 5 ees are co ec e 2

vi f ll w R S t $ 5 ;
.
,

B ill f l g l
s or t t e a se r ces are s en ou as o o s: one , 2 0

J W d $ ; K S d $ 3 ; L Wat
.

oo 1 00 $5 an s, 00 e rs , 00
N ta y f ll t d $ 4 3
. . . .
,

o r e es are co ec e

R t i pai d f m th $ 5 ; l a y t a t g aph
.
,

en s or o n e i paid on 1 0 sa r o s e no r er s
w k $ ; tamp b ght $ 5
,

f
or o n e ee 20 s s are ou 1

d J W d p y th i b ill i a h R S t giv a t
.
, ,

L Wat e rs an oo a e r s n c s one es no e
f hi b ill p yab l i 6 day wit h i t
. . . .

or s a t e n 0 s n e res

t h f ll wi g t a a ti i t h app p iat b k p t t t h
,

E t n er e o o n r ns c on s n e ro r e oo s, os o e
l dg
e fi d
er , d h w n t h l dg ant h p fit t a f S t h p fi t t th
o on e e er e ro r ns er e ro o e
t d d aw p t h b ala h t
,

p p i t
’ 1
ro r e o r s ac co un an r u e n ce s ee

Th f ll wi g b ala al ady t h l dg
.
,

e o o n n ces are re on e e e r.

C has P pi ro r e t or

Eq ipm
u en t A P y bl ccoun t s a a e
Exp e n se
P hur c ases

A R
ccoun t s iv bl ece a e

M erchan dis e is b ought o n account from Vesey Co $ 24 0

is r e ce iv e d fo r acco un ts re ceivab le ; re n t is p aid for on e m on t h $ 7 5
.
,

M dse is sold for cas h $ 5 00 Po st age an d s tatio ne ry are purchase d

.
,

fo r cas h 5 0 S alarie s are p ai d for o n e w ee k $ 3 6 ; cas h is paid o n ao

. .
,

co u n ts p ay ab le Vesey M ds e is sold on accoun t t o Joh n

.
, ,

Co
Gree n $4 00 an d t o Ro nal d
. .
, ,

S on $ 600
M ds e is b ought for cas h A ccounts receivable are paid
.
, , ,

.
,

d v h b
Ron al 81 S o n gi e an automob ile for t eir ill Th e pro prie tor ta es k
h h f d
.

t is for hi s pe rsonal use Cas is o un , $ 1 0

v m h d
. .

Th e in en tory o f e r c an ise at t h e e n d is Expe nse inv en

b
tory is $ 2 7 5 Wages lia ility is $ 3 6
m wh h d d
. .

Fro at actu al sources s oul yo u e xpe ct t o fi nd po ste t h e items

x d
e p r es s e v b w hw m
in t h e t e ntati e e n try elo ? S o h ow t h e ite s poste d
w k f wh h
ill loo in t h e sour ces rom d
i ch t ey are poste .

C h as

M h di erc an se
A R iv bl
c co un t s e ce a e
T P i A o ro p r e t or

A P y bl cco un t s a a e
T h b k h t
o e nte r o n d li b ili i b ght i t e oo s t e asse s an a t es rou n to t he
b i by A h i lid i g hi b i
u s ne ss wi h hi .
,
w o s co nso at n s u s nes s t t s.

See no t e o n page 1 75 .
 APTER XII
CH

TH E PRIN CIPLES OF LA B OR S AVIN G D EVI CES

-
IN LED GERS
S ub or di nat e L dg rs W hav
e e f . sp o k en o f A ccoun ts Re
e e so ar

ceiv ab le an d o n A cc u ts Payabl as chi

e e fly s o u r c e s o f i n fo rma ti o n

fo r th e b alan c e sh e e t an d this is quit e c o rr e ct

, A little though t .
,

h ow ev er will S ho w that s o me thin g m o r e than in fo rmati on fo r th e

,

balan c e S h e e t is n eed ed in co nn e cti on with th e substan c e which

th e s e acco un ts rep re s en t If a man k n ows that a c e r tai n numb e r
.

o f th o usan d d olla r s ar e o w e d him but h e d oe s n o t k n o w w h o o we s

him th os e d olla rs h e is in a fair way t o l o s e m or e o f th em than h e

,

would b e if h e kn e w ; an d if h e kn o ws that h e himse lf owe s a num

b e r o f th o usan d d o lla r s but d o e s n o t k n ow wh om h e o we s his ,

c r e dit wi ll u n qu e stion ably sufi er In fo rmation ab out d eb t s ow

’

ing an d owe d S ho uld b e syste ma tiz e d Th e obvious sugge stion .

is that w e mak e use o f th e l e dg er for all such in fo rmation an d o p en

a l e dg e r ac cogn t with e ach p e r so n w h o o we s us and e ach p e rson
t o wh om w e o w e a n ythin g In fact in small busi n e ss e s that is
.
,

what is d on e ; an d s ev e ral o r many accou n ts tak e t h e plac e o f t h e

o n e A cc o u n ts Re c e ivabl e an d s e v e ral o r man y o th e rs tak e th e
,

plac e of t h e on e A cco u n ts Payable In p re parin g figu re s for t h e .

balan c e S h e e t th en th e sum of th e balan c e s of th e accoun ts o f all

, ,

d ebto rs is call e d A ccou n ts Re c eivabl e as if th e y w ere all in on e ,

acc ou n t an d t h e sum of th e balan c e s o f th e acc oun ts o f all credi

,

to rs is call e d A cc ou n ts Payabl e This w o rks v e ry we ll in small .

busin e ss e s Whe n howev e r t h e numb e r o f custom er s ru n s in to

.
, ,

hu n d re ds o r th ousan ds as it doe s in many larg e busin e sse s or

, ,

e v e n in to t h e hu n d re ds o f th ousands as it d o e s in a fe w t h e t ask ,

o f fi n di n g t h e am o u n ts o wi n g re qui r e s s om e o th e r m e th o d than

that just m en tion e d if in fo rmation is de si re d o fte n an d promptly .

I nd e e d ge ttin g figure s fo r A cco un ts Re c e ivabl e an d A ccou n ts

,

Payabl e at lo ng in t e rvals will n o t s e rve in busin e ss e s t oo la rge t o

b e watch e d at fir st han d by t h e man ag er s S uch man age r s must .

hav e fre qu en t re po rt s of c on diti on an d o ften accoun ts rec e ivabl e ,

an d acc o un ts payabl e ar e impo r tan t e l em e n ts in such re ports .

Obvi ously th e prepara tion of s uch repor ts would b e unduly labo

 TH E PRIN CIPLE S or O
LAB R SA IN G DE -
V VICES 1 79

riou s if the figure s co uld b e go t only by fin ding hun d reds of bal

an ce s o f indi vidual acc o un ts an d th e n addi n g th e m to g e th e r .

Th e thi ng t o do sugg e sts itse lf We can have an acco u n t in t h e

.

l e dge r for all acco un ts r e c eivable in a bu n ch o r group just as if ,

all we re r e c e ivabl e fro m on e man (and as w e hav e s o far tre ate d

th em ) an d th en w e can ke ep d e tai ls o f th e bun ch o r group in a
,

sub ordin ate ledge r whi ch S hall S ho w how much of t h e gr oup t o tal
,

is owe d by e ach m emb e r o f th e g roup S uch a sub o r dinat e le dge r .

“
for acc oun ts re c e ivabl e is c o mm onl y call ed a sale s l edge r or ,
“ ” “
custom er s l edg er an d for acco un ts payable is calle d a pur
,
” “ ”
chas e le dger or c re di tors l e dge r
, .

Th e B ookke e ping This w o uld b e lab ori ous if it in volve d a

.

p ostin g for e ach e n try to b o th th e gro up acc o un t an d th e in divid

ual acco u n t d oublin g th e lab o r ; but w e hav e al re ady s ee n that
,

this is n ot re quire d We have alr eady by th e u s e of sp e cial

.
,

c o lumn s fo un d a way of carryi n g to th e l e dge r all ite ms of ac

,

coun ts re ce ivabl e for a wh o le p e riod in on e p o stin g It make s .

n o diffe r en c e wh e th e r ou r p e r i od is a day o r a w e ek o r a m on th :

w e c an p o st th e to tal fo r that p e riod f rom th e to tal o f th e sp e cial

c o lumn f or that accoun t If in addition we n ee d to kn ow in
.
, ,

le dge r form what is owe d us by e ach i ndi vidual of th e gr oup w e ,

e stablish a gr o up l e dge r an d p o st e ach item to th e app r op riat e

,

in dividual accoun t in that le dge r Th e n th e sum o f th e balan c es

.

o f all acc ou n ts in t h e gr o up l edge r must b e id e n tical with t h e bal

an ce o f A cc oun ts Re ceivabl e in th e g en e ral ledge r fo r t h e tw o ,

co n sist o f t h e sam e thin g on e poste d in small pi e c e s t o t h e sub

o rdin ate l e dge r an d th e o th e r post e d in gr o ss t o th e g e n e ral l e dg e r

, .

Th en t h e ge n e ral man ag e r can wat ch gr oss figure s f ro m t h e fre

qu e n t r e p o rts o f A cco un ts Rec e ivable o f th e ge n e ral l e dge r an d ,

t h e colle ctio n man age r can watch de tails f ro m t h e subo r din ate
l edg er On page 1 7 1 w e have an illustration o f this pri n ciple ex
.
,

c ept that i t is applied t o acc oun ts payable ra th e r than t o accou n ts

re ce ivable In th e form sh own th e t otal o f th e c olumn is ob v i
.
,

o u sly p o st e d for t h e l edge r f o li o is giv e n ; but n o f o li o app e ars

,

o pp o sit e t h e n am e o f S mith or o f J o n e s If w e are t o main tain .

t h e sub o r di n at e l edge r syste m jus t d e scrib e d w e must post c re dits

-

t o th e ir acc o un ts in t h e sub o rdi n at e l e dge r an d in dicate by usin g ,

as a pos ting ch e ck th e l edg e r folio numb e r o f th eir acc o u n ts in

-
1 80 U
TH E F ND AMENTAL S OF ACCOUNTING
that ledge r t h e fact that p o st in g has b e en made No spe cial
,
.

n o ta ti o n n e eds t o b e mad e o f th e fact that th e ir l e dg e r f o li o n um

-

be r s are fo r t h e subo rdi n ate le dge r fo r th e p re s e n ce o f th e amoun ts

,

in t h e A cco u n ts P ayabl e co lumn sufii cie n t ly in di cate s th at fact ;

but for co nv eni en ce in po s ti n g th e n am e s o f S mi th and Jo n e s
,

sho uld appe a r in t h e j o urn aliza ti on co lumn ; an d th e wo rds A c “

coun ts Payabl e may b e o mi tte d from th e de taile d en try .

C ontr olling Account s H isto rically w e hav e gon e backwards

.

in o u r tr e atm e n t o f sub o rdi n ate l e dge r acc o un ts

-

In t h e days o f
.

l e ss d ev e lop ed b ookk ee pin g m e th od th e re we re no sub o rdi n ate

,

l e dge r s All acco un ts w e re k e pt in t h e on e le dge r Th en with

. .

t h e n e e d o f p ro mpt an d fr e qu e n t s tatistical r e p o rt of d ebts o w e d

an d o win g ,
th e pla n was e v o lv e d of o mittin g fro m t h e l e dge r
d e tails re gardin g d ebto r s and cr e di tors an d substi tutin g an ac
co un t for t h e wh ol e group o f e ach and r el e gatin g th e d e tails t o a
,

suppl e m en tary l e dge r such as has b e en d e sc rib e d Th e group .

“
accoun t in t h e ge n er al l e dge r is call e d a c on trollin g accoun t ,

b e cause it c on tro ls t h e sub o rdin a te l e dge r in t h e sen s e tha t on e

“

wh o has fi gu r e sfo r th e con tr o llin g accou n t k n ows what t h e sum o f

t h e o th e rs mus t b e that is h e has t h e key in his own hands It
/

, .

is o bvious that gre a t care must b e tak en tha t no e nt ri e s are eve r

mad e t o a sub o rdin at e l e dg e r acco un t with out provision fo r a S im
-

ilar de bit o r c r edi t t o t h e c on tr ollin g acco u n t an d no en try mus t

,

e v e r b e mad e t o t h e c on tro llin g accoun t with o u t pro visi on for

similar d ebit o r cr e di t t o t h e prop e r sub o rdi n at e l e dg e r acco un t

-

In dee d a r e aliza ti on of this is a t th e basis of t h e wh ole plan If a

, .

chan ge is t o b e mad e in t h e c on tro lli ng acco un t it is b e cause an d ,

o nly b e caus e a chan g e must b e mad e in a sub o r din ate l e dg e r ac

,
-

c o un t A tran saction can n ev e r origin ate in co nn e ction with a

.

co n t rolli n g acc o un t for th e co n trollin g acc o un t re p re s en ts n o

,

e n tity. Th e e n tity is in what is r e pr e s e n t e d by th e sub o rdin at e

l edger accoun t ; and that accou n t is subordin ate only in th e book
k e epi ng s en se k e pt in a min o r book for conv en i en ce no t en ,

t e r ed o n t h e balan c e sh e e t but ac tu ally re pre s e n tin g th e real

,

thin g for which a group accoun t is subs ti tute d in th e gen er al

l edg er an d t h e balan c e S h e e t .

Th e S ub or dinate Le dge r Ab s tract

-
A S a ch e ck on t h e par all e l
.

ism b e tw een th e con trolling ac coun t an d th e sub ordi nate l edge r

 U
TH E F NDAM ENTA S L OF A CCOUNTING
group of i tems is so large an d so impor tan t tha t t h e task o f com
, ,

bin ing th e d e tails from in di vidual accoun ts in to a t o tal or bal an ce

as often as t h e figu re is n e e d e d for th e gui dan c e of th e m an age r
is m o re lab o rious than w ould b e t h e k e e pin g of a c on tro llin g ac
c oun t in additio n t o t h e in dividual acco un ts (whi ch are re le gate d
t o a sub or din at e l e dg er ) an d as w e hav e s e e n t h e t ask o f kee p
, ,

ing a c o n tr o llin g acc ou n t is n o t gr e at .

Exte n s ion of th e P rin cipl e . This prin cipl e is applicable for

o th e r thin gs than acc o u n ts r e c e ivabl e an d acc oun ts payabl e If .
,

for e xampl e a man ag e r wish e s t o watch care fully his e xpe n s e s

, ,

n o t in d e tail but in t o tal an d t o hav e m n ut e d e tails o f sub di visi o n

, i
o f e xp e n s e watch e d by sup e r in t en d e n ts it w o uld b e d e sir abl e to
,

e stablish a c on tro lli n g acco u n t f or e xp e n s e s as a wh o l e in th e

g en e ral l e dge r an d ca rr y t h e d e tail e d e xp en s e s t o a sub o rdin ate e x

pen se l e dge r Th e sam e s or t o f thi n g can b e d on e in a man ufac
-
.

tu rin g busin e ss by c onfin in g d e tail e d acco un ts o f factory adminis

“ ”
t r at io n t o a sub o r di n at e l e dg e r call e d t h e factory l e dge r and ,

k e epi n g a c on tro llin g acco un t in t h e ge n e r al l edg e r t o rep re s en t

it c omm on ly Qalle d Facto ry L edge r
,
“ ”
I n di vidual S hipmen ts
.

o f m e r ch an dis e t o b e so ld o n c om mi ssi on can b e c on t r o ll e d

th rough a c on tr o llin g S hipm e n ts Th e re is no limit t o th e ex

.

t e n sion of th e p rin cipl e e xc e pt that of c onv en i e n c e de tail ed

acc oun ts n eedin g f re qu en t obs ervati on as a gro up an d s uifi cien t
in n umb e r t o m ak e a gr oup acc ou n t p r e fe r abl e t o t h e fre qu en t
gath e rin g toge th er of d e tails f rom th e indi vidual acc oun ts .

Th e S ub d ivision of C ontr o llin g Accou n t s A cor ollary of th e

.

p rin cipl e o f c on tr ollin g acc o un ts is w o rth obs e rvati on Fan cy .

your s elf tryin g t o ge t your abstr act o f acc oun ts r e ce ivabl e tak en
f rom a hun d re d th ousan d sal e s l edge r balan ce s If you f o un d a
-
.

di sc r e pan cy wh e r e sh o uld you b e gin t o hun t for t h e e r ror ? Th e

,

e rr o r may b e in t h e m e r e additi on o f t h e balan c e s t o ge t t h e t o ta l ,

o r in t h e figu rin g o f t h e balan c e s o n t h e sub o r di n ate l e dge r and ,

t h e sub o r din at e l edge r its e lf may b e right in o th e r wo rds t h e ,

e rr o r may b e in t h e t e st its e lf Of course t oo e ith e r o f t h e

.
, ,

l e dge rs can hav e an e r ro r a car e l ess o r an o mitt e d p o stin g

,
.

In atte mptin g t o d e te ct t h e e rr o r o n e w ould n aturally first

,

ch e ck up th e additi on o f t h e l e dge r balan ce s th en t h e figuring ,

of t h e balan ce s an d th en if th e e rror we re not foun d ch e ck up th e

,
 TH E PRINCIPLES OF LAB OR S AVIN G -
DEVI CE S 1 83

pos tin gs t o b o th th e g en e ral an d t h e sub o r di n ate l e dg e r In .

o th e r w o r ds n o thin g o f t h e o rigin al t e st can b e d e e m e d t o b e

,

satisfacto ry un til it has b e e n d o n e again or t h e e rr or has b e en

f oun d ; an d h e n ce t h e wh o le te st must b e gon e ove r unl e ss t h e
e rr o r is fo un d so o n e r This is disco u r agin g If t h e te st can b e
. .

m ad e pie c em e al an d e ach pie c e b e judge d by its e lf only th e pie c e s ,

t hat f ai l t o p ro ve c o rr e ct at t h e fi r st t rial n e e d b e d on e a s e c on d
time Now that th e prin cipl e o f th e con tr o lli n g acco un t is avail
.

able such pi e c e m e al te sts are po ssible S uppo s e ins te ad o f on e

,
.

c on tr o llin g acc oun t fo r t h e hun dr e d th ousan d accoun ts w e have

t en c on t r o llin g acco un ts an d t e n sal e s l e dg e rs f o r app r o ximat e ly
,

t e n tho u s an d acco un ts e ach . S uppo se w e put in to S ale s L e dge r

# 1 all acco un ts of custom e r s wh o s e surn am e in itials ar e A o r B ,

in to S al e s L e dge r # 2 all wh o se in i tials are C o r D in to S al e s ,

L edge r #3 all who se initials are E F or G e t c Then th e bal

, , ,
.

an ce of A ccoun ts Re c e ivabl e A cc o un t # I must agr ee with t h e

sum of th e balan ces o f all acc ou n ts in S ale s L e dge r # 1 If it doe s .

agre e w e hav e n o furth e r co n c e rn with that sub di vision of o ur

,

A ccoun ts Re ceivable but will hun t for discre pan cie s in thos e
,

acco un ts onl y for whi ch t h e agre em en t is n o t f oun d Thi s mak e s .

it p o ssible t o k e e p agr e em en t b e twee n t h e sub ordin ate l e dge rs

an d t h e c o n t r o llin g acc o u n ts in busin e ss e s which are so larg e

that err ors wo uld possibly n eve r b e f oun d if th e re wer e no pie ce

m e al comparison f or n e w e rr o r s might c r ee p in to work o f such
magnitude faste r than old e rr or s co uld b e d e te cte d .

Othe r Lab or S av ing D e vice s Num e r ous de vice s for saving

-
.

lab o r in conn e cti on with l e dge r s have a do ubl e lab o r savin g as -

t f th y c mbi n in in g e n i o us ways o rigin al e n tri es an d

p ec , o r e o e

postin gs Th e se are discusse d in t h e n ext chapte r

. .

QUESTIONS A ND PROB LEM S

I. Th e state ment b elo w s h o ws balan ces o n le dge r accounts .

C ash $ 50I ,2 Pr prie t or o

Me ch andi se
r Ac o un ts Payable
c

A oun t s Rece ivable

cc Kuh n B ro s .

Morris H mes
ol S on
Mar sh
Fulle r
Gen eral Exp ense
1 84 . TH E FUND AMENTALS OF A CCOUNTING
f w
Ente r th e o llo ing transaction s in th e j ournal , cas h b oo , purch ase k
b k
oo , an d sales b k
oo ; po s t t o t h e ap p ro p riate l e ge rs ; ta e a tri al d k
b
b alance o f t h e gene r al le dge r an d a s tr acts o f th e sales an d pur c ase h
l dg
e ers

accoun t fro m S hort Co m erchan dise costing

.

W b e uy o n an d

f mL o ng B ro th ers m e r ch an dise co s tin g $ 5 3 0

.

ro

M orris pays his bill an d buys o n ac coun t more of m erchan di se

.

We pay H olmes 81 S on on acco un t

S ale s ar e mad e t o D B lan ch ar d for cas h $ 5 0 t o S tickn ey 8: S o n o n

.

accoun t $ I 2 00 t o Ros s B ro th ers o f which $ 5 00 is pai d in cas h

.
,

Purch as es for are m ad e f ro m M o n tgo m e ry B ro s o n accoun t

.
, ,

Pu rch as es are made for cas h at an auction $ 5 00

. .

Wages are paid $ 1 2 6 ; s uppli es are p urchase d $ 5 0 ; po stage is pur

.
,

ch as e d $ 2 5 ; e xp ress is p ai d $ 7 Th e p rop ri eto r withdraw s 5 0 fo r his

, ,

.
, ,

pe r so n al u s e

Mars h pays his b ill ; Fulle r p ays $ 7 0 on accoun t

.

Th e manager o f a b u sin ess ha s giv e n up all ho pe o f collecting t h e ac

.

in S ales Le dge r B ) an d o f ! ee
.

count o f J ay K ay Co ( Co ( in S ales
L e dger D ) and o f collectin g on th e promi sso ry n o t e o f A B ee Co
. .
,

H e or ders t h e b oo kk eep e r t o write 011 th es e ass e ts as wo rt hles s

.
, .

(a)
What entries s hould b e made in what boo ks ? (b) Six months later all
.

th ese fi rms p ay t h eir o bligations In fu ll What e n tries s houl d b e made ?

(c) Would the e ntries b e difi e ren t In any cas e if t h e bus in ess had b e en
.

' '

carryin g p r e vious t o t h e writin g o fi an acco un t calle d Allo wan ce fo r

.

B ad D e b ts ? If so m ak e t h e e n tries an d in di cate fo r which o f y ou r

, ,

o t h e r e n tri es th ey w ould b e su b s titu te d

,

Would it b e pos s ible t o hav e a con trollin g account for cash ? If so under
.

what circums tances ? If not why not ?

,

,
1 86 U
TH E F NDAM ENTAL S or A CCOUNTIN G
the cus tom e r (an d A cc
o un ts Re c e ivabl e ) must b e cr e dit e d fo r th e

full amou n t of t h e bill If w e w e re t o adh e re rigidly t o t h e p ri n

.

ciple o f havin g on ly cash in t h e cash bo o k w e sh o uld hav e t o split ,

this e n try b e tw e e n t w o b ooks a d ebit t o C ash an d a cr edi t t o t h e

,

custom er in th e cash b ook an d a d e bit t o D isco un t G iven an d a

,

cre dit t o t h e custome r in t h e j ourn al This m e an s t w o p o stin gs.

B y puttin g t h e disco un t as w ell as

’
t o t h e custom e r s acc ou n t .

t h e cash in t o t h e cash b oo k h o w e v e r w e c an cre dit th e cus to m e r

, ,

by o n e p o sting If on t h e o th e r han d w e wish t h e custom e r s

.
, ,
’

l e dge r acc oun t t o S h ow wh e th e r h e t ook his disc oun t as summary ,

i nf ormatio n fo r th e c re di t man age r w e must p o st t h e items s epa

,

r at e ly t o his acc o u n t ; but e v e n th en it is w o r th whil e t o have t h e

disc ou n t in t h e cash b o ok f or on e e xplan ati on will d o f or b o th

,

p o stin gs an d b o th may b e p o st e d fr om th e sam e bo ok M an y .

ar ran gem en ts o f th e cash b o ok f or thi s purp o s e are in u s e an d as ,

th e y are typ ical o f t h e fl e xibili ty of b o okk e epin g f o rm th e y are ,

w o r thy of obse rvation ; in de e d th e y c ompris e o n e of t h e b e st illus

,

t r atio n s that can b e giv e n o f fl e xibility an d h en c e stud en t s o f ,

bo okk e e pin g ma y w e ll study th em with car e an d compar e th em

critically .

W ith C ontra It e ms A c omm only us ed an d acc e ptabl e prin ci

.

l all ws n o v e r sta t e m e n t o f an y acc o u n t p r o vide d t h e o v e r

p e o a

stat eme n t is carrie d t o b o th S id e s of th e acc o un t and p r ovide d t h e

actual to tal is n o t o f valu e fo r statistical purp o se s Th e re is little .

valu e for e xampl e in th e t o tal o f t h e cash acc ou n t for it d oe s n ot

, , ,

r e p re se n t a n ythi n g that t h e ma n age r ca re s ab out It is a result of .

so man y thin gs that it me asur e s n o o n e thi n g : balan c e s o nly ar e

what cou n t with r e sp e ct t o it No harm is do n e th e n if w e e xag
.
, ,

ge rate cash r e c e ipts prov ide d w e at th e sam e time (l e avin g no

,

margin o f tim e for a false c on clusi on abo ut t h e cash balan c e)

e qually e xagg e r ate t h e cash disbu r s e m e n ts : that is if w e f o r c on , ,

v e nie n ce in b ookk e e pin g r e p o rt m o r e m o n e y as comin g in th an

,

r e ally cam e in an d at th e sam e tim e re p o rt th e same e xc e ss as

go in g ou t n o harm is d one p r ovide d this do ubl e (c omp e n satin g)
,

e rr o r h as n o t aff e ct e d an y o th e r acc o u n t We have seen tha t to .

have t h e c ompl e te re co r d of t h e paym en t of bills by custome rs all

in on e plac e r at h e r t h an divide d be twe en t wo books wo uld b e a
, ,

s avin g of labor in b o th explanation and pos tin g If we treat th e

‘

.
 LAB OR—S AVIN G DE VI CES 1 87

bill as if paid in cash in full e ven tho ugh a disc oun t is take n by th e
custom e r an d th e n mak e an o th e r e n try as if w e had giv en him
,

his disc o un t in cash in ste ad of d eductin g t h e am oun t f rom t h e fac e

o f his bill w e shall ge t th e sam e e ffe ct in th e e n d an d mak e o u r
,

s e lv e s le ss wo rk S uppo se a bill is for $600 but th e custome r by

.
,

payin g e ar ly is en titl e d t o a di sc oun t o f o r $ 30 H e will actu .

ally pay $ 5 70 in cash Th eo r e ticall y w e sh o uld de bit C ash $ 5 70

.
, ,

d ebit D isc o un t G ive n $ 30 an d cr e di t t h e custo me r (an d A ccoun ts

,

Re c e ivabl e ) $ 600 If w e c onfin e o ur cash book strictly t o cash

.

en tri e s w e shall o n t h e cash b oo k c r edit t h e custo m e r (

,
an d A c

c oun ts Re c eivabl e) $ 5 70 an d d ebit C ash fo r t h e sam e am oun t

, ,

an d shall on th e j ourn al d ebit D isco un t Giv e n $ 30 an d c r e dit t h e

custom er (and A cco un ts Re c eivable ) $30 If o n th e o th e r han d .

, ,

w e e n t e r o n th e r e c eipts sid e o f th e cash b ook th e wh o l e $ 600 ,

cr edi tin g t h e custom e r (an d A cc oun ts Re ce ivable ) an d d ebitin g

C ash o f c ours e an d th e n o n t h e disburs em e n ts sid e of th e cash
, ,

bo ok d ebit D isc ou n t G iv en an d cr e dit C ash we shall have t h e ,

c o rr e ct credi t t o t h e custom e r t h e corr e ct d ebit t o D i sc o un t

,

Give n an d t h e c o rre ct balance o f d ebit t o C ash (

,
but n o t t h e co r
re ct to tal o f cash on eith e r S id e ) We have repr e se n te d just what
wo uld have happ e n e d if t h e custom e r had n egl e cte d t o tak e o ff
his disc ou n t an d th e n w e had s en t hi m a ch e ck t o co rr e ct t h e e rro r .

This is fo r practical purp o s e s prop e r b o okk e epin g th ough th e o ,

re tical ly n o t quit e truthf ul in d e tail and actually truthful in n e t ,

e ff e ct
. This is illustr ate d b e lo w by t w o such tr an sactio ns the
firs t a cash r ec e ipt as just de scrib ed an d t h e o th e r a cash paym en t ,

on a bill for wi t h a discou n t all owed o f or

Cas h Receipts

47 B S ykes Inv oi ce , Pd
Di
.

A
.

24 Taken
sco un t Bed e ,
.

x7 Acco u n ts Receiv able

9 Cash , D r .

Cas h D is burs ements

25 Di G iv en
scoun t k
B S y es . s a , co n tra
A
.

97
19
9
A
dam B ed e
cco un ts
C as h , Cr .
P y
a ab le
Inv oice , 1 2 2, Pd .
 88 U
TH E F ND AM ENTAL S OF A CCOUNTING

Th e r e sult h e re is a d e c re as e o f cash by $ 3 80 o r t h e difl e ren ce

'

net ,

b e tw e en $ 6 5 0 d e bits an d $ 1 030 cre dits th ough t h e actual cas h ,

re c e ive d was but $ 5 70 an d that disburse d was $ 95 0 again a diff e r ,

e n c e o f $ 3 80 This f o rm has still an awkwardn e ss in makin g en

.

tri e s h ow eve r Th e cash paym e n t and t h e disc o un t go on oppo

, .

site side s o f th e cash b o ok and e ach must b e e xplaine d fully

,

en ough t o id e n tify it t h e sam e tra n sacti on twic e e xplain e d We .

should lik e t o avo id this duplication Le t us see wh e th e r by a .

n e w u se of t h e spe cial c o lumn w e c an put b o th pa rts o f t h e t r an s

ac ti on o n th e sam e sid e o f t h e cash b o ok We have so far use d .

t h e sp e cial c o lumn as a d e vic e fo r h o ldin g up te mpo r a r ily c e r tai n

ite ms an d th en p o stin g th em in a lump sum We may u s e it als o .
,

o bvi o usly fo r o th e r similar purp o s e s such as t ra n sf e rr in g it ems t o

, ,

th e o th e r sid e o f a cash b o ok If th e n w e e n te r t h e disc ou n ts on

.
, ,

t h e sam e S id e of th e cash b ook with t h e paym en ts ( e v e n th o ugh

th ey represe n t th e amoun ts no t paid) w e can tr an sf e r the m in ,

lump o r to tal t o th e o th e r side of th e cash b ook wh e n e ve r w e

, ,

wish t o p o st items In o rd e r t o obse rve this le t us tak e a large r

.
,

n umb e r o f it e ms than in ou r p r e vi ous illust r ati o n i n cludin g s om e ,

o f a diff e re n t n atur e s t ar t with a cash balan c e an d cl o s e t h e cash

, ,

b o ok It will b e n o te d in t h e fo rm foll owi n g that th e disc o un t

.

take n by S yk e s is en tered on th e r e c eipts sid e o f th e cash b ook ,

th ough it w as n o t re c e ive d but gi ven and th e to tal of th e c olum n ,

in whi ch it stan ds is at t h e e nd of th e p e ri od carr ie d t o th e o th e r

sid e of t h e cash b oo k th ere t o in cre as e th e C ash cre dits as much
,

as th e in clusion o f t h e discoun t h e re in t h e $ 600 has in cre as e d th e

C ash d ebits S o t h e exagge ration o f C ash d ebits is o ff s e t by an
.

exagge ra ti on of C ash cre dits .

A ccts . Recei vable

s/ Ba lance 27

$
I3 B i lls Receiv ab le 6 7 Paid
47 B S y es k nv o ice , 5 7 Pd
P 3
3
. .

64 B at terson
. Inv o ice , r 2/ r , 5 9 , Pd .

V D isco unt con tra

I7 Ac t c s. Receiv ab le
24 D isco un t Ta kn
e Contra
9 Cash , Dr .
1 90 U
TH E F ND AM ENTAL S OF A CCOUNTING
had tr eate d t h e b ills paid as if paid by cash in full We now hav e .

t h e n e t cash sh ow n s e pa r at ely an d th e r e f o r e might as w e ll in clud e

,

in ou r cash t o tal d e bit an d t o tal cre dit o nly t h e cash actually

han dl e d on e ith e r S id e o f t h e b oo k Th e n w e S hall n ee d n o c on tr a
.

items or tra n sfe r s t o t h e o th e r sid e of th e cash b ook Un d e r this

,
.

m e th o d t h e e n trie s can b e made e xactly as ab ov e but t h e cl o sin g ,

will diff e r s om ewhat Th e t o tal of th e n e t cash c olum n will go

.
-

di re ctly in to t h e su nd ri e s c o lumn b e f o re th e ad di tio n of disc ou n ts .

Th e di sc ou n ts will n o t n o w b e tr e at e d as cash ite ms but will b e ,

tre at e d pu rely as j ou rn al en tri e s havin g n o c onn e cti on with cash ,

e xc e pt as i n v o lv e d in t r a n sacti o n s in which cash is als o i n v o lv e d

in a parall e l n o t a c ompl em en t ary way

,
Th e cl o sin g r ep e atin g
, .
,

n o thin g abov e th e f o o tin gs of th e fo rm ab o v e is th e n as f o ll ows : ,

Receipts
A ccts . Recei vable

V Net Cash 05 0 00

25 Di sco un t Giv er, D r

!
.

1 7 A cco un ts Recei v ab le , Cr .

9 Cas h , D r .

V B alance

A ccts Payable
.

D is co u n t

21
V
Ex pense , Dr .

Net Cash
Di Taken , Cr
scoun t

y
24 .

1 9 Acco un ts Pa ab le , D r .

Th e doubl e rulin g u n de r an d

sh ows that th e ite ms go n o far th e r d o n o t go in to th e su n dri e s

c olumn for t h e n e t cash has alre ady b een carri ed th er e Oth e r
, .

d evic e s s e rve similar purp o se s but th e se are sufli cie n t ly typical

, .

As sugge sted in Chapt e r VIII t he se fo rms may e asily b e adap ted

,

t o sh ow an d pr ovid e p ostings for dis coun ts f orfeit e d .

 O
LAB R S A -
VING DEVICES 1 91

PURCH A S E B OOK PURCH AS E LED G ER

, , A ND S TOCK B OOK
C OM BINED

B o ok of Origin al En try as Le d ge r On e of t h e tim e c on sumin g

.
-

tasks o f b ookk e epi n g is p o stin g Un de r c er tain ci r cumstan c e s

.

th e sp e cial c o lum n can b e appli e d fa rth e r than w e have ye t ap

pli e d it an d b e mad e t o t ouch th e le dger its elf If le dge r acco un ts .

are n o t t o o n um e ro us an d t r an sacti on s ar e n o t t oo va ri e d t h e ,

sp e cial c olumn in a b o ok o f o rigin al en try may b e itse lf us e d as a

l e dge r thus av oidin g t h e n e ce ssity of p o stin g from it We sh all
,
.

o bse rv e such a d e vic e in t h e n e xt pa r agr aph If o n th e o the r .

,

han d e v en though l edg e r acc o un ts ar e num e rous tran sacti o n s are

, ,

f ew in ki n d w e may re ve r s e t h e p ro c e ss an d us e t h e l e dge r its e lf as

,

a b o ok o f o rigin al e n try as d e scrib e d in t h e fou r th par agr aph fol

,

l owin g In b o th o f th e se cas e s h owe v e r t h e l e dge r c on c ern ed is

.
, ,

sub ordin ate fo r only in e xtrem e ly rare cas e s w ould a busin e ss b e so

,

simpl e as t o warra n t th e s e d evic e s applie d t o th e ge ne ral l edge r .

Pur ch as e B ook an d Pur ch as e Le d ge r If t h e busin e ss buys

.

f rom v e ry fe w so ur c e s o f supply no t mo re than can b e conv en

,

ien t ly pr o vid e d with a pair o f sp e cial c o lumn s for e ach th e pur ,

chas e b ook may pro vide its own pu r chas e le dge r A con tro llin g .

acco u n t may th e n b e provid e d in t h e g en e ral l edg e r n o t s o much t o ,

sav e lab o r as t o giv e assu r an c e that t h e liabilitie s for pu r chase s will

n o t b e f o rg o tte n in d r awin g up r ep o rts Obvi ously n ot all en tri e s
.

t o th e pu r chas e l e dg e r acc o u n ts will b e f o u n d o n th e purch as e b o ok

-

h owe v er for paym e n ts of bill s will b e on th e cash b ook and h en ce

, ,

so m e p ostin gs will b e n e c e ssary t o th e se acc oun ts from o th e r b o oks ;

but t h e e limin ati on o f t h e c re di t p o stings is in its e lf w orth whil e .

Th e S to ck B ook In e xamin in g t h e d evic e just m e n ti on ed le t

.
,

us se e h ow o th e r in formati on may b e c oupl ed with it S upp o se .

t h e busi n e ss d e als in o nly a f ew kin ds o f c ommo di ti e s that th e se ,

are han dl e d in larg e quan titi e s o r n umb e r s an d that it is co nv e n ,

ie n t t o k e e p p e rp e tual in f o rma tion of th e amoun t o f e ach ite m in

st ock B y p roviding sp e cial column s fo r e ach ki n d of goo ds
.
,

e n t e ring in th e m all pu r chas e s o f e ach an d p r o vidi n g similar col

,

u mn s in t h e sal e s b ook an d tr a n sf e rri n g t h e sal e s to tal o f ea ch ki n d

p e ri odicall y t o t h e pu r chase b o ok fo r subtractio n from th e pur

chase s w e can S h ow t h e sto ck on han d
, .

Oth e r Fa ct s L astly inf ormation ab o ut th e date wh en bills

.
,
1 94 . U
TH E F ND AM ENTAL S OF A CCOUNTING

add ed toge th e r on th e le dge r itse lf an d thus give o ur to tal credi t

,

t o e ach o f t h e e a r ni n gs acc o un ts w e d o n o t n e e d an y o rigin al

,

en tri e s as such but can p o st di r e ctl y t o t h e custom e r s l e dg e r

,

f rom th e i n spe ctor s re por ts of m e ter re adi n gs an d t h e sto re s

’ ’

charg e S lips o f lamps an d applian c e s and th en save the s e r ep o rts

,

an d slips f o r r e f e r e n c e This can b e d on e if w e r un o u r custo m er s

.

le dg e r h oriz on tally rath e r than ve r tically In t h e ordin ar y type

.

o f l e dg e r cha rg e s ar e pla ce d un d e r e ach o th e r items or igin atin g

,

man y m on ths apart c o min g in to juxtap o sition It is n o t e asy .

( i n d e e d it is
,
alm o s t imp o ssibl e with o ut e r r o r) t o pick ou t t h e

ite ms of an y o n e m on th an d l e arn th e char ge s o f t h e pe riod .

Wh e n h owe ver t h e l e dge r ru n s h o rizon tally an d ch ar g e s f or an y

, , ,

m on th are in a c o lum n f or that m on th t h e t o tal o f t h e c o lumn fo r

,

that m on th is t h e t o tal charge t o all custome r s fo r that m on th

fr om that s o urc e .If s e v e ral c o lumn s are pro vid e d for e ach
mon th th e in co me s f r om s epar ate s o u r c e s may b e l e a rn e d in th e
,

sam e way an d from t h e t o tals of t h e c o lumn s o f t h e cust om e rs

l e dge r may b e p o st e d t o t h e c r edi t of t h e va ri ous in c om e acc o un ts .

This is S h owngin t h e f orm b e l o w In addi ti on sin c e balan c e s on

.
,

custom er s acc ou n ts cann o t n ow b e b r ought d o wn th e y ar e car

’
,

ri e d o ve r in a sp e cial c o lumn Th e y will c o mplicate e n tri e s t o t h e

.

c o n t rollin g acc o un t un l e ss pre cauti on is tak en but this is e asily ,

p ro vid e d as e xplain e d in a n o t e t o t h e f o rm .

TA B ULA R LED GE R
Februa ry

P ower Light P ower Etc

.
 O VING DEVICES LAB 1 95 R SA-

Th d bi e A e R iv bl i
t to h f i f h
cco un t s l m f l f
e ce h a e s no t t e oo t n g o t e co u n or t ot a t at
i l d b l b h v l f h b l b d d h , or
nc u es h
a an c e s i
ro ug t o e r ; so t e t o ta o t e a an ce s s su t ract e t e
d h di A iv bl will
an
ne t i s po s t e lli Th to t e R
co n t r o n g a cco un t . e cr e t to cco un t s e ce
h h h b k ip b y h m f h di
a e
b e gre at e r t an t e cas i h
oo re ce ts t e a o un t o t e s c o un ts : s n ce t e
di d d p h b k h dit A
-

s co un t h
oe s n o t n ee to R i
ap e ar on t e ca s oo t e c re to c coun t s

bl m y b m d f m hi b l l dg f h di l m h
, e ce v
a e a e a e ro t
d h s t a u ar e er a ter t e s co un t co u n an t
l m h v b dd d h Th h lm hwv
e cas
co u n a e l f h
ee n a e t o ge t e r e t o ta o t e cas co u n,

h ld b h k d f wi h h l f h p i l l m i h h b k
. o e e r,
s ou e c ec e o r accu racy t t e t o ta o t e s e c a co u n n t e c as oo
blwh l p ig h k f h l l dg
.

Th fig e u re s e o t e t o ta
Th fl
s are o st n c ec s or t e ge n e ra e er . e net e e ct
of h i i
t ese entr es s

A R
cco un t siv bl e ce C h a e 5 as 0 20
Giv
.

Di s co un t en

T A R iv bl o cco u n t s ece a e

VOUCH ER PAY AB LE S Y S TEM -

A S ubstitut a Le d ge r No t man y ye ar s ago it was comm on

e f or .

“ ”
for busin e ss h o us e s t o k e e p a runni n g acco un t with th ei r c r e di
t o rs o r custome r s with n o spe cial care that paym e n ts S h ould
,

e xactly m e e t pa r ticul ar bills P ur chas e s might b e scatt er e d .

th rough th e m on th an d paym e n t o f a lump sum appr oximate ly ,

su ffi ci e n t t o c ov e r t h e items wo uld b e mad e in t h e f ollowi ng

m o n th or late r with t h e in te n tion of k e e pin g d e bits an d c r e dits
,

vi r tually par all el but n o t n e ce ssarily tallyin g ite m by item This .

custom mad e it n e c e ssary t o k e e p a l e dg er acc ou n t with e ach

cr e di t or an d e ach d e bto r s o that t h e balan c e which might n ot b e , ,

t h e e xact am o u n t o f an y bill o r gr oup o f bills c o uld b e e asily ,

n o te d In r e c e n t ye ar s this m e th od has s e e m e d t o o e asy g o in g

.
-

B usin e ss me n wish t o hav e sp e cifi c bills paid an d paid on sp e cifi e d ,

du e dat e s It is o bvious tha t u n de r this pla n n o l e dge r acc oun t

.

with e ach c re ditor is e sse n tial for a fi le o r list o f u npaid bills giv e s ,

t h e d e si r e d i n f o rmati o n th e balan c e o w e d e ach c re di t o r is al

ways o n e o r m or e sp e cific u npaid bills It is th er e fore n owadays .

r ath e r c o mm o n t o fi n d such a list o f un paid bills systematicall y

a rr an ge d o f c ou r se ,
substituted for t h e old acc o un ts payabl e -

l e dge r It is n o t c omm on to fi nd such a list subs titute d for t h e

.

acco un ts re c e ivabl e l e dge r f or such an ar r an gem en t is n o t con

-

v e nien t wh e n t h e n umb e r o f it ems is lar g e an d acc o un ts r e

ceiv ab le ar e usually far m o re num e ro us than acc o u n ts payabl e ,

fo r sal e s ar e usually mad e in small e r un its t han pu r chas e s .

 1 96 TH E FUND AMENTA S L OF A CCOUNTING
Th e Pr in ciple . me thod of substitutin g a list of acc o un ts
Th e
payable fo r t h e sub o rdin ate l e dge r wh en it is c oupl e d with ,

t h e m e th o d of e n try d e scrib e d b e l o w is c omm onl y call e d th e

,
“ ”
vouche r syst em . Th e te rm is fle xibl e h ow e v e r an d may co m , ,

pris e m ore o r le ss than what is d e scrib e d h e re In e ssen c e th e .

,

vouche r syste m c on sists o f f o ur par ts : (I ) substitutin g an acc oun t

call e d Vouch e rs Payabl e f or t h e o ld A cc o un ts Payabl e ; (2 )
“ ”

substitutin g a list o f con s e cutive ly numb e re d bills fo r t h e old

sub o rdin ate le dger acc o un ts ; (3 ) pro vidi n g as an in trin sic part Of
-

t h e ar r a n g e m en t o f t h e list o f bills o r f orm fo r listi n g th e m ad e

, ,

quate m e an s f or makin g p o stin gs t o t h e var io us acc o un ts that ar e

t o b e d ebit e d an d t o V o uch e rs Payabl e which is t o b e c r e dit ed ;
,

an d ( 4 ) maki n g d ebits t o Vo uch e r s Payabl e f r o m t h e cash b o o k

wh e n e ve r bill s list e d are paid This sav e s t h e lab o r of p o stin g
.

cr e di ts t o i ndi vidual acc ou n ts for th e o rigin al listin g of t h e bill is

,

itse lf t h e o r igin al e n try an d p o stin g all in o n e Th e listin g Of t h e .

bills in app rop riate c olumn s mak e s p o ssible by m e re addition th e , ,

d e te r min atio n o f d ebits t o th e vari ous acc oun ts f or whi ch t h e b ills

w e r e in cu rredo j ust as in t h e tabular l e dge r sh own ab ov e w e
f oun d t h e cr e dits t o th e e arn in gs acc ou n ts from th e t o tal of th e
c olum n s of charge s t o custom e r s This is virtually t h e r e ve r se of
.

t h e par ticular tabula r l e dg e r S h o wn ab o v e e xc e pt f or on e thi n g

th e u ni t o f e n t r y in that tabular l e dge r is t h e cust om e r an d all ,

his ite ms app e ar in o n e plac e f or on e m on th (fo r h e is a r e gular

custo me r an d th e re for e has an e stablish e d plac e) ; but t h e un it
Of e n t r y u n d e r th e v o uch e r syst e m is t h e bi ll an d bills ar e ,

en t e re d in ch r o n o l o gical o r d e r irr e spe ctiv e o f w h o th e c r e dito rs

Th e Vo uch e r Re gi s te r Th e vouch er re giste r is th e key of t h e

.

syste m In t h e fo rm fo ll o win g th e c olum ns at th e right are fo r

.
,

t h e d ebits t o b e mad e f o r t h e purch as e s ( o r liabili ty f o r s e rvic e s ,

lik e te le ph on e s e rvice ,
bu t n o t e ve ry acc ou n t that may n e ed
a de bit is provid e d with a c olumn A group o f c o lumn s is pro.

v ide d fo r sun dr y it e ms which d o n o t hav e in dividual co lumn s ,

an d th e s e must Of c o u r s e b e p o st e d indi vidually as are it e ms in th e

sun dr i e s colum n o f a cash b oo k In or d e r t o in dicat e t o what ac

.

coun ts th e s e items are t o b e p o s ted a column is p rovid e d (j ou r

,

nalizat ion c o lumn ) an d of c ourse a l edge r fo li o c o lumn is n e e de d

,
—
 LAB OR S AVING -
VICES
DE 1 99

k e ep bills paid promptly howe ve r this will no t b e labo riou s If

, , .
,

t oo w e e
,
k e p a ca r d in d e x o f all v o uch e rs payabl e arran g e d alpha ;
,

b e ti cally by c r edito r s th e t ask ofj fin ding th e re co rd of o ur re la

'

ti ons with an y firm is n o t gre at Wh en it comes t o this h oweve r

.
, ,

t h e task of makin g po s tings to a subo rdin ate l edge r is har dly

gr eate r ; fo r d e bit p o stin gs mus t b e mad e from t h e cash book in
an y case e ith e r t o t h e v ouch e r r e gis t e r as j us t s hown or t o t h e
, , ,

l edge r an d it is virtually as much wo rk t o en te r credi t i tems in an

,

in de x as in a l e dg e r In summary t h e vouch e r system is e xc e ll en t

.
,

for small an d occasion al ite ms fo r which th e r e c ord will no t p ro ba

bly n ee d in dexin g ; but for pu r chas e s o r e xp enses c onn ected with
firms for wh om c ompl e te re cords o f d e alin gs are importan t t h e ,

r egul ar me th od of l e dge r acco un ts is usuall y m ore satisfacto ry .

No thing of t h e v ouch e r system that is val uable h oweve r n ee d b e , ,

give n up e ve n if th e le dge r accoun ts are main tain ed ; for t h e

v ouch e r r e gist e r may b e u se d as a m edi um Of p o s tin g t o l edge r

accoun ts o f cre dito r s (me re ly addin g a column for accoun ts paya

b le an d placin g in that column r ath e r than in th at for vouch e r s
,

payabl e ite ms t o b e po st e d t o a subo rdin ate le dge r an d pos tin g

, ,

th e t o tal t o A cc o un ts Payabl e) an d t h e un if orm vouch e r form

,

an d vouch e r ch e ck can lik e wis e b e use d wh e re d esired .

PRIVATE LED GERS

Th e Principl e . A lab or savin g device is some times an apparen t
-

con tradicti on in terms It may mak e m o re labo r than it save s

.
,

an d ye t b e in a s en s e lab o r savin g If i t sac hi gh cost lab o r

-

.
-

an d substitutes e v e n mo re low c o st labor i t may b e worth while

-

, .

Th e e stablishm e n t of t h e private l e dge r syst e m r educe s t h e w ork

-

o th e rwis e n ec e ssary o f th e c onfid en tia l bookk e e per wh o is o f t en

a me mb e r o f th e fi rm and a pe r so n who se time is ve ry valuabl e .

Th e purpo s e o f t h e private l e dge r is to kee p in th e confid en tial

fil es in accessible t o ge ne ral b ookk e e pe rs ce rtain matter s that
, ,

th e se b ookk e e pe rs do no t nee d t o kn ow such as th e inve stm e n t , ,

t h e am o un t o f profits th e salarie s o f part ne rs wha t m on e y is b o r

, ,

rowe d an d what re al e s ta te an d o th e r prope rty n ot direc tly con

,

sort of thin g just m en ti on ed are inf re quen t It is n ot much lab o r .

f or an y one t o rec ord th em Th e c omplication aris e s fr om t h e

.
2 00 U
TH E F ND AM ENTAL S OF A CCOUNTING

fac t that man y o f th

e m ar e in e x tricably ti e d up wi th tran sac t io n s

whi ch r e quir e gr eat lab or to r e cord Profits for in s ta n c e ar e de .

, ,

pe n d en t o u pu r chas e s and sal e s ; bu t no busy partn e r o r co nfi den

tial b o okk e e p e r sh ould tak e tim e t o e n t e r sal e s : th e y must b e
han dl ed by o th e rs Th e task th en is t o d e vis e a plan of l e ttin g
.
, ,

e ach b ookk e e p e r k e e p what h e must an d th e n o f r e latin g t h e t w o

se ts of it ems with out le ttin g t h e gen e ral boo kk ee p er s k n o w wha t

c onfide n tial things ar e r e la te d t o th e n on confi d e n tial thin gs -
.

S in c e t o o t h e confid en t ial b ookke e p e r ca nn o t giv e tim e t o g e ttin g

, ,

t rial balan c e s et c , for th e gen e r al b o okk e e p e rs t h e g en e ral books

, .
,

must b e c ompl e te in th ems elve s must stan d squar e ly on th e ir ,

o wn f e e t This sugg e sts th at t w o s e ts of b o oks are k e pt e ach

.
,

c ompl e t e in its elf but with c er tain matt e rs c omm on t o b o th s e ts

,

of b o oks Th e b e st way t o s ee t hat this is p o ssibl e is t o re m emb er

.

that ou r A cc oun ts Re c e ivabl e are in par t s om e b ody s e lse A c ’

c oun ts Payabl e f or what I am o w e d so m e b o dy ow e s me an d th e

, ,

ite m is on b o th s e ts of b oo ks with out c onfu si on Of o the r items on

e i t h er .Tha t is virtually th e r e lation of pr ivate an d gen er al
l edg er s Th e in sid e (confiden tial ) Ofli ce is tre at ed as if it w er e a
.

s e pa r at e busin e ss that had d e alin gs wi th t h e ou t side (g en e ral)

Offic e an d vi ce ver s a Le t us n ow e xamin e t h e m e th od
, . .

S tartin g th e S ys te m S upp o sin g t h e syst e m is b e gun afte r t h e

.

c omm on system is alr eady in ope ration th e fir st st e p is t o e stab ,

lish in t h e n ew private books th e pre sen t s tatus Of th e accoun ts

which h e reafte r are t o b e k e p t e xclusive ly in th e private b ooks .

S i n c e too t h e private l e dge r sh ould b e th e ul tima te re c e ptacl e of

, ,

all th e facts ab out t h e busin e ss s o that a bir d s eye vie w o f th e

,
’
-

busin e ss may b e tak e n by th e partne rs from it with out c on sultin g

t h e g e n e ral o r outsid e Ofli ce l e dg e r a summary S h o uld b e mad e in
-

t h e p rivate l e dge r Of t h e s t a tus Of all accoun ts t o b e k e pt h e r e aft e r

in t h e ge n e ral l edge r In o th e r wor ds w e will tran sfe r t o th e
.
,

privat e le dger a large n umb e r Of acco un ts fr om t h e ge ne r al l e dge r ,

an d w e will e n t e r in t h e p rivat e l e dge r n o t o nly t h e acc o un ts tak e n

o v e r from t h e g en e r al l edg e r but a summary o f th e accou n ts r e

maini n g o n t h e ge n e r al l edge r Le t us illustr ate by a c on c re te

.

case Foll owi n g is th e balan c e sh e e t of a busine ss on t h e day

.

wh en th e n ew sys tem is t o b e in augura te d :

2 02 U
TH E F ND AM ENTA S L OF A CCO UNTING
is ac tually th e valu e of t h e ass e ts con ti nu e d on th e gen e ral l ed ge r
ove r th e liabiliti e s so sh o wn ; fo r th e ass e ts still o n th e gen e r al
l e dge r are an d t h e liabiliti e s are

W e must n ow obvio usly brin g o ur ge n e r al le dge r in t o acc ord with

t h e n e w plan takin g ofl f ro m it th e it ems t r an sf e rr e d t o th e pri
,

vate le dg e r an d creditin g th e private l e dg e r for t h e e xc e ss liab ili

,

tie s (t o partn e rs) which it has taken over from t h e ge neral l edge r .

Th e e n try f o llo ws :
Partner A
Partn e r B
No tes Payab le
To M e rch andise Inv entory
Fixt u r es
Real Es tate
v
Pri ate Ledger

Now le t us ob se rve th e bal an c e S h ee t of e ach l edge r .

Gener al Ledger
Cas h Accounts Payab le
A ccounts Receivab le Private L edger
$2

Wh y d oe s th e priva te l edge r have a d ebit of t o th e

gen e ral
le dge r ? B e cause t h e latte r is re spo nsibl e to acco u n t for a net
Of pro pe r ty Wh y d oe s t h e g e n er al l e dge r hav e a credi t of
.

t o t h e privat e l e dge r ? B e cause t h e in side Ofli ce r epr e ‘

,

se n te d by t h e private ledge r has l e f t in th e ca re o f th e o u tsi de

,

Ofli ce o f e xc e ss o f ass e ts ( o v e r liabiliti e s ) t o b e acc o un te d

f or ; an d th e in sid e O ffi c e n ow k e eps u lti mate c on tr o l Of all

a ccou n ts in its own h an ds fo r it has a con tr o lli n g accou n t
,

which con tro ls e ven th e con tro llin g accou n ts k ep t by th e ou t

sid e ofli ce .

Operating th e S ystem Th e mos t co nve ni en t way to o pe ra te

.
 LAB R S A O -
VIN G DEVICES 2 03

th e system is t o hav e tw o cash acc oun ts an d two bank accoun ts , ,

o ne t o b e han dl e d in e ach o ffi c e ; but f o r t h e sak e o f studyin g t h e

me th od un de r th e m o st adv e r se circumstan c e s w e will assume ,

h e re o nly o n e cash accoun t an d o nl y on e bank acc o un t Ob v i .

o us ly o rdin ary t r ans acti o n s of pu r chas e sal e an d e xpe ns e will b e , , ,

han dled no w in t h e usual way e n te re d o n t h e ge n e r al books o nly , .

Th e acc o un ts on t h e privat e bo oks ar e n o t aff e ct e d by th e s e tra n s

acti on s an d h e n ce ge t n o en tri e s cu rr en tly N ow suppo se .

is bo r rowe d o n n o t e s payable Th e gen eral b oo kke e pe r s are n ot .

t o k n o w wh e r e t h e m on e y cam e f ro m The y are me re ly told to .

cre dit th e private l edge r and th e cash is dep osite d in t h e regu lar
,

bank acco un t by t h e confid e n tial b o okk ee pe r S O t h e gene ral .

bookk e e pe r s d e bit C ash and cr e dit Private L ed ge r an d t h e confi ,

de n tial b o okk e e pe r d ebits G en e r al L edge r an d cr e dits No te s Pay

able If n ow t h e Old n o te s payable are paid t h e confi de n tial
.
, , ,

b oo kke e pe r ge ts a blank ch e ck from t h e gen e ral bo okk e e pe r t ells ,

him t h e amo un t t o b e d r awn on th e ch e ck an d in structs him to

d ebit Private L e dge r an d th en h e himse lf d ebits No te s Payabl e
,

and c r e dits G e n e r al L e dge r A t t h e e nd of th e mon th th e can

.

ce ll e d che cks are se cure d from t h e ban k by th e c o nfid en tial book

kee pe r w h o rem ove s th e ch e cks charge able o n t h e p rivat e le dge r
, ,

and th e n give s t h e re st o f th em t o t h e ge n e ral bo okk e e pe r no tify ,

ing him als o of c ourse of an y such ch e cks still o utstan ding In

, , .

this way e ach s e t o f b ooks goe s its own way but j o in t t ran sact i ons ,

ar e e n te r e d on bo th in re ve rs e d e n tri e s and e ach with such d e tail

, ,

onl y as e ach n e eds En trie s whi ch d o n ot c on ce rn t h e ge n e ral

.

bookk ee pe rs b e cause not to uchin g accoun ts tha t th e y ke e p are

, ,

e n te re d in t h e private bo oks o nly .

Fin d in g Pr ofi t In findi ng pr ofi ts w e hav e to e stablish a n ew

.

relatio n Th e ge ne ral b oo kk ee pe rs pre f erably should n o t kn ow

.

inv e n t ori e s for if th e y d o k n owin g purch as e s an d sale s th e y will

, , ,

k now gr oss p rofits an d k n owing als o mo st of t h e e xp en s e s th e y

,

will kn o w o fte n t oo much abo ut n et profits an d in th e se days

of flo atin g ofli ce he lp i t is we ll n o t to l e ave lyin g ar o un d loo se in

fo rmatio n that a flo a ting boo kk e e pe r may carry so m e day t o a
comp e tin g fi rm With in ven to ri e s o n th e priva te l e dge r o nly
.
,

and purchas es sal e s an d curr e n t e xpe n se s o n t h e g e n e r al l e dge r

, ,

o nly th e t ask is simply to t ran sf er to t h e privat e l edge r all in

,
204 . U
TH E F ND AMENTALS OF A CCOUNTING

f o rma ti o n n ee d e d th ere for fin ding pr ofit S upp o s e duri n g t h e

.

curr en t pe ri o d th er e hav e b e e n e n tere d on t h e gen e ral l edge r pur

chas e s Of sale s Of an d e xp e n s e s o f

an d that t h e in v e n t o ry of m e rcha n dis e at t h e e n d o f t h e ye ar is

On th e ge n e r al bo oks th es e en tri e s wo uld b e mad e :

S ales
To P rivate L e dger

P rivate L edger
To P urch ases
x
E p enses

This cl ose s t h e thr ee n omin al accoun t s n am e d an d for t h e n et

, ,

cr edi t of t h e th r ee of th e m as pre vio usly stan din g on t h e ge n e ral

l edge r substitute s a n e t credi t t o Private L edg e r On t h e privat e
,
.

bo oks thi s e n try w ould b e mad e (or t w o e n trie s th e re ver se of ,

t h e t w o ab o ve w o uld b e us e d )
,

Pur ch as es
G en e r al L edg er
To S ales

Wh y in this l ast e n try is t h e gen e ral le dge r d e bited Be

cau se du rin g t h e p eri od of o p e ra ti on s t h e busin e ss h as acquir ed
ass e ts as a re sult of buyi n g an d s ellin g o f
, , which ar e still
o n th e bo oks o f t h e o utsid e o fli ce an d hav e n e v e r b e e n put o n t h e

books of th e in sid e ofli ce but sh ould n ow app e a r on th o se b ooks

,

as a charg e t o t h e o utsid e o ffi c e ( for t h e o utsid e o ffi c e still h olds

t h e pro pe rty or has alr e ady b e e n cr e dit e d if it has su rr e n d e re d
,

an y) .S imilar ly in t h e e n try o n t h e gen e ral b o oks th e i n sid e ,

Ofli ce is n ow taki n g ov e r th e acco un ts f o r t h e pr ofits mad e ( as far

as th e y ar e c o v e r e d by t h e it e ms ab ove ) but all ows t h e o utsid e
,

Ofli ce t o r e t ai n t h e acco u n ts for t h e ass e ts ; an d s o t h e i n sid e o fli ce

is c re di t e d for th e in cre as e of asse ts which it all ows th e o utsid e
Ofli ce t o ke e p e v e n tho ugh it tak e s o v e r t h e e arnin gs acc o un ts
‘
.

Now p r ofits can b e f ou n d on t h e private l edge r f o r wh e n th e n e w

,

inven tory is e n te r e d all t h e e lem en ts of p rofit will b e th e re S up .

p o sin g for simplicity tha t no exp en s e s h ad b e en in curre d e xcep t

those on t h e ge ne r al ledge r we sho uld th en have th e se closin g
,

e n tri e s f o r fin din g profi ts ( usi ng _ for

, illus t ratio n th e simpl e s t
,

meth od of clo sin g)

2 06 TH E F NDAM ENTA S U L OF A C COUNTIN G
combin e t h e t w o trial balan c e s i nto one afte r can ce llin g th e pri
vat e ledge r acc o un t on th e g en e ral le dg e r trial balan ce again s t
- -

t h e gene ral l e dg e r acc o u n t on t h e privat e l e dg e r trial balan c e as

- -

foll ows :
Cas h Partner A
Accounts Receivable Partn er B
M e rchan dis e In ve nto ry Accoun ts Payab le
Fix tures No tes Payab le
Real Estate Loss and Gain

QUES TIONS A ND PROB LEM S

D ISC OU NTS
I . Th e B ro w Ma f t i g C mpa y ll g d
n n u ac ur n th f ll wi g o n se s oo s on e o o n
t m p t a h % Ofl ; d
er s: s o c s 3 d 10 6 d t It l10 s 0 s 0 s ne co ~

l t f m G that h
, , ,
. . . .
,

ec s ro 8 S pa ym t
ree n t h i b ill f 1 on en on e r or as run

30 day f m Whit B th p ym t a bill f

s, ro e ro hipp d e rs a en on or s e
t d y f m B la k paym t
o -
a ro a b ill f $ 5 that h
c w k
en on or 00 as run on e ee

d f m Lav d paym t a b ill f $ 5 t hat h

, ,

an ro en er 6 5 day
en on or 1 ,2 0 as r un s

S h w b y th m th d th t i m t h h b k f th
.

o r ee e o s ip t f e e n r es e cas oo or e r ece o
a h d i di at t h p ti g that
c s an n c t b ma d f m t h
e e a hb k
os n s are o e e ro e c s oo
t att mpti g t h w di t f f it d b y t m
, ,

no e n o S o s co un s or e e cu s o e rs .

H w diflo t d a h m th d w l d t h d bit id f th a h
e re n un er e c e o ou e e s e o e c s

b k l k if di
oo oo t f$ h d b tak b y t h b i
s coun s o d i g 1 00 a ee n en e us n ess ur n
th e s am p i d ? e er o

G d
oo b th b ght d ld th f ll wi g t m 8% i day
s are o ou an so on e o o n er s: n 10 s,

4 % i 3 d y 6 day
n 0 t E t
a s, i t h a h b k th f ll wi g t a
0 s ne n er n e c s oo e o o n r ns
!

bj t t th di d h w what p ti g w ld b
.

a ti
c ons s u ect o es e s coun s , an S o os n s ou e
mad f m it e ro t h wi g di t f f it d wh y
no S o n sco un s or e e en ou

(a) hav a l m f t t b a i d
, ,

edi co u n ta d or scoun s o e c rr e co n r , an use

t tal i th l m f t h
o s n t lli g a e co u t d n or e co n ro n ccou n an

h
,

( b ) a y di
c rr t t a
no d t a
s co un si t h l m f
co n r , an use ne c s n e co u n or

th t lli g ae co n rot n ccoun s

v i fN
.

O Ja a y J
n pay hi
nu r 1 am ti g t $ 7 ;
o nes s s In o ce o ov 2, oun n o 00
S mith pay h i v i fD ; B w pay hi
.
,

s am ti g t $
s In o ce o ec 2, oun n o 2 , 000 ro n s s
i v i
.

n fD
o ce o am ti g t $ 5 ec 2 2, oun n o 00
th at d y p y t Bl h a b ill f D 3 $ 7 5
. .

W al e so o n a d t
a o uc e r o ec 0, an o

Oxf d b ill f D 3 $ 8
.
,

or 3 o ec 2 00
D vi a f m f a h b k f h wi g wh b ill
. . .
,

e se or o c s paid b y th
oo or s o n en s are e
fi m what di t it tak what di t it f f it d what h ld
,

r scoun s es , scoun s or e s , an s ou

dit d t M ha di f igi l v d bit t

,

b e cr e e o ti f th
e rc n se o r corre c on o e or na o er -
e o

M h di at t h t im t h b ill w
e rc an se iv d e t h p ti e f th e s e re r ece e e or on o e
b ill whi h w f a c m d d lay i paym t di
as or ss u d pg e e n en as s cu s s e on a es 1 2 2

I thi f m d
,
“ ”
12 3 . n t y di
s or t ta ; d o no t hi
carr scoun s con r an use n e cas n
 LAB OR S AVIN G -
DE I CE S V 2 07 .

t he colu mn for th e co n t rollin g account Apply t o th e form which you

d vi in th e las t paragrap h o f P ro b le m 2 ab ov e
.

e se t h e t w o e n ries t .

Cons truct a tabular le dger t o s how for t h e in divi dual d epos itors of
a bank t h eir daily balances daily d epos its and daily che cks drawn
En t e r in th e tab ular le dger t h e follo wing :
, , .

At th e clo se of b us in ess on We dnes day May 2 2 t h e b alan ce of

A Oakes is $ 1 4 0 o f James Rob inso n an d of S ilas Lo w ell
, ,

.
,

On Thursday May 2 3 f ll wi g w p t d f c h k ec s o f th e o o n er e r es en e or

paym t R b i $ 7 6 3 ; L w ll O th t d y
, ,

$ 7 $ en : o ns o n , 21 1 00, o e n a a

Oak d p it d $
, ,

es e os e 2 00

O F iday M y 4 h k w t d f paym t f l
.

n r p a 2 c ec s e re rese n e or en as o .

l w f Oak $ 5 $ 5 ; O f R bi
, ,

o s: o $ 5 $ 5
es , f 1 1 2 o n so n , 1 0, 22 o
L w ll $4 D p it w mad b y R bi
, ,

o e 00 by e os s er e e o nson

L w ll
.
,

o e

S h w h w p ti g f d p it
o o d h k will g t i t th g
os n s l or e os s an c ec s e n o e e nera

l dg e er .

T V OU S M H E CH ER Y S TE

Sh w oth v onh gi t d th a h b k ll that h l d h w

e ouc er r e s e r an on e c s oo a s ou s o

f
or t h f ll wi g t a a t i
e o d h w b y p ti g h k what h ld
o n r ns c o ns , an S o os n c ec s s ou

b p t d f m a h f th
e os e b k ro e c o ese oo s

d h f l w f m S C $ 5 pay b l
.

J M
an . 1 i p d l se s ur c ase as o o s: ro o 00, a e
d ; f m R 8 R $ 75 p yabl i d ; f mB 8 M
. . . .

i
n 10 s ro 1 0, a e n 10 s ro 1

payabl i w k Offi ppli ha d f m D

. . . . . .

e n one p ee S ce s u es are ur c se ro on

$ 5 p yabl i
. .

f or 0, 5 d a e n 1 s.

J 8 B 8 M
an p a i d i f ll 1 are n u

p id i f ll
. . . . .

J anR R 1 1 ar e a n u

paid i f ll
. . . . .

J 6 anD 8 S 1 1 on ar e n u

H w will y th V h R gi t th paym t f a bill

. . . .

6 . o d ou recor on e ouc er e s er e en o
in part ?

D es ir ing durin g t he year t o c an ge yo ur accoun ting et o s so t at h m hd h

th e gen eral b oo kk
eepe r cann o t learn t h e large r an d ore co nfi e n tial m d
fact s o f t h e b
u s in ess , you es ta li s a p ri ate le ge r in to i c ar e t o b e b h v d wh h
k
ta en all it ems of th e gen eral ledg er e cept Pur c ases , S ales , Accoun ts x h
vb
Recei a le , A ccoun ts Paya le , E pens es , an d C as b x h
d d
.

Th e gen eral le ger t rial b alance at t h e ate se t for inaugurating the

-

new sys tem is as ollo s : f w

C as — h 0

Pur ch ases m
Acct s Payab le f '

b b
.

Acct s Re ceiv a le~ No t es Pay a le

x
.

E pe nses Proprie t or
q m
E uip e nt
2 08 TH E F ND AM ENTAL S U OF A C COUNTIN G

(a) h w th t i
S o b th t h g
e e n r es on al j l d th p ivat
o e en e r o urna an e r e
j al f maki g t h t a f
o u rn or d h w th
n k l t l dg
e r n s er, an s o e s e e on e e rs

t h y l k af t
as e th t a f
oo er e r ns e r.

(b) Th b i e f th
us n ess t f th y a i or f ll w
e res o e e r s as o o s

S l ( lla es ha g a a t)
on c p h
r e a ( ll cco un s ur c ses a on

h g a ll t d ivabl
,

c ar e t) ccoun s t co ec e on acco un s r ece e,

p d t payabl paid
,

a i a on ccoun s t e, o n n o es

payabl withd aw l b y p p i t
e, xp r a ro r e or , e e n ses

p i d a b w d t p ay ab l
o rro e o n no es e,

a ha t ha dl d b y t h g al a h
,

S pp i g u ly os n on on e c s cco un n e e e ne r c s

h w (i j al f m) th t i b th t f b k
,

i er , S o n o u rn or e en r es o n o se s o oo s

th i v t y f m ha di at th d f th y a
.

() S p p
c u o se e n e n or o e rc n se e en o e e r

t b o e S h w t h m th d f fi di g p fi t o d l i g
e e o o n n ro s an c os n

th m t th p p i t a t ’
e o e ro r e or s cco un

(d) S h w t h t ial bala f a h l dg aft th b k

.

o e r n ce o d e c e er er e oo s are a

j t d f t h bala
us e or h t e n ce s ee

Th t i l b ala al l dg f a b i mb 3
.

8 e r a f th g nce o e enerD e er o us n ess o n ece er 1

f ll w
.

is as o o s:

R lE ea s t at e

M h di e rc an se

A R
cco un t s iv bl ece a e
A P y bl
c coun t s a a e

N P y bl
o t es a a e

Fix t ures , e t c.

Part ner A
Part n e r B
Co mmi ss io n

Op e rating x
E penses

It is now decided to Open a private j ournal an d p rivate le dge r and

t o conti nu e o n t h e old boo ks o nly ite m s n ee d e d fo r t h e gen e ral ofli ce
,

Th e in ven to ry of merchan dis e is foun d t o b e

.

t h e r eal es tate
mu st b e depreciate d an d t h e par tn e rs dr aw cas h each :

t h e b alan ce of p rofi t is t o b e cr edite d t o partn e rs e qually S ho w t h e

e n tries for clo sin g t h e Old boo ks so as t o s h ow o n th e m an d le ave o n
.

th e m only th e n ecessary information an d S h ow t h e en tries fo r t h e

v d
,

p ri at e j o u rnal in clu di n g t h e fi n in g o f p ro fi t at t h e e n d o f t h e ye ar

S how t h e fi nal trial b alance of each ledger after adj ustment and
.

S h ow t he general_ b alance sheet .

2 10 U
TH E F NDAM ENTALS OF A CCOUNTING
this singl e acco un t must b e ide n tical wi th t h e d ebits an d cr edi ts of
e ach o f t h e six acc o un ts f or which it is a subs titu t e or e lse co n ,

s o lidati ng six in to o n e wo uld hi de in fo rma ti on In subs t an c e .

,

the n o ur rul e for t h e sin gle acc o u n t b e c om e s this : whe neve r any
,

Of t h e S ix acco un ts pre vi ously m e n tion e d wo uld b e d e bit e d d ebi t ,

t h e sin gl e acc o un t In te re s t ; wh e n an y o f t he m would b e cre di te d

, ,

cre dit In te re st ; e xce pt of c o urse that it is ridi cul ous b o th to debi t

, ,

an d t o cr e dit In te r e s t an d h e n c e wh e n any e n tr y in v olve s two of

,

o ur six in t e r e st acc o un ts w e o mit all e n try u nl e ss o the r ac

c o un ts also are c on c ern e d an d m ore is in volve d o n on e side of th e
six than o n t h e o th e r in whi ch ca se t h e n e t exce ss o nly is en te re d
,

t o In t e re s t Th e n e t e ff e c t of all this is that a d ebit to In te re s t

.

may m e a n any o n e Of six thin gs an ass e t in th e f o rm of in t e r e s t

accru ed an asse t in th e f o rm of i n te re st p repaid th e c or re cti on of

, ,

an e arn i n g o v e rstat e d a paym e n t o f in t e re s t accru e d liability

, ,

t h e expirati on Of t h e te rm of a l o an fo r which in te re s t has b een

co ll e ct ed in adva n c e an d a cha rge (,
cos t or expe n se ) fo r t h e use of ,

m on e y ; an d a cre di t t o in te r e st may m e an an y o n e o f six thi n gs

paym en t to us of in tere st accru e d t h e e xpir ation of t h e tim e for ,

which w e hav e pre paid in te r e st th e e arn in g of in te re s t by us in

, ,

curr in g liability f or i n t ere s t t o b e paid by us re c e iving in te re s t in ,

advan ce of t h e p e ri od f or which w e have r en de re d t h e se rv ic e of

l o an an d a c orr e ction of in t e re st charge s (c o st o r e xpe ns e) Al
, , .

tho ugh he re is much c o n s olidati on Of u nlik e thin gs t h e acco un t ,

c om e s o u t e xactly right in t h e e nd if at t h e time of adjus tm en t all

items o f accrual an d pre paym en t (b o th in favo r of th e busin ess
an d agains t it) ar e t ak en in t o co n sid e ra ti o n by any o n e of th e

me th ods about t o b e de sc rib e d This is illustrat e d by t h e four

.

tran sactio n s that w e use d t o summarize t h e t re atm en t of in te re s t

un de r t h e six acc o un t m e th o d sho wn on page 1 2 9 Fo r con v en
-
.

ien ce t h e table Of tra n sacti o n s is rep e ated h e r e

, .

A mou nt
trans ac

Dec 1 b wi g
o rr o n N o te Payable
h
.

1 1 C as
1 6 C as h
1 9 No t e Payable
 TH E TE CH NIQUE OF CLO SING TH E B OOKS 21 1

Un d e r th e sin gl e acc o un t for in te re st t h e f o ll owin g e n tri e s wo uld

b e mad e o n t h e day o f t h e o rigin al tran sacti on as in di cat e d .

D ec 1 Cas h
In teres t [ p repaid]
.

To N o t e s Payab le

D ec 11 Notes Recei vabl e

h
.

TO C as
In teres t [ unearned]
Dec 16 No t e s Recei vabl e
h
.

To C as

D ec 1 9 Cas h
Payable
.

To Not es

Th e d ebit t o In t e re st on D e c emb e r 1 repre s en ts an ass e t : w e hav e

b ought an d paid for t h e right t o us e th e l o an for a c e r tain tim e .

Th e cr e dit t o In t e re st on D e c emb e r 1 1 r e p r e se n ts a liability w e .

h ave tak e n t h e in t e r e s t paym e n t f or a s e rvic e that w e have n ot

t r e n d e r e d an d w e are liabl e f o r e ith e r t h e s er vic e o r t h e r e turn

y e ,

Of a p o r ti on Of th e paym en t in c as e th e n o t e is paid b e f or e it is du e .

On D e c e mb e r 3 1 t h e S ituation has chan ge d with re spe ct t o all fo ur

no t e s On t h e fi rst of th em th e asse t has shrunk by 30 days
.
,
’

e xpira ti on ( or to so that if w e w e r e t o mak e an

en try it w o uld b e In ter e st [ cha rge s ] D r I n t e re st [ pr epaid] C r ; , .

, , .

’
o n t h e s e c o n d o u r liability has shru nk by 2 0 days s e rvic e r en
,

d er e d (or t o $ 5 0 so that if w e w e r e t o mak e an e n tr y i t

,

w ould b e In te re st [ u n earn ed] D r In te re st [ earn ed ] C r ; o n th e, .

, , .

third 1 5 days accrual Of ass e t in our favor has occu rre d

,
’
so ,

th at th e en try would b e In ter est [ accru ed] D r In tere st [ ea rn ed] ,

.
, ,

C r an d o n t h e f o u r th a n e w liability has b e e n in cu rr e d fo r in t e re st
.

t o b e paid 1 2 days ,
so that t h e e n try w ould b e In te res t
,

[ ch arg e s] D r I
,
n t e r e st.
[ accru
,
e d liability ] C r W e d o n o t mak e , .

th ese en trie s of cou rse for th ey would produce n o eff e ct on th e

, ,

singl e accoun t for in ter es t Und e r th e sin gl e accou n t m e th od .

-

w e adjust fo r t h e facts Of a ss e t an d liability an d th en ea rn in gs ,

an d cha rg e s auto ma tically app ear Th o ugh In t e re st is o n o ur.

b oo ks with a n e t d ebit bal an c e of d e bit le ss

cre dit) what it really t o day re pres e n ts in th e way o f re al thi n gs is
,
-

asse ts o f (as s e ts of a nd l e ss li abi li ti e s of 5 0

212 TH E F ND AM ENTAL SU OF A CCOUNTIN G

an d the r wor ds a c on ve rsion has tak en plac e s o tha t

in o , ,

what is o n th e b ooks at is a n e t ass e t of o nly $ 1 8 5 0 and .

,

Of t h e $ 2 2 5 0 must b e tra n sfe rr e d f rom this in te re st acc oun t

.

t o C o n ve r t ed A ss e ts o r o th e r cl e arin g acc oun t an d o nl y

, ,

will b e car ri e d do wn t o t h e balan c e S h e e t an d th e n ew ye ar .

Th is it will b e Obs e rv e d is just what w e Obtain e d un d e r t h e S ix

, ,

acc o un t m e th od discuss e d in Ch ap t e r VIII (page 1 30) That m e thod

giv e s full inf ormation as cur r en tly as we wish t o k e e p it This .

m e th od give s us vi r tually n o inf ormati on e xc e pt at such tim e s as

w e ar e willin g t o go th r o ugh o u r n o t e s an d d r afts an d s e e what
ass e ts o r liabiliti e s on acco un t of in te r e st th e y in volve an d e ven ,

th en t h e inf ormatio n fo r t h e balan c e S h e e t is Of m o st summary

char ac te r wh e r e as t h e o th e r m e th od giv e s d e tails
, .

Wh at i s t o b e Clo s e d With such variation s of m e thod

. n ot

t o b e r e gr e tt e d b e caus e fl e xibility is t h e s o ul as distin guish e d

,

fr om t h e b o dy Of b ookk e e pin g it is cl e ar that n o rul e of thumb

f o r cl o sin g t h e bo oks can b e fo ll ow e d S O far as an acc o un t is al
.

re ady writte n u p t o t h e tim e that is adjuste d t o th e t h e of th e

,

balan c e sh e e t ; n o thin g r e main s t o d o but carry d o wn t o t h e

/

n e w y e ar o r cl o s e t o app r o priat e cl e arin g acc o u n ts t h e balan c e

S h ow n o n t h e acc o un t Th e t i tl e Of an acc ou n t h ow ev e r will n o t

.
, ,

in dicat e at all wh e th e r it is adjust ed t o t h e tim e o f t h e balan c e

sh ee t (u nl e ss in de e d as occasi on ally t h e titl e its elf in clud e s a
, , ,

dat e as In v en tory o f M e rchan dis e J a nuar y 1

, , , Th e titl e,

may sugg est cu rre n t adjus tm en t as C ommission A ccru e d In , ,

su ran c e Pre paid ; but if th e last en tri e s are Old t h e acc o un t n e e ds ,

adjustmen t f o r e ve n acco un ts wi t h titl e s that sugge st cu rr e n t

fr e sh n e ss cann o t b e k ept abso lu te ly fr e sh with out c o n stan t an d
un n ec e ssary pe tty adjustm en t t o chan g e s of n o daily S ign ifican c e
th ough o f larg e sig nifican c e o ver l on ge r pe ri ods E v e ry acc o un t .

n e e ds e xami n ati o n t o d e te rmi n e wh e th e r it n e e ds adjustm en t .

Th e m o r e n e arly it has b e en k ep t fre sh curr e n tly t h e l e ss adjust ,

m e n t it will n e ed .

Th e Effe ct t o b e Pr o d u ce d Th e eff e ct t o b e p r o duc e d d ep e n ds

.

upo n t h e d e gre e t o which it is d e si r e d that t h e balan ce S h e e t S hall

S h o w d e tails This may again b e illustr ate d by r e ve r tin g t o ou r
.

six acc oun t an d o n e accou n t m e th o d Of han dli n g i n t e r e st Un de r

- -
.

t h e six acc ou n t m e th od w e hav e on our balan ce sh ee t t w o ass e ts

-

,
 14. U
TH E F ND AM ENTAL S OF A CCOUNTIN G

$ 1 00, an dmust S h ow o n t h e o p e rati n g statem ent whil e th e b al ,

a n c e of fu e l which t h e n ew ye ar in h e ri ts is $ 2 5 0 and this mus t ,

sh ow o n t h e balan c e sh ee t S o w e tran sfe r $ 1 00 fr om Fu e l to

.

G o o ds in Pr o c ess o r C o n ve rt ed A ss e ts or L o ss and G ain and

- -

, , ,

l e av e $ 2 5 0 o n Fue l an d b rin g down th is balan ce t o t h e new year

, .

S i nc e w e are n ow c once rn e d with t h e t e chn iqu e ra th e r tha n with ,

t h e substa n c e as w e w e re wh e n th e cas e s came up b e f or e w e may ,

we ll h e re Obs e rve t h e f o rms Le t us first Obs e rve th e ledge r ac

.

coun t for Fu e l b e for e th e bo oks w e re clo sed .

Th e c losin g t y follows
en r .

Goods ln P rocess
- -

(or Co nve rte d As sets )

(or Lo s s an d G ain )
To Fuel

Wh en this try has b een poste d supposing i t was mad e from

en ,
'
j o urn al pag e 4 7 an d Fue l h as b e e n bal an ce d we get t h e follow
, ,

FUE L
Dec 3 1
. d
Goo s in - -
Process
B alance

B alance

G OODS -
IN -
PROCE S S

e ”
n !
47 w

Now l e dge r S hows just what i t sh ould : Fu e l shows s t atistically

o ur

h ow much valu e of t h is s o r t w e hav e han dl ed durin g t h e pe riod ,

an d h ow much w e have still un c o n sum e d an d availabl e f or t h e

c oming p e riod ; an d Goods in Pr oce ss shows t h e de stin atio n of

- -

what has b een con v erte d Exactly t h e sam e handlin g is co rr e c t

'
.

f or th e Pr e paid I nsuran c e A difl eren t resul t follows wh en t h e

.

asse t conv er t ed has not b ee n put upon t h e bo oks but th e books

ar e n ow t o b e b r ough t up t o t h e tim e S upp os e workm e n ar e .

p aid by t h e pi e c e bu t wag e s ca
,
nn o t b e paid up t o t h e m omen t
b e cause of t h e d e lay incid ent t o calcul ating th e wages due S up .
 TH E TECH NIQUE OF CL O SIN G TH E B OOKS 21 5
pose t oo that w e have d e bite d W ag e s f or all sums paid in wage s
, ,

durin g th e p eri od but have n o t ye t d e bited G o ods in

,
-

Pr o c e ss In cl o sin g our bo oks th e n w e must d ebit G oo ds in

.
, ,
-

Pr oc e ss n o t onl y f o r all wag e s paid an d alre ady d ebited t o Wage s ,

but als o f or all wage s e arn e d tho ugh n o t paid say $ 5 00 Th e , .

e n try f or thi s is

We n ow have a cr e dit balan ce of $ 5 00 on Wage s Thi s con sti .

t u t e s a liability t h e e xc e ss o f asse ts s e cur e d o ve r t h e paym e n t

,

m ade for th o se asse ts an d h e n ce an own e r ship claim o f our e m

,
-

l
p yo e es f o r wag e s W e hav e thus
. m ad e o u r W ag e s r e al just as we
made Fue l re al by tran sfe rrin g to Goods in Pro c e ss C on ver ted
,
- -

A ss e ts or Lo ss and G ain that which was nomi n al and le aving as a

, ,

balan ce that which r ep re se n t e d asse ts an d liabiliti e s In th e case .

Of Fu e l o ur fin al bala n c e r e p re s e n t e d an as se t an d h e r e it r epr e ,

se n ts a liability This is n o t all h owev e r We are con cer n e d

.
, .

also with t h e eff e ct o n Wage s f or t h e n e xt pe ri od Th e accoun t .

f or t h e n e w pe riod b e gin s as w e have just s ee n with a cr edi t b al

, ,

an ce an d it is a re al acc o un t S uppose in t h e subse qu e n t period

, .

w e c o n tin u e t o use this sam e acc o u n t fo r wag e s o f t h e pe ri od as a ,

n omi n al acc o un t d e bitin g it f or pa me n ts mad e and cr editin g it

, y
for e ar n ings of empl o ye e s Th e wage s paid first in t h e n e w pe rio d
.

wil l b e th o se du e from t h e pr evi ous pe riod Wh e n th ey have b ee n .

e n t er e d as paid t h e acc o un t will h av e n o b al an c e of c o ur se ; an d

, ,

this is as it sh ould b e This de bit m ad e in t h e n e w pe ri od is n ot

.

f or w ork d on e in t h e n e w p e ri od an d h e n c e sh ould b e o ffs e t by

,

a cr edit givin g t h e acc o u n t immu n ity f o r that which is thrust

upo n it for th e acco mm odati on of th e old pe ri od Th e ne w pe ri od .

c onf e rs a b en efit o n t h e old an d sh ould b e give n cr ed it f or it

,
.

S in c e m or e ove r it is kn o wn b e f o r e han d that t h e n ew pe riod will

, ,

hav e t o pay for t h e old that cr edi t is actually give n in advan c e

,

whe n th e b ooks are cl o se d and aut omatically t h e re c ords ar e ad

,

juste d .

Making Ope r ating Account s Nominal The ca se s of Fue l and .

Wage s use d ab o ve may we ll b e use d also t o illustr ate cl o sin g by

makin g ope ratin g a cc ou n ts n omi n al H e re in ste ad o f le avin g t he .
,

re al e leme n ts in th e accoun t to b e clo se d (as a bala nce re ady for

216 U
TH E F ND AMENTAL S OF A CCO UNTING
t h e n ew p eri od) an d carryin g t h e nomin al portion t o Goods in -

Pr o c e ss C o n ve rte d A ss e ts o r L o ss an d G ai n w e shall ca rr y t h e
, , ,

r e al p or ti on in e ach case t o a n ew acc o un t l e avin g th e n omin al ,

po r tion t emp orarily in t h e Old acco un t an d th en tr an sfe r th e ,

bal an c e o f th e Old acc o un t (n ow n omi n al ) t o G oods in Proc e ss - -

C o n ve r t e d A ss e ts o r L O S S an d G ain
, Wi th ou t fur th e r e xplan a
.

ti on th e e n tri e s f oll o w .

Fuel Inventory
TO Fuel

To Fuel

To Wages

Th e l e dge r f o ll ows .

C as h 9 c. 31 Fuel In e nt ory v
d
G oo s ih ro ce ss
- -
P

FUEL INVE NTO RY

H
D ec 3 1
. 47 25 0

C as h cc 31 G oo d s -
in -
Process 47
bili y
.

De c 3 1
. Wage s Lia t

G oons -
IN -
PROCES S
D ec 3 1
. Fuel
Wages 47

Th e sse n tial diffe re nce b e twee n t h e two m e thods lie s in t he place

e

an d titl e of t h e r e al acc o un ts aft e r t h e b ooks are cl o s e d S hall th e .

inve n t ori e s an d liabiliti e s stan d a t th e time t h e balan c e she e t is

,

taken in accounts that never c ontain an ything els e and tha t carry
,
218 U
TH E F NDAM ENTAL S OF A CCOUNTIN G
balan c e o n Fu e l for all fue l aft e r D e c
,
.
3 1 ,
1 2
9 ,0 mus t b e 1 92 1 or

lat e r Fo ll owing is th e illustr atio n

. .

FUE L
35 0 Dec 3 1 . I nventor y
Goods i n Pr oces s
- -

35 °

B alance V 25 0

G OOD S ~IN~PROC ES S [ p age 28

ll
Fuel
!
D ec 3 1
. LI 2 1 00

S trictly spe aking t h e $3 5 0 d e bite d t o Fuel is split in to t w o par ts

, ,

o n e pa r t is carr i e d d o wn t o t h e n e w Fu e l an d t h e o th e r t o G o o ds ,

in Pr o c e ss an d th e c re dit items ar e t o S h ow just h o w t h e acc oun t

-

is bala n c ed Th e r e ason fo r n ot makin g a j o urn al en try is simply

.

that n o tr an sacti on is in v olve d an d that w e are m ere ly splittin g

,

t h e $ 3 5 0 al re ady re c or d e d b e tw e e n t w o p e ri ods
, , Our wage s .

ite m is in a se n se a re ver s e cas e H er e w e have t o carry t o Go ods

.

in Pr o ce ss o r C o nv e rt e d A ss e ts or L o ss an d G ain n o t o n ly all
-

, , ,

that has b e e n d eb it e d but m or e We are splittin g n o t t h e asse t

O
.

that w e go t f or o u r c o sts but t h e paym e n t that is made for th e m

,

paid this ye ar and $ 5 00 t o b e paid n e xt ye ar Our .

wh ol e must b e carri e d t o t h e summary o pe r ati n g acc ou n t

( G oo ds in P-
r o c e-
ss o r C o n v e r t
,
e d A ss e ts o r L o ss an d G ain ) of , ,

c o u r s e but thi s will no t bala nc e o ur acc o un t an d sh ould n o t

, , .

A par t of n e xt ye ar s paym en ts are charge able t o this year s busi

’ ’

n e ss .We might mak e a j o urn al e ntry d ebitin g Wage s 1 920 f or ,

what has yet t o b e paid for 1 92 0 an d c r e ditin g Wage s 1 92 1 , on

t h e gr o un d that t h e w or k d on e in 1 920 is an ass e t an d as 1 92 1 will

pay t h e bills it sh o uld b e cr e di te d Wh e n t h e pay r oll is me t in.

1 92 1 ,Wag e s will in t h e n atural c o urs e of e ve n ts b e d ebit e d ,

th o ugh part of that paym en t is f or w o rk d o ne in 1 920 : h e n c e

Wage s Of 1 92 1 sh o uld n ow b e c re dit e d f or taking o ver a bur d en Of
1 92 0 f o r payi n g bills that c o nf e r a b e n e fit o n t h e busin e ss Of
1 92 0 . We c an d o all this wi th out j o urn al e n tri e s h owe ve r an d , ,

w e ar e justifi e d in it sin c e t h e r e c or d is n o t f o r ne w t r an sact i o ns

bu t f or a m e r e split b e tw e e n p e ri ods We th e re f ore cl o s e o ur o ld .

Wage s by en t e rin g (pre f er ably in r ed ) $ 5 00 o n th e d e bit side for ,

t h e wage s accru e d n o t yet paid r e all y a bala nce th at we are t o

,
 TH E TE CH NIQUE OF O
CL SIN G TH E B OOKS 219

ca rry to th e n ew Wage s (f o r an d o n t h e cr e dit S id e

(als o p r e f e r ably i n re d ) a b ala n c e

,
that w e ar e t o ca r ry t o G oods
in —Pr o c e ss or C on v er te d A ss e ts or L oss an d G ain
, , Wh en this .

has b e e n d o n e an d th e am ou n ts d e sign at e d have b e e n so tr ans

fe rre d w e ge t th e l edge r (for th e se ite ms) as fo llows :
,

WAG E S [ p age 14

C as h De c 3 1
. Goods i n Proces s
- -
L2 8
De c 3 1
. Liability 5 00

B alan ce

m
G OO DS -
IN -
PROC ES S
Wages
[ r
Dec 3 1
. L1 4 e

Wh e n ite ms tran sf e rr e d in thi s way t h e in de x figur e is th e

are ,

le dge r page from whi ch and t o which tran sf e rr ed o f c o ur se in , ,

st ead of t h e j o urn al page from which po ste d Th e balan c e on .

Wage s b e in g n ow re al re pre se n ts sums d ue for wage s exactly as

, , ,

if th e n am e s o f t h e in dividuals t o whom m on e y was owe d for

wage s app eare d in l e dge r accoun ts wi th credi t balan c es o wn e r

ship clai ms
-
.

C ompari s on of M e tho d s It is n ow wo rth whil e t o e xamin e th e

.

l ed ger un de r e ach Of t h e thr e e m e th ods an d n o te diff e re n ce s For .

thi s purp o se th e accoun ts for fu e l are re pe ated b elow :

[ ME TH O D 1 ] FUE L
C as h 35 0 De c 3 1. d
Go o s in - -
Proce ss
B alan ce

B alance

[ METH OD 11 ]
C as h cc. 31 Fuel In v
e n t ory

FUE L INVENTO R Y
47 25 °

[ METH OD 11 1]
cc 31 I nventory

B alance
2 20 U
TH E F NDAM ENTALS OF A CCOUNTING
Fr om this case it is obvi ous that t h e diff e re n ce in appe aran ce
o n t h e le dge r I S n e gligib le Th e in de x re fe re n ce s diff e r Of c ourse ;
.
,

t h e te rm use d in th e e xplanati o n c o lum n f o r i n v e n t or y diff e rs

slightly ; t h e c o l o r o f ink (if o ne use s re d) diff e rs f rom f o rm
t o f o rm ; in o n e case t h e in ve n t o ry is in a se parate acc o u n t sub s ti
,

t u t e d f o r t h e r e gular acc o un t H e r e t h e diff e r e n c e s e n d

. In .

o th e r w o rds th e y ar e n e gligibl e e xc e pt f o r matt e r s o f taste

,
On e .

c ombin ati on of m e th ods sugge sts its e lf : carr yi n g th e in ve n to ry to

an in ve n t o ry acc o u n t by j o u rn al e n tr y an d th e n carr yi n g th e ,

balan c e Of t h e acc o un t (t h e n omi n al po r ti on ) t o G oods in Pr oc e ss - -

( o r its substitut e ) by d i r e ct l e dge r t r a n sf e r This w o uld .n o t giv e

a n ew re sult h owe v e r bu t only a diffe r en t c o mbin ation of it e ms

, ,

in t h e re sults S h ow n ab ove It wi ll b e n o te d that G oods in

.
-

Pr o c e ss is id en tical in t h e three cas e s e xc e pt f o r th e in d e x re f e r

e n c e j o u rn al page 4 7 in t w o cas e s an d l e dge r page 1 2 in o n e ; an d
,

h e n ce it is n ot r e p e ate d he re With r e sp e ct t o t h e illustr atio n

.

with W age s w e again ge t virtually th e sam e r e sult un d e r th e

,

three m e th o ds t h e sam e d ifl e r e n ce s as with Fu e l .

C omm e n t o n M e th o d s I an d II Th e o r e tically t h e ch oice b e

.

tw e e n t h e fi r st an d t h e s e c o n d m e th o d (makin g t h e acc o un t re al ,

an d makin g it n omi n al ) is n e gligibl e Pr actically e ach has it s

.
,

advan tage s an d its disadvan tag e s Wh e n t h e fir st is us ed t h e

.
,

th e
w
M
ne w ite ms
e
fo r t h e e ri od

se con d m
Un d e r t h e
an d can be

co u n t by its e lf an d 1 s th e r e f or e always availabl e f or statistical

,
m
us e d
n ac
s t at i s ti call lat e r

u se e ve n if it is imm e diat e ly t r an sf e rr e d t o t h e o p e r ati n g acc o un t

,

f o r t h e n e w p e ri o d (
f or acc o un ts t r an sfer r e d p r e s e r ve th e i r o rigi n al
figu r e s Of c o ur se but have th e m o ff se t by e n t ri e s o n t h e o the r
, ,

side ) Th e tr an sfe r t o th e o p e r ati n g acc o un t f or t h e n ew p e ri od

.

may b e po stpo n e d e ve n t o th e en d of th e n ew p e ri od ; an d this is

o ft e n d o n e wh e n t h e n e w it e ms o f t h e n e w p e ri o d ar e d e sir e d

sta tistically s e par ate from t h e ite ms in h e rit e d f rom t h e old pe

rio d On e disadvan tage fro m this s e par ati o n b e sid e s th e addi
.
,

t io n al bo th e r Of cl o si n g t h e i n v e n t o ry acc o un t O ut t o the n ew

o pe r ati n g acc o u n t as al r e ady m en ti o n e d is t h e fact that if t h e in

,

v en t ory is n ot at on c e close d o u t t o th e n e w o p e ratin g accoun t ( ia -

 22 U
TH E F NDAMENTAL S OF A CCOUNTING
t
t o D iscou n Giv en ; cl ea r ly if all th e old discou n t s Ofl ered ar e tak en
by c ustom ers th e d ebit balan ce on D isc ou n t Given will S h ow
t h e n ew disco u n ts given ; but if any of t h e old disco u n ts off e red
ar e for f eit e d t h e immu ni ty given in adva n c e wi ll b e exc e ssive

and will d e stro y by S O much t h e S ign ifica n c e o f th e d e bit bal

an c e on D isc ou n t Given Th en w e shall n ot kn ow ei th e r h ow

.

much di scoun t was actually tak en on sal es of th e n ew ye ar or

h ow much o f t h e discoun t o ff e red on sal e s Of th e Old y ear was
forfeited t o us as an extr a gain Thi s m e th od will n o t give us
.

satisfac to ry sta tis ti cal i n fo rmati on t h er e fo r e Th e sam e sor t

, .

Of thi n g is tru e Of c ou r s e for A ll owan c e for D isc oun t Avail abl e

, , .

Wh en t h e r e fo re t h e amo un t o f an allowan c e is a m ere e stimat e

, ,

o f s o m e thi n g b e l on gin g t o t h e Old y e ar but n o t asc e r t ain abl e ac

cura t e ly un t il t h e n ew t h e me th o d o f bri n gin g d o wn t h e old all o w

,

an c e immediate ly t o t h e acc oun t fo r t h e n ew ye ar an d m aki n g

th er e after no distin cti on b e twe e n Old items and n ew n o t on ly
mak e s impo ssibl e a t e st of th e accuracy o f t h e o ld allowan ce and
s o d e str o ys its valu e as a guid e f or t h e futu r e but p r e ve n ts a c
,

curate statistic s for th e n ew y ear This has alre ady b e en full y

.

illustrated in c onn e ction wi th A ll owan c e for B ad D ebts on ,

—
page s 1 2 4 1 2 6 .

C omm e nt on M e th o d —co mme n t o ft en 4 n ad e

r

ge ste d t h e adjustmen t e n t ri e s of th e kin d just discusse d are n o t

,

f or t ran saction s but fo r di visio n Of costs b e t w eeTIj ae rio ds Th e.

Th e an sw e r t o this is that an y d e sirable me m or an da supp or tin g

such le dge r ite ms may b e e n t ere d in th e j ou rn al as m em or an da
( n o t e xt en d e d in t o m o n e y c o lu mns ) with o ut
, t h e f o rmality of
posti n g Th e third o bj ec ti on W
.
W W L
S
c (as th e y ar e wh e n
j ourn al en tri es ar e made n aturally followi ng o n e an o th e r in im
,

m e diate succ e ssio n) but_ are scatte re d thro ugh all t h e acc o u n ts
,

c on c e rn e d e ach havin g its own adj ustm en t and that adj ustme n t
,
 TH E TE CH NIQUE OF CLOSING TH E B OO KS 2 23

go ing no whe re els e e xc e pt usually t o L oss an d G ain (or its s ub s t i

t u t es ) . Un d er t h e j o urn al m e thods of cl o sin g t h e d e tail e d items ,

o f L oss an d G ain w o uld b e in t h e j ou rn al an d usually o n ly t h e

to tal of e ach side w oul d b e in t h e le dge r ; but un d er t h e dir e ct

l e dge r me th od of cl os in g t h e de tails of L o ss an d G ai n w ould b e on
t h e l e dge r acc o un t b e caus e th ey w ould b e tr an sf e rr e d o n e by o n e
,

f rom difl eren t s ourc e s t o that acc oun t Th e task o f closing is .

Simpl er by th e d ir ect l e dge r m e th o d o f c o urs e f or l e ss writin g is r e

, ,

quire d an d c ompar ative ly f e w adjust m en ts n ee d explan ati on ; an d

,

wh en t h e items t o b e adjusted are n o t n um e ro us s o that th ey can b e ,

r e adily f o un d f o r r e f e r e n c e on t h e l edg e r its e lf thi s is an e xc e ll e n t ,

m e th od Wh e n on th e o th e r han d man y items n ee d e xplan ati on

.
, ,

an d man y ite ms n e e d adjustm en t an d th e re f o r e a summ ar y vi e w ,

would b e hard t o ge t from t h e l e dge r al on e b ecause th e y w ould

b e sca tt e re d o n e of th e j ou rn al m e th od s Of cl osi n g is p r e f e r abl e
, .

Fo rm s Pr e liminar y t o C lo s in g th e Le d ge r Ofte n m an y items .

n e e d adjustm e n t b ef o re th e cl o sin g is c ompl e t e an d e ve r y adjust ,

men t has t w o e ff e cts as ev e rythi n g in double en try has a d ou

b le asp e ct It is difli cult t o carr y man y items th rough with out
.

n e gl e ctin g or duplicatin g s om e thin g P articular ly is this so wh en .

a succ e ssi on Of adjustm en ts hin ge on o ne a n o th er as closin g

Fre ight t o Fu e l Fu el to Pow e r Powe r t o G oo ds in Pr o c ess e t c
, ,
- -

, .

If th e adjus tme n t o f Fre ight is wr on g all subs e qu e n t items in this ,

se ri es are w ro n g It is no t usually safe th er e fore t o go o n with

.
, ,

th e cl o sin g p ro ce ss un til t h e wh ol e p r o ce dure has b e e n plan n e d

ah ead an d te ste d by balan ce sh e e t an d in come sh e e t figur e s - -

work e d ou t fr om th e outlin e d pl an an d fo un d con siste n t .

Form of S ix C olumn S tat e m e n t -

Th e simpl es t o f f orms fo r
.

assista n c e in clo sin g th e b oo ks has six column s t w o f or th e t r ial ,

balan c e as it stan ds b e for e adjustm e n ts t w o for th e bala n c e ,

sh ee t figur es (afte r adju s tm en t o f c ou r se ) an d t w o for t h e o pe r

, ,

ating statem en t figur es (aft er adjustm en t) Th e ite ms of th e

-
.

tri al balan c e which r e pr e s en t asse ts or liabiliti es just as th e y

stan d i e pur e r e al acc oun ts are e xt e n de d in th e ass e t and li ab il
,
. .
, ,

ity c olumns with out chan ge Th e items which are pu re ly n o mi

.

nal an d are c ompl e t e t o t h e tim e Of t h e trial balan c e are e xt en de d

in to th e op e ratin g stat em e n t c olumn s without chan ge

-

Th e .

mixe d item s those which ar e b ehin d or ahead of th e t im e are

, ,
2 24 U
TH E F ND AM ENTALS OF A CCOUNTING

not e xten d e d in to o th e r co lum n s but t h e amo un ts to b e ext en de d

,

f ro m th em are d e riv e d f rom th e trial balan ce figure s by such ad -

justm e n t as may b e n e c e ssa ry B e lo w is a six c olumn state me n t

.
-

fo r a S impl e m er can til e busin e ss having o n ly a sin gle accou n t fo r

m erchan dise .

2 Q
Lia bi l
L os ses

I P ro p rie t o r

2 C as h
3 A c co un t s Re ce i v bl
a e

5 A
c co un t s Pay a bl e
6 No t e s aya le P b
7 Re n t
8 Ta e s x
10 In t e re s t 75

To tal Re so ur ces To tal G ains

To tal Liabilit ie s To t al Lo sse s
Ne t Gain N e t Gain

Th e figu re s for t h e fi rs t th r e e acc o un ts an d for th e fifth an d t h e ,

sixth are obvi ous for t h e acco un ts ar e re al n e e d n o adjustm en ts

, , , ,

an d acc o r din gly give e xact it e ms fo r th e r e s o u rc e an d t h e liability

c o lumn Th e s e v en th simil arly give s a figu r e for t h e lo ss c olumn

.

( v er t e d ass e ts d ebit)
c o n -

M e rch an di s e Th e d ebit balance o f M erchan dise S hows tha t

.

t h e t o tal cha r ge d t o M e r chan di s e is m o r e than has b een go t back ;

but w e d o n o t kn ow h ow much m er chan dis e still r emain s un so ld .

If th e am ou n t un s o ld is w o r th at c o st pric e $ 1 600 t h e han dlin g Of , ,

m e r chan dise has r e sulte d in n e i th e r gro ss p ro fit n o r l o ss ; fo r wha t

w e hav e l e ft just e quals what all o u r m e r chan dis e c o st us l e ss what
w e hav e go t back If on t h e o th e r han d what w e n ow have on
.
, ,

han d is wo r th at c o st price m ore than it is Obvi ous that w e

have m ad e som e gr o ss pro fit ; fo r if w e had n o m e rchan dise l eft ou r
lo ss wo uld b e o nly To put this in an o th e r way t h e un ,

r ec ov e red co s t of wha t we hav e o n han d is o r th e n e t

2 26 U
TH E F ND AM ENTAL S OF A CCOUNTING

b ili t y t o pay i n te r e st o f $ 2 5 , re ducin g t h e n e t e arni n g t o $ 7 5 , or it

t
may b e r e c o gni ti o n Of t h e fact hat i n te re st has b e en paid t o t h e
busine ss in advan c e an d that $ 2 5 of this h as n ot ye t b e e n e arn e d ,
for t h e busin e ss is r e spo n sibl e t o all o w fur the r u s e of its mon e y
with out fu rt h e r c ompe n sati on an d h e n c e a part of this $ 1 00

will b e an e arni n g of a later pe ri o d aft e r t h e o bligati on t o all ow th e

l o an ed mon e y t o b e use d is fulfill e d In ei t h e r cas e o nly $ 7 5 has .
,

b ee n e arne d in th e pe ri o d an d $ 2 5 is t h e am o un t f or which t h e
,

busine ss is liable t o pay t o re pay or t o all o w in t h e u se o f its

, ,

fu nds an d he n ce con stitute s some owne rship claim Th e ite ms -

.

are e xt e n d e d acc o rdi n gly .

Th e Pro of If w e hav e s t art ed wi th a co rre ct trial bal an ce and

.

have e n tere d p ro pe rly all adjustmen ts an d fin al disp o sitio n s o f

items o ur six c ol umn state me n t must b e in balan ce fo r we have
,
-

k ept th e do ubl e asp e ct of do ubl e en tr y thr o ugho ut In e ve ry .

cas e w e have e ith e r us e d a trial balan ce figure as i t w as o r hav e

-

made in it an adj ustmen t which go t in to both th e re so urc e liab il -

ity an d t h e l o ss gain s e t of c olumn s Wh e n for e xampl e we

-
.
, ,

raise d t h e me rch an dis e figure from to w e cha n ged

t h e l o ss gain figur e fro m
-
l o ss t o g ain ; whe n w e r e
d uced t h e tax l o ss f rom $ 5 00 t o $ 4 5 0 we also i n cre as e d t h e re ,

source by $ 5 0 ; wh en w e sh ow e d $ 600 liability for wage s w e in ,

cre as e d our l o ss by $ 600 ; when w e sh owed a liabili ty of $ 2 5 for

in te re st we r e duc e d ou r gain by $ 2 5
, S O always w e kep t ou r .

chan ge s in d o ubl e e n try In th e e nd th en t h e ne t asse ts mus t

.
, ,
’
e qu al t h e pro pri e to r s own e rship claim We s tart e d with th e
-
.

pro prie t o r s own e rship c laim b e fo re ad j us tm e n t was mad e an d

’
-

have carri e d all chan ge s of his o wn e rship claim in t h e fo rm of -

profit o r l oss in to t h e lo ss o r th e g ain c o lumn It must fo ll ow that .

t h e e xce ss o f t o tal ass e ts ov e r to tal liabi liti e s ( in cludin g th e pr o

i l dg r bala n c e o f o wn e rs h ip claim b e fo re adjus t m e n t
’
p r e t o r s e e -

, ,

as a liability) is th e in cr e as e Of n e t as s e ts fo r t h e p e riod S in ce .

t h e l o ss an d gain it e ms S h ow t h e o p e ra tin g figu r e s as sub di visi on s ,

of th e propri e to r s profi t claim it also fo llows that th e exc ess of

’
-

to tal gain s o ve r to tal lo sse s is th e in cre ase in pro prie to r s o wn e r ’

ship claim f or t h e p eri o d The se t wo thi ngs mo r eov e r are th e

-

.
, ,

t w o aspe cts of t h e sam e thin g t h e grow th Of ass e ts an d t h e

g row th of ow n e rship of as se ts 80 th ey mus t b e e qual Th e six

. .
 TH E TE CH NIQUE OF CLO SIN G TH E B OOKS 2 27

co lumn stat e m en t may we ll S ho w that t e st as ab ove Wh en t h e , .

figu r e s are pr o ve d in this way on e is r e ady t o go on an d cl os e th e

,

l edge r in c orp o ratin g t h e adjustm en ts an d t h e cl o sin g items upo n it

, ,

by on e of t h e m e tho ds d e scrib e d ab ove wi th assu r an c e that thin gs ,

will go sm o o thly an d pro duce right r esu lts if du e car e is tak en .

A noth e r Illus tr ati on Le t us tak e n e xt an o th e r illustrati on

.

m ore complicate d We will use again th e figur e s of th e proble m

.

use d f o r illustr ation of t h e in ven to ry m e th o d o f g e ttin g an op e rat

in g state me n t in C hapte r VII startin g b e f o r e an y adjustm en t

, ,

an d cl o sin g e n tri e s w e r e mad e Th e trial balan c e o f th e se figu re s

.

wo uld giv e in th e t rial b alan c e c olumn s th o se that foll ow b e l ow

-

It will b e rem emb er e d that th e fo ll owin g fact s w e re n ot S h own on

t h e books b e f ore th e ir adj ustm en t : in ve n t ori e s raw mate rial ,

fu el $ 2 5 0 ; ins uran ce prepaid $ 2 2 5 ; goo ds in proc e ss

, ,
- -

,
—
fin ish ed g o ods $ 600 : liability royalti e s $ 2 80 .
, ,

S ix Column S tatement
-

Proprietor
C ash
Raw Materiar
Wages
Ins ur an ce Prepai d
Fu el
Ren t
G ene ral E p e nsesx
Accoun ts Re ce i a le vb
91 700

d
Goo s in Process
hd d
- -

Finis e Goo s

To tal Li a bili it es

Ne t G ain 5 00

Oth e r Form s W h en adjustm en ts ar e n um e rous an d c onsis t

.
,

no t m e r e ly o f splittin g ite ms be tw e en p e ri o ds an d carryin g all

ope ratin g figur es t o L oss and Gai n (o r its substi tu tes) bu t of ,

2 28 TH E F ND AMENTALS U OF A CCOUNTIN G

cl o sin g a cc ou n ts in s eri e s on e accoun t t o an o th e r an d th en that t o

, ,

a s e con d an d this in turn t o a thir d con fusion is lik e ly t o arise from

, ,

clo sin g an acc ou n t b e fo re all adjustme n ts have b e e n mad e in it o r ,

l e avin g it op en t oo l on g A ddin g c o lumn s t o t h e S ix c olumn state

.
-

m en t t o S how an d t e st t h e n e c e ssary adjustm en ts is lik ely t o preven t

t h e n e e d f o r c o r r e cti on e n tri e s for th e n e rr o r s wi ll b e disc o v e red
,

b efore th e y have b e e n in c o rpo r ate d on t h e bo oks th ems elv e s .

Th e Eigh t C olumn S tat e me nt

-
Th e e igh t c olumn stat e men t .
-

adds t w o c o lum n s imm e diate ly aft e r t h e t rial balan c e c olum n s -

f o r adjustm e n ts that ar e t o b e mad e by j o urn al e n tri e s such as ,

d ep r e ciati on in te r e st accr u e d o n se curitie s o wn ed an d in te re st

, ,

all owe d on par tn e r s bal an c es S uch adjustm en t items h owe ve r

’
.
, ,

p re fe r ably sho uld n o t in clude tran sfer rin g l o ss e s an d gains or ,

c osts an d yi e lds t o G o o ds in Proc e ss o r C o nv e r te d A ss e ts or

,
- -

, ,

Lo ss an d G ain for th en t h e lo ss an d gain column s of t h e stat e

,

m e n t woul d hav e vir tu ally n o en t rie s (fo r t h e it ems wo uld have

b e en tr an sf e rre d t o t h e summary or cl e arin g acc o u n t by t h e ad , ,

j ustmen ts an d o nl y t h e fin al ne t figure wo uld b e left for t h e l oss

,

an d gain c olumn s ) ; an d w e S h o uld hav e t h e summary i n f or mati o n

Of an in c o m e sh e e t r ath e r tha n t h e d e tail e d i nf o rmatio n Of an

Op e r atin g stat e m e n t S o o nly adjustmen ts o r tr an sf er s sh or t Of
.

cl o sin g t o t h e fin al l o ss an d gai n acc oun t sh ould b e pu t thr ough

t h e adjustme n t c o lumn s This de vice Of adjustm en t c olumns
.
,

h ow e v e r if w o r th whil e at all b e cause adjustm en ts ar e n um er ous is

, ,

usually w or th carr yin g furth e r so as t o sh o w t h e n e w t rial balan ce ,

afte r adjustm e n t re ady t o give figures fo r th e balan c e sh e e t an d op

,
-

cr ati n g stat e m en t c olum n s

-
This give s us a t e n c o lumn statemen t
.
-

Th e Te n C olu mn S tat e me nt
-
Th e t e n c olumn stat em en t as .
-

w e hav e s e e n diffe r s f r o m t h e e igh t c olumn stat e m en t in havin g

,
-

t w o c olum n s f o r t h e ne w trial balan ce aft e r t h e adjus t men ts pro

v i d e d f or in t h e e ight c o lumn stat em e n t have b e e n mad e
-
A .

time whe n t h e t e n column statemen t is likely t o b e particularly

-

s e rvice able is wh e n vari o us de partmen ts are r un in d ep en den tly

but ar e t o shar e ce rtain e xpens e s comm on t o se ve r al or all of th e m ,

thr ough a cl e arin g acco un t an d i t is de sirabl e t o S h ow on such a

,

stat e men t t h e figu res for t h e balanc e Sh e e t an d op e ra tin g state

m en t (th e lat t e r comprising virtually d ep ar tm en t figur e s only)
l

A n illustra ti on fo ll ows .
2 32 U
TH E F ND AM ENTAL S OF A CCOUNTIN G
trial balan ce of a b usin es s 3 1 is as f ll w
o o s

vb
No t e s Re ce i a le
No t e s Pay a le b
Ac c o un t s P blaya e

Co mmi s sio n

W age s
Re al E s t a t e
d
M e rch an i se
Re n t
In t e re st
R oyalt ie s
Prop rie t o r

d
Th e r eal es tate h as epr e ciat e t o d t h e in en tory o f mer v
ch an dis e is $ 7 w h f hv
$ 800 o r t O r o y al t ie s a e accru e in a o r of d fv
b d
t h e u s in ess ; r e n t h as accru e again st it , in te r e s t h as accru e d
again s t it , $ 60
m m m
.

Fr o t h e inf o r ation gl v e n co ns t ru ct a six column s t at e e n t

-

d b
.

C o n s t ru ct t h e le ge r in co rp o rat in g to tals an d al an ces o f all a cco un t s

hw
S o n o n t h e S ix colu m n s ta t e
-

en t m b w
e lo an d clo se i t I n c los in g us e

d m hd m d d w b h
.
,

t h e ir e ct le ge r et o Fr o t h e le ge r ra up a alance S e e t
d
d m w h b m b w
. .

H o w o es i t co par e it t h e res ou rce an d lia ility colu n s elo ?

Resou rce

C as h
M d se

Accoun t s Re ce ivable
.

Acc oun t s Payable

Re al E s t at e

Ne t Profit

Th e f ll wi
o o ng accounts are on t he le dger
C A SH
III
C APITAL S TOCK
 TH E TE CH NIQUE OF CL OSIN G TH E B OOKS 2 33

MD S E . RE AL E S TA TE

III III
EXP EN S E RE NT
III
U i g th
s n f w
inf o rmati on t o o llo , cl ose th e le ger irec t ly , it ou t
e
‘

d d wh
th
e u se Of j o ur nal e n t ries

Th d b
.

e r e s an accru e
i in te r e st lia ili t y o f $ 1 00 ; o f t h e cr e di t t o rent,
d d
$ 2 00 is prep ai ; r eal e s tat e h as ep r e ci ate $ 5 00 ; t h e e r c an i s e in d m h d
v e n t o ry is o rt w h f x
O e p e n s es ar e un co n s u e ; w e a e md hv
d
accru e in our a or $ 2 5 0 fo r co iss ion fv mm
f w d b v b w h
.

6 Th e ollo in g le ger alan ce s ar e o n c o n s e cu t i e p ages ( egin nin g i t

f d d d
.

a
p g e 1 ) O t h e le ge r S al es R e t urn e S ales , M se
v h d h
.
, .

In en t o ry 1 / 1 / 2 0, Pu rc as es , R e t urn e P ur c ases ,
m h d
Th e in e n t o ry o f v e r c an i s e at clos in g , is
m h v
E n te r t h e clos in g in e n t o ry o f e r c an di s e o n t h e oo s , an d clo s e t h e b k
d b d d
le ger alances i r e c t ly o n t h e le ge r t o t h e clearin g acco un t C ar ry .

t h e fi n al p ro fi t t o Lo s s an d G ain
k x wh h
.

(a) If a co n t ro llin g accoun t is e p t for gen eral e pe n ses ic ar e ad

d f d d
j us t e at t h e e n d O t h e fi s cal p e rio , h o w o e s t h e co n t rollin g ac
h m b m d d
co un t a t t at t i e e co f
e a j u s te t o th e ac ts
b f x d
.

(b ) Th e alan ce O G e n e ral E p ens e s on t h e gen e ral le ge r is

b x d f w
Th e alan ces o n t h e acco un t s o f t h e e p e nse le ge r ar e as ollo s
W ages , x
Insu r an ce , $ 2 4 8 ; Ta es , $ 5 00 ; In t e r es t , $ 4 5 ; Re n t ,
h h h
$ 2 5 0 ; Telep o n e 81 Te le grap , $ 1 2 0 ; Lig t , $ 3 1 2 ; H e at, $ 4 8 8 ; D e
p r ec iat i o n $ 2 00 ; S u pp lies $ 1 4 0 ; P o s t a e
g , $ 2 75 A t t h e e n d o f t h e

d v f w
.
, ,

fi scal p e rio in e n t ories ar e as o ll o s : insu ran ce , $ 2 00 ; r e n t, $ 5 0 ;

supplies , $ 7 0 ; po s t age , $ 7 5b b k
Lia ili ties n o t y e t o n t h e oo s are
w x f x
.

ages , $ 2 2 0 ; ta es , $ 7 5 ; in te r es t , $ 2 0 Trans e r all e p e nse s o f t h e

d d d
.

pe rio b y j o urn al e n t ry t o Goo s in P roces s on t h e ge n e r al le ger , - -

an d s oh wb h ot g e b d
ne r al a n d h m
d su or inate le ge r for t es e it e s
f w wh h d w h h f
.

8 En ter t h e o ll o in g tran sa ctio ns ( i c ar e i e n t ical it t os e O

b m h b v b k w h
.

p ro le 1 , c ap t e r X1 ) in th e app ro p riat e la o r sa i n g oo s , it co n -

d
trolli ng accoun ts , an d po st t o t h e approp riat e le ge rs Carry all ex
m x
.

pe ns e it e s t o a S in gle e p e nse acco un t

v w h m h d
.

Th e p rop ri e to r in es ts o rt of e r c an i se an d in
ah
c s

R t i pai d $
.

en s ; p tag $ ; t ti 2 00 y $5 os e, 1 20 s a o n er 0

G d ld t B y ah
.
, ,

oo s are s o G y $8 ; W y o a t a 00 a o c s

m $ 5
, , ,

cus t o ers , 1 00

paid $
.
,

W g a es ar e 2 00

C h i iv d f m B y
.
,

as s re ce G y $8 ; W y
e ro a a 00 a

withd aw $ f h i p
, , ,

Th p p i te ro r e or l r s 1 00 or s e rso n a us e
Th i v t y O f m h di i w f d t b $ xp
.

e n en or erc th an se s no ou n o e 1 e e e nse

i v t yi f
n en o r d t b $ ; d xp li bility m t t $ 5
s o un o e 2 00 an an e en s e a a o un s o 0

d th di ti b y j a dj t t h b k f t h
.

R e co r es e lco n i on s ou rn a en t r es , us e oo s or e

b la h t d h w t h b l
a n ce S ee ,
h t
an S o e a an ce s ee .
2 34 TH E FUND AM ENTALS OF A CCOUNTING
S h w i mpl t t i
o s x co d th i a t t atm t f i t t
e e e n r es , un er e s x -
cco un re en o n eres

whi h a h d bit p diti p di g

,

of c e c th am e th ex res ses e s e co n on as e co rres on n

d bit t th i gl a
e o t f i t t d ib d i t h fi t half f
e s n e cco un or n e res escr e n e rs o

t h p a ag ap h
“
e r titl d A S i gl A
r en tf I t t e p g n e cco un or n e r es
”
on a e 210

Sh w i t i f whi h a h di t xp
.

o p di g
s x corr es on n th am
en r e s o c e c cr e e res ses e s e

co n diti th o n as p di g di t t t h i gl a
e corr es t on n cre o e s n e ccoun

Th f ll wi g t a a t i m pl t f m with
.

e o o n t b t d
r ns c o ns are o e e n e re i n co e e or

f ll d tail d i d x f a ied
,

u e s an tb — —
l ti g fi g
n e i mb
re eren ces , v
e resu -
n ur es are e c rr
-
‘

th w f a y a
tm mm m; th b k th t b l d f e e oo s are en o e c ose as or

e n o d a b ala h t fe r , ant h b gi i g f th w nce s ee or e e nn n o e ne

p i
er o d i t b h w
s o e s o n

Walt Di k d C ha l S tt f m a th hip
.

er c e ns an y a pa t r es co or ree e r r n ers
-

un d th er am f D i k e n S tt U d th t m f t h p a t
e o c e ns co n er e er s o e r n er

ha d f ll w
.

s hi p ag m t t h p fi t r ee d l
en t b e ro s an o sses are o e s re as o o s
Di k c e ns o n e thi d d S tt t w thi d -
r an co o -
r s.

Th b k t b e oo d s aj l a p ial l m
o e use ah b k ar e ou rn a s ec -
co u n c s oo
a al b k a p ha b k w df m
, ,
—
s es oo h gi t
ur c ( t se oo ue e r re s er no u se or er

wag ) a al l dg a pu ha l dg d a g l
, ,

c h di an f se o r or es s es e er , rc se e e r , an e ne r a

d f th w
,

l dg
e er t At th e

p d th i v t y en o m ha di i e n f t ti
en o r 0 er c n se s s a o n er
en o
y
o

q
, ,

$ 5 9 f w ra
1
ppLg
o p p li $ D p iat i suf t ip m t
es , 1 00. e re c on o s o re e u en is
k
d ta fi r fi i d t mi i g d di g p fi t
2 ‘

$ ;a
’

20 ccrue xes e er n n an r e co r n ro s,

s h ld b tak that ll
ou e a y addi ti al fa t
en a id d
n e ces s r on c s ar e co ns e re

Di k i v t a h S tt i v t $ 5
.

Ja a y nu r 1 i c ens n es s n c s co n es s : 000

a h; t q ip m t w th $ ; a t f G S t f
. .

i
n c s s o re e u en or 2 , 000 no e o on e or

b h w h O m f
.

a
p y a l Ma e i t i t rc t ; a t f 1 H l d
n e res no e o o es or ue

Ja a y 6 with t i t t a t f R W od f
.
,

du F b
'

nu r 1 ou n e res no e o o or e e

wi th i t t A ll t hav D c mb
.
, ,

ru ar y 1 n e r es i no e s e run s n ce e e er 1

i l a d f t i p id f
. .
,

Ja a y nu r A t 2. tw y a d
s o re s! e se
-
or o e rs an re n s a or

th m th $4 5
r ee on Th b i s, by a 0 t f m B wl e u s n ess u s on ccoun ro ro n ee

w th f m ha di ; f paym t i day 6 % di
.

B ro s . or o e rc n se or en n 10 s s

coun t ff d
is o Ofii f i t e re i b gh t a t f m E mpi
ce urn ur e s ou on ccoun ro re

D k C
.

es o

B y m ha di f m B igg 8 S
.

Ja nuar
y 3 u er c B y n se ro r s 1 on , u

y f m Wat ma k C f ah $
.

s t ati o n er ro Tw al gi l
er hi d
r o or c s 2 00. o s es r s are re

at $ 5 p w k
.
,

1 er ee
Ja a y 4 S tt withd aw $ al b ill S ll
.

nu r t p y hi p
co r s 1 00 o a s e rson s. e

m ha di W Whitma
.

e rc a n t H H y
se o n ccoun : S e nr n,

m h d b h
. . .
,

F o ss , F g im a t f hi oss a i p ay a l Ma 5 no e or s e rc n se , e rc

with t i t t t h bill i d
ou n e res that d y e s ue on a

Ja a y 8 B y m ha di f m B w l B th
.

nu r u e rc n se , ro ro n ee ro e rs

bj t t 6 % di t f paym t i t day
.

su ec o sco un P y l gi l or en n en s. a sa es r s

wag $ f p vi w k vi
es , 2 0, or re o us ee
’
s se r ces

Ja a y 9 P y B w l bill f Ja a y taki g adva tag f

.

’
nu r a ro n ee s o nu r 2, n n e o

t h di
.

e t scoun
t at t h b a k P y $
.

Ja a y nu r Di t F 10 s coun f oss s
’
no e e n a 1 00 or

f ight m ha di iv d
. .

re on er c B y t n ig $ 5 S ll R W d
se r ece e . u s ore s n, 0. e . oo
 CH AP T ER XV
AUXILIA RY RE C RD S O
Type s of Auxiliary Re c or d M uch inf o rmati on e xp re ssibl e in
.

figu re s an d in tabular fo rm is o f imp or tan c e in c onn e ction with

b o okk e e pin g r e c or ds e ve n th ough it d o e s n o t ge t r e c or d e d in
,

d ebits an d c re dits S ome of this c on sists o f d e tails applicable

.

dire ctly t o de bit an d c r e dit ite ms such as t h e classifi cati on of ,

acc ou n ts re c e ivabl e by date o f re quir e d paym e n t an d s om e has ,

n o such di r e ct app licati o n but co n stitut e s par all e l in f ormati on ,

such as numb e r o f sal e s mad e n umb e r o f ar ticle s man ufactu red

, ,

n umb e r o f t o n s o f fu e l bur n e d Le t us e xamin e fi r st th e b ook

.

’
k e e p e r s r e c ords .

Th e U se of Pe tty C as h In m o st busin e ss e s man y ki n ds o f ex

.

p e n di t u r e ar e f re qu e n t but sma ll in am o un t Th e b o o ks w o uld .

b e unn e c e ssaril y bu r d e n e d if e ach e xp e n ditu r e o f this s o r t w er e

give n full b ookk e epin g r e co gn ition S uch ite ms m o r e ov e r b e .
, ,

in g small re quir e l e ss f o rmality o f v ouchin g than n ormal it e ms

,
.

U sually th e r e f ore s o m e on e is d e sign at e d t o k e e p a p e tty supply

, ,

o f cash fo r such e xp e n ditu r e s an d t o k e e p t h e ,

p e tty cash ao
c ou n t On e co n v en i e n t m e th o d o f han dli n g this accou n t is to
.

d e bit Pe tty C ash th rough th e cash b ook wh e n ev e r fu n ds are

giv en t o t h e cashi e r o f p e tty cash an d th e n th ro ugh t h e j o u rn al
, ,

at co nv e n i e n t in t e rvals di stribute as d e bits t o th e va rio us ex

,

p en se acco u n ts t h e t o tal am ou n t sp e n t fo r e ach sin ce th e last

distributi on with a c r edi t t o Pe tty C ash This l e av e s as a bal
,
.

an c e on Pe tty C ash a t all tim e s t h e sum o f t h e p e tty cash in

han d an d th e am ou n t sp en t sin c e th e last di stributin g j ou rn al

e n tr y — r e ady f or t h e n e xt M an y o th er m e tho ds have b e en
.

“
us e d but that m o st wide ly r e c omm e n d e d is calle d t h e imp re ss e d
,
”
syste m . A n y o n e w h o u n d e r stan ds this can e asily un d e r stan d
t h e o th e r s wh e n h e has e xamin e d th e m an d h e n ce h e r e as w e , ,

ar e n o t att e mpti n g t o t r e at c ompl e te ly all s o r ts o f b o okk e e pi ng

m e th od w e w ill illustr at e this o n ly

, .

Th e Impr e s s e d S ys te m o f Pe tty Cash Th e th e o ry o f th is .

 AUXILIARY RE C RD SO 2 37

sys te m is tha t wh en th e cashi e r o f p e tty cash fin ds t h e cash n e ar

in g e xhaus ti on h e mak e s a d e man d up on t h e g e n e r al cashi e r f or
r e pl e ni shm e n t o f t h e e xact am o u n t alr e ady disbu r s e d H e im
“
.

”
p r e sse s mo re cash H e has k e pt a r e c o r d o f all ca sh sp en t (in
.

S impl e m e m o r an dum f o rm o r in simpl e cash b oo k f orm) an d at

,
-

t h e tim e o f impr e ssm e n t o f m o r e c ash n o tifi e s t h e g e n e r al cashi er

fo r what t h e m o n e y t o b e r e p lac e d has b e e n sp en t Th e g en e r al .

ca shi e r th e n dr aw s a ch e ck for t h e e xact am oun t an d d e bits t h e ,

repl en ishm en t t o t h e acc o u n ts fo r which t h e o rigin al m o n e y was

spen t H e th en has a can c e ll ed ch e ck as hi s v o uch e r for this ex
.

d i t u S t h e p e tty e xpe n ditu re s are e n te r e d o n t h e ge n e ral

p e n re o .

b o oks in summarize d f o rm (all i tems o f a kin d c ombi n e d in t h e

r e p o rt r e quisiti o n i n g m or e m o n e y) but ar e e n t e r e d lat e b e caus e
,

o f t h e fact that th e y are e n t e r e d at t h e tim e o f r e plac e m e n t r ath e r

th an o f o r igin al paym e n t In case o f n e e d o f re fe r en ce t o t h e

.

actual paym en t o f c ou r s e t h e pe tty cash acc ou n t is con sulte d

, , .

Th e p r o c e ss is r e p e at e d as o ft e n as r epl e nishm e n t b e c o m e s n e c
e ssar y E xc e pt f o r t h e in itial en t r y wh e n t h e p e tty cash fu n d is
.

fir st e stablish e d this is al l th e re is o f t h e syste m Th e in itial

,
.

e n t ry simply d e bits P e tty C ash an d c r e dits C ash N o o th e r .

e n tr i e s are e v e r n e c e ssar y fo r Pe tty C ash u nl e ss t h e S ize o f t h e

maximum fun d is in c re ase d or r educ ed Pe tty C ash r ep r e s en ts .

a subdivision of gen e r al cash t h e cash h e ld by a sp e cial cashi e r ;

an d o f c o u r s e t h e cashi e r o f p e tty cash must at all tim e s hav e o n

han d e ith e r cash or v o uch e rs fo r th e full amoun t o f t h e p e tty cash -

fu n d ; an d at t h e clo se of t h e fiscal pe rio d h e w ill tak e pain s t o ge t

re pl en ishm en t an d so hav e actual cash as call e d for by t h e bal
an c e sh e e t an d thus t h e ge n e r al b o oks will have r e co r d o f p e tty
,

cash e xp en ditu r e s fo r t h e pe rio d Th e wh ole p ro ce ss is ill ustr at e d

.

b e l ow o n t h e suppo sitio n that t h e g e n er al cas h b o ok alr e ady has

,

s ev er al c onv e ni en t sp e cial c olumn s .

GE NE RA L CA S H BOOK
D is burs ements

J an
.

1
1
5
5 8 Pe t
S un es
2 6 Freig h t
Cas h
‘

Cartage
To
P t
et
es ta b lis h ,
y Cas h re p en
£ 87 8
l ish ed , # 930
l
1
2 38 U
TH E F ND AM ENTAL S OF A C COUNTIN G

PE TTY CA S H BOOK
Receipt: Di b s u rs ement:
J an. 1 Receiv ed ch eck # 8 7 8 5 0 00 Exp r ess lans P
Car f ar es W J M .

P
. .

Pos 0 arc e l Pos

Tray — L M
p
Ex ress
Po s tage
Ink
S ta m
H . .

Wages H A . .

Trav el R F . .

Pos tage Car ds

S ummar y

1 5
p
B alance
Re lenishmen t ch eck, #9

Not e B ook, or B ill B ook . Wh en

s r e c e ivable an d n o te s no e t
payable are han dl e d it is imp or tan t t o have ad e quat e r e min d e r s
,

wh e n th e y ar e du e If on e is no t pre pare d t o pay n o te s payabl e

.

an d acc e pt e d d r afts as th e y matu r e on e s c re dit is s e ri ously im

’
,

paire d an d busin e ss the r e afte r will b e c on ducte d un d er a han di

cap If one do e s n o t pr e se n t n o te s r e c e ivabl e an d acc e pte d
.

drafts fo r paym en t wh e n d u e on e l o s e s t h e u se of t h e mon e y an d , , ,

what is o ften far m or e s e ri o us an y e n d or se r s on t h e n o t es an d ,

drafts ar e re l e as e d f ro m th e i r liability t o pay in cas e t h e mak e rs

or d raw e e s r e fus e o r ar e u n abl e t o pay A c ommon form of b ook .

for n o t e s an d d r afts c o n tain s full in f o rmati o n ab o ut e ach sh o w ,

in g r e c e ivabl e an d payabl e ite ms s e par ate ly ( co mm onl y at op

i t e n ds o f th e b o o k ) an d givin g e ach n o t e an d draft a n umb e r
p o s e , .

Th e n e n tri e s may ref e r t o the m by n umb e r as N R (No t e Re ,

. .

ceiv ab le ) # 2 4 9 N P # 1 2 1 , an d av o id d e tail e d e xplan ati on

. .
,
A .

lin e is giv en for e ach no te or draft an d c o lumns are p rovid e d for ,

t h e dat e o f e n try n umb e r of n o t e or d r aft mak e r of n o te o r

, ,

drawee (paye r) o f d r aft en d o rs er s of n o t e s o r d r awer an d e n

,

dorse r s o f drafts date o f n o te o r draft te rms of paym e n t an d

, , ,

date d u e A s a re ady r emin de r of t h e day fo r paym en t a column

.
,

is p rovide d fo r e ach m on th in t h e ye ar an d o ppo site e ach no te is ,

given in th e c olumn for t h e appropriate m on th t h e day on whi ch

it is due Wh en man y n o t e s are han dl e d s e ve ral c olumn s for
.
,

day du e ar e pro vid ed fo r e ach mo n th as 1 1 0 1 1 2 0 2 1 3 1 or — - -

, , , ,

- —
1 8 9 1 6 1 7 24
—
25 31 Thus a glan ce daily d own th e appro
-

.
, , ,
 AUXILIARY RE C RD S O 24 1

It will b e n o te d that p o stin g is mad e f ro m t h e fir st amoun t

c o lumn but n o t fr om late r c o lumn s Th e y ar e statistic al o nl y
,
. .

B ill # 6 2 1 th o ugh e n t e re d as d u e in M ar ch was paid in J an uar y ;

# 6 2 2 w a s sim ila r ly paid but tw e n ty days
,
lat e r ; # 6 2 3 is still d u e ,

in Februar y ; # 6 2 4 th o ugh d ue in J an uar y still re m ain s u n paid

, , .

B ills paid e a rly r e qui re n o du e n o t a t io n in t h e t r an sfe r mo n th ;

but bills o v e r du e sho uld hav e a blan ke t dat e in t h e late r mon th .

Th e f oo tin gs fo r J an uary ar e tak e n f o r th e y sh o uld Ch e ck with ,

t h e c o rr e sp o n din g it e ms o f t h e cash b o ok Th o se f or Feb ruary .

an d M ar ch ar e n o t y e t tak e n f o r o th er it e ms will b e add ed lat e r

,
.

Of c o ur s e t h e acc oun ts payabl e bo ok can b e S imilar ly tr e at e d

-
.

T ickle r s Wh e n man y n o te s ar e han dl e d o r man y acco un ts

.
,

are t o b e c o ll e ct e d o r paid it may pay t o hav e a b o ok d e v o t e d e x

,
“ ”
e lusiv e ly t o ticklin g t h e m e m ory of t h e pe r s on r e spo n sibl e f or
th e ir pr e se n tatio n o r paym e n t an d p ro vi din g a spac e for e ach
,

busin e ss day of t h e ye ar This spac e th e n is p re fe r ably a blo ck

.

r ath e r than a c o lumn with all it e ms d u e t hat day an d n o thin g e ls e

,

i n that blo ck an d c o n tai n s all t h e inf ormati on n e c e ssa ry t o i d e n

,

tity t h e item an d pr e par e f o r its ca r e A bank maki n g c oll e ctio n s .

fo r o th e r s must b e par ticular ly ca r e ful n o t t o n e gl e ct its re sp o n si

b ili t y
. A tickler might l ook as follows :
J uly 1 2
Nu m
ber P ayer E ndor s er Wher e P ayable A mou nt Collected Pd Cf Rema rks
v h
. .

7 83 A B r o wne C D a is C an al Natio nal E Fr e n c

b
. . .

81 5 G H e nry
. I Jaco s
. 6 3 Co ngre s s S t . K Lin co ln
.

C h e ck marks will S h ow that t h e ite ms hav e b e en c o ll e cte d an d ,

that th e y have b e en c r edit e d t o th o se f o r wh om th e y w e r e col

le ct e d wh e n such marks ar e app r o p riat e
,
.

Oth e r Auxili ar y Re co r d s R e c o r ds of t h e s or t n ow t o b e dis

.

cusse d are n o t stan dar d and u n iv e rsal for th e y diff e r with t h e ,

typ e of busin e ss an d am on g busin e ss e s of th e same typ e th e y diffe r

,

with t h e cir cumstan c e s Th e y c on stitute what are c ommo nly

.

call e d statistics an d diffe r fr om th e statistics alr e ady di scuss e d

,

in that e ith e r th e y ar e n o t e xp r e ssibl e in d ollar s an d c en ts o r th e y ,

ar e n o t e xp r e ss e d in t e rms of d e bit an d c r e dit e v en th o ugh e xp r e s ,

sibl e in d ollar s an d c e n ts Th e y ar e r e qui re d f or in te llige n t in

.

t e rp r e t at io n o f t h e d e bit an d c re dit figu r e s Pr obl e m 3 o f C hap .

t er VI page 6 7 is a go o d illustr ation

, ,
To kno w what yo u pay .
24 2 U
TH E F ND AM ENTAL S OF A C COUNTING

fo r a thin g is n o t v e ry e nlighteni ng un le ss you kno w j ust wha t

t h e thi n g is that you ge t . M an y busin e ss r e alitie s are t oo com
pl e x t o b e cl e ar ly e xp r e ss ed by a S imple or e ve n a co mpl e x t e rm
, ,
.

Th e y must b e an alyz e d an d e xp r e sse d in figu r e s o r e ven in com ,

pl e x e s of man y ki n ds of figu r e s at on c e This is tru e n o t o nl y o f

.

pur chase s but o f e xp e n s e s (like wage s i n suran c e an d r en t ) o f

, , , ,

p ro duction an d o f sal e s ; an d man y o f th e s e hin ge upo n chain s

,

of e a r li e r statistics which in turn hi n g e up on o th e r s

,
A few onl y .

o f th e se can b e giv e n h e r e but th e y sugg e st t h e ki n d o f t hi n g

,

that goo d acc oun ting re qui re s f o r t h e task o f t h e acc ou n tan t

is t o an alyz e an d in te rpr e t a busin e ss .

S t ati s ti c s of P u r ch as e s
. S uppo s e a sh o e d e al e r finds du r in g a
sh o e s e as on that h e is c o n tin u ally lo sin g an opp o rtuni ty t o mak e
a sal e b e caus e th o ugh h e can suit hi s custome r in styl e an d qual
ity an d pric e h e h as n o t sh oe s that fit What is his r e me dy for th e
.

futu re ? C le arly n e xt se ason t o chan ge t h e size s on hi s pu r ch as e

o rd e rs
. B u t h ow ? Unle ss h e kn ows what h e o rd er e d for this
s e ason an d what siz es h e faile d t o provid e h e is quite as lik ely
, ,

t o go wr o n g ag i n n e xt s e as on
a S upp
. o s e a man ufactu r e r of

S h o e s fi n ds that c e r tain l o ts o f l e a th e r wh e n cut f o r sh oe s hav e

much wast e b e caus e o f small scraps o r ar e o f po or quality or are

, ,

o f varyi n g quality What is hi s re me dy f or th e future ? U nl e ss

.

h e has r e c or ds which S how wh e re t h e particular l o ts cam e f ro m ,

o r what s or ts o f l e ath e r th e y actually c o n tai n e d h e cann o t pr o ,

cee d m o r e i n t e ll ige n tly n e xt ye ar H e cann o t t e ll what s or ts n ot

.

t o buy n o r of wh o m n ot t o buy no r can h e b e e v en su r e wh e th e r

, ,

t h e wast e was d u e to po o r S hap e s o f ski n s or t o care l e ss cuttin g

o n t h e par t o f his cutt e rs .S upp os e a man ufac tur in g ch emist
buys raw mate rial in man y mark e ts an d fin ds that so me days h e
,

g e ts t e n hun dre dw e ight of a c e rt ain pro duct f rom a t on o f raw

material an d on o th e r days h e ge ts o nl y ni n e hun dr e dwe ight and
, ,

o n so me e l e ve n What is his proc edu re t o ge t e leven hun dre d

.

w eight 01 t o l e arn W h e th e r n in e t e n o r e l even is mo st pr ofitabl e

, , , ,

f o r him ? S o man y diff e r e n t e l e m en ts e n t e r in to t h e c o st tha t

e v e n th o ugh h e fi n ds that it c o sts m o r e in pr o p or tio n t o produc e

e l e ve n hun dr edw e igh t than n in e it may still pay t o go o n d o in g

,

som e o f th e thin gs tha t e n te r in to t h e high e r cos t fo r th ey may ,

n o t b e t h e e l e m e n ts tha t caus e t h e high e r cos t In o th e r words

.
,
2 44 U
TH E F ND AM ENTAL S OF A CCOUNTIN G

n umb e r o f diff e r e n t plac e s visite d n umb e r o f C OD or de rs

,
. . .
,

av er age r ate o f tr av e l e t c , .

S t at is tic s of Pr o d u cti on In man ufactu ri n g busin e ss e s t h e

.

c o mm on stan dar d o f statistical comparison is p ro ducti on If .

pu r chase s an d e xp en s e s go up o r do wn th e y sho uld go in a re c og ,

ni zab le r e lati o n ( n o t n e c e ssar ily in t h e sam e p r o p or ti o n as w e ,

S hall s e e in t h e chapt e r o n fin din g c o sts ) an d h e n c e statistics o f ,

p r o duction ar e e ss en tial t o ad e quate c ompar ativ e stu di e s ; but th e

d ollar o f valu e p r o duc e d is n o t always ad e quat e as a stan dar d o f
c ompar ison fo r b o th m o r e pro ductiv e s e rvic e an d m o re profit may
,

s om e tim e s com e fro m p ro duct with a lo w s e llin g p ric e than from

p ro duct with a high p ric e A gr e ate r s e r vic e may b e r en d ere d t o
.

t h e c omm u n ity by p r o duci n g w o r th o f o n e kin d o f goo ds

at a c o st of than by p ro ducin g wo r th o f an
o th e r at a c o st o f an d it w o ul d pay t h e p r o p ri e to r t o

mak e t h e l o w e r c o st g oo ds for h e g e ts a lar ger margin o f p r o fit

, ,

an d e v e n m o r e wag e s an d m o r e e mpl o ym e n t f o r fact o r y faciliti e s

may b e p r ovid e d fo r t h e c o st o f r aw mat erial may b e so much

high e r In t h e s e c o n d cas e than In t h e fi r st as t o mak e all t h e diff er
0
e n c e in s e lli n g p ric e. C l e ar ly h e r e n e ith e r c o sts n o r pr o fits c an b e
put on a d ollar basis o f c omparis on C omparis o n s must b e mad e.

o n a u ni t o f p r o ductivity o th e r than d o llar s an d that u n it must ,

tak e in to acco u n t t h e di ff er e n c e in t h e n atu r e of t h e pr oducts .

This is n o plac e t o e stablish stan dar ds o f c omparis on fo r varyin g

pro ducts ; suffi ci en t h e re is it t o p oin t ou t that such stan dar ds c an
b e e stablish e d an d c omparison s c an b e mad e o n ly th r o ugh statis
tical an alysis o f t h e S ituati on Th e y w ould in v olv e t o giv e o n ly
.
,

a f ew illustr ati on s such thi n gs as h or s e p o we r c on sumpti on lab o r

,
-

h ou r s machi n e h ou r s an d idl e h ou r s o f machin er y

, ,
.

S tatistic s of S al e s .S al e s statistics hav e al r e ady b ee n discuss e d

s omewhat in c on n e ction with th o se o f pu r chas e s an d e xp en se s .

U sually th e y ar e us e d as a basis fo r makin g a c ompar ativ e study

o f t h e o th e r s . A few h oweve r ar e m ore o r l e ss in dep en den t
, , .

Th e m o st in t e r e stin g o f th e s e is st o ck turn H o w man y tim e s a

-
.

y e ar is t h e sto ck of go o ds s o ld ou t an d re pl e nish e d ? If a m an can

s ell hi s st o ck o f g oo ds and r e pl enish it six tim e s a y e ar h e n e e ds , ,

s o f ar as st o ck is c o n c e r n e d o n ly o n e sixth as much capital as th e

,
-

man wh o can s e ll his stock onl y o n c e a y e ar ; in o th e r wo rds th e ,

 AUXILIA R Y REC RD S O 24 5
man
’
wh o can ru n a st o re succe ssfully on a tw o mon ths supply of
goods has o n ly on e sixth as much m on e y ti ed up as th e man wh o
-

re qui re s a y e ar s supply S tatistics of sto ck turn are th e r efore

’
.
-

v e ry imp or tan t .

Oth e r S tati s ti cs M an y o th e r items n o t di re ctly conn e cted

.

with an y s o far m en ti on e d are wo r thy of car e ful study M uch .

att en tio n in la rg e e stablishm en ts should b e giv en t o what is com

“ ”
mo nl y call ed lab o r tur n ove r -
H ow man y e mpl oy e e s ar e em
.

pl oye d in a y e ar on th e ave r ag e t o k e e p on e p o sition fill e d ? If

, ,

t h e bus in e ss has po sition s an d di ffe r en t p er s on s wer e

,

e mplo y e d t o fill th o s e p o siti on s in an y y e ar th e lab o r tu rn o v e r in ,

-

that ye ar was t w o Thi s is typic al o f t h e u s e o f statistics n o t only

.

n o n fin an cial but n o t di re ctly c o nn e ct ed with an y fin an cial fi g

-

u re s M an y busin e sse s from such figur e s as th e s e m o re ove r

.
, , ,

hav e l e arn ed h ow much it c o sts th em on th e av er age t o change , ,

e mpl o ye e s .

Me th od s of Gath e rin g S tati sti cs M an y of th e figu re s men .

t ion e d in v olv e sp e cial d e vic e s o r spe cial r e c ords M an y on th e .

,

o th e r han d c an b e gath e r e d by t h e utilizati o n o f d e vic e s al r e ad y

,

p ro vid e d for b ookk e e pin g purpos e s m er e ly by th e ad di tion o f a

c olumn or t w o an d an addition al it em for e ach e n try Th e n um .

b e r o f sal e s mad e is e asily go t by n umb e r in g sal e s c on s e cutiv ely

an d usin g t h e n umb e r o n t h e sal e s b ook an auto matic n umb er

in g machin e can b e o p e r at e d by an i n exp en sive cl e r k o r o ffi c e

’
b oy . In dividual cl e rk s sal e s are e asily e n t er e d fr om sal e s S lips .

Th e r ail ro ads fi n d pass e n g e r mi l e s ( n um b e r o f passe n g e r s mul ti

-

plie d by t h e n umb e r o i mi l e s tr ave l e d by e ach) by multiplyin g

t h e n umb e r o f tick e ts s o ld b e twe e n e ach t w o statio n s ( r ep o r t e d

n e c e ssarily by tick e t ag e n ts fo r i n co m e purp o s es ) by t h e n umb e r

o f mil e s b e tw e e n t h e stati o n s n am e d To n mil e s ( n umb e r o f .

-

ton s multipli e d by n umb e r o f mil e s haul ed ) ar e go t similarly

f rom n e c e ssary f re ight re po r ts Th e n umb e r of t rain mil e s is
.

g o t f r o m n e c e ssa r y c o n ducto r s r e ports

’
.

Advantage s of Pu tting S tati st ics on th e Le dge r On e of t h e .

advan tag es of d oubl e e n t ry is t h e t e st by t h e trial balan ce whi ch , ,

as w e have s ee n d oe s n o t pr o ve that figur es are right but doe s

,

give ve ry go od pr e sumptive evid en c e that th ey are right If .

statistics have n o ch e ck agains t e rro r th e y are le ss valuable than ,

24 6 U
TH E F NDAMENTAL S OF A CCOUNTING
if w e ll suppo r t e d by pre sump tiv e evid en c e I t is possibl e t o run
.

thr ough t h e b o oks of o rigin al en try an d t h e l edge r any statistical

figur e s that ar e e xpr e ssibl e in d o llar s an d c en ts for it is p o ssibl e t o
,

e xp r e ss a d o ubl e asp e ct o f such figur e s an d thus t o pu t th em in to

doubl e en try an d subj e ct th e m t o th e trial balan ce t es t o f c o rr ect

-

n e ss .

S tati s ti cal Account s in M uni cipal Adm ini s tr at ion A good il .

lustr ati on o f this is in mu nicipal acc ou n ting in which it is n ece s ,

sary t o k e ep t rack of approp riati ons o f c ommitm e n ts again s t

,

app ropriation s an d of e xpe n diture s against app rop riations Y et

, .

som e of th e s e d o n o t c o n stitute transacti on s n ormally e xp resse d

in d e bit an d cr e dit e n tr i e s I n de e d wh en t h e municipal d epart
.
,

m e n t doe s n o t handle fun ds di r e ctly but han dl e s its fi n a n c e s

th rough t h e city tre asur er it has n o tr an saction s in t h e o rdinary
,

s en se but it d oe s n ee d sta tistics o f its o p e rati on s It may k ee p

, .

statistical acc ou n ts by o r di n ary b ookk e e pin g m e th o ds th ough o f ,

c ou r s e it wi ll u s e titl e s for its acc ou n ts diff e ri n g fr om o rdin ary

c omm er cial titl e s It wish e s a r e co r d of m on ey app ro priat ed by
.

t h e city gov egnm e n t f o r its u s e an d it wish e s a r e c o r d of any

,

am ou n ts o f exp e n ditu r e o r e xp e ndi tur e c on tract ed fo r that it has

, ,

alre ady appli e d again st e ach app ropriati on It sh o uld n o t b e .

d e p e n d en t on t h e tre asu ry m o reo ve r fo r its inf o rmation I t

, , .

n e e ds m or e in f o rmati o n than t h e t r e asu r y c an giv e it an d much ,

in fo rmation it wish e s in fo rm diff e ren t fr om that which t h e tre as

u r y us e s . It may wis ely th ere fo re k e e p its ow n se t of b oo ks usin g ,

title s di ff e r en t fr om th o s e o f t h e t r e asu ry n o t o n ly b e caus e co nfu

sio n sh ould b e avo id e d but b e cause th e p oin t o f Vi e w is diff e ren t .

H avi n g n o cash an d n o acc o u n ts r e c e ivabl e fo r in stan c e it will

, ,

h av e n o acco un ts fo r th o s e it e ms ; but it will wish t o k n o w wha t

cash t h e tr e asu ry has availabl e fo r it t o d r aw up on an d what t h e ,

tre asury is coll ecting for it on bills It will have o n e o r m ore ap~
.

O ri at io n S o r auth o rizati o n s t o sp e n d m o n e y T h app pri

p p
r , ,
e r o. a

ti on is what has b e en gran te d t o th e d epar tm e n t for its purpos es ,

an d h en c e t h e d e partm e n t will c r e di t A pp ropriati o n fo r t h e

am o un t It wi ll c orr e spo ndin gly d ebit Appro priation for am oun ts

.

charge abl e agai n st it thus r educin g th e bal an ce of app ropriation

,
.

Th e balan c e o f th e acc o un t is t h e availabl e approp riati on r emain

ing fo r fu r th e r activity I t is cl e ar tha t appropria ti on s canno t
.
24 8 TH E F ND AM ENTAL S U OF A CCOUNTING
that $ 2 5 is hf
a s ufii cie n t m fo r th e pe tty cas un d What en tries
su -

h ld th w b kk k hb k h
.

s ou e ne oo ee pe r ma e in t h e cas oo for r eplenis me n t

at th w fi g p v d
e ne h h k ur e , ro i ed t ere are in t h e cas b oo special columns
f F igh t
or d P t g
re an os a e

A f it ll f t m th b a i f f m t hly
.

2 ur n t it t
ure s o r e se s urn ur e o cus o ers o n e s so our on

Wh at ki d f d vi h l d y k pi g t a k
.

i t allm t
ns en s .
gg t f n o e ce s ou ou su es or ee n r c

of t h i tallm t ?
e ns en s

A i n mpa y f whi h a mma y tat m t i giv b l w wi h

ce co n or c su r s e en s en e o s es

tai tati ti l i f mati

, ,

c er n s s ca n or on .

S ales
h d
Ice o n an I/ 1 / 2 0
v
H ar e sting C os t s
C fi
ost oh dl d ce an e

I h d
ce on an 20

C fi
os t o ld ce so

D liv y Exp
e er enses

Maint enan ce o f Equipment

Wage s of Teams t e rs
Administ rat v i e E penses x
Total cos t
Pro fi t
w h h
Ice w as gold for $ 60 a undred e ig t A n a e rage o f 4 0 teams te rs v
w v w md
.

e re e mpIo y e d D eli eries er e a e 3 00 days in t he year Th e

v d v h d d d
. .

a erage eli e ry is o n e un re po un s
d h d dw h d
.

Fin ( a) un r e eig t sol

b
( ) tons sold
()
c d e li e ry cos t p evr un h d dw
r e e igh t

v (C 6C
d v
a erage eli e ry (tons ) pe r man pe r year
N
(e) d ay
(0 m
( t ) day
(g) n um e r o f b d v
eli e ries pe r man pe r day

h
( ) p erce ntage o f eli e ry cos t t o sales d v
(i) co s t o f ice so l t o sales d
(i) d v x
a min istrati e e p ense t o sales
() k p ro fi t t o sales
(1) p rofi t on a erage sale v
If t h e lo ss b y elting o f ice w as m how sh ould you s o this hw
loss on th e operating s tate en t? m
 APT ER XVI CH

S O ME P EC ULIA RITIE S OF C O RPO RATION A CCOUN T S

Th e E tial Nat r f Co p r ti
ss e n u e o M a y f atu s disti
r o a on s . n e re n

gui sh c orpo rate from private o wne rshi p but mo st o f th e m are ,

l egal or e c on omic an d have n o acco u n tin g signi fican c e L e gally a .

c o rpo r ati o n is usually pe rpe tual s e lf c on tin uin g wh e re as a S in gle

,
-

pro p ri e to r s busin e ss sto ps with his d e ath an d a partn e rs hi p is

’
,

disso lv ed with t h e d e ath or indi vidual bank ruptcy o f an y partn e r

o r at t h e e xpi r ati on o f a t erm o f y e a rs This has acc ou n tin g S ig
.

nifi c an ce b e caus e in t w o of th e s e cas e s a d e ath in v o lve s s e ttli n g

t h e affairs o f t h e busin e ss an d in t h e o th e r case it d oe s n o t In a .

c o rpo r ati on usually t h e stockh o lde r s have no pe r so n al liability

fo r an y d e bts o f t h e c o rpo rati on ( b e yon d th e ir inv e stm en t or ,

o rigin al re qui r e d paym e n t f o r capital st o ck ) but a singl e pro ,

p ri e t o r o r a part n e r is liabl e t o t h e full e xt e n t o f hi s p r o pe r ty f o r

all t h e d e bts o f his firm This has acc o un tin g sign ifican c e in case
.

o f bank ruptcy f o r in t w o o f th e se kin ds o f p ro p r i e t o r ship e n tri e s

,

hav e t o S ho w in di vidual liability an d paym e n t an d in t h e o the r ,

n o such e n tr i e s ar e r e qui red In private pro p ri e t or shi ps c o n tr o l

.
,

is di r e ct ; but in co rpo r ati on s it is by a re pr es e n tative b o dy a ,

b o ar d of di re ctor s e le cted by t h e st ockh old e r s This has ac

, .

c o u n tin g S ignifi c an ce in that auth orizati on fo r tr an sactio ns must

b e sho wn for t h e audit o r must kn o w that what was d on e was
auth o rize d an d his e vid e n c e is t h e min ute s o f th e st o ckh old e r s
,
’

an d di r e cto rs m e e ti n gs Fro m t h e ge n e r al acco un ti n g p o in t o f

’
.

vie w e xc ept for t h e te chnical matte r s just m en ti on e d which a

, ,

boo k o f this e l e m en tary so r t ca nn o t discuss th e e ss e n tial diffe r ,

e n c e b e tw e e n a c or porati o n an d a p rivat e o wn er ship is that t h e

p rivate o wn ership usually rec o gni z e s at all tim e s t h e shar e o f t h e

busin e ss o wn e d by e ach prop ri e to r in te rms o f d ollar s an d c en ts ,

wh e re as in a co rpo r ati o n t h e propri e to r ship is n o t c ove re d by

acco un ts with in dividuals but by an acco un t o r acc o u n ts r e pre
,

s en ti n g t h e wh ole gr oup o f sto ckholde rs an d the n n o o n e acc o un t

,

may e ve n attempt t o giv e t h e value in d o llars and c en ts of t h e t o

tal pro pri eto rship Th e chi e f pro prie torship acc ou nt is th er e fo re
.
 5 0 U
TH E F ND AM ENTAL S OF A C COUNTIN G

pe culiar in its n atu r e an d n e e ds car e ful o bs e rvation Un d er .

rec en t pr actic e t w o kin ds o f c e rtificat e s of o wn e r ship ar e issu e d ,

o n e with an d t h e o th e r with out p ar valu e We will discuss first .

t h e o ld e r with par valu e

,
.

Capital S t o ck Accou n t in P ra cti ce C apital S t o ck c ov er s t h e

.

fac e or par valu e usually $ 1 00 o f st o ck c e rtificate s It is a con

, ,
.

trolling acc oun t ke pt in th e main le dger and is matche d by a ,

s tockh old e rs l edg e r in which ar e acc ou n ts sh owin g h ow man y

’

shar e s of stock of what par valu e are h e ld by e ach in dividual sto ck

, ,

h old er T hi s l e dge r is us ed t o d e te rmin e t h e am oun t o f divid en ds

.

’
payable t o e ach sto ckh old e r an d vo tin g rights at st o ckh old e r s
,

m ee ti ngs ; and o f c our s e all tr an sf er s of st o ck ar e e n t e r e d in it .

Oft e n a c orporati on issu e s t w o or m o re kin ds o f stock c o mm on ,

an d pre f e rr e d o r c o mm o n an d t w o ki n ds o f p r e f e rre d fir st an d
, ,

se con d Pr e f e rr e d sto ck is a fi r st claim t o divid e nds up to a fix ed

.

p e rc e n tage of di vid en d an d c omm o nly has a pr e fe ren ce o v e r

,

common in di stributi on of asse ts in cas e o f disso luti on ; c omm on

sto ck is a Claim t o all divid e n ds an d ass e ts afte r th e claims of pre
f e rr e d stock are satisfie d S o if p rofits are ve ry high c ommon
.
,

sto ck is o ft e n w o r th mor e th an pr e f e r r e d but if profits ar e low or,

m oder ate p r e fe rr e d is lik e ly t o b e w o rth m o r e th an c omm on

, .

Th e acc o un ts disti n guish pre fe rr e d fr om c omm on as Pr e f e rre d ,

C apital S t o ck an d C o mm on C apital S t o ck but th ere is n o o th e r ,

acc ou n ting di s tin cti on that n e e ds t o b e made b e tw een th em an d ,

what is said la te r ab o ut C apital S tock appli e s to e ach as e ach is

c on c e rn ed Th e ore tically th e par valu e is supp o s ed t o re pr e sen t
.

actual v al ue of pr op e rty in v e ste d in t h e c o rporation but in r e ality ,

it may r ep r e s en t e ith e r m o re o r l e ss In s om e S tate s th e law fo r

.
,

bids t h e issu e of s tock for a lar ge r par valu e than th e am o un t

actually i n v e s te d in t h e c ompan y but n o S tat e forbids an issu e of
,

stock small e r than th e in v estm e n t S in c e m oreov e r val u es are

.
, ,

ofte n pr obl e matical an d o th e r thin gs than c ash c an b e accepted in

re turn for s t ock (lik e re al e state machin e ry an d pate n t righ ts ) ,
n , ,

ev en wh er e t h e i n t en t is t o issu e st o ck o nly t o match actual in

v e stm e n t it is har dl y p o ssibl e t o kn o w that t h e st o ck is r e pt e

s en te d by ac tu al valu e in pro pe r ty o r in righ ts M any S tates , .

m ore o v e r allow s t ock to b e issu e d in exc ess of t h e inv es tm ent,

,

an d t o b e issu e d wh en onl y a por tion of t h e amoun t s ub s crib ed for

25 2 U
TH E F NDAM ENTALS OF A C COUNTIN G
of stock late r exce pt th e re c o rd of tra n sfe r o n th e stockholde rs
,
’

le dge r is whe n t h e s t ock has o n ce b ee n issu e d an d late r b e c ome s

,

th e p ro pe r ty o f t h e c ompa n y as we shall ob se rve in du e c ou r se

,
.

Th e Pr op e r M e th od of H a n d ling Capit al S to ck It is obvi ous .

that any b o okke e pi n g me th od that le ave s in d oubt t h e status o f

capital sto ck is de ficie n t C apital sto ck auth o rize d should b e
.

distinguish e d from (1 ) that subsc rib e d for but n o t issu e d (2 ) that ,

subscrib e d for but late r f orf e it e d (3 ) that paid fo r but n o t issu ed

, ,

()4 that issu e d an d ( 5 ) that

,
o n c e issu e d but now back in th e
t re as ury It is p o ssibl e t o k e ep s e pa r ate acc oun ts fo r e ach o f
.

th e s e asp e cts of capital sto ck an d fo r m o st o f th em it is wor th

,

whi l e if t h e sto ck has so man y asp e cts A s was p oin t e d ou t in t h e .

pr e c e di ng chapt e r l e dg er acc ou n ts can b e k e pt f o r all s o r ts of

,

statistical figu r e s if th e y are e xp r e ssible in d ollar s an d c e n ts .

H e r e fo r e xampl e w e may hav e o n on e sid e C apital S to ck A u

, ,

t h or ize d C apital S t ock S ubsc r ib e d C apital S t o ck P aid For

, , ,

C apital S t o ck Issu e d e t c an d o n t h e o th e r sid e C apital S to ck

,
.
,

Un subscrib e d C apital S to ck S ubsc ripti o n s C apital S t ock Fo r

, ,

fe it e d C apit agS to ck D on at e d e t c
,
It is n o t wor th while in a
,
.

b ook o f this s o r t t o tak e up all t h e c on dition s that apply t o st ock ,

fo r t h e variatio n s o f law amo n g t h e S tat e s cre ate man y W e wi ll .

c onfin e ou r s e lve s t o n o rmal c on diti o n s o f s o un d c o rpo rate po licy ,

assumin g (I ) that in o rigin st ock is issu e d on ly wh en subsc rib ed

for that is that it is n o t s o ld by t h e issu in g c o rp o r ation lik e a
, ,

c omm o dity but th e f ormality o f subscr iption is us ed th ough it ,

may b e s old by t h e co rpo r ati on if r e acquire d an d (2 ) that it is ,

issu ed o n ly wh en paid fo r Th e titl e s us e d are ch o s en b e caus e

.

th e y s ee m b est t o sugge st t h e c on te n t o f t h e acc ou n ts but o the 1 ,

title s will s er ve if th ey d o n o t l e ad t o c onf usi on as s om e titl e s ,

o ft e n us e d o ccasi on ally d o .

Un s ub s crib e d C apital S t ock Au th orize d I t is by n o m e ans .

e ss en tial t o S h ow sto ck auth o riz e d fo r t h e figure is pu re ly statisti

,

cal If how ev er it is d esir e d t o sh ow t h e mar gi n by which th e

.
, ,

c ompan y may r e c e iv e n ew subsc ripti on s this may w e ll appear ,

o n th e l edg e r Th e acc ou n t fo r it Un subscrib ed C apital S t o ck

.
,

Autho rized is of course cr edited for th e legal auth o rization for

, ,

t h e auth o rizati on t o issu e st o ck is th e o rigi n al s o u r c e of t h e ass e t s

which are re ce ived by th e inve stm en t o f stockh old e rs Th e s e .

 S OME P E CULIARITIES OF O O
C RP RATI N O A CCOUNTS 25 3
cou n t t o b e d ebited re p r e s en ts th e blank stock c er tifi cates av aila
b le fo r issu e an d may b e call ed Un subsc r ib ed Unissu e d S t ock
,
.

A s s oo n h oweve r as an y of thi s stock is subscrib ed for th e com

, , ,

pan y h as r e duce d its margin o f stock for whi ch it may re c e ive

subsc ripti on an d Un subscrib ed C apital S tock Auth orize d sho uld
s
,

b e d ebite d t o S h o w thi s fact on t h e b ooks Th e bala n c e o f this .

acc oun t th e r e fore re p re se n ts n o t th e to tal auth orizati on but th e

, , ,

am oun t for whi ch th e c ompan y is still auth orize d t o rec eiv e sub
s cr ip t ions as w e shall s e e b e l o w
,
.

S ub s cripti on s Wh en an in t en din g in vesto r in a co rporati on

.

subscrib e s fo r its stock h e giv e s h is pledg e t o pay it som e thin g

, ,

an d it giv e s him a pl e dg e t o issu e t h e st o ck if h e fulfills hi s pl e dg e .

Fro m t h e po i n t o f vie w o f e ach a d oubl e aspe ct app e ar s Th e .

corpo ratio n g e ts an ass e t and assum e s a liability B o th should .

appe ar on its b ooks It sh ould d ebit S ubsc ription s t o C apital

.

S to ck an d c r e dit C apital S t o ck S ubsc rib ed

,
Th e f orm e r r epr e .

se n ts its p oss e ssion of a pro mis e of th e subscrib er t o pay akin t o ,

No t es Re c e ivabl e an d t h e latte r r e p r e s en ts its p r om is e t o ren d e r a

,

se rvic e akin t o No t e s Payabl e U sually subscripti on s ar e pay

,
.

abl e in in stallm en ts and th en various in stallm en t acco un ts like

, ,

S ubscripti on In sta llm en t f r ar e substitut ed for t h e singl e S u b

,

s cript io n s t o C apital S t o ck sugg e st e d ab ov e If w e have an ac .

c oun t for Unsubscrib ed C apital S tock A uth o rize d h ow ever as , ,

sugg e sted in th e p r e c edi n g par agraph still an o th e r e n try is n eces ,

sary at th e tim e th e subscripti on is r e c e iv ed Th e r e c e ipt of th es e .

subscripti on s has r educ ed th e auth orization t o tak e sub s crip

tions It has n o t ye t r educ ed t h e right t o issu e sto ck for n on e
.
,

has ye t b e e n issu e d but alr e ady w e hav e S h o wn t h e pl e dg e t o

,

issu e in C apital S to ck S ubscrib e d an d h e n c e it is wise t o r educ e

, ,

at on c e o ur balan c e of auth o rization l e st w e may re ce ive ov er ,

subsc ripti on s in adv er ten tly Ou r u n subscrib e d uni ssu ed sto ck

.

is also r e duce d o f c ou rse by r e c e iving th e s e subscr ipti on s an d

, , ,

h en c e w e S hould r educ e t h e acc oun t r ep re s en tin g it We m er ely .

r ev e rs e ou r origin al e n try o f autho rization by t h e am o un t n ow

subscrib e d fo r d ebiting Unsubscrib ed C apital S to ck A utho r
ized an d cr e diting Un subscrib ed Unissu e d C apital S t o ck Wh en .

paym e n t is m ad e C as h 18 d ebited an d S ubscripti ons t o C apital

, ,

S tock o r In s tallm en t f r e t c is cr edi ted

, Th e paym en t may in
, .
, .
25 4 . U
TH E F ND AM ENTAL S OF A C COUNTIN G

volv e an o th e r en try m o re ov e r If th e subscripti on is paid in full

,
.
,

t h e st ock sh o uld b e issu e d an d en try mus t b e mad e fo r fulfillm cn t

,

o f t h e o bliga ti on by th e c ompan y A s w e debit Note s Payable .

an d cr edit C ash wh en w e pay a n o te s o h e re w e d e bit C apital ,

S t o ck S ubscrib ed ( t h e acco un t re p r e s e n tin g o ur liability t o issu e

stock) an d cr edi t C apital S to ck (th e acco un t r ep re s en tin g th e
actual issu e) Wh en all subscription s are paid an d th e stock is
.

issu e d th e e n tri e s mad e will can c el th e old d ebit t o S ub s cr ip

,

tion s an d cr e dit t o S to ck S ubscrib ed an d th e n e t e ffe ct is just ,

what w e wan t in t h e e nd C ash d e bited an d C apital S to ck cr ed ,

it e d with all th e in t erm edi ate st e ps sh o wn

,
Th e s e in te rm e diat e .

st eps as a matte r of fact sh ould usually S how for it is imp or tan t

, , ,

t o k ee p t r ack o f in stallm en ts Wh e r e t h e law provid e s that st o ck .

shall n o t b e issu e d u n til fully paid for coll e cti on s may b e made in ,

s eve r al in stallm en ts b e fo re any sto ck is issu e d ; an d h en c e th e en try

for issu e wil l n o t par all el t h e in dividual en trie s for paymen ts bu t ,

will b e mad e onl y afte r a s e ri es of paymen t en tri e s .

Illu s tr ative Entrie s We may now w e ll r evi ew ou r progr e ss up

.

to this po in tQ by obs e rvin g con crete en tri es Let us suppo se (a) . .

t h e au th o rized capital st o ck is 5 00 000 ; (b ) is sub

scrib e d for at p ar payable In two in stallm en ts o f
, each ;

an d ( c) on e in stallm en t is paid .

(a) Uns ub scribe d Unissue d Capital S tock

To Uns ub s crib e d Capital S to ck Au thorized

()
b S u sc rip b
tion s t o C apk I tallm t #
ital S toc ns en 1

b k I tallm t #
S u s criptio n s t o Capital S toc ns en 2

k b bd
To Capital S to c S u scri e

U b ib d C pital S t k A th i d
ns u scr e a oc u o r ze

T U b ib d U i d Capit l S t k
o ns u s cr e n ss ue a oc

(C) C aS h
To S u b scrip tions to Capital S tock Installment #1

Our bala th l k f ll w
t rial n ce en oo s as o o s

U b ib d U i d Capital S t k
n su s cr e n ssu e oc

U b ib d Capital S t k A th i d
n su s cr e oc u o r ze

S b ip ti
u t C apital S t k I tallm
scr ons o oc ns en t #2
C apital S t k S b ib d oc u scr e

Ca h s 2 00 000
25 6 TH E F ND AM ENTAL SU OF A CCOUNTIN G

a littl e c on sid er ation shows that it is n o t s o S o f ar as e arn ings .

an d divid e n ds ar e c o n c e r n e d th e r e sult w o uld b e t h e sam e if th e

,

par value w e re 5 0 o r $ 1 0 an d still t h e in v e stor i n v e sted in t h e

busi n e ss $ 1 2 0 Th e thi ng that e ar n s p r o fits is n o t p ar valu e (a
.

m er e n am e) but in v e ste d c apital Th e $ 1 2 0 in ve st e d will e arn

,
.

as much wh e th e r t h e sha r e o f st o ck giv e n f or it h as a par valu e

o f $ 1 00 or $ 5 0 o r $ 1 0
, ,
Th e am o u n t o f pro fit will b e t h e sam e
. .

S upp o se it t o b e f or on e share o f stock $ 1 2

,
If th e p ar value ,
.

o f t h e sto ck giv en is $ 1 00 t h e rat e o f p r o fit will b e

,
If t h e
par valu e o f th e s to ck given is $ 5 0 it will b e if $ 1 0 it
, ,

will b e In o th e r w o rds th e sam e pro fit will give a diff e r

,

e n t pe r c e n tag e on di ff e r e n t p ar valu e s but wh e n th o se pe r c e n t ,

age s ar e applie d t o t h e par value s for pur p o se s of di vid en d t h e ,

high er or l ow e r rate obtain ed in t h e fir st in sta n c e is e n ti re ly offse t

by t h e application t o a l ow e r or high e r p ar value f or purpo se s of
distributi on Th e par value is th e re f ore o f n o c on s e qu en c e in this
.

c onn e ction (Wh en men say that th e y had rath e r hav e an in

.

v e stm en t at a disco u n t tha n at a pr emium it is fo r o the r r e aso ns ,

t han t h e r at e of r e turn usually b e caus e of c e r t ain psych ol o gic al

o
factors in a sp eculative mark e t ) Issu e of sto ck at ab ove par .
,

the r e for e cr e ate s in acco u n tin g onl y t h e awkwar d n e ss of havin g a

,

cr edi t t o C apital S tock of par and a d e bit t o an asse t acco un t of

,

m ore than t h e e quival en t figure An o th e r e leme n t n ee ds r ec ord

. .

In thi s c ase t h e pro pri e tor ship claim is n ot wh olly cove re d by

,

C apital S t o ck f or more than par w as paid

, We mus t co nse .

quen tly cr e dit ano th e r pro prie tor ship acc o un t for t h e am o un t of
inve s tm en t in exc e ss of t h e par valu e of sto ck and t h e titl e sh o uld ,

m ak e cl ear what t h e acco u n t re pr e se n ts Th e usual ti tl e for ex .

c ess of asse ts paid in ov er th o se which are re pr es en t ed by capital

s to ck is surplus
“ ”
A s surpluses may b e e arned don ated or in
.
, ,

v est ed it is d e sir able t o di stin gu ish tha t which is in v es ted an d i t

, ,

may b e call e d Pr emium S urplus Our fi rs t e n try for r eceiv

.

ing subsc ripti on s at a premium th e n suppo sing in ste ad of ( ,

b)
,

on pag e 2 5 4 w e hav e subsc ripti o n s f or is as follows

Su b tion s t o Capital S tock Ins tallment f r
scrip

Su bs crip tio ns t o C apital S tock Ins tallmen t i s

To Capital S tock S ub scrib ed

 SOME P ECULIARITIES OF O O
C RP RATI N O A CCOUNTS 25 7
Th e sec on d en try f or (b ) pag e 2 5 4 w o uld b e un chan ge d f or t h e
, , ,

am o un t of stock whi ch has b ee n pl edg e d for issu e is still onl y

c) an d (d) w o uld b e th e sam e exc ept that th e
E n tri e s (
am o un ts o f (c) an d o f th e first part of (d) w o uld b e e ach .

Th e last part o f ( d) is still f or In o th e r w o r ds Pr e ,

mium S urplus is cr edited wh en t h e subscripti o n s are r e c e ived fo r ,

that is when th e surplus ass e t was r ec eived an d n e eds n o fur t he r

,

att en ti on un l e ss th e subsc ription s ar e f or fe ite d in whi ch cas e

t h e c o rr e cti on e n tr y w oul d c orr e ct Pr emium S ur plus as w e ll as ,

S ubscripti ons an d S t ock S ubscr ib e d

,
If on e doe s n ot min d a
.

littl e extra bookk e epin g lab or and IS h e sitan t ab o ut lab e lin g as

,

s urplus m e r e pr omi se s t o pay p r emium on e may c r e di t Pr e mium

,

S urplus S ubscrib e d in ste ad of Pr emi um S urplus In t h e fi r st in

stan c e an d th en wh en t h e l ast in stallm e n t o f subscripti on is paid
,

d ebit Pre mium S ur plus S ub s crib ed (t o tran sf e r it) an d cr e dit

Pre mium S urplus .

S t o ck I s su e d at b e l ow Par In so m e r espe cts t h e issu e of

.
,

stock at b e low par is t h e re ve r se of issu e at abo ve p ar L e gally it .

is n o t th e r e v er se for man y S tat e s f orbid issu e at a disc ou n t

, .

Takin g st o ck at b e low p ar at its o rigin al issu e is takin g it b e fo r e it

is fully paid f or an d h e n c e is assuming a liab ili ty t o mak e up th e
,

difi e re n ce if t h e co mpan y lat e r b e c o m es bankr upt for t h e law ,

rec ogniz es re spo n sibili ty of stockh old er s up t o t h e p ar value of

the ir st o ck ; but th e deficien cy in in ve stm en t may b e made up o ut
of later e arn ings if th e c ompan y de cide s t o apply suffi cie n t e arn
ings t o that pur pose r ath e r than t o divid e n ds Wh e n issu e of .

stock at b e low par is allowable t h e en tri e s f or th e di sc o un t are

,

similar t o tho se f or premi um e xc e pt that th e y ar e r eve r se d Th e .

su b scripti on s b ein g for l es s than par t h e ass e ts are l e ss in am o un t

,

than t h e obligati on t o iss u e stock assume d an d h en ce e xtr a ,

d ebits ar e n ec e ssary r e ally d educ tions fr o m own e r ship claims .

B ri efly th e e n try for subsc ripti on is as f o ll ows

,

S ub scrip tions t o C apital S tock

D isco un t o n C apital S t oc k
To Capital S tock S ub scrib ed

On payment th e t
en ry is
Cas h
,

3 601 000
To S ub scrip tions t o Cap ital S tock 3 601 000
25 8 U TH E F NDAMENTA S L OF A CCOUNTING
F th imm diat ly f ll wi g i
or e e e o o n ssue , t
en ry is
Capital S t k S b ib d oc u s cr e

T Capital S t k
o oc

Th th t ial b ala
en e d
r n ce r ea s

Ca h s

Di t Capital S t k
s co un on oc
Capital S t k oc

In a se n se this D isc o un t on C api t al S tock re pre se n ts an ass e t for

, ,

it re pr e se n ts a Claim that in case of bank ruptcy may b e mad e by

c re ditor s agai n st in dividual s t ockhold e r s ; but c o ll e cti o n is so
bo un d with r e d tap e an d with e x empti on s that o ften it is of
slight p r ac tical value That is why som e S tate s forbid th e issu e
.

o f sto ck u n til fully paid fo r M o s t compani e s try e ar ly t o fill

.

t h e v o id l e ft by di sco u n ts and withh o ld s o m e of th e ir e ar n in gs

,

fr om distribu ti on as dividen d and apply th em by m e th ods t o ,

b e d e sc rib e d late r .

D on a ti o n s of S to ck S t o ck is s om e tim e s in eff e c t issu e d at a

.

disc ou n t by a d e vic e which mak e s it app e ar n ot t o b e s o issu ed .

S om e tim e s thi s d e vic e is empl oyed t o e vad e t h e l e tt e r of laws for

bid di n g issu e at a disc o un t an d s om e tim e s i t is an evasio n of ,

n ei t h er l e tt er n or spi rit of an y law In b o th cas e s t h e p ro c e ss .

usually b egins with issu e in t h e or din ar y way at par an d is fo l ,

lowe d by a do n ation t o t h e c o rp or ation by its st o ckh old er s of

so m e of th e st ock which has b e e n issu e d t o th em This in effe ct .
,

o f c o u r se giv e s t h e st ockh o ld e r l e ss st ock tha n t h e valu e o f t h e

,

ass e ts tur n e d in an d h e n c e h e is in r e ality takin g his st o ck at a

,

p r emium If h e take s t en shar e s for

. an d th en d o n at e s

t w o S har e s h e has l e ft e igh t shar es f or

,
o r t h e e quiva le n t o f

e ight shar e s at 1 2 5 Th e po in t is that t h e S hares ar e n ow all fully

.

paid for Th e par value of th em has n ow b ee n f ully in ve sted

. .

Th e re is n ow n o liability of an y st o ckhold e r t o pay mo re an d th e ,

c ompan y has in its vaults fully paid f or two S hare s o ut of t e n , , .

It may d o as it pl e ase s with th e se ; it may se ll th em fo r what it can

g e t ,
o r e v e n giv e th e m away in a pr o pe r caus e ; f o r th e y hav e o n c e

b e en fully paid f or and th e re fo r e e ve n t h e se v e r e st law is com

,

plie d with Of c o u r se t oo th e re is n o m o r al or o th e r r e as on why

.
, ,

t h e c ompan y sho uld n o t se ll th e m fo r what i t can ge t for the y ,

2 60 TH E F ND AM ENTAL S U OF A CCOUNTING

A c co unting f or D o natio n s No distin ction of tre atm en t can b e

.

made b e tw e e n t h e t w o case s of do n atio n give n ab ove for it is pre ,

sume d that wh oeve r k e e ps t h e acco u n ts is u n awar e of th e ov er

valuation N O accoun tan t w ould c o n scio usly e n ter th e pro pe rty
.

at an ove r valu e d figu re for it is t h e task o f an acco u n tan t t o t e ll

,

t h e truth . H e cann o t usually unl e ss h e is e n gage d f or that pur

,

p o se an d is c omp e te n t t o d o it in v es ti gate t h e value of all pro p

,

er t y giv e n in r e tu rn f or st o ck : h e is e xp e ct e d t o p r o vide th e e u

tr ie s f or th e actu al issu e o f st o ck as made Un l e ss e ngage d as .

auditor for such a pur po se h e is n o t r e spo n sible f or t h e pro pr ie ty

,

o f stock issu e s an d h e wi ll assum e th e m p ro p er un l e ss so m e thin g

,

o n t h e fac e o f thin gs discr e dits th e m A ssumin g pro p er v alua

.

ti on s as give n him by th e action of t h e di r e ctor s h e will tr e at ,

d on ation s as bon a fid e L et us n ow e xamin e t h e e n tri e s Th e

. .

don ate d st o ck had its o rigin in th e r e turn o f sto ck t o t h e co rpor a

tion as a gift s o that t h e st o ckh o lder s have c o n tribut ed t o th e
,

busine ss n o t o nl y all th ey o rigin ally in v e sted but as much m or e as

this do n at ed sto ck will bring Th e t o t al am o un t of p ar valu e of
.

sto ck issue d is n o t inc re as ed by this gift but if t h e sto ck b r in gs ,

an ythin g b al e th e asse ts will b e in cre as e d an d th e o wn e r ship ,

claim of t h e st ockh old ers will b e in c re as e d Th en t h e o wn e r ship .

claim of st o ckhold e r s will e xc e e d t h e par valu e of st ock an d this ,

e xc e ss is su rplus We must th ere f ore d e bit an asse t acc ou n t f o r

.

t h e st ock d o n at e d an d c r e dit a surplus acc o u n t f or t h e pr o p ri e t o r

,

ship—claim c re ate d by t h e ass e t S om e tim e s T r e as u r y S tock is

.

de bite d an d W o rkin g C apital is cr e dite d S in c e T r e asu ry S t oclf

,
.

is usually us e d f or pu r chas e s by a c o rpor ation o f its ow n st ock it ,

“
had b e tt e r n ot b e use d als o f or d on ate d sto ck ; an d sin c e wo rkin g
capital is vagu e an d is us e d in c o mm on sp e e ch f or cash acc o u n ts
, ,

r e c e ivabl e an d suppli e s n ee d ed t o k e e p a busin e ss in n o rm al run

,

n in g c o n di ti o n it had b e tte r b e av o id e d f or a v e r y sp e cific thin g

,

lik e d on ati o n s by st o ckh old e rs Th e f o ll owin g e n t ry sugg es ts

.

what h as actually happ en e d .

D onat ed Capital S tock

To D onate d S urp lus

Th e ne xt qu e sti on con ce r n s t h e am o un t of t h e e n t ry S om e .

rec omm e n d that t h e e n try b e made for t h e am ou n t that t h e d o

nat ed s t ock is lik e ly t o bring at sal e This am o un t is usually
.
 S OME PECULIARITIES OF O O
C RP RATI N O A C C OUNTS 26 1

probl ematical ; and h en c e t h e e n t ry can m e an little par ti cular ly ,

as o n e ca nn o t te ll from t h e balan c e sh e e t whe the r much st ock is

e n t e re d at a low p ric e o r littl e st o ck at a hi gh pric e In an y c as e
.

an adjustm e n t e n try is alm o st su re t o b e n ee d e d wh e n t h e st o ck is

actuall y s o ld It s e ems wise r th e r e f ore t o e n ter such d on ation s

.
, ,

at par valu e ; for t h e ide n tical stock app e ar s on t h e o the r side o f

t h e balan c e sh e e t at p ar ( in C apital S t ock ) an d o n e is as g oo d as
,

t h e o th e r No o n e is lik e ly t o b e d e c e iv e d by th e it em fo r an y on e
.
,

kn owing what d on at e d st ock is will un d erstan d that it is on t h e

b ooks awaitin g di spo sition an d is un lik e ly t o b r in g p ar at sale .

Wh en don ate d st ock is s o ld it is obvio us that th e am o un t of di s

coun t suff e re d on th e sal e is just s o much re ducti on in t h e am o un t
o f t h e n omi n al d o n ati o n S o D on at e d S urplus is d ebit e d If w e
. .

suppose th e re f ore that t h e do n ati on giv e n ab ove was o f

, ,

par value of st ock an d that t h e stock was s old f or 80 t h e en try

, ,

f or th e sal e w o uld b e as f o llows :

Cas h
D o nat e d S urplus
To D o n at e d C ap ital S tock

t
D on a i on s b y In d ivi d u al s t o In d iv i d ual s S om e tim e s th e d o
.

n atio n s d o n o t go th r o ugh t e t r e asu r y o f t h e c o rp o r ati o n , but are

h
made dir e ct t o n ew stoc kh olde r s by old st ockh olde r s ; i e th e . .
,

origin al stockho ld er s mak e an agr e em en t with e ach o th er that

e ach wi ll do n at e a c e r tain p r o p or ti o n o f his s t ock f o r a c omm on

po o l an d that ou t o f this p oo l will b e give n t o n ew st ockhold e rs a

,

c e rtain n umb er of shar e s as a bo n us with e ach blo ck o f S hares

purchas e d S in c e this is a pure ly pr ivat e matt e r b e tw ee n old
.
,

stockhold e rs as indi viduals an d n e w stockholde r s it d oe s n o t ap ,

pe ar on t h e b ooks o f t h e c o rpo ratio n in any f o rm Th e only .

qu e stion r e gardin g its pro pri e ty is t h e pro pri e ty o f t h e o riginal

issue that is wh e th er t h e ass e ts give n we re o ve rvalue d ; but
,

e v en that is n o t a qu e stio n o f d on ati on but o f issu e

,
.

For f e ite d S ubs cri pti on s Th e law r e gardin g f o rf e itu r e s o f sub

.
«

scrip tion s is n ot un if o rm am o n g t h e S tat e s an d it is unn e c e ssa ry

,

in a b ook of this type t o tak e up t h e va r io us acc o un tin g r e quir e

m en ts S uffi c e it t o say that whe n a srib scrip t ion has b e e n for
.

f eit e d t h e b o oks must S h ow s e v e r al things : (1 ) t h e l o ss o f t h e

asse t In t h e f o rm o f furth e r subscrip ti on s c o ll e ctibl e ; (2 ) t h e can
2 62
'

TH
~ U
E F ND AM ENTAL S OF A CCOUNTIN G

c e llati on o f pl e dge t o issu e st ock ; (3) t h e can c ell ation o f any

th e
premi um o r di sco un t invo lv e d in t h e sub scr ipti on ; (4 ) th e cre di t
t o a spe cial sur plus acc o un t o f an y am o un ts f o rf e i te d t o t h e com
pan y by t h e f o rf e itin g subscr ib e r ; 5 ) an y liability th at th e com
pan y may hav e t o m e e t c on tin g e n t or o th e rwis e for actual pay
, ,

m e n ts by th e f o rf e itin g st o ckho lde r W o rkin g out e n tri es f or .

th es e is in ter e stin g e xer cis e in actual c on tin gen t an d st atistical , ,

acco un ts an d is r e comm e n de d for o rigin al w o rk on t h e par t of t h e

,

stud en t .

C onv e rtin g Priv at e int o C orpor ate B u s in e s s Th e m e thod of .

c onv er tin g a p rivate busin e ss in t o a c orp o r ati on is m or e or le ss

o bvi ous . Th e ste ps ar e m e r e ly t h e l ogical ste ps r e qui r e d by t h e
n ature o f e ach f o rm of busi n e ss If th e n ew busi n e ss is t o tak e
.

o v e r t h e o ld b o o ks t h e o n ly n ew acc o un tin g f e atu r e s ar e t h e sub

,

s t it u tion o f C apital S t o ck f or t h e old p ro p ri e t o r ship If th e old .

partn ers tak e sto ck e qual in par valu e t o th e valu e o f t h e asse ts as

sh own by t h e b ooks th e en trie s simply give th e ir subsc ripti on in
,

t h e o r din ar y way as sh own a b ov e an d th en can c e l t h e old pr o

, ,

p r ie t o rs h ip claim -
f o r t h e n e w capital st o ck t h e surr e n d e r o f t h e

pro per ty t o T h e c o rp or ati on S upp osing t h e o ld n e t ass e ts ar e

.

w orth ar e o n t h e bo o ks f or tha t figu r e an d that Jo hn ,

D oe an d Richar d Ro e are th e partn e r s w h o ar e t o tak e st o ck o f a ,

par valu e of w e ge t t h e followin g

S ub scription s t o Capital S tock

To Capital S tock S ub scrib e d

John D oe
Richar d Roe
To S u b s crip tions a tal S tock
t o C pi

Cap ital S toc S u s cri k b b ed

To Capit al S to c k
Th e s e c on d t y can c e ls th e old cr edi ts t o partn e rs as pr oprie
en r

tor s o n th e tr an sfe r o f th eir rights as indi vidual propri e tors in

,

paym en t o f th eir subscripti on s ; an d th e e xplan ati on p or tion s of

t h e e n tri e s giv e t h e wh ol e sto ry of t h e tr an sac ti on If th e old .

busin e ss is w or th m ore than t h e valu e of th e asse ts as sh own b y '

t h e b ooks b e caus e of t h e good will t h e first t as k is t o put t h e

, ,

good will on t h e books an d cr e dit i t to th e Iold prop ri e tors and ,

2 64 TH E FUNDAMENTALS OF A CCOUNTING
by th e directo rs an d the re fo re h e can have n o cre dit in di vidually
,

f o r pr ofits m e r e ly b e caus e th e y hav e b e e n e ar n e d Wh en di vi .

d en d s ar e d e clar ed a lump sum of profi ts is car ri e d t o a divide n d

,

acc o u n t as a liab ility ; an d this is th e n paid t o t h e in dividual

sto ckh older s on th e str en gth o f th e r ec o rds of th e sto ckho lde r s

,
’

l edg e r an d is d ebited t o t h e dividen d acco un t It is c omm on t o

, .

e stablish a s e par at e acc o un t o n t h e l e dg e r f o r e ach divid e n d d e

clar e d an d t o mak e a sp e cial ban k d e p o sit for t h e am o u n t an d

, ,

t h e n t o draw divid e n d ch ecks o n that b ank acc o u n t Th e r e c o n .

ci liation of t h e bank s t at e m en t will S how t h e divid en ds un paid .

B e fo re di vid en ds are d e clare d th e pr o fits are carri ed t o a g e n e r al

acc o un t f o r pr o fits an d th e n t h e am o u n t t o b e pai d in divid e n ds
,

is tak e n fr om thi s accoun t an d c redi ted t o D ivid en ds whi ch is ,

d e bite d wh en th e divid ends ar e paid S om e tim e s t h e dividen d is

.

l e ss than t h e profit f or t h e p e riod an d s om e tim e s m o re It can

, .

se ld o m b e e xactly e qual t o t h e pr o fi t f or t h e figu r e o f p ro fit will

,

s eld om b e e xactly di visibl e by t h e n umb e r of share s of sto ck .

C on se qu e n tly an in di visibl e r e sidu e may accumulate an d th en b e

drawn upo n For m o r e imp or tan t r e as on s howe ve r t h e di vi
.
, ,

den d is likelf t o b e l e ss th an t h e profits : it is w e ll t o h old back a

part o f t h e profi ts for em e rg e n cie s or t o in cre as e th e capital alon g
,

with t h e gr o wth o f th e busine ss Th e p rofits r e tai n e d may b e

.

sh own in an y one or mor e of se veral accoun ts acc ordin g t o cir

cu ms t an ce s .

Un d ivi d e d Pr ofi t s . acc ou n t call ed Un di vid e d Profits 18

An
“

s o m e tim e s us e d f or small r e sidu e s wh e n n o p e rman e n t par ticular

,

r e ten tion of th e m is c o n t emplate d S o m e tim e s thi s acc oun t is

.

us ed as a po ol s o t o sp e ak in to which are put t h e pro fits of t h e

, ,

y e ar b e f o re d ivide n ds are d e clare d and in which is l eft an y r e sidue .

Wh en put t o this u se di vid en ds are d e clar e d out of this pool an d

, ,

h e n c e may b e m or e or l e ss than t h e pro fits o f t h e ye ar with ou t

this fact showin g c on spicuo usly S uppos e th e un divide d profits
.

o f t h e pr e c e din g y e ar t o b e t h e pr o fits o f t h e y e ar t o b e
an d t h e di v id e n d s d e clar e d t o b e Th e f o ll owin g
e n tri e s will b e mad e .

Loss an d G ain
To U dv
n i ided P rofi ts
(U v ndi id ed Profi ts n ow hw s o s a cr edit of
 S OME PECULIARITIE S OF O O
C RP RATI N O A C COUNTS 2 65

U divid d P
n e ro fi t s

To Cas h
A t th e en d , shows a balan ce o f
U n di vid e d Pr o fits as it
sh oul d f or t h e divide n ds have d eple ted th e old balan c e by
,

b e cause th e y e xc ee d e d th e p r ofit o f t h e ye ar If on e wish e s t o .

e mphasiz e t h e fact that divid e n ds w e r e paid in par t o u t of p r ofits

o f th e past it w o uld b e b e tt er t o tak e divid e n ds ou t o f pr ofits (

,
as
f ar as profits ar e ad e quat e ) b e f ore tran sfe rrin g pro fits t o Un di
v id e d P r o fits thus , ,

Lo ss an d Gain
U divid d P fi t
n e ro s

T D ivi d do en s

This m e th od sho ws cl e arly on its f ace t h e r elation b e tw een t h e

profits an d t h e divid e n ds as als o b e tw e en t h e un di vid e d pr ofits
an d t h e di vid e n ds If t h e divid en ds had b e en onl y
. we
sho uld hav e had th e fo llo wing :
Lo ss an d G ain
To vd
D i i e n ds
U vd dP
n di i e t
r ofi s

This sh ows that n o t all profits w e r e appli e d t o divide n ds M e re ly .

as a matte r of e mphasis th e re f ore it s ee ms d e sir able t o tr an sfe r t o

, ,

Un di vid e d Pr ofits on ly th e par t o f n e w pr ofits n o t divide d r ath e r ,

than t o tr an sfe r all pr o fits an d th e n tak e ou t th e divid ed p or tion .

To this acc ou n t may b e cr e dite d or charg e d c o rr e cti on s o f pr ofits

o r l o s se s sh o wn e rr o n eo usly by t h e b oo ks in e ar li e r pe r i o ds as is ,

b o un d t o happe n fr om tim e t o tim e with e stimate d figur e s lik e th e ,

allowan c e s f or d e pr e ciati on f or bad d ebts an d for disco un ts

, ,
.

This acco un t is use d als o as a s or t of re se rv o ir f or e qualizin g di vi

d en d s . If e ar nin gs are r ath e r irr e gular ye ar by ye ar but d o n ot
d e par t v e r y s erio usly fr om t h e av e r age o ver thre e o r fo ur y e ar -

pe rio ds in e sp e cially goo d y e ars a par t of t h e profits may b e l e ft

,

in this acc o un t an d in o n e o f t h e r e curr e n t l e an y e ars may b e

drawn f or divid en ds S om e tim e s t h e acc o un t is call e d S imply
.

“ ”
Pr ofit an d Lo ss A lways of c o urse Un di vid e d Profits r epre
.
, ,
2 66 U
TH E F ND AM EN TAL S OF A C COUNTING

se n ts a claim of sto ckh old e rs t o ass ets arisin g from gains and ,

d oe s n ot its e lf re pre se n t an y ass e ts .

S urplu s . If a part of t h e un di vid e d profi ts ar e in ten d ed to b e

k ept p erman e n tly o r for a long tim e in t h e busin e ss as a g en er al
, ,

provision f or saf e ty or for s om e sp e cial purp os e it is w e ll t o tr an s

, ,

f er t h e am oun t fr om Un divid e d Pr ofits t o a sp e cial accou n t ; f or

t h e v e r y ti tl e Un divid ed Pr ofits is a t emptati on t o di vide an d , ,

as w e have s een th e acc o un t is a s ort of r e s e rv oir f or dr awin g in

,

l ean ye ars H e n c e profits in ten d e d t o b e h e ld and n ot di s t rib

.

u t e d sh o uld b e sp e cially lab e l e d an d t h e b e st way t o lab e l th em is

,

t o put th em in t o an acc o u n t with a titl e that s e rv e s t o in di cat e

why th e items are carri e d s e par at e ly Th e gen e ric titl e for such .

acc o un ts is S urplus ; but th e r e may b e an y n umb e r of surplus ao

“ ”
c ou n ts, s om e with an d som e with o ut t h e w ord surplus in th e ir
titl e s an d oft en there is a single S urplus In th e last cas e t h e
,
.
,

titl e usually in di cate s m er ely that t h e amo un ts carried t o that

acc oun t ar e n ot in t en d ed at l e ast at pr e s e n t f or di vide n ds
, ,

th ough s om e c orp or ation s mak e n o di stin cti on b e tw e en Un di

v id e d Pr ofits u d S urplus but carry all bal an c e s o f profit un di s
g ,

tribute d as S urplus .

S pe cial S urplus e s S o man y sp e cial purp o s es may l e ad t o th e

.

accumulati on of pr ofits that it is vi r tually imp o ssibl e as w e ll as

u n d e sirabl e t o sp e cify th em h er e No t man y are lik ely t o b e in
.

fo r c e in an y o ne busin ess at o n e tim e h owe ve r S eldom will m o re

, .

than th re e or fo ur b e f o un d in o n e c orpo r ation S uch thin gs as .

acquisiti on of n ew prop e rti e s paym e n t of d ebt provisi on t o m ee t

, ,

e xt r a or din ary fi r e l o ss e s p r o visio n f o r p e n si on s of e mpl oy e e s ar e

, ,

S om e tim e s t h e te rm
“ ”
g ood ill ustr ation s . r e s e rv e is used in
S u r plus e mphasiz e s t h e fact that t h e
“ ”
pre feren ce t o surplus .

n e t asse ts ( ab ove all d ebts) e xce e d t h e am ou n t of capital sto ck ;

emphasiz es t h e fact that a part o f th e p r ofits (
“ ”
r e se rv e or ra r e ly

o rigin al in v e stm e n t in e xc e ss o f capital sto ck issu e d f o r it) ha v e

b ee n re se rv e d from dist ribution as di vid en ds for t h e purpo se

, ,

in dicat ed in th e titl e of t h e r e se rv e acco un t ; but the y e qually

rep re se n t th e owne rship of n e t ass e ts in exc e ss of t h e par valu e o f
capital stock pro vide d ass e ts are n ot o ve rvalu ed T hi s las t .

p ro vis o howe ve r is of t h e utm o st imp ortan ce Un fo rtun ately

, ,
.

man y acc oun tan ts us e t h e te rm r es erv e not for a sp e cial sur

“ ”
2 68 U
TH E F ND AM ENTAL S OF A CCOUNTING
calle d D e ficit .Thi s app e ar s on t h e d e bit sid e o f t h e bal an c e
sh ee t tho ugh it is n o t an asse t It re pr e se n ts a r e ducti on in pro
,
.

pri e t or s o wn e r ship claims ; but sin c e such claims have alr e ady
’
-

b een giv en an ar tificial figur e r e pr e sen tin g t h e par valu e o f st ock

issu ed w e can n o t n ow r educe t h e figu r e o n t h e b o oks an d t h e b al
,

ance sh e e t un til th e sto ck itse lf is ca n c e lle d an d a l oss d oe s n ot ,

acc omplish thi s re sult S o th e d e ficit n o t d e ductibl e o n t h e c r edi t

.
,

sid e o f th e balan c e sh e e t must b e add e d on t h e d ebit sid e In

,
.

d e ed it is in on e s en s e an asse t : it is availabl e t o th e man ag e r s fo r

,

e xplain in g what has b e c om e of t h e st o ckh o ld e r s p r o p e r ty Th e y ’

.

can l e gally se ttl e th e i r acc o un tability t o t h e st o ckh o ld e r s as w e ll

by po in ting t o t h e d e ficit as by p o in tin g t o cash or m e r chan dise

h owe ve r un happy such a sh owin g may b e Oft en t h e d e ficit ap .

pe ar s on t h e b oo ks as simply Pr ofit an d L o ss S in c e thi s title .

co v er s b o th l o sse s an d gain s on e can n o t t ell wh e th er gain or l oss

,

is in v olve d u n til on e o bse r ve s o n which side of th e acco un t th e

balan c e stan ds Its pre sen ce o n a balan c e sh ee t on t h e d ebit side
.

l e ss c on spicuo usly adve rtis es t h e fact of lo ss an d may som e

time s f or that r e ason mislead t h e uninf ormed sto ckh olde r .

Th e Efi e ct O f Pr ofi t s on Valu e s In single pr o p ri e t or ships an d

.

par tn e r ships it is obvio us that pr ofits in cre ase t h e pr o pri e tor s ’

o wn e r shi p claims -
It is e qually o bvio us that in a c o rp or ation th e
.

u n di vid ed profits an d su rplus do lik e wise S o far as th e value s

, ,
.

s h o wn o n t h e b ooks for ass e ts ar e accu r at e t h e in t r in sic valu e ,

( n o t taki n g acc o u n t o f t h e sp e culativ e futu r e ) o f e ach sha r e of

st ock is t h e capital st ock plus un divid e d profits an d sur pluse s

, ,

divide d by t h e n umb e r of shar e s o f st o ck issu e d (or t h e capi tal

st ock l ess de ficit di vide d by t h e n umb e r of shar e s) ; for all th e
, ,

n e t as se t s b e l o n g t o all t h e st o ckh o ld e r s Pr o fits th en add t o

.
, ,

t h e valu e of stock an d l o sse s d e p r e ss t h e valu e

,
Wh en a partn er .

withdr aws his profits hi s balan ce is of co u r s e r e duc e d S o when a

,
.

c orp or ation pays di viden ds t h e value o f its shar e s is r e duce d for

, ,

t h e p rofits pr e vi o usly appe r t ain in g t o e ach shar e ar e th e r eby wi th

d rawn This is n o t onl y th e or e tically tru e but pr actically for
.
,

pro vision for di vid en ds is accompan i ed o n t h e mark e t by a d ecline

in t h e pric e Of shar es e quival e n t appro ximate ly t o t h e am o un t of
t h e divid e n d ; an d t h e d e gr ee of appro ximatio n d e p e n ds up on t h e
absen ce of psych ologic al e lem en ts c onn e c te d wi th th e divid end
 SOME PE CULIARITIES OF O O
C RP RATI N O A CCOUNTS 2 69

( such as t h e f e ar o f a l o w e r di vid e n d n e xt tim e ) T hi s d e clin e in

.

pric e occurs usually subse qu en t t o t h e d e clar ati on of divide n ds

and on t h e day o n whi ch tr an sfe r s o f st o ck b e tw e en in dividuals

ce ase for t h e pe ri o d A large c o rporation must have a pe rio d o f

.

time wi thi n which n o tr an sfe r of stock will b e r e cogni z ed of ,

co urse for it must kn ow to whom divid en ds ar e t o b e paid an d it

, ,

cann o t safe ly mak e paym en t if constan t chan g e s an d c o rr ections

ar e call ed f o r C o n s e qu e n tly f or a c e r tain p e riod aft e r e ve ry
.

d e clarati on o f di vid en d th e tran sfe r b ooks ar e Cl o se d f or tran sf e r s .

P er son s buyin g st o ck be fo re t h e tr an sf e r bo oks ar e cl o se d ar e e n

title d t o r e ceive th e divid en d an d pe rs on s buyin g afte rward
,

must wait f or th e n e xt di viden d or as it is calle d buy ex di vi

, , ,

den d .
”
On t h e day when tran sfe rs cl ose th e r e fore th e price , ,

drops S om e tim e s on t h e o th e r han d on t h e day on whi ch a

.
, ,

declarati on of di vid en d is ann o un c ed th e stock may rise S harply ;

f or th e ann oun c em en t of large r earn in gs than had b ee n e xp e cted
stimulate s d eman d for t h e sto ck Th e d e clar ati on of di vid en ds
.

canno t cr e ate valu e but it may di sclos e valu e ; an d t h e ann o un ce

,

m en t that di viden d s are t o b e paid may psycho lo gicall y cause

st o cks t o ris e in valu e e v en wh e n t h e am o u n t o f e arn in gs was pr e

v i ou s ly kn own fo r on t h e gro un d that a bir d in t h e han d is w o rt h

, ,

t w o in th e bush s om e peopl e h ad ra th e r hav e th e ir pr o fits in cash

,

than left in th e han ds of t h e compan y as addi tion al capital A s a .

matte r of f act man y psycho lo gical e leme n ts aff e ct sto ck value s

, ,

but n one of th em aff ect a cco un ts un til th e y e n t er in t o t r an s ac

tion s Th e mark e t value of a stock is d e pe n den t on se ve r al
.

thi ngs chiefly th e f o llowing : th e s oun dn e ss of its ass e ts as a basis

, ,

for se ttle m en t with st o ckh o ld e r s in cas e o f di ss o luti on ; its cur r en t

e arn in gs as a basis f or divid e n ds ; t h e pr o bability o f futur e e arn
,

in gs as a basis f o r future re turn on pr e sen t in v e stm en t ; t h e atti

,

tude o f t h e buying public toward thi s par ticular sto ck as a basis ,

f or d e t ermini n g h ow r e adi ly t h e in ve stm en t can b e tur n ed in t o

cash in case of hasty n ee d for r e ady m on e y Only t h e fir st t w o are.

matte rs that accou n ts can S how Th e t h ird is a matt e r of judg

.

m en t an d pr o ph e cy Th e last is larg ely psych o lo gical

. .

In cr e a s e of C apital from Pr ofi t s If ass e ts d e riv ed from pr ofits

.

are di st ribut e d as divid e n ds an d th e n t h e c ash paid o u t as divi

,

d end s is rec eive d b ack by t h e co rporati on fr om t h e s t ockh old e rs

2 70 U
TH E F ND AMENTAL S OF A CCOUNTING
as inv e s tm en t cov e r ed by n ew s t ock issu e d it is cle ar that t h e
,

capital of t h e c o rp or ation has b e en incr eas ed o ve r what it was b e

f ore th e profi ts we r e e arn e d for th e profits are s till in t h e busi
,

n e ss . It is e qually cl e ar that if t h e asse ts d e rived fr om profi ts

had n eve r b e en distribute d at all t h e con diti on w o uld hav e b een
,

virtu al ly t h e sam e : t h e e arn ed ass e ts wo uld b e in t h e busin ess

j ust th e sam e but th er e woul d hav e b ee n no dividen ds n o cash
, ,

han dl ed an d n o n ew capital st o ck ; an d so th e divid en ds mak e no

,

diff e r en c e to an y o n e if t h e am o u n t r e c e iv ed is imm e diat e ly re

turn e d t o th e compan y as in ve s tm ent an d t h e capital stock
,

th o ugh in cr e ase d in am o un t for e ach sto ckh olde r r e pr e sen ts no

m ore ass e ts than b e f o r e and h en c e is w o rth n o m o re in t h e larg e r
am o un t than in t h e small e r Th e in cr e as e in t h e n umb e r of shares
.

r e duces t h e valu e of e ach share This d oe s n o t m e an that a share

.

o f st ock is worth l e ss than it was a t t h e b e gin n in g o f th e e arn in g

pe rio d but l e ss than it was at t h e e nd of that p erio d : if t h e shares

,

issu e d e xactly e qual in par valu e t h e divid en ds paid an d r e turn e d ,

t h e in cre as e in ass e ts (from profits) durin g t h e p e ri od is e xactly

match e d by t h e in cr e ase in par valu e of S har e s issu e d an d t h e ,

value p er share 15 thus n o t aff e ct ed ; bu t b efor e t h e di vid en d w as

d e clar e d th e pro fits w e re co ver e d by th e own er ship of o ld share s ,

addin g j us t s o much pr o p o r ti o n at e ly t o t h e valu e o f e ach an d ,

h en c e t h e issu e o f n ew S har e s brin gs back th e valu e of e ach S hare

to what it was at t h e b e ginn in g o f th e p e ri od an d thus r e duc e s i t
,

b elo w wh at it was at t h e e n d of th e p e riod b e fo re t h e dividen d was

d e clare d In o th e r wor ds in e ss e n tial f e ature s t h e S ituation is
.
,

t h e sam e as b e f o re t h e di vid en d was d e cla r e d but in n omin al,

fe atur e s it is chan ge d f or divide n ds an d n ew st o ck have app e ar ed

, .

S om e tim e s th e s e n omin al chan ge s ar e w or th whil e f or p e opl e are,

aff e cte d by pu re ly n o min al thi n gs For a c o rpo r ation t o omit an

.

e xp e ct ed di vid e n d o fte n has a d e pr e ssin g e ff e ct b o th up on its

c redi t an d upo n t he mark e t value of its sto ck e ven th ough t h e ,

c ompan y is s o un de r an d in a b e tte r po sition t o e arn pr ofits by

o mittin g t h e di vid e n d B usin e ss p olicy must o ft e n tak e in to
.

accoun t pu rely psych olo gical facto rs On t h e balan c e sh ee t

.
,

h owe ve r t h e o nly e ff e ct o f it all is a substituti on of an addition t o

,

C apital S t o ck fo r t h e cr e dit t o Un di vide d Pr ofits or S u rplus tha t

would have appe ared if t h e dividen d h ad n o t b e en d e clared .
272 TH E F ND AM ENTAL S U OF A CCOUNTIN G

t
S t ocks wi h o ut Par Value A s w e hav e alre ady s een t h e sig
.
,

nifi can ce o f t h e par valu e o n st o ck is slight ; y e t i t is doubtl e s s ,

tru e that man y subscrib ers or pur chase r s have th ought so me

”
san ctity attach ed t o t h e one hun d r e d d o llar s app e ar in g on t h e
fac e of a sto ck c er tificate an d have b een led t o pay m ore o r se ll
,

f or l e ss than o the rwis e In s o m e S tate s t h e i n ability t o se ll stock

.

at a disc o un t has le d t o awkwardn e ss t o misun d e rstan din g an d , ,

e v e n t o t e mptati o n On e d evic e re c e n tly adopte d in th e ho pe of

.

e limin atin g th e s e difi i cult ies is t h e issu e o f st o ck c e r tificat e s with

‘

o u t p ar valu e . Th e se o f c ours e c er tify m e re ly that t h e o wn e r of

, ,

t h e c e r tificate is a pa r t o wn e r in t h e e n t e r p ris e an d is e n titl ed t o a

,

ce r tain pr o p or tion o f its d eclar ed divid e n ds an d in case of di ss o lu

tion t o a c er tain pro p o rti on o f its n e t asse ts S in c e n o n am e d .

valu e is attach e d t o t h e c e rtifi cate n o disc o un t or p remium is ,

r e c ogni zabl e for th e re is n o thing with whi ch t o c ompare th e

,

am o un t in v e st ed in t h e c o mpan y an d c o v e re d by th e c e rtificate .

In o th e r w o rds t h e compan y may issu e sha r e s a t what e v e r it can

,

in duc e p eo pl e t o in v est upo n th em but of c o urs e it must tak e ,

ti
e v er y pr e cau o n that all p e rs o n s shall mak e t h e sam e in v e stm en t

f or t h e sam e n umb e r o f shar e s e xc e pt s o f ar as c on diti o n s hav e

change d b e tw ee n t h e tim e s of in ve stm e n t Th e e n try f o r issu e o f .

shar e s by compani e s issuin g o nl y share s wi th ou t par valu e is con

v enie n t ly

Asse ts (cas h or what no t) -

To In v es te d Cap ital

an d th e am ou n t sh ould b e t h e actual valu e o f th e prop erty in

v e ste d It is pr e f er abl e n o t t o u s e th e t e rm C apital S t o ck for
.
,

t hi s shoul d b e co nfin e d t o t h e b ooks o f busin e ss e s havi n g stock

with a p ar valu e (simply t o avo id co nfusion ) Fr om this p o in t .

on ,
t h e acco u n ti n g f o r st o cks with n o p ar valu e is vi r tually
id en tical with that fo r par valu e sto cks e xc e pt f o r items whi ch
-

hinge upon a par value S urplus is e xc e ss o f n e t ass e ts ab ov e

.

inv e stme n t r ath e r th an ab o v e par o f capital sto ck an d D eficit ,

is th e m e asure of th e failu re o f n e t asse ts t o m ee t in ve stme n t .

Pr emi um S u rplus an d D isc o u n t o n S t o ck th e n cann o t b e for ,

th ere is n o such thin g as pr emium an d discoun t on stock in such

c orp or ati o n s If how e v e r t h e c o rp or atio n issue s on e kin d of st ock
.
, ,

with par value saypre fe rre d an d an o th e r witho ut it will n e cessa

, , ,
 SOM E PECULIARITIES OF O O
C RP RATI N O A CC OUNTS 2 73

rily have an acco un t for capital sto ck an e n t o cr e dit In v e st ed , d th

C apital f o r t h e am o un t in ve st e d on sto ck with o ut p ar valu e w o uld
b e misl e adin g fo r it wo uld sugge st that t h e t o tal in v e st e d capital
,

was co v e r ed by it In this cas e t h e t e rm st ock had b e st b e k ept

.

“
an d t h e c r e dit at issu e may w e ll b e t o S to ck o f No Par Valu e -

B on d s On e type of obligatio n issu e d by c orp or ati on s an d n ot

.

usu ally by privat e propri e tor ships is b on ds Th e se ar e vir tually .

onl y promissor y n o te s runn in g f or a lon g t erm but th e y com ,

monly hav e m or tgage fe atur e s attach ed S in ce oft en th e y ru n f or .

man y ye ar s b e fo re maturity it is n atural that th e y sh ould b e ,

issue d by c o rpor ati on s whi ch hav e a lon g or pe rp e tual char te r .

Th e acc ou n tin g p rin cipl e s in v o lv e d in b o th bo n d issu e an d b on d

holdin g wi ll b e discuss ed in C hapt e r XX .

QUES TIONS P RO B L E M S
A ND

1 S h w th
o e en ries t for t h e foll owin g transactio ns :
cap ital s toc k is s u b s crib e d for in tallm ents
.

a
() of tw o in s
v
,

60% an d 4 0% r espe c t i ely

k b t p aid i ah
.

03) o f s t oc s u s crip ions ar e n c s

m f pit l t k i b ib d f at p
.

()c o re o ca a s oc s su s cr e or ar.

(d) i a h i pai d n c st k b ipti s o n s oc su scr o ns

kh d d f t k f th
.

( e) S t l
oc at
o t t h e rs p ati on e o e co r o r on o s oc o e

p ati
co r o r on

(f) Th d t d t k i ld at 8
.

e o na e s oc s so 0
S h w t h bala h t at th d
.

o e n ce s ee e en

A p ti i a th i d t i w t k
.

2. co r o ra on s u fo r ze o s s ue o ne s oc

f t k i b ib d f i t h i tallm t f
.

o s oc s su scr e or n r ee ns en s o

A ddi ti al
n a on f t ki b ib d f o s oc s su s cr e o r.

I tallm t # # #3
ns en s p aid # 1 d #3 i 2, ah # i arevi 1 an n c s 2 n ser ces .

b ipti p id i h
, , ,

Th l t e as su scr o ns are a n cas

t k i i d wh p id f i f ll
.

Th e s oc s ss u e en a or n u

S t k f p val d t th p ati a gift

.

oc o f ar i t ue o s r e urn e o e cor o r on as .

It i t h
s ld f
en so or

Sh w o t i f th
e n r es t ti or with th bala h t at th d
es e ransac o ns , e n ce s ee e en

A p ati i g i d t t k v d b
.

co r o r on s o r an ze d p a ld io a e o e r an ex n an o u s n ess

iv f m t h i b ip ti f f t k
.

It r ec e es pro t e n cor o ra o r s su s cr o ns or o s oc

at p ll t t h
ar , co h di
ec s h t
e cask an ss u e s t e s oc
It th b y th ld b i f whi h t h bala h ti h w b
.
,

en u s e o u s n ess , o c e nce s ee s s o n e

Plant e t c Proprie t or A
Accoun ts Re ceivable
, .

Proprie t or B
Merc h d an i se Accounts Payable
2 74 . TH E F ND AM ENTALS U OF A C COUNTIN G
It fi n ds that t h e asse ts wh h h fi gur e at ic t ey s tan d o n
ar e w t h th
or e

d b k v
t h e re s o urce s i e o f t h e alanc e s ee b I t t a e s o e r t h e u s in e ss , in h t
d b h b v
.

clu ing ot ass e ts and lia ilit ies , an d gi es th e old proprie t o rs fo r

h k hv v
t eir in te res t s stoc in t h e co rpo ration a ing a par alue o f
v b
Th e n e w co rpo ration no w rece i es s u s criptions for p ar
k
o f s to c q m
at 1 1 0 in t wo e ual ins tall en t s, an d collects t h e fi rs t in stall
m t en

A ll t h am d y b y p a a g m
.

t a a ti e se th r ns c o ns o ccu r o n e s e a re rr n e en t ,

d aft th m at a m ti g f th di t th t a bmit
,

an er e ee n o e re c o rs e re s u re r s u s a

bala h t f ll w
n ce s ee as o o s:

Plant e t c
Account s Re ceivable Accoun ts Payable
.
,

Me rchandise
C 8 3 1] 65 1 000

(a) If accept th e treasurer s fi gures explain t h e m b y s howing

you
’

t h e j ournal e n tries that gav e ris e t o the m

,

If you d o n o t accep t
th e m S how your own balance s h eet an d th e en t ries t hat es tab
.

lish e d it
b m f h b k
.

( ) No w i agin e yours el t o b e in c arge of th e oo s of t h e old

hw
fi rm, an d S o j o urnal e n tries for fi n ally clos ing t em, s u ppo sing h
q
A and B t o b e e ual partn e rs in all r es pec ts
h d f k
.

4 A corporation is au t orize t o issu e of pre er red s toc an d

h mm k v
.

s are s o f co o n s toc of n o p ar alue

f d k b b b
.

Th e pr e e rr e s t oc is su scri e d for at paya le in thr ee

q
e u al ins tallme n ts

h h k bd
.

Two t ousan d s ares of common stoc are sub scri e for at 5 0 a

s ha re .

I tallm t # i paid i a h O th a d ha
ns en 1 s f mm t knc s ne ous n s r es o co o n s oc

b ib d f at $ 5
.

ar e s u s cr e or 0

I t llm t 6 i p i d i a h Th
.

ns a en 7 mm
52 s ha a paid f i n c s e co on s res are or n
ah d
.

c s an i d are ss u e

h Th p f d t k i i d
.

I t allm t #3 i paid i
ns en s n cas e r e err e s oc s ssu e

Sh w i j l f m th
. .

o n ay ti
ourna or e necess r e n r es .

A p ati
co r o r h t k i don f ll w t p f das s oc ss u e as o o s: Is re erre

[ p val d p f d [ p val mm
,

ar ue 2 r e erre ar ue co on ,

ha [ p val ] Th di vid d all d f b y t h t p

,

S res no ar ue e en s c e or e rs re

f d ha ally d b y th d p f d h
.

e rr e s mi a
res ar e se -
nnu an e 2 re e rr e s ar es

v b divid d f a half y a
,

3 % m isea ally
-
T h a i
n nug a aila l f e e rn n s e or en s or -
e r

g la divi d d d la d
.

are Th e re u t d d p r e n s are ec re on I s an 2 re
f d ha O t f th b l
e rre S r es f a i g a divid d f
u o p e a an ce o e rn n s en o er
h a i d la d t k d t h mai d f t h a
.

s re s thec mm re on e co o n s oc an e re n er o e e rn

i g i add d t a t k divid d f
,

n s s pl O t f th
e pl
o s ur us u o e sur us s oc en o o ne

ha f d p f d t k i d la d t a h h ld f ha f
.

s re o 2 r e erre s oc s ec re o e c o er o on e s re o

co mm t k Th a h divid d paid d th t k divid d

on s oc . e c s en s are , an e s oc en

is Is sue d .
 CH APTER XVII
WH ERE D O PRO FITS B E GIN ?

Wh at are Co s t s ? It is co mm on t o re ad of s ome farm e r wh o at a

r e staur a n t mak es criticism of t h e high pric e s an d t e lls of t h e mar
g in O f p r o fit ; f o r h e k n o ws what h e as a p r o duc e r r e c e iv e s f or t h e
product s e rv ed in t h e r e staura n t On e may c riticiz e such e riti
.

cism an d ye t n o t go f ar in d e f e n se o f t h e r e stau r at e u r V ery .

f ew pe o pl e ar e c omp e te n t t o d e t e rmin e pr o fits f or few ar e com,

p e t e n t t o d e te rmi n e wh e r e profits b e gin Th e difficulty is in

.

fin di ng what is n ot p rofits It is e asy t o say that pr ofits c on sis t

.

o f all t h e r e tu rn in e xc e ss o f c o sts ; but this l e av e s us t o fi n d wha t

w e m e an by c o sts . W e shall late r di scuss b ri e fly t h e m e thods of

fin di n g t h e c osts of sp e cific ar ticl e s but h er e w e are c on c ern ed
,

with t h e ge n e r al qu e sti on of what w e me an by c o sts D o e s c o st .

m e an what w e hav e actually put in to t h e pro duct or what w e ,

S h o uld hav e t o sp e n d n ow in o r d e r t o b e back wh e r e w e w e r e b e

f ore w e made or b ought t h e product ? D oe s it in clud e things that

w ere n ot in cu rre d f or this pro duct bu t for s om e t hing e ls e ye t of ,

which this p roduct go t t h e b en efit e ve n th ough th e c o st or con

,

sumption of t h e things wo uld have b e en j us t as gr e at if this pr od

u ot had n e v e r b e e n mad e ?

Vagu e n e s s of Cos t.
”
Th e word
“
c o st lik e man y o th e r
,

e c o no mic an d acc o u n ti n g t e rms has s e v e r al m e a n in gs an d w e

, ,

cann o t go far in a study o f c o sts witho ut s om e thin g appro aching a

d efiniti on Th e t e rm is us ed som e tim e s f or l o ss s o m e tim e s for
.
,

what is given up ou t of what o n e h as an d som e tim e s f or that o f

,

which o n e give s up a p o ssibility th ough o ne n e ve r gav e up t h e

th ing its elf (b e cause on e n e ve r h ad it t o give up) E con omis ts .

say f or exampl e that e c on omic r en t doe s n o t e n te r in to t h e cost

, ,

o f pr oducti o n f or such r e n t is paid fo r th e u s e o f a sup e ri or pr o

,

duct iv e age n t an d o n e ge ts back in e xt ra pr oducti o n what o n e

,

pays in ren t ; s o that th e r en t re ally c o sts n othin g t h e e xtra

r e turn is e qual t o t h e e xtra paym en t lik e t h e exchange of a fi v e
,

d ollar bill for fi v e o n e dollar bills This is a p erfe ctly good u se of

-
.

t h e w ord
“
c o st ; an d if r en t is not cos t b ecaus e th e ou tlay
”
 WH O
ERE DO P R FITS B E GIN ? 2 77

com e s back in th e p roduct what th e e con omists are really talk

,
“ ”
ing abo ut in this ca s e is c o st as un r e tur n e d o utlay ; but this
cl e ar ly is n o t c o st in th e acco un ting s en s e ; for w e hav e alr e ady
s ee n fr om ou r study of t h e o pe r atin g statem e n t that w e sh o uld
l o se much n e c e ssary statistical in formati on if w e allow e d outg o
an d in c o m e t o b e ca n c e ll e d again st e ach o th er with out r e c o r d o f

e ach s epar at e ly E v e r ybod y says that wag e s paid ar e a c ost o f

.

doin g busin e ss f o r cash is given up in g e ttin g th e n ew thi n gs ;

”
an d this is an acc o un tin g s e n s e o f c ost whi ch w e may call
,
“
E co n omists say that if w e u s e ou r capital in
”
c ost as o utlay .

o ur o wn busi n e ss t h e in t e r e st t hat w e mi ght hav e r e c eiv e d o n it

by l en ding it is a c o st o f c on ducting o u r o wn busin e ss Thi s w e .

may call c ost as abstin e n ce ”

Much diff e r en ce o f opinion is
.

found am on g acc oun tan ts ab out thi s sor t of co st but it is d u e t o ,

diffe ren t po in ts of vi e w with re spe ct to t h e m e an in g or t h e d e sira ,

b le m e an in g of ,
“ ” “
c ost an d pr ofits With t h e fi r st o f t h e
.

m eanin gs of c o st c ost as un r e tur n e d o utlay w e have h e r e n o thin g

, ,

t o d o ; f or tho ugh it is tr u e that e c o no mic r e n t is n o t a c o st in t h e

se n se in whi ch t h e t e rm is us e d in that c onn e ction it is a c o st in ,
“ ”
t h e s e con d s e n s e co st as outlay whi ch w e ar e n ow ab out t o
, ,
“ ”
e xamin e . Th e thi r d s e n se c ost as abstinen c e w e shall e xam
, ,

in e lat e r in c o n n e ctio n with t h e fin din g o f c o sts f or sp e cific ar ti

,

cl es o f pr o duct .

In d e pe n de n ce of Co s t an d S e lli n g Pri ce Th e fir st st ep in an
.

und e rstan din g of pr ofits is a r e alization of t h e in d ep en d en c e of

c o st an d s e llin g p rice It is tru e that in th e lo n g ru n s e lling pric e
.

must e qual c o st plus a mar gin of profit e ls e go o ds will n ot b e pr o

,

du ce d an d s o ld an d s ervic e s will n ot b e re n d e r e d
,
It is als o tru e
.

t h at se llin g pric e will affe ct c os ts in som e in stan c e s for t h e p rice ,

d oe s some tim es aff e ct e fli cie n cy l e adin g t o gr e at er e c on omy wh en

,

t h e p ric e is low an d gr e at e r ca r el e ss n e ss wh en t h e p rice is hi gh .

With th e se e xc e ptio n s ho we ve r c ost an d price ar e for an y p art icu

, ,

lar busin ess man at a par ticular tim e d e t e rmin ed by in de p en d e n t

transacti on s with unr e late d e l em e n ts o f busin e ss s o cie ty Th e .

“ ”
fact that a s e llin g pric e is so high that th e pr oduct can stan d
h e avy c o sts an d that o the r p rice s ar e s o low that o th er pr o ducts
,
”
can n o t sta n d h e avy c o sts has n o thin g t o d o w ith t h e facts o f
,

c ost. C os t h as t o d o wi th th e hard facts of r e ality in produci n g

278 U
TH E F ND AM ENTALS OF A C COUNTIN G

go ods an d re n d erin g s e rvic e s an d c om e s from d e alin g with c e rt ain

,

gr oups of pe o pl e an d circumstan ce s an d usually it has n o th ing to

,

d o with what is t o b e r e c e ive d f or t h e g oo ds or s e rvic es aft e r th e y

hav e b een pr od uc ed or r en dere d in d e aling with o th er groups o f
,

p e ople an d circumstan c e s A cco un ting has t o d o with th e tru th

.
,

t h e whol e truth an d n o thin g but t h e truth ; an d it must n o t b e

,

aff e cte d by on e s wish e s or pr e judic e s o r n o tions of h ow things

’
, ,

w o uld have b e e n if th e y had b e en diff e re n t Th e pr obl em of ac .

c o un tin g is t o show h ow things actually ar e M an y tim es i t is .

diffi cul t t o kn ow h ow things are f or circumstan c e s ar e s o c ompl ex

, ,

an d data ar e s o in ad e quat e that t h e c on diti on s d e fy c ompl e te

,

an alysis as o fte n f or illustrati on with t h e actual am oun t of

, ,

d e pr e cia ti on on a building ; but t h e b e st availabl e k n owl edg e of

c o sts should always b e u tili z ed in d ep en d en tly of e xtran eo us cir
Cums ta n ces . It is th e h eight of acc ou n tin g misr epr es en tati on to
char ge on e thi ng m o r e than an o th e r for c o sts m e re ly b e caus e i t
chan c e s t o hav e a hi gh er sell in g p ric e : t h e purpo s e of acc ou n ting
is in part t o sh ow t h e diff er en ce b e tw e en c ost an d s e lli n g pric e ,

an d if w e all ow t h e s el lin g p ric e arbitr arily t o afi e ct t h e figurin g

o f c o sts w e ar e d e str o yin g in that p r o c e ss t h e possibility of d o in g

W e ll o n e o f t h e v er y thi n gs w e s e t ou t t o d o .

In de pe n de n ce of Co s t an d Re pla ce me nt Th e s e c on d prin ciple.

n e ce ssar y t o an un d e r s ta ndi n g o f pr o fits is that c o st has n o thin g

t o d o with circumstan c e s u n r e lat ed t o t h e par ticul ar busin e ss

an d particular tr an sacti ons c on c e r n e d If I pay . fo r a bi t of
p ro pe r ty an d sell it for witho ut in cide n tal c o sts my profi t ,

is an d t h e fact tha t I lat e r buy a n o th e r h it o f pr o p e rty ,

lik e that s old for,

doe s n ot affe ct my profit It is tru e .

that I n ow have m or e cash than aft er I b o ught t h e firs t

pr o pe r ty se llin g pric e l e ss paid for th e n ew articl e) ;
but of this is pr ofit o n th e fir s t articl e an d is
o rigin al capital r e turn ed t o me from th e sal e an d n ow s e t fr ee by

t h e fact that I can buy a n ew ar ticl e ch e ap e r than t h e old .

S imilarly if a n e w articl e sh ould c o st

,
my profits on t h e
o ld b o ught at
,
an d s o ld at w o uld n ot b e th ereby
r e duc ed t o t h e fact w ould b e S imply tha t t o c on tin u e in
busin e ss of that s or t I S hould r e quire m ore capital A l e ss simpl e .

case however is wor th furth er s tudy S uppose we buy e quip

, , .
2 80 TH E F ND AMENTALS U OF A CCOUNTI NG
pric e w e n t up f or h e will hav e a lo n g t e rm of r e apin g lar ge profits ;
,

but h e will l o s e that again if h e Chan c e s t o r en e w his e quipm en t a t

high p ric e s just b efo re th e y fall again Th e r e is th e n n o qu e s .
, ,

tion o f justic e in vo lv e d in t h e exclusio n o f re plac em e n t fro m c o sts ;

f o r if t h e cust o m e r o ught t o pay fo r r e pl ac e m e n t that is a matt er ,

of se lli n g p ric e o nly : c o st is a m tt e r o fh is t orical fact with which

a
n eith e r s e llin g p ric e n o r re plac afft has an ythi n g t o d o
’

C o st as Outlay It is Cl e a r that c o st is c o n c ern e d with t h e

.

acquisiti on of pr op er ty o r s ervic e s fo r wh en w e sp e ak of c o sts w e ,

hav e in min d s ome thi n g acquir e d e ith e r p ro p e r ty acquir e d o r ,

s e rvic e s r e n d ere d t o us o r on our b e half t o s om e on e e ls e ; but t h e

m e asu re of c o st is always t h e compl e m en t of t h e thi n g acqui r e d
n am e ly t h e thin g giv e n
,
It is cl e a r fro m th e pr e c e din g discus
.

sio n t o o that c o st is a matte r of past or pr e s en t n o t o f th e futur e

, , , .

Exc ept o f c ours e wh en th e t r an sacti on is in extricably a pa r t of

, ,

a large wh o l e su ch as th e t en year lif e of th e machin e m en ti on ed

,
-

abo ve co st has n o thin g t o do with t h e futur e of t h e prop e rty or

,

se rvic e acqui red with eith er its di sp o siti on o r its r e plac em en t

, .

Th e c omm on e rr o r s In d e t e rmin i n g c o sts lie in th r e e dir e cti on s

fo rg e ttin g t h e simpl e facts just stat e d n e gl e ctin g t o s ee all t h e ,

valu e giv en failin g t o obse rv e just what was go t f or what was

,

given If o n e acqui r e s pr op e rty by simple e xchange th e c o st is

.
,

o bvi o us If I giv e fi v e do llars t o a b oo k agen t f or a b oo k that h e

.

b r ings t o my h ouse t h e c o st o f t h e b o ok is obvi ously fi v e d o llar s

, .

A s we have s een how ever a large par t o f busin e ss con sists of

, ,

so m e thin g e ls e than simpl e exchan g e C on ver sion o f ass e ts is .

involve d fo r e v e n simpl e sal e s usually in vo lve sal e sm en an d

o th e r s e llin g e xp e n s e s an d t h e ass e ts whi ch pay fo r t h e c on t rib u
,

t o ry thi n gs th e r eby b e c om e c on v e r te d in t o th e ul timat e thin g got .

If fo r exampl e I buy a fact or y sit e fo r fi v e th ousan d d ollar s th e

, , ,

actual c o st of t h e lo t may b e much m ore ; fo r I may hav e p aid a

su rv e yor tw e n ty d o llar s f or a surv ey a law y e r a hu n d r ed do llar s ,

f or passin g up o n t h e titl e an d t h e d e e d an d t h e Re giste r o f D ee ds ,

t w o d o llar s f o r r e gist r y an d stamp tax e s may am o u n t t o s e v e r al

,

d o lla rs an d tr av e lin g e xp e n s e s an d p o stag e an d t el ephon e calls in

,

c o nn e cti o n with th e compl e ti o n o f t h e pur chas e may am o un t t o

man y do llars t o say n o thing of t h e pay o f cl e rks c o pying docu
,

m en ts e t c S om e of th e s e thin gs it sh ould h e re mark ed have

, .
, ,
 WH O
ERE D O P R FITS B E GIN ? 281

n o thing t o do with t h e actual valu e o f t h e lo t : th e y ar e in cid en tal

t o my pur chas e of th e lot an d t h e lo t w oul d p robably b e w o r th
,

just as much if I had n eve r he ard o f its e xiste n c e ; but for my po s

se ssio n of t h e lo t th e y ar e co sts T hi s has b e en exp r e ss ed b ri e fly
.

in b oo kk e epin g f orm in C hapte r VI I th r ough C on ve rt ed A ss e ts ,

whi ch w as d ebited f or all t h e c o sts go in g in to t h e goo ds s old Th e .

c re dit side o f this acc o un t o f c o u r se has n o thin g t o d o with c o sts

, ,
.

Th e d ebits are typical o f c o sts an d f r om th e m w e may d e v el o p

,

o u r p r in cipl e Th e y in clud ed t h e fo ll owin g typic al items : wag e s

.

an d r e n t ,
fo r cash paym e n t for s e rvic e s which th o ugh th e y ,

b ro ught their e quival e n t in valu e did n o t appe ar o n t h e l edg er,

un der t h e titl e of t h e actual asse t obtai n ed fr om th em ; r educti on s

in valu e lik e fu e l c o n sumpti on an d e xpir ati on o f in sur an ce pr e
,

paid ; an d ro yalti e s for ro yalty liability in curr ed In o th er words

,
.
,

all of th em involv ed som e typ e of disappe aran ce o f valu e en

tire disapp e ar an c e o i valu e par tial disappe ar an c e of value o r t h e

, ,

s e ttin g up o f a liability (whi ch is t h e sam e thi n g as a disappe ar

l
an c e of valu e f or valu e will disappe ar in m e e ti n g it) This in
,
.
,

d e e d is what w e m e an in t h e acc oun tin g s en se by c ost

, ,
di sap ,

p e ar an c e o f valu e in t h e acquisiti o n o f o th e r valu e S o m e tim e s .

t h e disapp e ar an c e is du e t o m e r e e xcha n ge o f valu e s an d so m e ,

tim e s t o c on ve r sio n of valu e s Th e b oo ks S how w hat valu e s have

.

disapp e ar e d an d what valu e s hav e appe ar ed ; but onl y th e f orm e r

,

ar e c o sts the y ar e t h e c o sts o f obtain ing t h e latte r Y e t if w e .

ar e care l e ss in S h o win g t h e valu e s that hav e app e ar e d t h e yi e ld ,

fr om t h e c o sts w e shall have mi sre pre se n ted that t o which t h e

,

c o sts apply an d ou r c on clusio n will e rr as badly as if t h e c osts

,

themse lv e s had b e en misre pre s en ted .

Fin d in g th e C o st s Th e disappe ar an ce s of valu e whi ch c o n st i

.

tut e c o st ar e much m o re n um ero us an d much l e ss obvi ous than

t h e un ini tiat e d are lik e ly t o susp e ct an d s om e tim e s fin din g th e ,

r elati on b e twe en t h e r e tu rn s fro m costs an d t h e c o sts which pro

d u ced t h e r e turn s is s o diffi cult that l on g e xp e rie n c e is e sse n tial t o
succ essful c o st acco un tin g For this re as on n o att empt will b e
.

mad e h e re t o discuss t h e matter fully S uch di scussion of m e thod .

as is fe asibl e in thi s b ook is give n in C hapte r XXII It is worth .

whil e h e re howe ve r t o n o te at l e as t o n e illustr ati on o f t h e va ri e ty

, ,

o f el em en ts e n t e rin g in to t h e c o st o f a simpl e articl e thus g e ttin g a

,
2 82 U
TH E F ND AMENTAL S OF A CCOUNTIN G
hin t o f t h e re as on why findin g costs is no t a matt er o f h asty ob
s e rvation usually b e cause man y o f th e co sts ar e n o t vis ibly
c onn e ct e d with t h e fin al pro duct Le t us re v e rt t o our illustrati on
.

at t h e b e ginn in g o f thi s ch apt er food s e rv e d at a r e stauran t, .

Th e o bvio us thin gs of whi ch t h e farm e r was do ubtl e ss thin kin g

w ere t h e c o st o f t h e raw food t h e fu el fo r cooking it an d t h e
, ,

wag e s of c ooks Let us add a fe w only o f t h e o th e r items (for t h e

.

c o mpl e te list w o uld cov e r s ev er al page s o f t ext an d sadl y b or e t h e

r e ad e r) C onn e ct ed wi th t h e raw fo od w e fi n d t h e c o st of buyin g
.
,

(in clu di ng cl e rical h e lp postage an d stati on e ry) fre ight an d

, , ,

car tag e r e c e ivin g an d sampling an d Ch e ckin g t h e g o o ds with t h e

,

in vo ic es do in g t h e b ookk e epin g for pur chas e s c orr e sp on d e n c e

, ,

r egar din g purchas es and paym en t sto rin g r e frig er ation l oss by , , ,

spo ilag e o f fo od re ady for (2la carte s e rvice but n o t d e man d ed in ,

suran ce on go ods in sto rage r en t an d light an d ca re o f sto r er o oms

, ,

an d s el e cti n g r e quire d f o o ds fr o m t h e st o r e roo m fo r u s e C on .

n e ct e d with t h e p r e para ti on o f f oo d w e may hav e pu r chas e st o r ,

age an d han dlin g o f fu e l ; in suran c e tax e s an d d e p r e ciati o n o f

, , ,

c ookin g ran ges an d ute n sils ; r en t light an d he at o f kitch ens ; , ,

sp o ilag e wa st e an d p e tty thi e vin g ; cl e an in g o f ut e n sils an d ca r e

, ,

of kitch en C o nn e cte d with th e s e rving roo m w e hav e alm o st

.

all t h e c o sts o f t h e kitch e n r e p e at e d C o nn e ct e d with t h e di n.

’
ing ro om w e may hav e n o t only wait e r s but Ch e ck e r s an d c ash
’

i er s wag e s ; in su r an c e tax e s an d d e pre ciati on o f tabl e lin e n o f

’
, , ,

chin a of silve r of glass an d of furn iture ; ren t o ften ve ry high

, , , , ,

light in abun dan c e h e at ; p rin tin g of m e n us ; fl o r al an d o th e r

,

d e cor ati ons To fi nd h ow much of all th e se c o sts t oge th e r with

.
,

th os e n ot n am e d ab ove is charge able t o a plate of to ast and h ow

,

much t o a b r oil e d chick e n is a pr obl e m b e yon d th e sco pe of b ook

k e epin g To s olve it e xactly w e sh o uld hav e t o d e ter min e h ow
.

much of e ach o f th e s e c o s ts c o n t ribut e d t o t h e to as t as s er v ed an d

h ow much of e ach t o t h e chick e n as s e rv e d .

D iv i s ion of C o s t s b e t we e n Pe ri od s Th e diffi cul ty of a ttach .

ing c o sts ev e n aft e r th e y hav e b e en f o un d in t o tal t o p articular

, ,

parts of pr oduct (as w e did by t h e c os t acco un tin g m e thod of -

C hapt er VI bu t co ul d n o t d o by t h e in v en t o ry m e th o d o f C hapt e r
VII) is found some tim es t o apply t o a di v isio n of c o sts b e tw een
riods S upp o se fo r e xampl e tha t a m ac hi n e cos tin g is
p e .
, ,
2 84 . U
TH E F ND AMENTA S L OF A CCOUNTIN G

sh ow tha t c os ts are n o t always e xactly asce r tain able ; for th ough

t h e futu r e cann o t alt e r t h e facts of t h e past som e thin gs must b e
,

tak en o ver larg e wh ol e s an d t h e share which t h e past has in th o se

who le s cann o t b e k n own u n til t h e who le s ar e kn own Th e y b o th .

sugge st t h e d e si rability o f a re s ervati on o f supp o s e d p rofits as a

s o r t of bu ffe r t o tak e t h e sho ck of di sc o ve r y that c e r tain c o sts an d
profits have b ee n miscalculat e d an d that c e r tain asse ts supp o sed
t o b e go od have shru nk b e l ow t h e b ook valu e s ( as wh en machin
e ry h as b e en d e p r e ciat e d 7 5 % an d disc o v e r y is mad e tha t 90% is

n on e t oo much ) .

C o st an d Inve nt o rie s M e rch an di se On e of t h e comm on es t

.

tasks in c onn e cti on with di vi di n g c osts an d profits b e tw e e n p e ri

o d s is that o f fi n di n g gr o ss p r ofits o n m e rchan di se . In man y mer
c an til e busin e ss e s it is n o t th o ught w or th whil e t o attach t h e c o st

o f e v e ry ar ticl e s o ld t o its s e llin g p ric e ; an d th ere f o r e gr o ss pr ofits

can no t b e f o un d by t h e c ost acc oun tin g m e th o d of C hapt e r VI

-

but must b e fou n d by t h e in v en t ory m e th od of C hapt er VII .

Th e dan ge r of e rr o r li e s in t h e m e th o d of tak ing in v e n t o ry . Th e

purp o s e of takin g in ve n t ory is in thi s c onn e ctio n t o l e arn what has
n o t b e e n s old f in or d e r that w e may l e arn t h e c o st o f what h as
’

b e en s old (that is t h e di sapp e ar an ce of valu e th r ough sal es in

, ,

acquiring t h e s e llin g p ric e) It is obvi ous that an e xagge rati on of

.

t h e in v e n t o ry of what h as n o t b e e n s o ld ( which is subtr acte d from

t h e t o tal goo ds ha n dl e d) r e duc e s t h e appar e n t c o st o f what h as
b e en s old an d s o e xagge rate s profits Optimism cr e at e s a stron g
,
.

t emptati on t o e xagg e r at e in v e n t ory fo r it t en ds t o think t h e

,

g oo ds w or th m or e than th e y ar e A littl e th ought m ak e s cl e ar

.

that t h e in v en to ry sh oul d n e v e r b e high e r than c o st h ow ev e r t h e

mark e t p ric e may hav e ris en for t h e go ods hav e n o t b e en s old an d
,

h en c e cann o t y e t hav e yi e ld e d a pr ofit e v e n th ough th e y may

d o s o in t h e n e xt p e ri o d . N o p r ofit is e v e r mad e on anythi n g

“
whil e it is h eld : t h e p rofit is only imagi n ary (s o call e d pap e r -

”
profit ) un til t h e ar ticl e has b e e n e xchan g e d for s om e thing els e of
hi gh e r valu e : th e n t h e c on v er sion or e xchan ge has actually tak en
place an d t h e p rofit is r e al S in c e p rofit is mad e onl y on what is
.

s old t h e inv en t ory c on sisti n g of what has n ot b e en s old cann o t

,

in clud e an y p ro fit . Y e t th ough w e usually d e sign at e as p oo r a

,

rul e that won t w ork b o th ways virtually all accou n tan ts are
’
,
 WH E RE Do PROFITS B E GIN ? 85

agr ee d that in ve n tori e s of m er chandi s e sh ould b e tak e n at l ow er

than co st if t h e marke t price has fall en S in ce pur ch as e Th e .

gro un ds fo r this an d th e c on diti on s un der which it is tru e r e quir e

e xamin ati on .

Inve nt orie s at Le s s than C o st H op e sp rin gs e t ern al in t h e

.

human b r e ast : a p r o sp e ct o f pr ofit has le d t o man y an e xt r av a

g an c e (b o th p er s on al e xp en ditu r e an d capital in v e stm en t) tha t
un re aliz e d p r ofit could n ot pay for an d t o man y a bankruptcy, .

On e sh ould n o t only n o t c o un t th e Chick en s b e f or e th e y are

hatch e d but sh ould n o t assum e that all will liv e will all b e h en
, ,

chi ck e n s an d will all lay e ggs S e n sible co n s e rvatism is in m ost

, .

cas e s suffi ci e n t r e ason fo r takin g i n ven to ri e s at less than Cost

wh en t h e ma rk e t p ric e has fall en An oth er r e as on o ft en ap
.

p ear s m or eov e r Goods ar e usually b ought for e arly sal e (cer

,
.

t ainl y t h e t en d e n cy o f m o de rn e co n omy in m e r can til e busin e ss e s

is t o buy littl e an d oft en r ath er than much an d s e ldom) G oo ds .

o n han d at t h e e n d o f an e a r n i n g p e ri o d c o n sist th en o f t w o s or ts :

th o s e i n ten de d fo r sal e in t h e last pe ri od an d l e ft o v e r ; an d thos e

b ought fo r futur e sal e W e are h e r e fac e d with t w o c on tr adi ctory
. .

d esir es W e de sire t o S h ow c o sts on our b ooks but w e d e sir e also

.
,

n o t t o o v e r state p r ofits w e d e si r e n o t t o exagge r at e p r ofits f or

thi s pe ri o d e v e n if t h e exagg er ati on will b e c orr e cte d in t h e n ext
pe ri o d for misun de r stan din g or chan ge s of own e r shi p in t h e
,

m e an tim e may cause injury o r in justic e If w e carry our in v en .

t ory at co st ab ov e t h e p re s e n t mark e t p ric e at which w e c ould

,

n ow buy w e hav e n e gl e ct ed t h e fact that g o ods b ought t o b e s old

,

in t h e last p e ri o d hav e shrunk in valu e an d that th e n ew p e ri o d

S h oul d n o t b e ask e d t o tak e o v e r by inh e rita n c e g oo ds with a

han dicap attach e d S in c e ou r pu rp o se is t o de t ermin e t h e divi

.

sion of ultimat e profit an d l o ss b e twe e n pe ri ods w e sh ould put ,

e ach pe ri o d o n its ow n f e e t Th e shrin kage in valu e o f t h e l e ft

.

o v e r st ock is a c o st o f t h e vain att e mpt t o s e ll it an d is charg e abl e

t o t h e p e ri o d in which it was m e an t t o b e s o ld an d su re ly S h o ul d ,

n o t b e th rust in to a n e w p e ri o d hich w oul d b e han dicapp e d by it

w .

Th e n e w p e ri od sh oul d b e giv e n cre dit on t h e o th e r han d fo r an y

, ,

p rofit that it may mak e on t h e l e ft ove rs of t h e p e ri od b e fore an d

-

that pr ofit is t h e diff e r e n c e b e tw e en t h e p ric e at which it inh e rits

fai rly an d its s ellin g p ric e (l e ss s e lling co sts) S t ock purchas e d .
2 86 U
TH E F ND AM EN TAL S OF A CCOUNTIN G

for sal e in t h e n ew p eriod o n t h e o th e r han d is charg e able t o th e

, ,

n ew p e ri od an d h e n c e if o ur acc o u n ts ar e t o S h o w t h e hi sto rical

,

facts t h e am o un t carr i e d t o t h e n ew ye ar S h ould b e c o st Th en

,
.

t h e diff e r e n c e b e tw e e n t h e actual co st an d t h e actual s e llin g pr ice

( l e ss s e lli n g c o sts ) wi ll b e sh o wn o n t h e acc o u n ts o f t h e n e w p e

ri od wh e r e in r e ali ty it b e l on gs
,
A s a matt er of fact howeve r in
.
‘

, ,

p r actice this di visi o n of in v e n to ry in to it ems b ought for past sal e

an d it ems b o ught f or futur e sal e is n o t mad e but f o r t h e sak e o f ,

c on se rvatism all ar e usually carr i e d at co st o r marke t whi ch e ve r ,

”
is l owe r B y c o st o f c o urs e w e m e an c o st aft e r all dis cou n ts
.
, ,

availabl e have b e e n subtr act e d wh e th e r th e y w e r e actually tak en

,

o r n o t f o r w e hav e o bs e rv e d tha t a l o st di sc o un t is n o t a par t o f

,

t h e c o st o f g oo ds but a paym e n t for e xt e n d e d u se of o th e r pe o pl e s

’

m on e y .

Inve ntori e s of Raw Mat erial Th e c on side r ati on s o f t h e las t

.

par agraph hav e much we ight whe n appli e d t o t h e r aw mate ri

als o f ma n ufactu re If ma rke t p ric e s have fall e n an d w e tak e
.

t h e in v e n to ry at t h e r e duc e d price s t h e l o ss falls on t h e ye ar

,

whe n th e p rice s de clin e d and th e am oun t cha rge d t o t h e p roduc t

,

of t h e late r ye a r whe n th e ma te rial is con sum e d in man ufactu rin g

will b e l e ss than th e mate ri al actually co s t In o th e r wor ds th e .
,

actual c o st o f th e go o ds man ufac ture d from th e s e r aw ma te rials

will b e un de r stat e d b e cause a par t o f tha t c o st was absorb ed b e
fo re th e mate rial was use d Is tha t d e sir abl e ? D O w e wi sh ou r
.

c o st accoun ts t o S ho w wha t o ur product actu ally c o st o r what i t ,

might have co st if w e had b ought materials diff e r e n tly ? If we are

t o sh ow actual co st w e mus t carry th e inv e n to ry t o t h e bala n c e
,

sh e e t (an d th e re fore t o t h e n ew p e ri od) at c o st e v en th ough tha t ,

ove rv al u e s (in r e sp e ct t o pre s en t marke t p ric e) som e o f ou r p rop

e rt y . A s w e shall see in th e foll owin g chapter s howeve r t h e bal , ,

an c e sh ee t is at b e st a po o r indi cato r o f mark e t valu e s and it is ,

Of d oubtful adva n tag e t o sa crific e t h e c o st figu r e s that w e can ,

p erfe ctly w e ll k ee p fo r th e a ttempt t o show ma rk e t figu re s tha t

,

w e ca nn o t e v e r S h o w w e ll It is th e r efor e wis e t o car ry raw ma

.

t e rial b o ught distin ctly fo r fu ture u s e a t c o st s o that it may ge t ,

in to th e acc oun ts at c o s t for t h e pe riod for which it was pu r chased ,

an d r e duc e t h e in v e n t o ry o f raw mat e rial in cas e o f a d e cli n e in

t h e ma rk e t only wh en such ma te rial has b een l e ft ov e r from o ve r

2 88 U
TH E F ND AMENTAL S OF A C COUNTIN G

t L
C api al os s e s a s Co s t s . Aki
in de e d virtually a part of
n to, ,
‘

t h e di visi o n o f c o sts b e tw e e n p e ri o ds is t h e acc o un tin g t r e atm e n t

o f S O call e d l o ss e s o f capital
-
C apital is an y w e alth d ev o te d t o
.

pro ductio n wh e the r cash n e c e ssary f or curr en t paym en ts o r

,

ass e ts o f a d e cid e dl y l on g en du r in g typ e lik e buildi n gs an d ma

-

chiner y It is comm on h owe ve r t o sp e ak of ass e ts of th e l ong

.
, ,

e n du rin g typ e as capital ass e ts f or th e y ar e e xp e ct e d n ot t o b e

,

e xhaust e d in o n e u s e lik e raw mat e rial suppli e s p o stag e an d

, , , ,

o th e r curr e n t it ems but t o f o rm part o f t h e e n du ri n g capital o f

,

t h e busin e ss C apital is supp o s e d t o b e c o nsum e d in op e r ati o n s

.
,

an d w e hav e d e fi n e d c o st as di sappe ar an c e of as s e ts in t h e acqui

s i tio n o f o th e r ass e ts ; but s om e tim e s ass e t s disapp e ar n o t n o r

mally but e xtr aor din ar ily S upp o se a shippin g c o mpan y o p e r

.

at e s a fl e e t of tw e n ty ve sse ls o ve r r egul ar ly e stablish e d ro ut e s ,

an d e ar ly in a fin a n cial y e ar l os e s a v e ss e l b e f or e it has had an y

e ar n in gs . If t h e l o ss o n t h e ve s se l wr e ck e d (valu e l e ss in su r an ce
r e c o ver e d) e xc e e ds t h e n e t e arn in gs of t h e o th e r nin e te en ve ss els
f or t h e y e ar has t h e c ompan y mad e a pro fit or suff e r e d a l o ss ?
,

Th e qu e stio n mi ght als o b e put in t his f o rm : must c o n v e r si on s

k e e p capital in tact (supp osin g non e withdr awn ) b e fore profit can
b egin ? A s w e hav e alr e ady se en a c o st is ne ver m e r ely a c o st : i t
,

is t h e c ost of s om e thin g IS t h e disapp e ar an ce of a par t of th e

.

value of this ve ss e l a c o st of t h e e arn i ngs of t h e fl e e t fo r thi s p e

rio d ? If s o t h e ye ar S h ows a l o ss Thi s Is su r ely so if t h e l oss o f
,
.

o n e such v e ss e l a y e ar is an e xp e ct e d in cid e n t of o pe ratio n s if

t h e l o ss o f o n e v e ss e l a ye ar is n o r mal o n t h e ave r ag e If n o t this .
,

l o ss is in cide n tal n o t t o a sin gl e y e ar but t o s e ver al an d sho uld b e ,

tr e at e d as a c ost of s ev er al ye ar s e arni n gs To pro vide for such

’
.

th e y d o o ccur It sh ould b e n ote d t o o that if th e s e lo ss e s are

.
, ,

n atu r al t o t h e busi n e ss as th e y ar e in t h e s hi ppin g busin e ss f o r

, ,

i n sur an ce t o full valu e is n ot usually p o ssibl e a fai r p r op or ti on ,

earnings b ef or e profits are foun d Profits have n ot b e en mad e .

u nl e ss t h e gr o ss e arnin gs c ove r such pr ovisi on al on g with t h e

oth e r cos ts A n en t ry d ebi tin g In sur an c e Charge s and cr edItIng
.

.
 WH E RE D o PROFITS B E GIN ? 2 89

Provisi on for M a itim r e Hazar d as d e scrib e d in C hapte r VIII

, ,

gives assu r an ce that t hi s fact is n ot fo r go tte n It in dicate s that .

a par t of t h e asse ts will pr obably disapp e ar late r as t hi s y ear s ’

shar e of n ormal capital l o ss e s Thi s is un like th e r e se rve re com

.

m en de d on pag e 2 6 6 : that is a par t of what is b e lie v ed t o b e

p rofits but may p r ov e n o t t o b e pr ofits ; this is b e li e ved to b e a
,

n e c e ssar y d e ducti on f r o m e ar ni n gs an d h e n c e n o t t o b e p r ofits

, ,

but may prov e t o b e unn e c e ssar y or large r than n e c e ssar y an d

h en c e t o b e profits afte r all If on t h e o th e r han d n o pr ovi
.
, ,

sion has b e en made in th e past f or capital l o sse s wh en th e y o c ,

cur t h e p or tion n ot b el on gi n g t o t h e curr e n t y e ar as a n ormal

-

o p e r atin g c o st must b e tak e n o u t of surplus e n te r e d as a d e ficit , ,

charge d di r e ctly t o partn er s or ca rri ed as a d ef : rr ed as se t Th e

,
.

o nly d e fe n se fo r th e last is in case th e lo ss o ccu r s so e a rly that

n o Oppo r tunity has b e e n giv e n fo r p ro vidin g fo r such l o sse s an d ,

it is p re sumable o n t h e law o f av e rage s that th e n e ar futu re

, ,

will e scap e th em ; so tha t thi s is a co st bo rn e n ow fo r t h e futu re .

In case a d eficit is sh own it is w e ll t o call it C apit al D eficit t o

, ,

disti n guis h it from an y accumulat ed deficit arisin g fr om n o rmal

op er ati o n s . It can b e wip e d out by late r cr e dits t o Pr ovision
fo r M ar itim e L o ss e s t r an sfe rr e d t o C apital D eficit If t h e l o ss .

occu r s afte r suffi ci en t p rovisi on for manth e l o ss es has b e en

made an en try de bitin g Provi si on for M ar itim e L oss es an d c r ed
,

itin g th e st eamship acc oun t or an all owan ce acc oun t is all that
is n e c e ssa ry .

S t ate me nt of S ur pl us . We have n ow se en that a c ompl e te

story o f a busin e ss may re quir e n ot t w o but th re e statem en ts .

Th e o pe r atin g stat e m en t ( or in c om e sh e e t) sh o ws t h e busin e ss o f

t h e pe ri o d as it is cha rg e abl e an d cr e di tabl e t o t h e pe ri od but it ,

d oe s n o t S how items that th ough th e y oc curre d in t h e pe ri od b e

, ,

lon g pro p er ly t o o th e r p e ri ods Th e balan c e sh e e t sh ows t h e

.

e ff e ct o f b o th s e ts o f it ems but cann o t di stin guish b e tw e e n th e m

, .

S o a thir d state m e n t is o fte n d e si r abl e t o sh o w what chan ge s have

tak en plac e in su rplus durin g t h e last pe ri od A dditio ns may .

have b e e n mad e t o surplus fro m e xtr aordin ary kin ds of gain such
as re fun ds of tax e s l evi e d in e ar li er p eriods un de r e rr on eous mt er
p r e t at i o n s o f law a
,
n d c o ll e cti o n s o f d e bt wr itt e n o ff in p r e vi o us

pe riods as un c o lle c tible ; an d n um e rous deduc tions may b e made ,

2 90 TH E F ND AM ENTAL S U OF A C COUNTIN G
'

as for xc e ssive am oun t of de bt of e arli e r p e ri o ds prov ed un

an e

c o ll e ctible an d di sc ov ery o f ins ufli cien t pro vision fo r de pr e ciation

,

in e ar li e r p e ri o ds If such fac ts are n o t re p or te d t o o wn e r s th e y

.
,

may w e ll c omplain that th e y ar e n o t k ept inf orm ed of all th e y

sh ould kn o w .

C apital G ai n s Akin t o capit al l o sse s discusse d ab ove but op

.
,

p os i t e in n atu r e ar e capital gain s W,

h e r e t r usts ar e in v o lv ed
.

faulty acco un tin g for th e m s om e tim e s l e ads to gr e at in j ustic e .

S upp o s e a buil di n g is o wn e d by an e stat e o f which t h e in c om e is t o

b e r e c e ive d by o n e b en e ficiary an d t h e prin cipal o r capital is t o b e
k ept in tact for an o th e r for u se after t h e d e ath of t h e lif e b en efi -

ci ary ; if n ow b e caus e o f cha n g e s in r e al e stat e c o n di ti o n s th e

,
-

buildin g is s old for a large r sum than its p re vi ous valu e is t h e gain ,

a gain of capital or of in c om e ? S upposin g this gain has c om e n o t

fro m r e al e state op e rati on s c o n ducted by th e trust ee as a re gular
-

par t of hi s man ag em en t of t h e e stat e but from p e culiar ci r cum ,

stan c e s in d e p en d e n t o f n o rmal op er ation s it has com e as an in ,

c re as e in t h e capital of t h e e state n o t as in com e of an y par ticular,

y e ar o r of an yg s erie s o f ye ars (unl e ss in d ee d t h e pro pe r ty was se , ,

cure d in t h e fir st in sta n c e f or t h e purp o s e o f catchin g t h e gr o wt h

in r e al e state valu e s in which cas e a n ew s e t o f acc o un tin g con
-

sid er ati on s in v olvin g a goo d d e al of math ematics b ec om e s

, ,

in v olv e d) S uch gain of capital sh o uld b e cre dite d t o C apital

.

S urplus s o that it shall n o t b e c om e c on fus e d with accumul at e d

,

g e n e r al surplus or undivid e d p rofi ts an d suff e r distributi on as

, ,

regu lar di viden ds misle adi n g t h e sto ckh o lder s as t o th e e arn

,

ings of th eir p r op e r ty an d p o ssibly givin g t o a life b e n efi ciary

,
-

p ro pe r ty that sho uld b e h e ld as capital t o e arn in c om e late r for

b oth lif e b en efi ciary and r emaind e r b en efi ciary
- -
.

S pe cial G ain s Occasion ally gai n s akin t o capital gain s j us t

.

discuss e d are mad e an d ye t th e y ar e curre n t rath e r than capi t al

,

gain s If a busin e ss fin ds in t h e dull s e as on that i t has surplus

.

c ash whi ch it will n ee d in t h e active s e as on it may temp or arily ,

inv e st that cash in st ocks an d b o n ds s o that it may b e e arn in g an

i n c om e If in addition t o t h e in te re s t an d divide n ds e arned i t
.

fin ally s ells th o s e st ocks an d b on ds at a profit or mak e s s eve ral ,

chang e s of in v e stm en t that yi e ld a p ro fit that profit is p rofi t of ,

t h e p e rio d For conv eni e n ce in o rd e r n o t t o c onfus e t h e st o ck

.
,
2 92 TH E F ND AM ENTAL S U OF A C C OUNTIN G
2 . A trial balan ce on D ecemb er as f ll w
o o s

C apit al S t o c k
d
B o n s Is s u e d
k
S t oc o f A fiiliat e d Co mp anie s
A cco un t s ay a le P b
A cco un t s R e ce i a le vb
Pur c h ase s

v
In e n t o ry , 1
/ /
1 20

In t e r e s t
Ta e s x
In s ur an ce
Wage s
S ale s
x
Ofli ce E p e nses
Adv ert i sing

L f m
o s s ro B ad D e ts b
m f m
In co e ro In v e s t mm ts

S urp lus

Th e in v t y m ha di
e n or D mb 3 at t i
of erc n s e on ece er 1 cos s

th e m k t val
ar f th i v t y i
e ue o Th adv ti i g i
e n t
en o r s e er s n s no

no w ti i g b t th h b
co n nu n appa t d li i al i
u ere as ee n no re n ec n e n s es s n ce

d Of t h al f g d t app val
,

i t w di ff t i
as s on nu e e s es , ar e or oo s s en on ro

Of th wag $ 5 hav b i d i th
.
,

an d t y t a
no pt d e cce e e es , 00 e ee n n cu rre n e

al f g d t d I a t th am t f $3 h xpi d
.

s e o oo s re ur n e n sur n ce o e ou n o 00 as e re

d agai t th mpa y t th am t f $
.
,

an d i t th a
n e re s as ccru e ns e co n o e oun o 1 00.

Of th h e caswhi h w iv d l mad i C a ada i i c as r ec e e o n sa es e n n s n

a Ca di a ba k d i w th i thi t y b f x t a di a y
, ,

na n n an s or n s coun r ecau se o e r or n r

x ha g di ti
, ,

e c n ly
e co n D i g th y a
on s , o n fa t ur n e e r o ccoun s

rec e ivabl hav b w itt ff f whi h

e e ee n i f al m d i
r en o , o c s or s es a e n

1 9 9 1

Sh w
.

p ati g tat m t
o an o erd th pl
n a s t f th y ae en an e sur us ccoun or e e r
S h w al th fi al b la h t
, ,

1 9 20 o so e n a n ce S ee

A pla t whi h at t h b gi i g f a fi al y a h b d p iat d t

. .

n c e e nn n o sc e r as ee n e r ec e o

p d a p d t
ro d i
uces
g t h y a at a t x
ro l iv f
uc ur n e e r cos e c us e o

d p iati f Th e timat d d p
,

e r ec on , o iati f th y a i e s e e r ec on or e e r s

At t h d f th y a h w v th pla t i ld f
e en o e e r, o e er , e n s so or

Sh ld d p
ou i ti ef re c a b ha g d a t f t h p d t ?
on o e c r e as co s o e ro uc

Of E plai wh y y a w x y d n d t t t h t f
ou ns er as ou o , an s a e e cos o
th p d te ro uc

Fi d t h t f th fi al p i d d th bal a h t at
.

n p ti g e o e ra n co s s or e sc er o an e n ce S ee
th d f it f m t h fi g
e en o gi v ro b l w e ur es en e o

L dg b l b f l i g th b k D 3 9 f ll w
.

e er a an ces e o re c os n e oo s ec 1 1 2 0, o o

C apit l S t k ivabl
.
,

a Pla t
oc B ill R An s ece e c

co un st R iv bl e ce Ca h a e Bill Payab l A s s e o

coun s t Payabl S al e W g S ala i R w

es a es r es a
 WH ERE D o P ROFITS BE GIN ? 2 93

Material M e rch an dise D iscoun ts Taken M erchan

dise D iscoun ts Given $4 4 0 Power Ins uran ce $ 1 5 5 Tax es
$ 3 1 0 In te r es t C harges $ 4 1 0 C o mmiss ion C harges Offi
, ,

ce

S upplies $ 1 80 S un dry E xp e ns es
, ,

Repairs $ 6 8 5
, ,
D ep reciat io n
$ 4 2 5 . S urplus
A ddition alf m ti i b tai d f ll w t in or ivabl t a on s o ne as o o s : n o es rec e e no

s h w th b k am ti g t
o n on e di t d i 9 9 w t
oo s o un n o sco un e n 1 1 e re o

d yp t t d d will b tak p t m w; f p ifi d
,

a r o es e an e en u o -
orro o s ec e ac

iv bl d v b
,

t
co un s d recef p i fi aa t e i an l o un s ec e cco un s r ece a e ar e

d m d b d ; i a xpi d i $ ; ta hav a d ag i t th
ee e a ns ur n ce e re s 1 00 xes e ccr ue a ns e

co mp y $ ; i te t liability i $ ; mmi i liability i $ 5 ;

an 2 00 n r es s 1 00 co ss on s 1 2

th ei v t y f n w mat ial i
e n or b t i t ma k t val
o ra er s s u s r e ue

i
s d th i v t y f ppli
an i $8 ; t dde n en or o su es s 0 no r ecor e on

th b k i a l
e j t
oo s d — s v t m h d $75 oss us occu rre a se ere s or as on e 0
damag t th pl t b t $6 f th am t i
e o e v abl f m
an , u 00 o e oun s re co er e ro

i a
n su r n ce

Th bala h t f th Adh iv Ch mi al C d aw p b y t h
.

e n ce s ee o e es e e c o as r n u e
f ll w
.

t i
r e as urer s as o o s

$ A dI m 23 ccr ue te s
A R iv bl
c co un t s A P bl
e ce a e c co un t s ay a e
M h di e r c an N P bl
se o t es ay a e
R M i law C i l S
at e r a k ap ta t oc
S pl ur us

D i id d v en s

ma k t val f th la d i
To day t h e-
d f t h b ildi g
r e ue o e n s an o e u n s
i
s Th m ha di h a ma k t val f e erc Of n se as r e ue o

th eG d i P oo s -
d f tiv d hav a p val
n -
r ocess , ar e e ec e an e s cra ue

o f Th G d Will p t a dv t ie i g am
oo i
p g f a re r ese n s an er s n c a n o

f w y
e g Th fi t
ears t a o. fi y a g b t
e x u res cos ve e rs a o, u ar e

no w w th ly or Th divid d on h w w d la d tw e en s s o n e re ec re o

y g b t hav
ea rs v b laim d b y th th t kh ld
a o u e ne er e en c e e en s oc o e rs .

Of a t ivabl
ccoun s th g l ll t ib ilit y i
rece tim t d at e, e ene ra un co ec s es a e

I th bala
s h t e t ? If d f d it
n ce s If t what h l d
ee co rrec so , e en no s ou

b d t it ? S h w th b la h t y thi k it h l d
.
,

e t o ne o co rr ec o e a n ce s ee as ou n s ou
l k
oo

hav ag d t ll y tp t f ma f a t d g d f
.

6 Y ou e ti ree o se our e n re o u u o nu c u re oo s or

What h l d
.

tw y a o t a i t at t pl
e rs o an% f th tsso c a e co s us 1 0 o e co s s ou

hav ha g d f th g d whi h w p d d i t h fi t y a
.

y ou e c r e or e oo s c ere ro u ce n e rs e r

un d th diti gi
er th
e con t p ag P Th g d w ons a t ally v en on e nex e e oo s e re c u

so ld for
2 94 TH E F ND AM ENTAL S U OF A C COUNTING

Tr ial B alance, Dec 3 1

k
.

Capital S t oc
Real E s t at e
Acco un t Re ce i v bl
a e

Raw M ate rial

P lan t
C as h
S ur plus
Wage s 81 S alaries
M ain t e n an ce
In s uran ce
Ge n e ral E pe nse s x
Re n t o f Real E s at e t
Fire oss L
Sale s

Th e re al es tate
inclu des prope rty o ccu pie , d
an d prop e rty

d
r e n te , h
T e re is no n ee d for an allo an ce for a e ts , w bddb
m
fo r yo u r o n e cu s to er is s ur e t o p ay fo r th e goo s d
Th e in e n to ry of v
d
.

goo s in pro cess at t h e e n d is

- -
of raw material, Th e
plan t h as ep r eciate d d
Wages 81 S alaries inclu es d
o f un earn ed s al arie s , pai d d uring

h
a s u t d o Wn du e t o a u el s ortage ,
-
/ ‘

f h d
p ai for t h e in s t allation o f
k
a sprin le r syste , an d m d d v
p ai f or a mi nis trati e s alaries Th e
h d m h d
.

in s uran ce c arge in clu es ins uran ce o n plan t on e r c an ise

$ 600, an d o n r eal e s ta te rente $ 2 00 d Of

t h e G e n e ral E xpe n s es o n e
h d d m f h d d
.

t ir w as in curre fo r anu acturing, an d tw o t ir s for a mi nistra -

df m
tio n Th e fir e loss res ulte ro a fir e in th e re nted prope rty A d
v hv b d hv b
. .

minis t rati e cos ts of a e een incurre b u t a e n o t ye t ee n

p a d
i f o r

h w wh h
.

C o ns truct an ope rati ng s tatement to S o e t er th e sellin g

w h
p rice w as in accord ith the cos t plus contr act ; an d s ow t he s urpl us
-

accoun t for the year .

2 96 U
TH E F ND AM ENTAL S OF A CCOUNTIN G
les cence is go in g o n rapidly ; f o r obs ol e sc e n c e g oe s on day an d
night , S un days an d h o lidays , wh e th e r t h e machin e is us e d much

or littl e an d s o som e tim e s on e must ge t e ve n with it by f or cin g

,

t h e machin e t o d o all it can b e f o r e o bs o l e sc e n c e r e n d e r s it w o rth

l e ss Th e e xtr e m e cas e o f thi s w o uld b e o n e in which t h e only
.

c ost f or we ar an d t e ar w ould b e d e pr e ciation with out main te

n an c e . S upp o sin g such a machin e t o e n du r e thre e ye ar s with ou t
r e pair s o r replac em en t of par ts after th e p o licy is d e cid e d up on ,

t h e o p e r atin g stat em e n t will S h o w e ach ye a r a charg e for d e pr e

ciat ion ( witho ut an y for main ten a n c e) an d a re duction of t h e
,

machi n e ry acc o un t o r an in c r e as e in t h e allowan c e accou n t fo r a

, ,

similar am ou n t Th en wh en r e plac em en t of t h e e xhausted pr o p

.

e rt y tak e s plac e a cha r g e will b e mad e t o t h e machin e ry acc o u n t

,

(or t o th e all owan c e acc oun t t o r e duc e t h e siz e of t h e r e cor d e d

“
h ol e in t h e r e st o r in g t h e o rigi n al situati on M ain
.

t en an ce d o e s n o t app e ar o n t h e b ooks at all Thi s is of c ou r se

.

rath e r th e or e tical than r e al for it is hardly c on c eivabl e that pr op

,

e rt y S h o uld ru n th r e e y e ar s with o ut s om e r e pai r s e v en th o ugh it

,

w as t h e w isg p o licy t o r e duc e r e pai r s t o a min imum an d t o ex

haust t h e p r op er ty as r api dl y as is co nsiste n t with e co n o my ; but
this cas e illustr ate s what w e m e an by a p olicy of d epr e ciati on as
c on tr ast e d wi th a p o licy of m ain t e n an ce .

M ainte nan ce with out D e pre ciation Much m ore c omm on is

.

t h e r ev er s e cas e
. It is tru e that n o pi e c e of pr op e rty c an b e main
t ain e d in p ristin e valu e by r e pai r s o r by r e plac em e n t o f par ts f o r
, ,

o bs o l e sc e n c e g o e s o n an d can n o t b e o ff s e t ; but pr o p er ty in la rg e

aggr e gati on s can b e main tain e d f or whil e s om e pi e c e s ar e gr owin g

,

l e ss valuabl e by o bsol e sc en c e o th e r pi e c e s may b e r eplac e d by

,

substitute s that have gr e at er valu e than what th e y r eplac e d A .

S impl e illustr ati on o f this is rail ro ad e quipm e n t A r o ad may

.

hav e w o rth o f l o c om o tiv e s an d car s som e n e ar ly n ew

, ,

s om e of ave r age age an d s om e ab out r e ad y f or t h e scr ap h e ap

,
.

Le t us supp o s e that du r in g t h e y e ar it s en ds t o t h e scrap h e ap

e quipm en t havi n g a valu e o n t h e b o oks o f an d that ,

after allowin g for re pairs made t h e d e pr e ciati on on th e r e st of t h e

,

e quipm en t am o u n ts t o S upp o sin g ( f or t h e sak e o f

illustr ati on th ough p r actically thi s is n o t quit e p o ssibl e) that th e
,

aban don e d e quipm en t has n o valu e t h e to tal de pr e ciati on is of

,
 D EPRECIATI N A ND O MAINTENAN CE 2 97

c ou r se but if du rin g t h e pe ri od n ew e qui pm en t is b ought

fo r t o re plac e that d e p r e ciate d n o d e p r e ciati on of t h e
,

pr op er ty as a whole has o ccurr ed ; for th ough s om e of that whi ch

was p r evi ously n e w has gr own old e r an d s om e which was of ave r
,

age age is n o w app r o achi ng aba n d o nm e n t an d still o th e r is re ady

,

fo r aba n d on m en t so much has b e en add e d in valu e th r ough t h e

,

substituti on o f n e w e quipm e n t for that whi ch was a ye ar ago

ab out r e ady f or aban d onm e n t that t h e n e t c on diti on o f e quip
,

m e n t as a wh ol e is exactly what it was a ye ar ago an d n o d epr e cia ,

tion takin g t h e ye a r as a whole has o ccurr e d though during

, ,

parts of th e y e ar dep r e ciati o n has b een in curr e d an d in o th er parts

has b e en o ve rcom e Th e balan c e sh e e t wi ll sh ow n o chan ge and
.
,

th e o p e r atin g stat e m e n t f or th e wh ol e p eri o d will sh ow

f or main ten an c e .

M ainte n an ce with D e pre ciation C omm on ope ratin g c ondi

.

ti ons in volv e b o th main t en an c e an d de pre ciation n ot on ly from ,

Ch oic e b u t fr om n e c e ssity In t h e fi rst plac e s om e kin ds of prop

.
,

e t ty cann o t b e e c o n omi cally main tain e d f or t h e sim pl e r e as o n that

,

con sistin g o f who l e s an d n o t of parts an d lastin g man y ye ars there

is n o way t o r eplac e th em e xc ept at lo n g in t ervals Th ough t h e .

o r e ticall y a machi ne c an b e k e pt in go od c on diti o n f ore v e r by t h e

r eplac em e n t o f o n e par t afte r an o th e r as th e par ts w e ar out in ,

fact this is virtuall y imp o ssibl e for o bso l esc e n c e s e ts in A build

, .

in g o n t h e o th e r han d b e in g a structural u ni t must b e m or e or

, , ,

l e ss destructive ly torn t o pie c e s wh e n ev e r r eplac em en t of parts

o ccu r s . Th e o n ly way in which a buildin g can b e m ai n tain ed
without d e pr e ciati on is by c on stan t addi ti on s an d imp r ovem e n ts
in on e dir e ctio n that Offs e t in e vitabl e l o ss of usabl e valu e ( or S har e

in fin al disapp e ar an c e o f valu e ) in an o th e r s o that s o t o spe ak

, , ,

lik e t h e n autilus on e m ov es ou t o f t h e o ld building in to t h e n ew

bit by bit un til t h e old is aban do n ed This is o f c ou r s eextr em e ly
.

rar e Th e onl y o th er cas e in whi ch r e al e state can b e main tain e d

.

is that in which man y pie c e s of r e al es ta te ar e h e ld an d d e pr e cia

ti on on so m e is offse t by impr ove m en ts on o th e r s ; but sin c e usu
ally an d d esir ably e ve ry pie c e o f r e al e stat e is gi v e n a s epar ate
, ,

l ed g er acc o un t (as s e par at e pi e c e s of e quipm en t an d machin e ry

ar e n o t) this is n o t in p r actic e a situati o n that av o ids d e p re cia
,

tion S o n ormally depr ecia tion and main tenance are co in ciden t
. .
2 98 U
TH E F ND AM ENTAL S OF A CCOUNTING

D e pr e cia ti on of Ne w Pr ope rty . A

th e r kin d of cas e com
no

monly in v o lve s u n av o idabl e de pr e ciati o n e v en th o ugh on its face

it s eems a c as e wh e r e main t e n an ce will s e rv e all n ee ds If a busi .

n e ss has a n e w plan t thr o ugh o ut e v e n th o ugh th e e quipm e n t c o n

,

sists as a wh ole of man y par ts s o that it s e e ms p o ssibl e t o off se t

d epr e ciation o f s om e p art s by impr o v e m e n t of o th e rs so lon g as ,

t h e p r o p e r ty is fai rly n e w n o appr ec iab le n u mb e r o f par ts n e e d

re plac em e n t an d n o o pp or tu nity is o ff e r ed t o offs e t t h e d e pre cia
ti o n of all A ll are d e p re ciatin g t oge th e r Ne ve r again pr e
. .
,

s umab ly will th e plan t b e all n e w

,
at l e ast such a ci r cumstan c e
is un lik e ly t o happe n again in a gr e at man y ye ar s in t h e sam e
busi n e ss f or n o t all parts will have th e sam e lif e o r d e pr e ciat e
at th e sam e rate S o it virt ually is impo ssibl e by main t e n an c e
.

t o r e st or e t h e plan t f o r t h e o rigi n al c on diti on o f u ni v e r sal n e w

,

n e ss is imp o ssibl e o f at tain m e n t Th e c as e b e co m e s lik e that

.

o f r e al e stat e though n o t from th e n atur e of th e pro p er ty but ,

f rom t h e circumstan c e s att en din g its pu r ch as e Only in cas e ad .

dition s w e r e mad e t o t h e plan t an n uall y o ff s e tti n g t h e gr adu al

,

d ep r e ciation can t h e valu e of th e wh ol e b e main t ai n e d To put

,
.

th is in an o t h gr way th e n ormal con diti on of an y plan t is on e of

,

half n e wn e ss
-
s om e pr op e r ty n ew s o m e of ave r ag e age s ome
, ,

o ld an d so m e in all t h e in t erm e diat e stag e s ; aft e r e quilib r ium has

,

o n c e b e en e stablish e d that is a n ormal w orkin g bas is

, th e
task of main ten an c e is t o k e ep t h e p r op er ty as effi ci en t as p os
sibl e at th e gre ate st age c onsiste n t wi th e c on omy an d of de ,

p re ciati on is t o r e pre se n t t h e c o st or o utlay that main ten an c e has

n o t tak e n car e o f .

Th e D e b it s an d Cr e dit s R em e mb e ring that b o oks ar e n o t

.

k ept written up t o t h e tim e w e must n ow s e e tha t what will b e

,

d ebite d at t h e time of adjustm en t d e p e n ds larg e ly o n t h e tim e of

makin g an en try an d t h e cr edit d ep en ds upon t h e d ebit If at
,
.

t h e tim e of makin g an e n try t o b r in g t h e b ooks t o t h e tim e w e fi n d

that w e have n o t main tain ed our pr op er ty f or t h e p er i od w e d ebit ,

D epre ciati on an d cr e dit t h e p r o pe rty o r A ll owan c e for D e pr e cia

ti on ; if we fi nd that w e h ave main t ain ed our prop er ty w e make no
e n try f or M ain t e n an c e has alr e ady b e e n d e bit e d an d C ash (
, or

s ome o th er re al accoun t) has b e en cr edi ted ; if o n t h e o th er han d , ,

t h e pr o p er ty h as alr e ady b ee n writt en down on th e b o oks f or d e

300 km U
F ND AMENTALS OF A CCOUNTING
fo r r eplac em e n t o f valu e that has al r e ady b e en writt en d own ; to
M ain tenan ce for re placem en t of valu e b efore it has b e en writte n
,

d own In cas e t h e p rop e rty has n o t b e en writt en do wn directly

.

but has b ee n writt e n down through a con tr a or all owan c e ac , ,

c ou n t t h e substituti on oi t h e all owan c e accoun t f or b o th t h e d e bit

,

an d t h e c r e di t t o t h e p r op e rty acc ou n t c ompl e t e s t h e illustrati o n

o f e n tr i e s .

Obj e ct ion to Fre q ue nt Re cor d of D e pre ciati on In t h e e xampl e .

give n in t h e p r e c e din g par agraph it will hav e b e en n o t e d that in

,

cl osin g t h e b o oks f or th e s e f our m on ths $ 1 5 0 will b e tr an sf e rr e d

t o Op e ratin g E xp e n s e s o r o th e r cl e ari n g acc o u n t f r o m D e pre cia
ti on an d 5 0 will b e tr an sf err e d from M ain t en an c e ; an d t h e
,

charg e s t o b e ca rri e d t o t h e op e r ati n g stat em en t c on sist o f $ 1 5 0

f or d e pre ciati on an d 5 0 f o r mai n t e n an c e Y e t this is fals e
. It .

giv e s a distin ct imp r e ssion of n e gl e ct of t h e pr op er ty an d th ough ,

it d o e s n o t o ve r state c o sts it d oe s misr e pr e s en t t h e kin ds of co st

in curr ed That is t h e obj e cti on t o en try of d epr e ciation on b ooks
.

o f acc o un t b e f o re t h e e n d o f t h e p e ri o d t o b e r e p o r t e d f or b e f or e ,

t h e e n d o f t h e p e r i o d t h e d e p r e ciati o n may b e o v e rco m e by main

t en an ce an d f if t h e p r op e rty or allowan c e has al r e ady b e e n c r e d
,

i t e d f or th e d e p r e ciati on t h e e n t ry f o r r e sto ra ti on must d ebit t h e

,

p rop er ty o r all owan c e acc o un t an d l e av e t h e fals e impre ssion on

D ep r e ciati on u n c orr e ct e d To r e p or t thin gs t ruly th e n e ith e r
.
, ,

d e pr e ciati o n sh ould n ot b e e n t er e d un til t h e end of t h e p eri od ,

wh en it may b e k no wn or a de vic e for c orr e ctin g t h e misl e adin g

,

statistical figu r e s sh o uld b e adopt e d In thi s cas e t h e obvio us .

,

thin g is at th e time o f t h e $ 1 5 0 of re sto r ation accomplishe d in

A pril t o mak e an addition al en try t o o ve rcom e th e depre ciati on
o f t h e fi r st th r e e m o n ths d ebi tin g M ain t e n an c e an d c r e di tin g
,

D epre ciati o n A s this en try involve s o nly statistical accoun ts

.
,

an e xchan g e o f classifica ti on o f an it e m fr o m o n e sta tis tical ao

c ou n t t o an o th e r an d as t h e ultimate di sp o siti on of t h e charge

,

is t h e s am e in which ev e r place its stan ds (Op e r atin g E xp e n s e s or ,

L oss and G ain or what n ot ) it is no t onl y harmle ss but de sir able

, ,

if statistics ar e t o b e us eful I t is b e tte r t o av oid t h e misle adin g

.

first en tr y an d th ereby av oid th e n e c e ssity for t h e s ec on d or cor

r e cti on en try This may b e accomplish ed by a t emporary or
.

in te rim acc ou n t for d epr e cia tion .

 D EPRE CIATI N A ND O MAINTENANCE 301

Re pair s , Re place me nt s , an d B e tt e rm e n t s Repair s c onsist of .

minor cha nge s re storin g t h e p ro pe r ty t o s e rvic e ability or prev en t

ing it fr om b e c o mi n g un s e rvic e abl e wh en th e chan g e s con sist in
t h e alt e r ati o n o f adjustm e n ts chan g e in t h e shap e o f parts sub
, ,

s tit u ti o n of sma ll pa r ts n ot in te gr al but sub or di n at e u n its ( sub

o r din at e parts b o lts nuts r ods e t c
, ,
but n o t in t e gr al par ts like
, ,
.
,

fe e ds whe els fram es

, ,
Re plac eme n ts on t h e o the r han d
, , ,

c onsist o f t h e substituti o n of c omple t e u nits wh e th e r in t e gr al ,

par ts of sin gl e machi n e s o r wh ol e mac h in e s for old u ni ts aban

d on ed .Th e y e qually con stitute c o sts an d In on e p oin t o f vi ew , ,

th er ef or e n ee d n o diffe r e n tiati on In a n o th e r r e sp e ct h ow e ver

,
.
, ,

th ey are fun dam e n tally un lik e : r e pair s can n e ve r d o m o re t h an

off s e t d e p r e ciati o n fo r th e y can n ev e r mak e t h e p r o p e rty b e tt er
,

than it was b ef ore t h e re pair b e cam e n e c e ssary ; but r eplac em en t

may substitute a b e tte r par t or e v en a b e tte r wh ol e machi n e an d
th erefore improv e t h e p rop er ty t o b e tte r than its origin al state .

Re plac e m e n ts th e n may i n cr e as e ass e ts if th e y e xc e e d d e pr e cia

, ,

tion In that cas e t h e exce ss of r eplac em en t ove r depr e ciation

.
,
“ ”
n o t c o v e r e d by r e pai r s is o ft en call e d b e tte rm en t If ou r e sti .

mate d w e ar an d te ar ann u ally for a plan t is $ 1 if our repai r s

ar e $ 3 000 an d if ou r r e plac em e n ts ar e
, , d e pr e ciati on is ob
v iously but if ou r r epair s are an d ou r re plac em e n ts

ar e b e tte rm en t is obvi ously an d sh ould b e char ge d

t o t h e pr op er ty acc ou n t o r b e carri e d in a sp e cial acco un t fo r

,

be tterm en ts of p r op e rty S ome acco un tan ts dislik e t o add t o th e

.

pr op er ty acc oun t di re ctly u nl e ss an actual in c re as e in t h e n umb er

o f un its of plan t has o ccurr ed i e un l e ss th e r e ar e m or e things
. .
,

t o b e c o un t e d an d h e n c e carr y t o B e tt e rm e n ts all in c r e as e s in

valu e of p ro pe r ty wh e re n o in cr e as e in th e n umb e r o f pi e c e s of
p rope rty has o ccu rr ed S om e tim e s a di stin cti on is made b e tw een
.

d epre ciati on of pr op er ty co n tin u e d in u s e an d aban donm e n t of

pr o pe rty Wh en that is do n e D e pre ciati on is us e d for t h e first
.
, ,

an d Re tir e m e n t for t h e s e c on d ; b o th of c ou r s e are c o sts ; in m o s t

busin e ss es thi s is an unn e c e ssary refin em en t .

Me th od s of Es timatin g D e pre ciati on We have alr e ady oh .

s er v ed that t h e di str ibuti on o f d e pr e ciati on b e tw e e n p e ri o ds is

impor tan t It is also difli cult Th e difii cult y aris e s from t w o

. .

cause s : t h e t o tal d epr eciation i tse lf is impossibl e t o l earn until th e

302 TH E F ND AM EN TAL SU OF A C COUNTIN G

e n d of th e u se of pr op e rty ; an d t h e el em e n ts e n t er in g in t o a
th e
basis for fai r di stributi o n b e tw een pe ri ods are s o n um er o us an d so
confl ictin g that Ch o ic e b e tw e e n th e m is b o un d usually t o appe ar

t o vi o lat e fai rn e ss s om e wh e r e N o att e mpt can b e mad e h e re to

.

discuss all t h e p ri n cipl e s o f distributio n t o t ak e up all t h e m e th ods ,

f oun d in pr actic e o r e v en t o S h ow th e comm on r at e s of d e pr ecia

,

tion appli e d t o sp e cific kin ds of proper ty S uch things b elon g in a .

b o ok o n d e pre ciati o n A ll w e can d o h ere is t o give a few illustra

.

ti ons of comm on m e tho ds an d prin cipl e s .

S impl e B a s e s of D e pr e ciati o n Th e m o st o bvi o us basis for

.

d epre ciati on is tim e f or p r o pe rty d e pr e ciat e s thr ough m ere lapse

,

of tim e esp e cially b e caus e of obs ol e sc en c e an d o f w e ath e rin g

,

( b o th o utsid e w e ath e r in g an d in sid e climatic c o n diti o n s ) It also .

depre ciat e s lar g e ly from u se w e ar an d te ar an d h e n c e pro duct is

, ,

an obvi o us basis f o r d e p r e ciati on A gain sin c e t h e value of pro p

.
,

e rt y is d e p e n d en t o n what it will pr o duc e an d aft e r a mach in e has ,

r e ach ed a c e rtai n limit of maximum producti on it n ot o nl y pr o

duce s l e ss an d p o ssibly p o or e r g o ods but c o sts m or e for re pairs
, ,

an d o p e rati on t h e d e pr e ciati on may tak e in t o acc o u n t its valu e

,

in such r e spé h t s Th e s e an d o th e r c on sid e rati on s are p er tin en t

. .

Th e main difli cult y with th em is that th e y c onflict an d t o giv e ,

th em due w eight w ould m e an elab orate math ematical calcula

ti on s t o fi n d t h e am o u n t of e mph asis e ach sh o uld have .

Th e S traigh t Lin e Me th o d
-
Th e simpl e st basis is t h e tim e
.

”
b asis givin g what is c omm only call ed t h e str ai ght li ne m e th o d
,
-

b ecaus e on a gr aphic chart t h e lin e of t h e valu e o f t h e pro pe rty is

straight If for e xampl e a machin e c o st
.
, ,
is e xp e ct e d t o
last eight y e ar s an d th e n t o have a scrap valu e of $ 1 00 t h e ann ual ,

d e pr e ciati on is — 1 00) It n e gl e cts at l e as t

thr e e r ath e r imp or tan t facts : (I ) one do e s no t n e e d t o sav e $ 1 1 2 5 0 .

ou t of product n ow and e ach y e ar f or e ight ye ars in or d e r t o ao

cumulat e $ 900 in e ight y e ars f or m on e y will e ar n i n t e r e st an d
, ,

h en c e le ss than a y e ar is s ufli ci en t ; (2 ) t h e machin e will

r e quir e m or e r e pairs in lat e r pe riods an d h en c e t o di stribut e its
, ,

cost ev e nly o v e r all p eriods t h e pe riods in which r e pair charges

,

ar e low sh o uld b e ar m ore f or d e pr e cia tio n ; ( 3) t h e product of th e

machine may n o t ru n e v e nly ove r th e y e ars an d pr obably will ,

i Thi s is s hw
o n h
grap ically on p age 305 .
304 TH E F ND AM ENTAL SU OF A CCOUNTING

D epr eciation

I t is Cl e ar that u n d e r this m e th od it w ould b e a c onv eni en c e t o

hav e d e pre ciation e n t er ed dir e ctly o n th e prop e r ty accou n t so ,

that t h e pe r c e n tag e c o uld b e applied di r e ctly t o t h e balan c e o f

that accou n t e ach ye ar This m e tho d it will b e observed take s
.
, ,

much larg er shar e s in e arly y e ars than in lat e for its purp o se is t o ,

abs orb a g ood d e al of d e pr e cia tion in th os e y e ar s A r e as on fo r .

d oin g thi s in additio n t o tha t al r e ady m en ti o n e d is that sin c e

, ,

d epr e ciati on can b e tak en only by gu e ss at b e st an d p oo r j udg ,

m en t may l e ad t o fals e h o p e s it is wis e t o tak e it lib e rally in e ar ly

,

y e ar s s o that if obs ol e sc en c e o ve rtak e s th e machin e un e xp e c tedl y

,
o
t h e l o ss will n o t h e su ff e r e d t oo h e avil y all at on c e .

Th e Re d uc in g Fracti on M e th o d
-
Th e math ematical diffi cul ty
.

of t h e r e ducin g balan c e m e th o d is on e dr awback t o its u s e A

-

c onv eni en t substitute li e s in arbitr ary fr acti on s that pr o duc e ap

pro ximately t h e sam e r e sul t s What w e d e sire is a s e ri e s of fr ac
.

tions that will pr ogr e ss according t o a definit e plan an d will

am ou n t t o u nity an d w e wish o n e fracti on f o r e v e r y ye ar o f t h e
,

life of t h e machin e If w e d e cide t o us e fr action s o f whi ch t h e

.

den omin ato r shall b e common t o all an d t h e n um e rat o r S hall b e

d e cr e as e d by on e e ach ye ar w e fi n d s oluti on of ou r pr obl em e asy
, .

If for th e last y e ar t h e fr ac ti on is I /x fo r th e pr e c e din g year i t

,

will b e 2 /x for th e n e xt pr e ce di n g 3/x e t c S in c e all ou r fr ac

, , .

ti on s t oge ther must e qual u nity s o as t o depre ciate th e pr o pe rty

,

fully our d e n omin at or must b e e qual t o t h e sum o f t h e n um e ra

,

t or s an d th e high e st n um er at o r will e qual t h e n umb e r r epre sen t

,

in g t h e lif e of t h e ma chi n e S o t o fi n d ou r d e nomin at o r w e add t o

.

g e th er t h e n umb e r s r e pre s en tin g t h e y e ar s of lif e ; as

+4 + 5 +6+ 3 6 Th e n t h e
. d e pr e ciation f or t h e first ye ar
1
h
T is is h
s own by a h h
grap ic c ar t on page 3 05 .
 D EP RE CIATI N A ND O MAINTENANCE 0
3 5
will b e 8/3 6 for t h e s e con d 7/ 36 an d co n tin uing so as to give t h e
, ,

se ri e
s or a t o tal

of 3 6/3 6 This app li ed n o t t o t h e d e cr e asin g valu e of t h e p ro p

.

ert y b ut t o its o rigin al valu e giv es d e pre ciati on an d valu e s f o r o u r

case ab ove as fo ll ows :

B ook value
Cos t 1 000

En d y ear 1

»
)

e
s

u
m
a
!
s
m
Thi s
is m ost c on v en i en tly han dl ed wh en de pr e ciati on is carri ed
to Allowan ce for D epr e ciation for th e fracti on s are appli ed
,
l
always t o o rigin al C OS t 1 11 111 V VI VII VIII
-
rv . . . . . . .
.

Th e mo st c onv eni en t way

t o c o mpar e t h e s traight
li n e an d t h e reducin g
balan c e m e tho d o f d ep re
ciat io n is t o p r e se n t t h e

b oo k valu e s un de r t h e tw o
m e tho ds in t h e fo rm o f
a gr aphi c chart In t h e .

char t sho wn t h e ho rizo n tal

,

lin e s ar e plac ed at in te r
v als t o rep re se n t hundr e ds
o f do llars o f valu e remain

in g in t h e p ro pe rty an d
1 0°
,

t h e v e r tic al lin e s t o r ep r e
1 d d h
If it is es ire to use t is type o f m hd et o d
b u t no t t o ge t so grea t a iff e renc e
d b w d m
in ep reci atio n e t een early and la t e years , t h e e no in ato r in t he las t year may
h h w
b e gr eat er t an 1 , say 5 : t e n t h e se ries o ul d f
run as o llow s :

1 0/ 6 8 , h h hw bv h
On th e gr ap i c c art s o n a o e t is
w d v
oul v h h f v b
gi e a flat t e r cu r e t an e i t er t he r acti o ns gi e n a ov e o r t h e pe r cen tage s
d
of th e r e ucin g alan ce b m hd w d
e t o , fo r i t oul v
gi e a 5 0% d ep re ci at i o n at a li t tle

h d wh b h h d w
-

lat er t an th e end o f th e th ir ye ar , e reas ot of t he o t e rs p ro u ce 5 0% ell

bfe ore the end of t h e thir d

y ear .
306 U
TH E F ND AM ENTAL S OF A CCOUNTIN G

se n t th e e n ds o f ye ars o f t h e lif e o f t h e machine Th e str aigh t .

o bli qu e lin e sh ows t h e valua t i o n o f th e machin e un d e r t h e

str aight lin e m e thod b e ginn in g at

-

, p assin g t h e e nd o f
y e ar I at th e l e v e l o f t h e e n d o f y ea r II at t h e l e ve l o f
$ 77 5 e t c an d e n din g with a scrap valu e o f $ 1 00 Th e cu rv e d lin e
, .
, .

S h o ws th e sam e s o r t o f thi n g fo r t h e r e ducin g balan c e m e th o d an d -

giv e s a v e ry h e avy drop in valuati on in e a rly y e a r s an d a sl o w

dr op in late ye ar s v e ry n e a rly o n e h alf b ei n g w ri t ten off in th e
-

fir st t w o y e a r s .

Application of B lanke t Rate s It is obvious that if deprecia tion .

must b e tak e n in to accoun t for lar g e groups of asse ts at on ce ,

rath e r than fo r sin gle ite ms of pr op e rty it is d e sir abl e t o classify ,

items of pro p e r ty in such a way that n o tw o ite ms subj e ct t o dif

f e re n t r at e s o f d e pr e ciati on shall b e carr i e d t o t h e s am e pr ope rty
acco un t If this p re caution is tak e n it may b e p o ssibl e t o apply
.
,

a r ate of d e p re ciati on t o a wh o l e pr ope r ty acco u n t at o n c e an d

thus r educ e t h e lab o r of calculati o n t o a minimum This is actu .

ally p o ssibl e h ow e ve r only if on e of t h e t wo f o llowi n g suppo si

, ,

tion s is tru e :G all pro pe rty in th e accoun t is of t h e sam e age or t h e ,

str ai ght li n e m e thod of d epr e ciati on IS us e d ; fo r o th e rwis e th ough

-

t h e r at e s might b e t h e sam e f o r c o rr e sp o n di n g y e ar s in t h e lif e o f

t h e machi n e s th e y w ould n ot b e applicabl e at actually t h e sam e
,

tim e s Thi s is an ad di ti on al r e as on f or t h e p opularity of th e

.

str aight lin e m e th od : t h e sam e r ate is appli e d t o all p rop e rty of

-

t h e sam e typ e t h e sam e e stimat e d lif e ) an d h e n c e it is ap ,

pli e d t o all prop e rty in t h e accoun t f or o n e class irr e sp e ctive of ,

its age .

Appr ais al M e th od S ome time s n o pr e de te rmin e d plan or r ate

.

o f d e p r e ciati on is ad o pt e d but e ach y e ar an e xami n ati o n is m ad e

,

o f t h e p r op e r ty an d t h e shrin kag e is d e te rmin e d by o bs e rvati on .

Thi s sh o uld b e in d e pen d e n t o f chan g e s in mark e t pric e of c o r re

s p o n din g n e w pr o pe rty fo r w e are c o n c e rn e d h e r e n o t with re
,

plac em e n t but with d e pre ciation of o ld as w e saw o n p ag e 2 79 , .

Wh en valuati on can b e fo un d an d di stributi on of d epr e ciati on ,

o v e r p e r i o ds can b e m ad e m or e accur at e ly t his way than by a p re

d e termin e d r ate this is a b e tte r m e th od

,
.

Pr ovi din g f or Re place me nt S o far w e hav e c o n sid e r e d only

.

th e c os t asp e ct of d e pr e cia ti o n Th e busin e ss man ag e r is usually

.
308 U
TH E F ND AMENTAL S OF A C COUNTING
u tiliz es machin e ry an d chan ce s t o b e c on duc ted wi thou t profit
star ts a y e ar with t h e f o llo win g simple balan ce sh ee t .

Cas h Accounts Payab le

Accounts Receivable Proprietor
Machinery

t t
S upp o s e , t o m ak e t h e illustr ati on a s e ve re e s of t h e principl e ,
t
that in t h e f oll owin g p e ri o d n ot all bills are c o ll ec e d U sin g th e
.

s impl est p ossibl e tr an sacti on s for a ye ar s o pe r ati on s , but tran s

’

ac ti on s ne ver th e l e ss typical w e may have

,
th e fo ll owin g en tri e s .

P ur chas es/ Cas h

Expe ns es / Cas h
D e pr e ciat io n/ Mach inery
A ccoun ts Re ce ivable/ S ales
C as h/A cco un ts Rec eivable
Lo ss an d Gain/ Pur chases
Lo ss an d Gain / Expens es
Lo ss an d Gain/ D epreciation
S ales/ Loss an d Gain

S upp o sin g we n ow hav e n o inven torie s or accru e d it ems , we ge t

t h e f o ll owin g balan ce sh ee t .

Cas h A ccounts Pay ab le

A ccoun t s Re ceivab le Proprietor 5
Machin ery

We obs erve a t o n c e that b o th to tal ass e ts an d propri e tor shi p are

in t act Wh e r e is t h e p r op e rty available for re placin g t h e machin
.

e ry? It li es in t h e in cr e as e o f cash an d o f accoun ts re c e ivabl e .

Th e fact that t h e balan c e sh e e t still is in balan c e with out a d eficit

,

or shrink age in pr o pri e to rship shows that t h e ass e ts have n ot d e

,

clin e d an d h e n c e t h e m e a n s of r e plac e m e n t must b e th e re s om e

whe r e A part o f t h e machin ery has b e en lit e rally c on ve r te d in to

.

cash an d accoun ts r e c e ivabl e Qui te t h e sam e thi n g w ould b e

.

t rue if for t h e cr edit t o M achin e ry w e had substitute d a cr e dit to

A llowan ce f or D epre cia tion Our balan ce sh ee t would th en have
.

b e en bigge r o n e ach side but b o th side s would hav e b e en

,

statistically padd e d s o t o sp e ak
,
by t h e o v e rvaluation of ma
chin e ry on one side an d th e allowan ce on th e o th er It would s till
.
 O
D E PRE CIATI N A ND MA INTENANCE 0
3 9
be tru e,h ow eve r that asse ts for r eplac em en t are in th e busin e ss
,

an d sho wn o n t h e bal an c e S h ee t fo r afte r all o w in g f or t h e paddin g

,

t h e ass e ts ar e as valuabl e as b e f or e t h e c on ve r si on .

S pe cial Pr ovisi on f or Re pla ce me nt W e hav e s een that if d e

.

pr e ciati on is n o t n e gle cte d in t h e acc ou n ts an d l o ss has n ot b e e n

suffe r ed an d capital has n ot be en withdr awn ass e ts must b e ,

availabl e fo r r e plac em e n t A furth er p r e cauti on must b e tak e n

.
,

h ow e v e r 4 that at t h e tim e r e plac em en t b e co me s n e c essary th e

ass e ts in t o which th e o ld p r op er ty has b e e n c o n v e r t e d shall b e

liquid en ough t o s e rv e f o r re plac em en t If machin e ry in a mill

.

has b e en gr adually d epre ciat ed an d t h e c on v er t e d ass e ts accumu

lated an d th e n th o s e c on ve r te d a ss e ts have b e e n in v e sted in a
,

n ew dam f o r t h e mill t h e p r op e r ty o f t h e mil l as a wh o l e is in tact ;

,

but t h e machin e r y cann o t b e r eplac e d fr o m t h e dam an d h en ce ,

o n e kin d o f fix e d p r o pe rty has b ee n c o n v e r t e d in to a n oth e r kin d

of fix ed pr op e r ty an d re plac e me n t o f t h e first is n ow imp o ssible

o u t o f t h e c o n v e rt e d p r ope r ty e xc e pt afte r a n o th e r l on g an d this
, ,

time a very lon g n ew c on version Watchf ulne ss is re quir ed to

,
.

mak e su re that lin e s are laid t o have liquid ass e ts availabl e wh en

n e ed e d Th e su r e st way t o d o this o f c o u r s e is t o s e t asid e
.
, ,

ass e ts ye ar by ye ar in a sp e cial fu nd fo r r e place m e n t Thi s usu .

ally is d o n e by buyin g S e curiti e s that are r e adily sal e able an d

d ebitin g th e m t o Re plac em e n t Fu n d S e curiti e s The n w e have .

o n ou r bala n c e sh e e t t h e p ro visi o n fo r re plac e m e n t sp e cially la

b ele d wh e re as t h e o the r m e th od l e ave s it as an indistin guishabl e

,

pa r t o f ge n e ral ass e ts in dicat e d only by th e fact that an allowan ce

has b e e n s e t up (a rathe r in con spicu ous lab e l) o r that th e fix ed
prop e r ty acco u n t has b e e n writte n d o wn (vi r tually an invisible
lab e l) Th e main o bj e cti on t o t h e s e ttin g as id e o f a replacemen t
.

fun d is that usuall y a busin e ss can e a rn la rge r in co m e with capital

that it utilize s in its o wn op e r ati o n s than with what it l en ds o r
in v e sts outsid e an d that the r e fore it may at t h e sam e tim e accu
,

mula t e a r e plac e m e n t fun d an d e a rn an e xtr a p rofit by applyi n g

its co n ve r te d asse ts t o its o wn di re ct activiti e s Wh e n ca re is .

take n that th e funds b e no t t oo much ti ed up thi s is o ften good ,

po licy .

Wh e n N0 Re pla ce me nt is C onte mplat e d S om e tim e s replac e

.

m en t is imp o ssibl e b e caus e supply o f t h e ass et is limi ted and no

3 1 0 U
TH E F ND AM ENTAL S OF A C COUNTIN G
mo re can b e had This is n o tably tru e of min e s quarri e s oil
.
, ,

w e lls e t c Th e s e c o n v e r t so call e d wasti n g ass e ts

,
.
-
“ ”
Op e ra .

tion s co n sist p rima rily in e xhaustin g th e asse ts an d o nl y waste ful

e xpe n s e c o uld b e i n v o lv e d in puttin g n e w ass e ts back In such .

in dustr i e s d e p r e ciati o n is a sp e cially imp o r tan t e l e m e n t If it is .

n e gl e ct e d wh e n p ro p ri e t o r s ge t back th e i r capita l in th e p ro duc t

,

th e y wi ll thi nk t he y are g e tti n g p ro fits an d wh e n t h e p rop e r ty is

,

e xha ust e d th e y will sudd e n ly wak e t o t h e fact that n o t o n ly hav e

p rofits stopp e d but capital h as disapp e a re d If o n t h e o the r .

,

han d d e p re ciati on is p r op e rly r e c o rd e d (in this cas e it is usually

,

call e d d e ple ti on t o sh o w that no t o n ly valu e but physical

prop e r ty its e lf has di sapp e a r e d) at th e e n d o f e ach p e rio d th e ao
,

c oun ts will mak e e vid e n t t h e fact that an app re ciabl e pa r t o f th e

ass e ts ar e m e r e c on v e r sion s an d n o t p rofits If th e busin e ss can
.

n o t w e ll u s e t h e s e c o n v er t e d ass e ts fo r e xpa n si o n it will usually

,

distribut e th e m t o o wn e r s ; but th e ma n ag e r s should le ave n o

sto n e u n turn e d t o mak e cl e ar t o o wn e r s that a par t o f th e dis
t rib u tio n is capital an d n o t p r o fits .

S e cr e t Rege rv e s . Th e c on trary o f t h e e rro r discuss e d in t h e

p re c e di n g par agraph maki n g in suffi ci e n t cha rg e fo r d e p re ciati on
, ,
”
r e sults in what is c omm on ly call e d a S e cre t r e s e rve T hi s will
.

r e sult e qually h owe ve r fro m e xc e ssiv e char ge s t o M ain te n an c e

, ,
.

S upp o s e in t h e cas e giv e n o n pag e 3 0 1 with e s timate d we ar and

,

te a r at re pairs at an d r e plac e m e n ts at

t h e wh o l e o f r e pai r s an d r e plac e m e n ts had b e e n cha rg e d

t o o p e rati o n s an d n on e t o b e tt e rm e n ts If t h e e stimate o f we ar
.

an d t e ar is c o rr e ct s o m e facts ar e hi dd e n : pro fits hav e b e en u n

o f t h e o utlay was n o t c on sum e d in m

,

d er s ta t e d f o r
,
akin g
t h e p ro duct of th e y e a r ; an d ass e ts hav e b e e n u n d e r stat e d fo r ,

of b e tte rm e n ts hav e n o t b e e n re p o r te d amon g the ass e ts .

A part of th e p rofits (bo th th e credit to p roprie to rship and th e

d ebit t o t h e asse t acc ou n t) are s e cre t B e in g s e c re t th e y are re
.
,

s e rv e d from distributi on : h e n c e t h e n am e A n y o ve r stateme n t of

.

e xp en s e s with c o n s e qu e n t u n d e rstat e m e n t o f ass e ts (

, for t h e as
s e ts are d e em ed to h ave di sapp e ar e d wh en th e y are still e xistent)
e stabli sh e s a s e c r e t r e s e rv e.

Wh at is M ainte nan ce ? We have obs e rv ed tha t tre atin g as

no min al ( d epre cia tion or m ain te n an c e) wha t should b e t re ate d as
3 1 2 U
TH E F NDAM ENTAL S OF A CCOUNTIN G

of th e p e ri od ; but cha rgin g t o t h e ass e t accoun t is call e d charg

”
in g t o capital fo r it assum e s that t h e e xp e n ditu r e in vo lve s an
,

additi on t o t h e p rop e rty o r capital in t h e busin e ss It is obvious .

that th e to tal e xp e n ditu re o n acc o un t o f r e place m en t o f p rop e rty

must b e charg e d e ith e r t o M ain t e n an c e o r t o t h e ass e t acco un t ;
fo r u n l e ss t h e e xp e n di tu re is wast e d it re plac e s o ld p rop e r ty n o t
writte n d o wn o r adds p r op e r ty (e ith e r r e placin g p rop e r ty a lre ady
,

w ritte n d o wn o r addin g n e w p ro p e r ty ) S in c e M ain te n an c e is

, .

o n ly t e mp o ra r y o r statistical an d t h e balan c e sh e e t is t h e fin al
,

d e stin atio n o f all figu r e s w e ar e c on c e rn e d p rimarily with th e

,

e ffe ct o f th e s e va ri ous p o in ts o f vi e w up o n that sh e e t If w e .

charge t o capital i e t o th e ass e t acc ou n t t h e e ffe ct of re place

,
. .
, ,

m e n t o n t h e balan c e sh e e t is a chang e in t h e fo rm of asse ts

machin e ry in ste ad of cash ) but p rop ri e to r shi p is n o t aff e cte d If
, .

w e cha rg e again st r e v e n u e i e t o M ain t e n a n c e w e assum e that

,
. .
, ,

t h e r e plac e m e n t has m e re ly re sto re d p ro p e r ty c o nv e r t e d is a co st ,

an d a r e duc ti o n in p r o p ri e to r shi p o r an ofi s e t t o what o th er wis e

wo uld b e in c re ase s in prop ri e to r ship comin g thr o ugh t h e yi e ld

f rom co n v e r ted asse ts S o t h e e n tr y which charg e s t o capital
.

l e av e s p ropn e t or ship u n chan ge d an d that whi ch charg e s again st ,

re v en u e r e duc e s p rop ri e tor ship b e lo w what it would b e if th e re

plac e m e n t had n o t b e e n n e c e ssary ; an d it mak e s n o diff eren c e
wh e th e r w e thi nk in t e rms of ass e ts o r in t e rms of p rop ri e tor ship ,

for th e y are t w o asp e cts o f t h e sam e thi ng Wh e t he r w e shall .

charg e t o capital or agai n st re v e nu e is d e t e rmin e d by t h e basis of

capitaliz ati o n ; for t his d e cid e s what shall b e cha rg e d t o capital ,

an d t h e r e st o f t h e e xp e n di tu r e f o r r e plac e m e n t is cha rg e d agains t

re v e n u e .

Thr e e B a s e s of Capitalizati on Th e t e rm capitalizati on has .

”
m an y use s as to tal issu e of capital sto ck
,
to tal in v e s tm en t ,

capital sto ck an d b on ds issu e d an d boo k figu re of ass e ts

”
,
”
We .

are h e r e c o n c e rn e d with t he last o f th e s e us e s o nl y t h e figure ,

place d up on asse ts in boo ks of accou n t an d in re po r ts This is .

imp or ta n t o f cou r se f or an y misu n d e r stan din g is lik e ly t o mis

, ,

l e ad mi sle ad as t o profits as t o inv e st m en t as t o t h e rate o f

-

, ,

profits as t o so lve n cy H e n c e a basis fo r capitalization must b e

, .

cle arly d e fin e d Though th e fi v e sugg e s tion s as t o th e p o ssible

.

me an in g o f main tenan ce give n on page 3 1 1 app e ar t o off er fi v e

 O
D EPRE CIATI N A ND MAINTENANCE I
3 3
po in ts of vi e w with r e sp e ct t o capitalizati o n as a matte r of fact ,

t h e fi r st t w o co n stitute e n gin e e rin g rath e r than acc o un tin g stan d

a rds an d he n c e fo r acc o un tin g pu rpo s e s re quir e con ve rsio n in to
'

d o llar s and c en ts in th e fo rm o f o n e o f th e o th er th re e Th e s e .

o th e r thre e ar e m o r e o r l e ss acc e pt e d bas e s for acc o un tin g an d

n e e d e xami n ati o n B e fo re w e can choo s e b e twee n th e m h ow e v e r

.
, ,

w e must d e cid e what w e wish o ur bala n c e sh e e t t o sho w ; for

th ough co mm on ly th e t h re e base s o f capitalizati on giv e th e sam e
r e sults o n th e balan c e sh e e t in man y cas e s th e y p ro duc e re sults
,

wid e ly diff e re n t .

Th e Fun cti on of th e B alan ce S h e e t W e have s e e n all along

.

that all d ebits are fo r e ithe r ass e ts o r own e r ship claims an d that -

in an y cas e th e y pro duc e th e ir eff e ct o n t h e ba la n c e sh e e t ; f or if

th e y ar e fo r di r e ct acquisition o f ass e ts the y app ear di re ctly o n
th e sh e e t if for c o n v e r sio n o f ass e ts th e y app e a r as c o n v e r t e d if
, ,

for lo ss e s th e y re duc e pro p ri e to r ship an d if fo r paym e n t o f d e bt

,

the y r e duc e liabiliti e s It f oll ow s t he re f ore that an e rr o r any

.
, ,

whe re ge ts so o n e r or late r up o n t h e bala n c e sh e e t u nl e ss comp e n

sate d fo r by an o th e r e rr o r e ls e wh e re an d that th e r e fo re un l e ss
,

th e re are c omp e n satin g e rror s p rofits canno t b e right u nl e ss th e

balan c e sh e e t is right To say that w e must choo se a basis for
.

balan c e sh e e t figu re s th e re fo re is t o say that w e must also ch o o se

-

, ,

a basis for p rofit o r lo ss figu re s Th e us e s t o which a balan c e

.

she e t as a who l e are c o mm o nl y put are fo u r : (I ) d e te rmini n g

solve n cy in which case t h e ass e ts must b e tak e n at t h e valu e at
,

whi ch th e y c ould b e c on v e r te d fo r th e pu rp o se o f payin g d ebt ;

()2 d e t e rmin i n g th e advisability o f l e n di n g t h e busi n e ss m o n e y o r

givin g it c re dit fo r m e r chan dis e in w hich cas e t h e l e n d e r is co n

,

c ern e d n o t with ultimate c o n v e r tibility afte r t h e l on g an d exp e n

sive p ro ce ss e s of liquidati o n but with th e asse ts soo n availabl e fo r
,

payin g th e d e bt ; (3) d e termin in g t h e valu e of t h e asse ts n o t for

liquidatio n but for th e us e s of a goin g c on c e rn s o that o n e may ,

se e t h e p r e s en t valu e o f what is n o w utiliz e d in t h e busin e ss ; an d

( 4 ) d e t e rmi n in g what is n o w actually i n v e st e d in t h e busi n e ss by

its o wn er s i rr e sp e ctiv e o f what t h e sam e p rop e r ty o r an e qually
,

e ff e ctiv e p r o p e r ty w o uld co st t o day an d o f what it wo uld b r in g

-

to d ay if liquidate d It is o bvi ous at a glan c e that n o balan c e

.

sh e e t can n atu r ally s e rv e all th e se purpos e s at o n c e f or th e y are ,

3 4
1 . U
TH E F ND AM ENTAL S OF A CC OUNTING

c onfli ctin g Th e first an d th e last fo r e xampl e are c omm only

.
, ,

wid e apar t : e ve ry on e kn o ws that if h e tr i e s t o fo rce p ro p e r ty on

t h e ma rk e t f o r imm e di ate sal e it is lik e ly t o b rin g much l e ss than
c o st fo r p e o pl e must b e off e re d a v e ry low p ric e t o in duc e t h e m
t o buy what th e y ar e n o t n ow s e e kin g t o buy R e alizin g th e n .
, ,

that n o balan c e sh e e t can n atu r ally s e rv e all th e s e pu rp o se s at

o n c e w e must ch oo s e a basis an d r e aliz e always that o u r bala n c e
,

sh e e t is t o b e c on structe d o n that p rin cipl e : w e must n o t u s e it as

if it w e re c on structe d o n som e o th e r p r in cipl e Le t us s e e h ow far .

a balan c e sh e e t se rv e s th e s e use s o r an y o f th em
,
.

Th e B alan ce S h e e t an d S o lve n cy A lthough th e balan c e sh e e t

.

has much valu e as an in dicato r o f so lv en cy usually it cann o t ,

ca rr y o n e far towa rd a d e fini te co n clusi on S om e m e th o ds o f .

in te rp re tin g balan c e sh e e ts are di scusse d in C hapt e r XX ; but th e

fu n dam e n tal fact sh o uld n o t b e fo rg o tte n fo r a mo m e n t that a
larg e par t of th e ass e ts of m o st busin e ss e s are n o t h e ld fo r sale o r
fo r e a rly c on v e r si o n that if th e y w e r e put o n t h e ma rk e t an d s o ld
,

the y would b rin g but a small par t of th e ir b ook valu e an d that t o ,

judg e so lv e n gy by sal e valu e of ass e ts is t o n e gl e ct an imp o r tan t

busin e ss p rin ciple Th e valu e o f ass e ts t o a g oin g c on c e rn is far
.

gre ate r than th e valu e o f th o se ass e ts at a for c e d sale If a busi .

n e ss sh o uld put o n its bala n c e sh e e t at sal e valu e t h e it e ms o f re al

e stat e machi n e r y e quipm e n t e t c

, , ,
that it had just b ought for
.
,

c on ductin g op e rati on s it w ould b e gin with a larg e d eficit ; for th e

,

cash whi ch it had just giv e n up wo uld far e xc e e d t h e valu e t o b e

plac e d o n t h e b o oks in its plac e It is imp o ssibl e th er e fo r e for
.
, ,

b o o ks t o giv e a balan c e sh e e t that will sho w o utright with out ,

qualificati on s an d m e ntal adjustm e n ts for cir cumstan c e s t h e ,

liquidatin g s o lv en cy of a busin e ss u nl e ss th e b o oks are k ept on

,

that plan an d this d e stro ys th e ir valu e fo r guidan c e in op e r ation s ;

,

an d sin c e o p e r ati o n s ar e usual an d liquidati o n is ab n o rmal it is ,

b e tt e r that b oo ks sho uld b e k e pt as for a go in g co n c e rn S o th e .

n e e ds o f t h e fir st o f o ur f o u r us e s o f a bala n c e sh e e t must b e r e

p u di a t e d as a basis f o r capitalizati o n .

Th e B ala n ce S h e e t a s Cr e d it In d i cat o r Wh e n th e balan ce

.

sh e e t is us e d fo r guidan c e in d e te rmin in g wh e th e r cre dit shall b e

giv en t o a busin e ss vir tually t h e sam e p rin cipl e s apply as whe n it
,

is us e d for judging solv en cy Th e only di ff e re n c e is that a small e r

.
3 1 6 TH E FUND AM ENTALS OF A C COUNTI NG
to the valu e in on e ofi se ts th e d e cre ase in th e value in th e o th er s .

If th e valu e s of t h e t e n had b e e n writte n d o wn b e fo r e re p lac e

m en t th e r eplac em en t would b e charg e d t o t h e asse t acc ou n t but
, ,

w e assum e h e re that n o thi n g has b e e n writte n d o wn f or thi s pe

riod an d h en c e th e cha rg e is t o M ain t e n a n c e No w supp o s e that
“

.
,

fo r mac hi n e s sim ila r t o th o s e which o riginally c o st w e hav e

t o pay B y c o st of duplicatio n o f c o u r s e w e m e an n o t
, , .

t h e c o st o r mark e t p ric e o f duplicatin g t h e sp e cific p r op e rty h e ld ,

f o r that is o fte n imp o ssibl e as w e ll as u n d e sir able but t h e c o st o f

,

dupli cati ng th e productiv e capacity o r e ffici e n cy On th e c o st o i.

-

duplicati on basis w e wish ou r balan c e sh e e t to sh ow t h e valu e o f

o u r p ro ductiv e capacity an d n ow with t h e i n c r e as e in t h e pric e o f
,

t h e machi n e w e n e e d an i n c r e as e in t h e bala n ce sh e e t figu r e f o r

-

t h e n e w machin e o v e r t h e o ld S o w e will d e bit M ain t e n an c e for

.

fo r t h e r e plac e m e n t o f th e o ld c o st (t h e c o st o f t h e o ld
machi n e wo rn ou t ) an d th e asse t accou n t fo r th e $ 2 00 add e d
,

valu e that is ,
is cha rg e d agai n st re v e n u e and $ 2 00 t o ,

capital n o t on ly b e cause w e hav e actually paid $ 2 00 add e d c o st o f

re plac e m en t but b e caus e an yb o dy e lse would hav e t o pay that
,

sum also as enhan c e d ma rk e t pric e if h e w e re t o t ry t o duplicate

ou r p ro ductiv e capacity No w le t us o bs e rv e what w e hav e ac
.

complishe d Th e n e w machi n e is o n ou r b o oks at r eplace m e n t

.

valu e ; but all p ro p e rty n o t r e c e n tly r eplac e d is still o n at old v al

ues . In o th er w o rds e ith e r o u r balan c e sh e e t is a mixtu re of
,

base s with so m e at re plac e m e n t valu e s an d som e at o ld valu e s o r

, ,

e ls e w e must adjust all o u r o ld valu e s t o p r e s e n t r e plac em e n t

valu e s Th e o n ly way w e can in c re as e valu e s that hav e ris en is

.

t o cre dit s om e gain acc o u n t ; but thi s wh e th e r w e cre dit a cu rr e n t

,

o r an accumulat e d gai n acc o u n t is c o u n ti n g Chick e n s b e fo re th e y

,

are hatch e d whi ch w e hav e al re ady s e e n in C hapter XVII t o

b e highly obj e c ti o n abl e ; an d t h e o n ly way w e can r e duc e valu e s is
t o d e bit s o m e l o ss acc o u n t but w e hav e suff e re d n o lo ss if t h e
p rop e r ty is still d o in g its wo rk A s w e have alr e ady s e e n in C hap
.

t e r XVII m o r e o v e r re plac e m e n t valu e s hav e n o thi n g t o d o with

, ,

profits an d lo ss e s I n c re ase s an d d e c re as e s in r e plac em e n t valu e s

.

afi ec t th e futu r e r e qui r e m e n ts o f capital fo r c o n ti n ua n c e in busi

n e ss but th e y ca n n o t af fe ct t h e c o st o f pro ducin g with t h e o ld

,

prop e r ty S o th e y ca n n o t affe ct lo sse s

. .
 DEP RE CIATI N A ND O MAINTENANCE 3 7
1

Th e Fu tility of th e Co s t -
of -
D upli ca ti on B a s is E v e ry appre cia
.

b le chan ge in t h e c o st o f labo r of mate rial , ,

o f tax e s , e t c , aff e cts .

t h e p ric e o f c o mm oditi e s an d h en c e t h e r e plac e m en t valu e o f all

,

fixe d p rop e r ty as w e ll as o f all salabl e p rop e r ty E v e ry chang e .

in t h e rat e o f wag e s an d in t h e pric e o f b ricks of lumb e r o f build

, , ,

e r s ha r dwa r e
’
o f w in d o w glass,
e tc chan ge s th e re plac em e n t ,
.
,

valu e o f all b rick buildin gs stan din g at t h e tim e o f th e chan ge .

Re plac e m e n t valu e s are n o t in th e l e ast stabl e Th e valu e o f .

machi n e ry chan ge s with t h e rate o f wag e s with th e p ric e of i ron , ,

with th e co st o f fu e l t o m e lt th e iro n e t c e t c H ardly a day ,

.
,
.

passe s wh e n t he r e plac e m e n t valu e o f a plan t o f large siz e is no t

aff e cte d by ma rk e t Chan ge s To atte mpt t o hav e t h e b o oks sh ow .

such chan g e s e v e n if o n ly at th e tim e o f adjustm en t would m e an

, ,

v e ry h e avy accou n tin g c o st It woul d b e al re ady b e hin d th e .

tim e s mo re ov e r as so on as d on e Wh y th e n t ry to d o it ? B e
, ,
.
, ,

cause w e wish t o kn ow th e valu e ? Th e n why n o t hav e an ap

p r ai s al mad e wh e n o n e wish e s th e figu r e s ? A s a matt e r o f fact ,

duplicati o n c o sts can hardly b e calculate d fro m th e b ooks in any

c as e fo r boo ks d o n ot usually sho w so man y d e tail s of co st o f fixe d
,

as s e ts that o n e can apply a chan g e in o n e o r t w o e l e m e n ts t o t h e

o ld figu r e s Imagi n e e g tryin g t o d e t e rmin e fr om th e b oo ks

.
,
. .
,

t h e e ff e ct o n th e valu e o f a buildin g tw e n ty y e a r s o ld o f an in
, ,

c re as e o f 1 0% in wages Figu re s ad juste d t o chan gin g ma rke t

.

c on di ti on s are e xtrem e ly u n re liabl e witho ut app r aisal fo r few ,

p e ople know to what t o apply th e chang e s S in c e t h e b oo ks .

cann o t k e e p th e re co rds o f duplicati on valu e but can o nly adjust

fo r th e m si n c e t h e chan g e s ar e n o t d ue t o tran sacti o n s o f t h e
,

busin e ss sin c e t h e figu re s are b ehi n d t h e tim e s alm o st as soo n as

,

e n t e re d it is r ath e r absu rd t o e n t e r th e m at all

, In o th e r w o rds .
,

t h e figu r e o f duplicati on valu e o f a plan t cann o t b e go t f rom th e

‘

b oo ks in an y case is of o nl y mom e n ta ry valu e whe n put upo n

,

t h e b o o ks an d h e n c e if an y o th e r basis wi ll giv e m o re valuabl e

,

pe rman e nt inf o rmatio n that o th e r basis had b e tte r b e us e d .

Th e A ppli cati on of th e E arn in g Ca pa city B asis Le t us tu rn -

.

n ow t o t h e o th e r m e th o d o f sh o win g o n o u r balan c e sh e e t t h e

valu e o f th e busin e ss as a go in g c on c e rn c on sid e rin g it as an

e arn i n g machi n e Un d e r t h e e a rni n g capacity basis if a machi ne
.
-

co stin g w e re re plac ed by a machi n e t o do th e sam e wo rk a t

3 1 8 U
TH E F ND AMENTAL S OF A C COUNTING

a c o s t of charge for t h e
th e would d epe n d on cir
cum s t an c e s . If th e n ew machin e was judg e d t o e arn n o mo re
p ro fit th a n th e old th e wh ole $ 1 2 00 would b e cha rg e d again st
, ,
'

revenu e so as t o av oid in cre asin g th e capital charge ; but if it

,

w e re d e e m e d m o re productiv e o f re v e n u e th e p o rtion d eem e d

e quival e n t t o th e o ld e arni n g capacity w o uld b e charg e d t o M ain

t e n an ce an d th e e xc e ss t o capital This is base d o n th e th e o ry

.

that t h e valu e of e ve ry produc tiv e ag en t is d e termin e d by th e re

la ti on b e tw e en its e arn in gs and n ormal e arni n gs : if fo r e xample , ,

6 % i n t e r e st is n o rmal an y p roductiv e ag e n t that will pro duc e $ 6

,

e a rni n gs is w o r th $ 1 00 an d an y that will pro duc e $ is w o rth

, 9
$ 1 5 0 ; but if in t e re st is an y ag e n t that will p ro duc e $ 6 is

w o r th $ 1 2 0 an d an y tha t will p ro duc e $ 9 is wo r th $ 1 80 This

, .

basis fi n ds th e mark e t valu e o f th e busin e ss as a p ro ductiv e ag en t

rath e r than th e valu e of its ass e ts as r e plac e abl e in dividual e n ti
ti e s If t his p ri n cipl e w e re carri e d o u t lo gically an y re plac e m en t
.
,

that would yi e ld in e arnings mo re than th e capitaliz ed valu e of its

c o st sh ould b e e n t e re d o n th e b ooks at m o re than c o st : that is if ,

t h e o ld machi n e c o st an d e a rn e d $ 60 but t h e n e w c o st ,

an d €vo u ld e arn $ 7 5 t h e cha rg e sh ould b e

, t o M ai n
t e n an c e an d $ 2 5 0 t o ass e ts with a c r e dit o f
,
t o C ash an d $ 5 0
t o S urplus ( o r so m e o th e r gai n acc o u n t) ; f o r th e e a r n i n gs o f t h e

n e w ar e o n e f o urth g re at e r t han th o s e o f t h e o ld an d h e n c e th e
-

capitalize d valu e sho uld b e o n e fo u r th gr e at e r In p r actic e h ow

-

.
,

e v e r th o s e w h o u s e this basis usually h e sitat e t o Cha rg e t o capital

,

m o re than c o st If th e n o u r p o licy is t o r e plac e on e machi n e a

.
, ,

y e ar an d charg e t h e re plac e m e n t t o M ai n te n an c e t h e pu r chas e o f ,

a machi n e t o re plac e on e co stin g is wh oll y charg e a

b le t o M ain t e n an c e wh e n th e machi n e wi ll e a rn n o m o r e is cha rg e ,

abl e t o M ai n t e n an c e an d $ 2 00 t o t h e ass e t acc o u n t wh e n

t h e machi n e will e a rn o n e fi f t h m o re ( o r m or e than o n e fi f th
- -

m o re) an d is cha rg e abl e som e what m o r e than

,
t o M ai n
t en an c e an d s o m e w hat l e ss tha n $ 2 00 t o t h e ass e t acc o u n t wh e n
t h e e a r ni n g capaci ty is g r e at e r but n o t o n e fif t h g r e at e r -

Th e Futility of th e Ea rn ing C a pa city B asis -

Just as with th e .

duplicati on basis th e e fi o r t is n o t wo r th th e troubl e E arn in g

,
.

capacity is co n stan tly chan gin g E ith e r a par t o f th e ass e ts .

n tly acquir e d) will b e o n an e arning capa city basis an d

( th o s e r e c e -
3 2 0 TH E FUND AM ENTALS or A CCOUNTING
d e te rmin e d t hat w e ar an d t e ar amo u n ts t o a y e ar for this
g r oup o f machi n e s S in ce th e n e w machi n e c o sts
. w e hav e
re plac e d th e w e ar an d te ar an d hav e add e d t o ou r i nve s tm e n t
$ 2 00 .S o w e d e bit M ain t e n an c e an d th e ass e t acc ou n t

$ 2 00 This is in accord with th e histo rical facts m o r eove r : ou r

.
,

fo rm e r i nv e stm e n t was an d o u r p re s e n t in v e stm e n t

as th e b ooks S h o w If t h e n ew machin e for re plac e m e n t co st on ly

.

$ 800 w e sho uld cha rg e M ain te n an c e $ 800 o n ly an d D e p r e ciati o n

,

$ 2 00 t h e latt e r havin g fo r i ts co mpl e m e n t e ith e r a writin g

d own of t h e asse t accou n t o r an in cre as e in th e A llo wan c e for D e
p re ciati on ; an d th is would b e tru e whate v e r its e arn in g capacity ,

for w e have fai l e d by $ 2 00 t o replac e th e w e ar an d te a r .

Th e V alu e of th e Actu al C os t B a s is Th e c o st basis giv e s us

-
.

hi sto rical facts Th e ass e t acco u n ts r e p r e s en t o n thi s basis what

.

t h e pro p ri e to r s hav e in th e busin e ss what the y hav e actually

put in an d hav e n o t ye t go t ou t by withd rawal o r by d e p r e ciatio n ,

o r o th er c o n v e r si o n Un d e r t his m e th o d t h e balan c e S h e e t has

.

u nity all figu re s are on t h e sam e basis an d n e e d n o adjustm e n t ,

f o r chan g e s in ma rk e t p ric e s o r in e a rni n g capacity S in c e th e .

c o st basis gfi e s a figu re no t o nly hi sto rically w o r th whil e bu t un

r

o b tain abl e e xc e pt f ro m acc o u n ts k e pt strictly o n th e actual c o st -

basis it is t h e lo gical m e tho d

,
.

A n Illu str ati on Le t us e xamin e by a fe w cas e s t h e wo rkin g o f

.

t h e actual co st basis -
W e will supp o s e that (1 ) a machi n e co st
.

o rigin ally $ 5 00 ; ( 2 ) its e s t i1n at e d lif e was fo u r an d a half y e a r s an d

its sc r ap valu e was e stimate d at $ 5 0 so that d e p re ciation was put ,

at $ 1 00 a ye ar ; (3) it n ow stan ds o n t h e b o oks whi ch w ere ad ,

juste d six mo n ths ago and fo u r y e a r s afte r th e machi n e was

b ought at $ 1 00 ; (4 ) w e n ow aban don th e machin e an d e xchang e it
,

fo r a n e w o n e just lik e it c o stin g $ 5 00 but w e ge t an all o wan c e

, , ,

o f 5 0 f o r t h e o ld o n e Thi s is vi r tually t h e simpl e st p o ssibl e case

. .

Th e b oo ks n ow sh o w $ 1 00 for th e o ld machi n e an d wh e n w e hav e ,

in stall e d t h e n e w th e y sh o uld show $ 5 00 Th e cash which w e pay .

,

ho w ev e r is o n ly $ 4 5 0 Th e simpl e st e n tr y is t o d e bit t h e ass e t ac

,
.

c o u n t $ 4 00 (t o ge t it at d ebit M ai n te n an c e $ 5 0 (fo r th e
half y e a r s d e p re ciati o n which has n o t b e e n written o ff but is now
-
’

offs e t) an d c re dit C ash $ 4 5 0

,
We may ho w e v e r if w e p refe r
.
, , ,

fi rst d ebi t D e preciation for th e six mon th s lo ss of valu e an d th en ’

,
 D EPRE CIATI N A ND O MAINTENANCE 3 2 I

charge th e asse t acc oun t (o r th e allowan c e ) fo r th e full $4 5 0 r e

sto re d (fo r th e 5 0 scrap valu e n e v e r disapp e ar s but m ere ly
chan g e s its fo rm fro m t h e o ld machin e t o th e n e w ) If h owe ve r .
, ,

w e cha n g e o u r supp o siti o n an d suppo s e t h e n e w machin e t o c o st

$ 600 in cash plus th e surr en d e r o f t h e o ld ) w e shall Charg e
,

t h e ass e t acco u n t $ 5 00 t o r ais e it f ro m t h e $ 1 00 at which it n ow

,

stan ds t o $ 600 (fo r ou r in ve stm e n t is n ow $ 600) an d M ain te n an c e

$ 5 0 We do n o t n e e d t o lo ok at an ythi n g but t h e plain facts of
.

th e cas e u nin flu e n c e d by c o n sid e r ati o n s o f e a rni n g capacity o r

,

pre vi ous ma rk e t valu e : w e m e re ly cha rg e M ain te n an c e for th e

r eplac e m e n t o f sh ri nk ag e o f valu e sin c e t h e b o oks w e r e last ad

juste d an d charg e t h e ass e t accou n t fo r th e re st o f ou r paym en t

, .

Th e fact that th e o ld machi n e c o st $ 5 00 d o e s n o t e n t e r i n to o u r

c on sci ousn e ss at t h e tim e o f maki ng t h e e n try ; fo r that has b e en
tak e n ca re o f auto matically by th e d e p re ciati o n charg e s o f o the r
y e ars If w e n ow buy t h e n ew machi n e for $ 4 00
.
5 0 cash ) o u r ,

d e bit t o M ain te n an c e is 5 0 as b e fo re but ou r d ebit t o t h e asse t

,

acc o u n t is but $ 300 This automatically puts t h e asse t o n t h e

.

b ooks at $ 4 00 which is what w e n ow hav e in t h e machi n e ry

, .

A S e con d Illustr ation S uppo se a case S imilar t o th e ab ove

.

e xc e pt that wh e n th e p r o p e r ty has b e e n h e ld f o r t w o y e a r s an d

has b e e n d ep re ciate d t o $300 o nly a ch ang e in t h e d eman d fo r

,

c ommo di ti e s thro ws thi s machin e ou t o f u s e an d it is re plac ed by

a n o the r co sti n g $ 5 00 cash and $ 5 0 all owan c e fo r th e o ld
machin e ) S hall t h e machi n e ry stan d n ow o n t h e b ooks at $ 7 5 0
.

o r at $ 5 00 : shall t h e c o st of t h e n e w b e add e d t o th e b ook valu e o f

t h e o ld o r shall th e o ld b e w ritt e n d o wn t o sc r ap valu e b e fo r e th e

,

ne w is add e d ? Th e o ld machin e has had its tu rn it has d o n e its ,

—
w ork n o t to b e su re th e wo rk exp e cted o f it but t h e only
, ,

w ork avai labl e for it t o do : th e d epre ciati on an d obso le sc en c e o n

it are charge abl e t o its p ro duct an d h en c e no lon g e r rep r e sen t in
v e stm e n t Th e n egle ct t o allow en ough d e p re ciati on in th e tw o
.

ye ars was an e rro r in judgm en t (such as all busin e ss is subj e ct t o)

and must n ow b e c o mp e n sat e d fo r by a r e tro activ e cha rg e agai n st

su rplus or som e S imilar accou n t as will b e discuss e d in t h e n ex t

,

chapte r ; an d it should n o t b e carri ed in th e asse t acco un t e ven o n

t h e actual co st basis fo r as thing s turn e d o u t th e d e pre ciati on
-

was su ff e re d fo r th e product o f two years Th e en try for replac e .

3 2 2 U
TH E F ND AMENTAL S OF A CCOUNTIN G

m e n t wo uld then b e a d ebit t o S urplus fo r $ 2 5 0 (t o co rr e ct th e

e stimat e o f lif e o f t h e o ld machi n e ) an d t o t h e asse t acc o u n t fo r
,

$ 2 00 (t o i n cr e as e it t o th e co st o f t h e n e w machi n e ) an d a c r e dit ,

t o C ash f or $ 4 5 0 Lo ss e s of p rope r ty fro m o p eration should b e

.

re cogniz e d o n th e balan c e she e t by a r e ducti on in t h e acco u n ts

re p r e se n ti n g th e ass e ts lo st just as th e lo sse s will sho w o n t h e
,

in c o m e she e t an d in t h e re ducti o n in p ro p ri e to r s acc o u n ts ’

.

An oth e r Illustration S uppo se fin ally at th e e n d o f t w o ye ar s

.
, ,

o f th e lif e o f t h e machi n e wh e n it has b e e n d e p r e ciat e d t o $ 300 as

,

in t h e last cas e t h e l e gislatu r e pass e s a law fo rbiddin g t h e u s e o f

,

this mach in e b e cause (o n accou n t o f t h e ca r e l e ssn e ss o f e mplo yee s)

it has b e e n fou n d g e n e rally dan g e rous in u s e (t hough w e have
tak e n such pre cautio n s that w e have had n o accide n ts) W e n ow .

are f o r c e d t o aban d o n it an d t o buy a n o th e r p e r haps c o stin g $ 600 ,

.

S ha ll t h e c o st o f th e n e w b e add e d t o th e u n r e c ov e re d valu e of th e
o ld makin g t h e l e dg e r figu r e $ 900 or S hall t h e n e w stan d at $ 600
, , ,

wi t h t h e o th e r $ 300 cha rg e d t o S u rplus o r so m e similar acc oun t

p ro vid e d for e m erg e n cie s ? It sho uld in any case b e Cl e a r that th e
$ 300 sh rinkage in valu e b e caus e of th e act o f th e l e gislature is n o t
charg e able t6 th e cu rr e n t p e ri od alo n e What is th e actual amou n t .

o f t h e p r e s e n t i n v e stm e n t ? It is th e u nre c ov e re d v al u e o f th e o ld
machi n e $ 300 plus t h e addition al paym en t fo r th e n ew $ 600 ; fo r
, , ,

t h e in v e stm e n t o f t h e prop r i e to rs has n e v e r b e e n who lly r e co v e ra

b le f ro m t h e o ld . Th e facts r e ga r din g t h e o ld are n ow di ff e re n t
f ro m th o s e u n d e r our s e c on d cas e In t h e s e c o n d cas e t h e n a t ural
.

co u r se of e v e n ts sho r ten e d th e lif e o f th e machi n e an d th e re fo re ,

i n c re ase d t h e charg e fo r e ach y e ar o f its u s e an d t h e inv e ste d ,

capital had its o ppo r tu nity t o r e coup its e lf in th e p ro duct th rough

c o nv e r sion If it di d n o t d o so th e busin e ss sho we d a lo ss as i t
.
, ,

sh ould In thi s thi rd cas e ho w e v e r th e busin e ss was p re v en te d

.
, ,

by cause s exte rn al t o th e n atu ral cou r se o f e v en ts f rom re co v e rin g .

its capital th rough con v e r si o n : capital put in was r e n d e re d u n re

c ov e rable n o t by th e op e ratio n s o f busin e ss which th e capital was ,

inv e ste d t o en du re but by l e gislative in te rf e re n c e A pa r t o f th e

,
.

capital has n e ve r b e en go t ou t and hen c e as actual co st it is still

,

th e re th ough as salabl e asse ts it n o lo nge r e xis ts This is .

what is m e an t by th e actual co st basis -

what has b e en put in to

asse ts and has n o t y e t b ee n wi t hdrawn or u tilize d in op e ra tio ns .
3 4
2 U
TH E F ND AM ENTA S
asse ts ; fo r though it is tru e
L OF A CCOUNTING
tha t if th e o wn e r s o f th e busin e ss
,

hav e suffe re d lo sse s (o r e ven pro fits low e r than n o rmal) th e y may ,

e xp e ct t o hav e th e s e r e c o up e d an d may c o n sid e r th e m a so r t o f

claim o n t h e futu re t h e plac e t o loo k fo r p ro fits o r lo ss e s is n o t

,

t h e bala n c e sh e e t but t h e i n c o m e sh e e t an d i n ad e quacy o f r e tu rn s

, ,

o n in v e stm e n t sh o uld n o t b e c o n so lidate d with actual c o st o f i n

v e stm e n t e sp e cially sin c e di ff e r en c e o f opi nio n may e xist as t o

what c o n stitut e s ad e quate re turn and matte r s o f opini on sh ould
,

n o t b e c o n s o lidat e d in t h e sam e acc ou n ts with matte r s o f fact .

Common Gr oun d of th e Th r ee B a s e s It should b e n o te d that

.

t h e c o mm o n s o r t o f tr a n sacti o n r e qui r e s t h e sam e tr e atm e n t u n

d e r all th re e bas e s o f capitalizati o n Un d e r n o rmal e con omic co n
.

di tio n s m o st r eplac em e n ts wh e n th e y e xc ee d in actual c o st t h e

,

prop e r ty r eplac ed b ri n g b o th in cre ase d e arn in g capacity and

in cre as ed duplicati o n valu e and then n o p robl em a rise s That
, .

is why as a matte r o f fact o n e sho uld b e al e r t t o fo ll o w a s e ttl e d

, ,

p olicy l e st in case s o f diff e ren c e on e may by in adv e r te n c e mak e

,

s om e en tri e s on o n e basis an d o th e r s o n a n o th e r thus p roducin g

,

acc o u n ts that as a wh o l e m e a n n e i th e r o n e thi n g n o r a n o th e r .

Public Inte r e s t in C a pitalizati on Of late ye ars much public

.

discussi on has spru n g up o v e r th e base s of capitaliz ati o n f or m o st ,

state s hav e pass ed laws fo r t h e regulati on o f th e charge s o f public

s e rvic e co rpo r ati o n s an d qu e sti on arise s as t o t h e basis fo r rea
son able r ate s A ll th re e o f t h e bas e s o f capitalizati on just dis
.

cuss e d t o say n o thi n g o f varian ts an d c ombi n ati on s o f t h em hav e

, ,

b een use d fo r d e te rmi ni n g r e as on abl e rate s It should b e ob .

se rv e d ho we v e r that t h e purpo s e o i acco u n ti n g is quite as much

, ,

to fu rnish a guide fo r th e op e ration of th e busin e ss as t o fu rnish

a b asis fo r r e ason abl e r ate s ; and as w e have s e e n al re ady that b o th
c o st o f duplicati o n an d e arni ng capacity c an b e le arn e d as w e ll
wh en th e y are n o t use d as t h e basis o f th e accou n ti n g as wh en th e y
are s o us e d t h e pu rp o s e s o f rat e makin g ca n no t r e quir e th e m o n
,
-

boo ks o f accou n t Th e ch oic e b e twe en b as e s fo r r ate maki ng is a

.

matte r of public p olicy rath e r than o f acc ou n ti n g A lli e d t o it is .

t h e public i n te re st in t h e qu e sti o n as t o wh e th e r rat e s S h ould

b e bas e d o n o rigi n al valu e o f prop e r ty o r o n d e p re ciate d valu e ,

which again is a matte r o f public p olicy rath e r than o f acco un t

in g Fo r bo th of th e se imp o rtan t ma tter s ho wev e r acc ou n tin g
.
, ,
 D E PRE CIATI N A ND O MAINTENANCE 3 5
2

m ust fu rn ish th e facts on which a de cision is re ach e d fo r justic e ,

can n o t b e assu re d wi th out a kn o wl e dge o f what has actually

h appe n e d .

D e pr e ciati on of M e r ch an d i s e Our discussi on o f d e p re ciati o n

.

Up t o this p o in t has use d m o r e o r l e ss fix e d ass e ts fo r ill us t r ati o n

ass e ts n o t e xhauste d with o n e u s e On e should r e aliz e that

.

m e rcha n di se an d o th e r p ro p er ty acqui re d for e arly sal e but ca rri e d

o v e r f r o m o ne p e ri o d t o an o th e r r ai s e n e w c o n sid e r ati on s When .

t h e sam e m e rchan dis e is ca rri e d o v e r s e v e r al p e ri o ds it is subj e ct ,

t o th e s o r t o f d e p r e ciati o n th at w e hav e b e e n discussin g g rad

ual d e te ri o rati o n by S h op we ar o r han dlin g an d o bsol e sc e n c e , .

Wh e n it is ca rri e d o ve r o n ly fro m on e p erio d t o t h e n e xt (as s om e

must b e ca rri e d u nl e ss o n e is t o disc on ti n u e busin e ss at l e ast
tempo rarily at t h e e n d o f e ach e arning p e riod ) d ep r e ciati o n may ,

som e tim e s b e tak e n on c e fo r all and n e v e r r e cu r S uppo se w e .

b egin busi n e ss wi t h a n e w sto ck of go o ds c o stin g $ 30 000 and ,

repl e ni sh it as fast as so ld an d th e re fo re at t h e e n d o f t h e p e ri od
,

hav e an in v en to ry (at c o st p ric e s) of $ 30 000 S o m e o f thi s stock

,
.

is d e te rio r at e d of c ou rs e at l e ast slightly for m o rd e r t o satisfy

, , ,

custom e r s w e must ca rr y m o re vari e ti e s o f sto ck than are actually

calle d fo r an d t h e u n call e d fo r ite ms b e c om e obsol e t e o r sho p
-

wo rn S uppo se w e d e bit D e p re ciati on o f M e rchan di s e

.

and c re dit A ll o wa n c e f o r D e p r e ciati o n o f M e r cha n dis e t o c o v e r ,

this d e te ri o r ati on Th e D e p re ciati on will b e clo s e d t o t h e cle a ri n g

.

accou n t S upp o s e fo r th e n e xt p e ri o d w e d o as b e fo re an d agai n

.

hav e an i nv e n to ry at co st p ric e s of What shall w e d o

abo ut d e p re ciation ? S hall w e mak e an o th e r d e bit for
If so w e S hall hav e an allowan c e o f
,
o n a st o ck o f

wh e r e as a y e a r ago w e had an all owa n c e o f o n ly on a sto ck

of D o w e n e e d m o r e n o w than th e n ? N o t u n l e ss t h e
sto ck is p o o re r than it was at th e e n d o f th e last p e ri od which ,

is c on tr a ry t o ou r supp o siti on Th e n w e ar e in e rr o r We d o n o t
. .

n e e d an y d e p r e ciati o n f o r th e s e c o n d p e ri od W e hav e main

.

t ain e d o u r st o ck at t h e av e rag e age that it had b e f o re ; but w e hav e

n o t cha rg e d an ythi n g t o M ain t e n a n c e b e caus e main t e n an c e is
,

automatically tak en care o f thr ough pu rchas e s A pa r t o f o u r .

pu rchas e s re plac e s th e valu e of goo ds so ld an d a par t re plac e s th e

,

d e p re ciation o n go o ds n o t so ld Only in c as e th e c on dition of

.
3 2 6 TH E F ND AM ENTALS U OF A C COUNTING

d e te ri o ra ti o n of s tock is wo rs e or in cas e an in cre as e in th e to tal ,

sto ck carri e d re quire s a lar ge r allo wan c e is a cha rge fo r d e p re cia ,

tio n n e c e ssary a se con d tim e : main ten an ce has p reven te d depre

ci at io n If on t h e o th e r han d l e ss all o wan c e is n e c e ssa ry b e
.
, ,

cause t h e sto ck is l e ss d e te rio rate d o r is smalle r a d e bit may b e ,

mad e t o th e A llow an c e fo r D ep re ciati on o f M e rchan dise r e ducin g ,

it This n e ce ssitate s a v e ry care ful han dling o f th e allo wan c e

.

a ccou n t th e c ompl e m e n tary acc o u n t an d th e cl e arin g acc o un t

, ,

fo r m e r cha n dis e p roducin g a c o mplicatio n t o o co nfusin g t o b e

,

wo r th study h e r e Th e e scap e f rom thi s c onfusion is to avo id

.

an y allo wa n c e f o r d e p re cia ti o n o f m e rchan dis e an d t o ca rr y t h e

i n v e n to ry at d e p re ciate d valu e o n ly In d e e d S in c e th e me r .
,

ch an di s e is i n t e n d e d fo r quick c on v e r si o n th e e stablishm e n t Of ,

an allowan c e is usually an u nn e c e ssa r y statis tical refin e m en t .

QUES TIONS A ND PROB LEM S

I. Th e b alan ce sh ee t of a b us iness is as f ll w
o o s

Re al Es tat e Pro prie t o r

Acct s Re ce i . v bla e Acct s Payable
.

M e rch ai i di se Pro fi t s

m
Co pe te n t e ngin eers e sti ate t at an annual e xpen di tur e o f m h
f w
will o f se t ear an d t e ar an d o s ole s ce n ce o f r eal es tate b
A ssuming
h h h b x h f
.

t at t e r e ar e no c an ge s in t h e us in ess e ce pt t o s e r es ultin g rom

t h e p olicy re spe ctin g r e al es tat e as in icate e lo (fo r t e re are no d db w h
hw
pr ofi ts o r los s es ) , s o j ourn al e ntries an d t h e alan ce s ee ts fo r eac b h h
f f w
O t h e ollo in g D O n o t rite o n t h e plant w dw
m
. .

(a) In t h e fi rs t ye ar is S pe n t fo r ainte n an ce
b d m
.

( ) In t h e seco n y ear $ 5 00 is s pe n t for ain tenan ce , an d $ 5 00 in

h
cas d d
is se t as i e as a e pr e ciat io n un f d
h d m
.

(0) In t h e t ir y ear is s p e nt for ai n t e n an ce an d t h e r eal

h f d d
,

es ta t e is t e n o u n t o b e in it s o rigin al con i tio n an d o f its o riginal

val ue

A b i b ght p p ty f timat d t h a al
.

2 u s n es s d ou ro er or an es e e nnu
ha g f m i t
.

c r e at $ 3
or D i g t h fi t y a it p t $ 3
a n e n an ce f 00 ur n e rs e r s en 00 or
mai t d it p t l y $
.

D i g th
n e n an ce D i g th
ur n e s eco n s en on 2 00 ur n e
thi d it p t $ 4 B l w d A i th w y th a t t ha dl d
.
, .

r s en 00 e o un er s e a e cco un an n e
t h it m U d B i th w y th ma ag t ld him th a
, .

e e s n er t s e a e n er o e cco un s
h ld hav ad D id b tw th m mp mi
.

s ou e re gg t ec e e ee n e co ro se , or su es
a th w y a y
.
,

no er fit a , s o u see .
3 2 8 TH E F ND AMENTA L S U OF A CCOUNTING

(b ) A re th e bala h t fig n ce s i t t with y-
iee m h t ures co ns s e n ou r n oo e~s ee
fig (aft y hav
ures er t d y ou i th i m h t) ?
e corr ec e an e rro rs n e n co e s ee

If t h w what th y h l d b ; b t d
no s o t ha g y fig
e s fou e u o no c n e an ur es or

m p f f f m ; ha g th m ly if th y
,

er e re eren ce o a t ally i
or c n e e on e ar e c u n

i t t with y
cons s e n fig If t h y t th y ta d
o ur u r es e are co rr e c as e s n

h w h w th fi g f w Obt i d f m th
.
,

s o o e u re s or e re a ne ro os e

Of d th f an f m th f os e o ro o se o

4 A p ati
co r o r h bon f y a as ha gi g t v what it might
ee n or e rs c r n o re e nue

p p ly hav ha g d t apit l d q tly h a m lat d a

.

ro er e c r e o c a an co ns e uen as c cu u e

v i th f m f a t t h w th b k d
,

la g r t
e s e cr e reser e, n e or o ss e s n o S o n on e oo s , an

s hw o l
s n o s ur
p t h b k us o nT h a t h a v b e oo t ly is es e sse s e e e n cur r e n n

v t d i additi al ma hi y Th i m t a th iti di v
.

es e n on c n er e n co e ax u or es s co er

thi ba k tax v al d i m
.

d a
s , an ssess th c es o n e unr e e e n co e

What t i h ld b mad t h p ay m t f th t x
.

e n r es s w f
ou e d
e no or e en o e a es an

t t th b k d t p t t th
o co rr e c e oo s an p ati agai t f t ao ro ec e co r o r on ns u ure ccu~

s ati f at t mp t t d f a d t h g v
on o e o m t? e r u e o ern en

O l i g t h b k at th
n c os n e d f t h y a whi h f th f ll wi g h ld
oo s e en o e e r, c o e o o n s ou

y ou carr y t v o re d whi h t en u e anpi t l a t ? Giv y a c o ca a cco un s e our r e so ns

pai t d t id wall f a b ildi g

.

(a) A ig S ti g $ 5
n co s n th 2 0 n e on e ou s e s o u n

l a d e d t y at will
se un er en anc

b d whi h h d
.

b
() R p i e ti g
a rs cos a il
n di g t w y l on u n o e ars o c a

t b
no p vi ee n ly p i d b t wre o us d p iat d th b k a re a re u as e re c e on e oo s

y f
ear a o
g $ 5 a m i
or g t h t t h b ildi g i w t d t
00, ss u n a e u n s no r es o re o

it igi al tat
s or n s e

b w d b d f f d
.

( ) Ac a t a
re ll y e F o y e f a t o u on by y i e r uar I or e ec oun ou n

g d b oo s gh t D ou mb 5 d till ha d on ec e er 1 an s on n

A di t t i g ma hi ti g $ 3 5 whi h limi at th
.

c a y t m
n c ne s s e cos n 0 c e n es e
-

d Of
n ee f th t g aph wh
one o iv a y a ly l a y
re e s en o r e rs o re ce es e r sa r

f o

() S vi
e er f a p i l wat hma d i g a p i d f t ik i t
ces o s ec a c n ur n er o o s r e r o s

(f) A ha g f la gi g a fa t y i mplia with

.

c r f e o or e n r n c or n co n ce

a w b ildi g l w q i i g a fi x d am t O f p p mpl y
ne u n a re u r n e o un s ac e er e o ee ,

if t h la g d b ildi g
e en r mm dat
e additi l p d tiv
u n acco o es n o o na ro uc e

p w o er .

Sh w o t i f t h f ll wi g p
en r e s or ha i g a h f th th ba f
e o o n u rc se , us n e c o e r ee s es o

capitali ati z on

a t m b il i p h d f
.

A ffi
n o ce u o o e t pla s ld a t
ur c as e or o re ce an o u o

m bil Oi th m mak d m d l wh th ld t $ 5 i th
o e, e sa e e an o e en e o co s 1 00, s on e

b k t $5 x ha g val Of $
, ,

oo s a d h00, an as an e p a t f th c p n e ue 2 00 as r o e ur

c h p i f th w
ase r ce o e ne

A m hi whi h timat d t hav a lif f fi y a

.

ac ne t $ ic cos s 2 00 s es e o e e o ve e rs ,

at th d f whi h it will h v
e en o c p val f$ Sh w h w m ha e a s cra ue o 20 o o uc

th ma hi w ld b d p iat d h y a
.

e c ne ou e e re c e eac e r

(a) b y t h t aight li m th d
e s r -
ne e o

(b ) b y t h d i g b l a m th d (th p tag i ghly 3 7 )

e re uc n -
a n ce e o e e rce n e s ro u

( ) b y th
c d i g f a ti m th d
e re uc n -
r c on e o

l l ti g di g d t x pt f fi di g th a d lla
'

In ca cu a n , sre ar ce n s e ce or n n e n e re r o r.
 CH APTER XIX
TH E DIS P O S ITION OF PRO FITS

S ummary of Pr e v i ou s D is cus s i on . We have alr e ady obser v ed

that p rofits canno t b e gin un til all co s ts goi ng in to th e c on ve rsi on s
from whi ch th e p rofits we r e d erived have b e e n p rovid e d fo r an d ,

that co sts in clud e no t o n ly th e o bvious cash o utlay for curr en t

.

e xp e n s e s but c o mm o nl y o utlay o f o th e r thin gs than cash ; that

care must b e tak e n n o t on ly that all outlay p rop e rly b e lon gin g t o
t h e pe ri od in qu e sti o n b e in clud e d in t h e c o st o f p r oduct but that,

outlay which p roduc e s its e ff e ct b e yon d th e cu rre n t p e riod b e no t

cou n te d as a c o st who lly of th e cu rr e n t p e riod ; an d that in com e
also may ne e d an alysis t o s e e whe th e r m o re o r l e ss than t h e ap
pare n t incom e Of t h e p e ri od is actually p rop e rly cre ditabl e t o that
p e riod.

Co nf u s ion of Co st with D i spo s iti on of Pr ofi ts Th e fi r st n e e d of

.

prop e r acco un tin g for p rofits is a re alizatio n tha t disp o siti on of

pro fi ts may e asily b e c onf use d wi t h co sts an d that o n e o f th e two
,

m o st imp o r tan t thin gs in acco un tin g is t h e c o rre ct statem en t of

profits an d th eir disp o siti o n Le t us tak e a simpl e illustrati on
. .

S upp o se a busin e ss has b ee n fo r tw e lve ye ars p ro vidi n g what it

has d e e m e d ad e quate d e p re ciatio n fo r its machi n e ry but n ow fin ds
that t h e machin e ry is Obsol e te an d must b e re plac e d S uppo se .

t h e all owan c e f or d e pre ciati o n was o n a fi f t e e n ye a r basis and t h e

-

o r igi n al c o st o f t h e machi ne ry was Th en t h e actual

annual charg e fo r d ep re ciati on was cos t I -

but n ow w e fi n d it sh ould have b e e n

S up o s e al so that t h e p rofits o f this ye a r o n t h e s tren gth of a
p
$1 charg e fo r d e p re ciati on would hav e b e e n but now
shat w e s e e that t h e a nn ual cha rg e fo r d e p re ciati on sh o uld b e

w e tak e t h e actual p ro fits at le ss than

b e fo re ) Is this co rr e ct ? What of t h e e le ve n ye ar s past wh e n w e
.

charge d d e p re ciation o n ly ann ually but should hav e

ch arg e d S uppo si n g w e hav e accumulat e d n o su rplus
but hav e di stribu te d all re po r te d e arn in gs as divid e n ds must n o t ,

this of n egl ec te d de pre ciation b e charg e d to thi s ye ar ? If

33 0 U
TH E F ND AM ENTAL S OF A CCOUNTING
so t h e profits o f t h e ye ar ar e re duc e d t o
, ( t h e pr e vi o usly
giv e n l e ss co rr e cti o n fo r n egl e cte d d e p re ciation ) .

This w o uld giv e an ab so lu t e ly f als e state m e n t

'

.Th e n e gl e ct o f
ad e quate d e p re ciati on in past y e a r s has n o thi n g t o d o with th e
profits Of thi s ye a r : o n ly th e p ro p e r d e p re ciati on o f this ye ar can
aff e ct thi s ye a r s p rofits
’
whi ch ar e Y e t if th e r e is n o
su rplus o u t Of whi ch t o tak e th e n e gl e ct e d d e p re ciatio n

o f t h e past must it no t c o m e o u t o f this y e a r s p r o fits ? N o t in

’
,

t h e s e n s e o f re ducin g th o s e p ro fits fo r th e i r r e ality is u n aff e ct e d by

,

that n e gl e cte d d e p re ciati o n ; but t h e dispo sitio n o f that

may b e much aff e cte d by th e n egl e cte d d e p re ciati on U n l e ss .

t h e c o mpa n y has m o re wo rki n g capital than it n e e ds o r is willin g ,

an d abl e t o b o r r o w ( thus c on ducting busin e ss m o re larg e ly than

h e re tofo re with o th e r p e opl e s mo n e y) it must withh old a par t Of
’
,

t h e p r o fits fro m distributi o n as divid e n ds an d apply th e m t o re

placi n g its d e ple t e d capital an d w e kn o w that t h e capital has

b e e n d epl e te d fo r all p re vi ous supp o se d pro fits hav e b e en dis

,

t ribute d (e ls e th e r e wo uld n o w b e a su rplus) an d a pa r t o f th o s e

,

supp o se d p roéi t s we r e n o t pro fits but capital If t h e compan y .

d e cid e s t o withh o ld t h e from divid en ds it will sho w th e

,

o n t h e in c o m e sh e e t as p ro fit o f t h e y e ar an d th e n S h o w
,

t h e applicati o n o f o f it t o t h e c o r r e cti o n o f e r r o rs o f pas t

y e a r s If it d e cid e s t o distribut e t h e p rofits o f t h e ye ar in spi te

.

o f t h e e rro r o f fo rm e r y e a r s it must n ow sh o w a d e ficit

,
due to
t h e disapp e a r a n c e o f ass e ts o r t o t h e paym e n t of divid e n ds in pas t
,

y e a r s in e xc e ss o f e arn in gs .

Account f or D i s po s iti on of Pr ofi t s Th e illustra tion of th e

.

p re c e din g par ag raph sugg e sts th e d e si r ability o f e stabli shin g

a cl e arin g acco u n t par ticularly fo r t h e disp o siti on of p rofits .

We have al re ady s e e n that a cl e arin g accoun t Ne t In com e may , ,

w e ll gath e r to g e th e r all sou rc e s o f in com e fro m diff e ren t fi elds Of

,

activity an d s e t off again st th e m t h e re sults in fi elds that p ro

,

d u ce d l o ss so that t h e balan c e o f this acc o un t shall sho w fin al

,

n e t i n c o m e f ro m all so u r c e s .T h is may w ell b e clo se d t o D isposi

tio n o f In c o me This m e th o d is p re fer abl e t o showin g dis t rib u
.

ti on s di re ctly o n Ne t In com e ; fo r in t h e latte r case t h e d ebits t o

Ne t In com e may in clud e b o th lo ss e s fro m ce r tain activi t i e s and
disp o siti on of profi ts , an d it is d e sirable to run no risk of conin
‘
33 2 TH E F ND AM ENTAL S U OF A CCOUNTIN G
in so lv e n cy may actually o ccur wh e n th er e is a n e t surplus for ,

asse ts may p rove t oo hard t o c on v e rt in to fu n ds acc eptabl e for

payi n g d e bt S p e cial surplus e s ho w e v e r ar e so num e rous and so
.
, ,

va ri e d an d o ccur u n d e r titl e s so littl e e xplan ato ry that som e o f

, ,

th e m n e e d e xamin ation .

Re s e rve s . Much con fusio n ha s arisen in in te rpre ting accoun ts , ,

t hr o ugh t h e lack o f an y e sta blish e d p r actic e with r e ga r d t o pro

visio n fo r e stimate d pre s e n t as c o n tr ast e d with p o ssibl e futu re
, ,

lo sse s an d co sts In C hapte r VIII w e discu ss e d A llo wan c e for

.

D e p r e ciati on A llo wa n c e fo r B ad D e bts an d A ll owa n c e fo r D is

, ,

co u n ts Offe re d an d sugge ste d that such accou n ts are also call ed

,
“ ”
R e s e rv e fo r D e p re ciati o n e tc It was p o in te d ou t th e n that
,
.

t h e allo wan c e r e p r e s e n ts t h e b e st e stimat e that can b e mad e o f

“ ”
t he ho le in th e c o rre sp o n din g asse t ; but th e m e asu re of t h e
h o l e is k e pt in a s e par ate acco un t rath e r than d e duct e d from ,

t h e ass e t acco u n t for statistical purpo s e s

,
Th e m easu re o f th e .

o v e r stat e m e n t o f th e ass e t is r e al th e re fo r e an d is tak e n in to

, ,

c o n sid e r ati o n in d e te rmin in g pro fit an d lo ss Th e o n ly e l em en t .

o f u n c e r tai n
ty is t h e am o u n t o f t h e n e c e ssa r y all o wa n c e ; an d thi s

is u n c e r tain o n ly b e caus e tho ugh t h e tran sacti on in v o lvi ng th e

c o st has al re ady o ccu rr e d t h e r e sult o f it cann o t b e kn o wn u n til
,

late r wh e n th e p rop e rty is w o rn o u t o r t h e d e b t b e com e s d u e or , ,

t h e disc o u n t day c o m e s a r o u n d En ti r e ly diff e r e n t h ow e v e r is

.
, ,

an o th e r kin d o f p ro visio n fo r t h e futu r e B e sid e s c o sts that are .

n o rmal an d virtually i n e vitabl e an d that can b e e stimat e d ar e , ,

lo ss e s which ar e e xtrao rdin ar y subj e ct t o no re gular r e cu rr e n ce

, ,

e scap e d alto g e th e r by man y busin e ss e s an d by man y o th e r s for a

g e n e rati on o r t w o at a tim e an d th e re fo re with out basis fo r

,

calculatio n . Th e A llowan c e fo r D e pr e ciati on A ll o wan c e fo r ,

B ad D e bts e t c are in t e n d e d t o tak e ca r e o f n o rm al av e r age

,
.
, , ,

c o sts o f thi s so rt o n t h e p ri n cipl e s of t h e law of chan c e ; but such

,

thin gs as Obsol e sc e n c e lo ss e s by bankruptcy e t c though th e y

, , .
,

fall o n all busin e ss e s at an av e rag e rate (fo r that is just what w e

m e an by av e rag e) as a ma tte r o f fac t fall by m e re chan c e m o re
,

h e avily on so me than o n o th e rs Y e t if th e y b e fall a busin e ss .

ab n o rmally it may b e put t o its d ownfall unle ss i t has sp e cially

p re pa red itse lf t o e n du re Provisi on sh ould b e m ad e n o t as a
.
,

matte r o f accou n tin g bu t as a mat te r of policy for such o ccur ,

 TH E D IS P SITI N O O OF P ROFITS 9
J 33
ronc es A ccoun tin g d o e s not n e e d t o p rovid e fo r th e m for p ro
.
,

visi on has alre ady b e e n mad e fo r t h e n o rmal t h e calculabl e c o sts ,

o f busin e ss Po licy howe ve r re qui re s that ou t Of p rofits b e r e

.
, ,

s e rv e d from distribution as divid en d som e thi n g fo r this pu rpo s e

that is a part o f th e asse ts o rigin atin g in profits which might
, ,

hav e b e en distribute d as divid e n ds b e k e pt in t h e busine ss re ady ,

t o r e plac e an y ass e ts lo st through on e o f th e mischa n c e s o f b e a r

,

in g m o r e than n o rmal o r av e rag e lo ss e s S in c e th e r e is dange r

, ,
.

that profits so r e tain e d b e by in adve rten c e later distribu ted thu ,

aband onin g th e p ro visi o n fo r b e arin g e xtrao rdin ary lo sse s it is ,

d e si rable t o tr an sfe r t h e amou n t o f such re s e rvatio n f rom Un

divid e d Pro fits o r S u rplus to a sp e cial su rplus acc ou n t with a
titl e t o in dicat e its pu rp o se as Re se rv e fo r Extr ao rdi n ary D e,

p re ciatio n R e s e rv e fo r E xtrao rdinary Lo ss e s from B ad D ebts

, ,

Re s e rve fo r Fi r e H aza rd e t c as d e scrib e d o n pag e 2 66

,
. Th e se
, .

titl e s may b e said t o put a red flag on c e r tain p rofits wi th th e ,

implicati on H a n ds Ofl Fo r E m e rg e n cy On ly
“
Un fo r tu .

”
h at e ly h o w e v e r t h e t er m
,
r e s erv e is so ofte n in p ractic e used
,
“ ”
fo r what w e hav e ab ov e call e d an allo wa n c e that o n e ca n n o t in ,

tryin g t o in te rp re t a bala n c e sh e e t always kn ow which is found

u nl e ss o n e can fi n d an in t e rp re te r Th e p ractic e se ems t o b e .

gro win g ho we v e r Of applyin g th e te rm allo wan c e t o a ho l e in

, ,
“ ”

“ ”
t h e ass e ts an d t h e t e rm
,
re se rv e to p rofits re se rv e d as a safe ty
p ro visio n .

S in kin g Fun d s On e typ e of re se rv e has le d t o much cu rio us

.

co nfusio n It has n o t b e e n u n co mm on fo r co rp oration s t o pl e dg e

.

th e ms e lve s o n th e issu e o f b on ds t o e stablish a sinkin g fun d that

S hall p rovid e t h e m e an s o f payi n g at matu rity t h e d e bt r ep r e

se n te d by t h e b on ds C ommo nly t h e sinking fu n d p rovision

.
-

r e qui r e s that t h e sin ki n g fu n d b e accumulat e d o u t o f i n c om e .

A sinkin g fun d mo re ove r accumulate s through t h e addition t o

, ,

it o f in te re st e arn e d o n t h e inve stm en t al re ady mad e in t h e fu n d .

A par t o f t h e progr e ssion of such a fun d e stablishe d o u t of

in com e is th e re fo re as follows : (I ) D isp o siti on of In com e is
d ebit e d an d Re se rv e for S inking Fu nd is cre dite d thus lab elin g
t h e p r o fits s o t o sp e ak ; (
,
2 ) B o n ds in S inki n g Fu n d ( o r what e v er

acco un t re p re s e n ts t h e fo rm whi ch th e in v es tm en t o f t h e fu n d
happ en s t o take ) is d ebite d an d C ash is credited ; (3) Bon ds in
334 U
TH E F ND AM ENTAL S OF A C COUNTIN G

S in king Fu n d ( o r its substitut e ) is d ebite d an d R e se rv e for S ink

,

in g Fu n d is c r e dite d f or t h e e arn in gs o f t h e fun d an d in v e st

m en t of th e m ; (4 ) th e s e p ro c e ss e s c on tin u e un til tim e fo r paym e n t

o r u n til t h e fu n d is s ufli cie n t fo r its purp o s e ; 5 ) B o n ds Issu e d is

d e bite d an d B o n ds in S ink in g Fun d is c r e dite d

,
t o c o v e r th e
applicati on o f t h e fu n d t o th e paym e n t of t h e d e bt for whi ch it was
accumulat e d ; (6 ) th e n e t r e sult o f thi s is that B o n ds in S inkin g
Fu n d an d B o n ds Issu e d ar e clo s e d but t h e Re s e rv e f o r S inkin g
,

Fu n d re main s H e r e is wh e r e t h e c onf usi on a ris e s

. W e have .

built up a sinkin g fun d hav e us e d it fo r payin g d e bt an d ye t ou r

, ,

fu n d app e ar s t o p e r sist In o rd e r t o obs e rv e this le t us s e t up

.
,

S k e l e to n l e dg e r acc o u n ts lab e lin g t h e e n tri e s by n umb e r s c o rr e

-

sp o n di ng t o th o s e giv e n ab o v e addi n g at t h e sta r t it e ms fo r t h e

,

prop e r ty pu r chas e d with th e pro c e e ds o f th e b o n ds an d fo r B on ds

Issu e d (a) an d fo r D ispo siti on o f In com e (o n ly S O much o f t h e
,

in c om e as will b e appli e d t o this u se) an d for C ash (b ) using sup ,

p o s i t i ti o u s figur e s a n,
d supposi n g o n e r o un d o f t h e cycl e

sufficie n tly build up ou r fu n d .

P ROPE RTY B OND S IS S UED

(a) (5 ) (a)

D IS P OS ITION OF INCOME
(1 ) b
() (b ) (2 )

RES E RVE FOR SINKIN G FUND B OND S IN S INKIN G FUND

(1 ) (2 ) (5 )
(3 ) (3)

We e nd with a d e bit t o Pro p e rty an d a cre dit t o Re se rv e for

S inkin g Fu n d .

Re s e rve f or S in kin g Fun d What is t h e n atu re o f this r e s e rv e

.

for sink in g fu n d ? It was e stab lish e d as a r e s e rvati on o f p ro fits

again st di stributi on o f divid en d ; and Of c o u r s e wh en w e r e se rv e
th e p r ofits w e e quall y r e s e rve fro m dist ributi o n t h e ass e ts whi ch
co n stitute tho s e p rofits fo r t h e ass e ts an d th e pro fits are t w o
asp e cts of th e sam e thi n g Y e t th e a sse ts s e e m t o h av e di sap
.

p e ar e d but th e p ro fits s e e m t o r emain If w e w e re t o tak e a

.

balan c e sh e e t Of th e accou n ts sh own ab ov e as th e y l ook e d b e fore

336 TH E F ND AM ENTAL S U OF A CCOUN TING
rowe d w e n ow h o ld it as e arn e d Th e surplus accou n t n ow shows
,
.

its fin al standin g as th e b on d acco un t showed its o rigin al stand

,

in g .

S ummary . Th e
substanc e o f disp o sition Of in c om e may we ll b e
e xp r e ss e d in t h e f o rm o f a fe w S k e l e to n l e dge r acc o u n ts sh o win g -

t h e s ou r c e an d di sp o siti on of profits in a suppo si ti ti ous case .

mh
S t ea s i p ine L d
Tra i ng
m
C o mi s sary D e part m e nt In t e re s t Earne d
D ispo si tion o f In co m e Re n ta l Earne d
Co mm is sion Earne d
3 72

D ISP OS ITION OF INCOME

Re se r v
fo r S in in g Fun
e k d Ne t In co m
e
Re se r v x
e fo r E t r ao r i n ary D e d
p re c at i on o f lan t
i P
v
Re s e r e fo r E t rao rdi n ary x
L o s se s

Su b i is cr Empl y
pt on to o ee s
’

P i F d
e ns on un

D ivid d en s

S pl
ur us

U divid d P fi t
n e ro s

S URPLUS
All wan ce
o fo r D e pre ciat ion of B alan ce
Plant A w
ll o an ce fo r B ad D e bt
s
Fire Lo ss D ispo si tion o f In co em
A t
pp rop ria ion fo r Re searc h
B alance

B alance

Th e th e r accou n ts in v olved n e e d n o t b e sho wn Only a fe w

o .

ite ms h e re n e e d sp e cial c omm e n t Th e fi r st t wo items o n th e .

d ebit sid e o f Ne t In com e re pre se n t lo sse s o f par ticular activi ti e s ,

an d t h e thi r d is t h e bala n c e Of n e t in c o m e Th e fou r th d e bi t t o .

D isp o siti o n o f I n com e re pre s e n ts a gift o u t of p ro fits t o t h e pen

si on fu n d fo r e mploye e s Th e subscripti on acc ou n t was c re dit ed .

as a li ability wh en this e n try was mad e an d will b e d e bit e d wh en ,

paym e n ts are mad e Th e first d e bit t o S urplus is t o c o rre ct in

.

sum ci e n t allow anc e for d e p re cia tio n in pre vious year s an d h en c e ,

 TH E DIS P S ITI N O O OF P RO FITS 337
is no t Charged e i th e r again s t this ye ar s o p e rati on s o r again st ’

Re se rv e fo r E xtrao r dinary D epre ciati o n Th e n e xt d ebit is f or a .

fi re lo ss in e xc e ss o f t h e pro visi on fo r fi re l o ss Th e n e xt d e bit is .

for an app rop riation ou t o f accumulat e d p rofits fo r sci e n tific r e

s e arch Th e app rop riati on acc ou n t was c re dite d wh en thi s e n try
.

was mad e an d will b e d ebite d wh en e xp e n di tu r e s ar e mad e Th e

,
.

first c redi t t o S urplus o th e r than th e balan c e is fo r a c o rr e cti on of

, ,

t h e all owa n c e f or bad d e bts mad e in an e arli er p e ri o d but n o w

fo un d unn e c e ssa ry Th e n e xt ite m is for t h e p o r ti on o f n e t in
.

com e tran sf err e d to S urplus thr ough D ispo sition of In c om e .

QUE S TIONS A ND PROB LEM S

I. A bus iness receives an awar d of an d cos ts o n a s uit w hi ch

has be e n pe n di n g fo r t h re e y ears (a) To wha t accoun t s h oul d th e

r eceip t o f t h e m on e y fo r t h e co s ts o f t h e s uit b e c r e di te d ? (b) Is t h e
.

awar d a profi t? (c) H ow s h ould the b e treate d o n

th e b k?
oo s

2. A b ma f a t d a y a g
u s in ess nu t a t g d whi h w
c u re e r a o o n con r c oo s c e re r e

j t d d th ght
ec e l bl b a
an f a fl w Th y w
ou un sa ad d e e c use o a e e re r e u ce on

th b kf m t pv l Th i y wi g
.

e oo s t ro cos o scr a a ue s ear o n

t ha g d diti th g d b am alabl d w
o c n e c on ons ld f e oo s ec e s e an e re so or

What t y h ld b mad f th en rl if ( a) th l a y a
s ou e e or e sa e , e o ss e r

g w
a o t at d a l f t h y
as re (b) it w
e as t t t d?
o ss or e ear , as n o so r ea e

What f t f h f th f ll wi g di ti g i h it f m h f th
ea u res o e ac o e o o n s n u s ro e ac o e

o th ? A all w
e rs a v ( th t m i d i thi b k) a
n o an ce , r ese r e as e er s use n s oo

p vi i v f d
,

ro a s on , r eser e un

b la h t f a p ati whi h h di t ib t d ll
.

Th t t ti e en a ve a n ce s ee o co r o r on , c as s r u e a

it t i
s ne m divid d b t h t i d
n co e as f g i en m s, u as r e a n e o ross n co e

t v d p iati timat d at th t am t aw iti g a d i i Of

o co er e re c o n es e a ou n a n ec s o n

t h di tm t f d p iati th b k i
,

e t t th t
r ec ors as o p e r ea en o e rec on u on e oo s, s

s hw blwo n e o

R l E
ea s t at e C pi l S k a ta t oc
C h as G I m ( v il bl t ros s n co e a a a e o

Oth A t er sse s v dp i i ) co er e rec at on

S urplu s

S h who ow bala
th e n ce s h ee t would loo k un der each o f the f ll wi
o o ng

g d w th
(a) Wri tin o n e p rope rty an d
d f d ht v dp
,

(1 ) S e tting as i e a un in cas o co er e reci ation

d f d
.

(2 ) No t se t tin g as i e a un
w v
.

(b) Se tting up an allo an ce of an d cre ating a r eser e of

33 8 U
TH E F ND AM ENTAL S OF A CCOUNTING

5 b w d
Th e trial alan ce o f a co rpo ratio n , it h ce r tain a ditio nal inf o rmation ,
v b w f m h
.

is gi e n elo Co ns tr uct rom t h e fig ure s th e accoun ts for erc an

d d hw
.

ise , tra in g, n e t in come , disposition of pro fi ts , an d s urplus ; an d S o

h
th e b alan ce s ee t .

k
C api tal S t o c I 5 0, 000

P lan t
vb
No t e s Re ce i a le
A vb
ccoun t s Re ce i a le

C as h
P
Not e s aya le b
A c co un ts P b
ay a le

S ale s
Wage s an d S alarie s
Purchas es
D is co un t s Gi env
Co mm i ssion Earne d
x
S e lli n g E pe nse
x
Ta es
In s uran ce

Wear an d tear d
fo r t h e y ear is es timate at h d th e me rc an ise
on h dan cos t $ 2 k v db
b u t has a presen t mar e t alue of e t

loss e stimate d is v m d dv
a p ro ision for fir e loss of $ 1 , 5 00 is a e ; i i
d
d e n ds o f 7 % ar e eclare ; d vd m x
is r ese r e fo r in co e ta es ;
m
o f in co e is carrie d
t o surplus ; vd d h
is r es er e for e p reciatio n ; cas
d v v d
is se t as i e in a s pe cial f un d t o co er th e res e r e for ep reciatio n ; it is
d dd
eci e b k
n o t t o charge t o t h e year th e fir e lo ss n ow o n th e oo s
.
34 0 U
TH E F ND AM ENTALS OF A CCOUNTING

ke t , which e v e r is low e r curre n t as se ts fo r coll e cti on tak en at

,

e stimat e d c o ll e ctibility ,
an d ag e n t s o f p roducti o n ( both fix e d
ass e ts an d mate rials for producti on an d s e rv ic e ) tak e n at c o st
,
.

Wh en this is don e w e p re s e rv e all th e in f ormati on that th e busin e ss

n e e ds fo r histo rical r e c o r d an d h av e a d e fin it e p o in t o f d e partu r e
,

fo r makin g all owan c e s an d adjustme n ts in c o n v e r ting th e balan c e

sh e e t in to a stat e m en t o f re alizabl e asse ts an d payabl e li abili ti e s
as a te st o f e ith e r ultimate o r imm e di ate so lv en cy .

Ul timat e an d Imm e diate S olv e n cy M an y a busin e ss h as gone

.

through in solven cy an d ye t paid on e hun dre d cen ts on th e dol

“

lar wi t hout new e a rn in gs I t was in solve n t imm e di ate ly bu t

”
.

n o t in solv en t ul timat e ly .I ts asse ts we r e as g re at as its liab ili

ti e s but its ass e ts w er e not conve rtible in to cash as fast as t h e
,

liabiliti e s d e man d e d cash A cco u n ts re c eivabl e am o un tin g t o on e

.

hun d r e d th ousan d d o llars if co ll e ctibl e in tw o m on ths will n o t

pay accou n ts payable of t en t housan d d o llars if d u e in on e m on th
unl e ss th e y can b e us e d as S e curi ty for b o rrowin g S o a balan c e .

s h e e t is n o t a wh o lly sa tisfac tory s ta t em e n t o f so lv e n cy e v e n wh en

all figure s ar e adjust e d t o actual c o ll e ctibility Th e e l e m e n t o f .

time must b e adde d In o th e r wo rds a b alan ce shee t at b e st can

.
,

s e rve o n ly as a basis fo r a statem e n t of asse ts an d liabiliti e s an d ,

t o try t o mak e it d o a n ythi n g e ls e is la rg e ly t o sp o il its valu e f or

What it might d o who lly w e ll .

A S tate m e n t of As s e t s an d Liab iliti e s Fo r pu rp o s e s o f sh ow

.

ing s o lv e n cy t h e b e st fo rm Of stat em e n t is bas e d up o n t h e balan c e

sh e e t an d sho ws on its fac e that it is n o t in c on sisten t with that
Sh ee t N0 sta n da rd fo rm is availabl e fo r n o t w o busin e ss e s and
.
,

n o t w o tim e s in t h e sam e busin e ss w ould r e qui r e t h e sam e fo rm .

Le t us fr o m t h e balan c e sh e e t sh o wn b e low f o r e xampl e c on str uct

, ,

a supp o sititi o us stat em en t Of asse ts and liabiliti e s .

No tes P aya bl
A co unts Rece ivable
e
Mort gage No t e s Payable
Merchandise
c

Accoun t s Pay ble

x Accrued Li bili t ies
a

F urnit ur e 8: Fi t u re s a

Real E s tat e Allowan e f r D epre ciatio n of

w Avail
c o
Allo an ce for D isco un ts Real E s t at e
a le b w
A llo an ce fo r B ad D e t s b
A ll o w an c e fo r D is co u n t s Ofl e red
'

Jo hn m 3 ,000
D oe (P e r an e n t Loan )
Proprie t or
 INTERP RETATION OF FINANCIAL S TATEM ENTS 34 I

Th e fi rst st ep in sho wing ass e ts an d liab ili ti e s in such fo rm that

judgm e n t o f so lv e n cy is e asy is t o an alyze th o s e ite ms that are n o t
all of a so r t that is s e parat e in to classe s th o se that are n o t all
,

applicabl e t o t h e same thin g at t h e sam e tim e This m e an s re .

co n structin g ou r balan ce she e t as a whol e so that in th e proo f of

d ebits an d credits w e may b e sure tha t w e have n o t lo st t r ack o f
an ythi n g We must sh ow fo r e xampl e that ou r accou n ts re
.
, ,

ceiv ab le c on sist n o t o n ly of sums c oll e c tible a t diff e ren t tim e s but ,

o f sums n o t c o ll e ctibl e at all an d sh o wn as c o n t r a ite ms o n t h e

balan c e sh e e t Y e t f o r t h e sak e of sh owin g b o th t h e re al valu e

.
,

an d t h e b o ok figu re s w e S h ow th e c o n tr a it e ms o n b o th sid e s o f
,

our stat e m en t (thus in a s en s e paddin g b o th sid e s toge th er )

rath e r t han subtract c on tra ite ms Th e an alyz e d balan c e she e t .

foll ows .

A ccoun ts

fi
Receiv ab le
Es timat ed co llections in
mo n t h
rs t
fi mon t h
rs t
seco nd mo nth
seco n d mo n t h
Mo e No tes

Es t ima t e d disc oun ts (co n tra)

EP
co nt ra)
ts ay ab le

Es tima t e d losses (co ntra) fi

D u e in
mon th
rs t
seco nd mo nth
Es t imated conv ert ed b y t hird mon t h
D
fi
cash sales in
rs t I on th
A
is co un ts av ailable (co n tra)

seco n g
mo n th
t hird mo n t h
fi
ccrued liab ilit ies
Du e in r s t mo n th
Es t imat e d co nv er t ed b y
char ge sales in
secon d mo n t h
mont h (co n tra )
12g?
1
All owance Di scounts
(con tra)
Furnit u re a n d Fixt ures

App
Real Es ta t e
li cab le o n ort gage M
P
No t es ay ab le (co n t ra )
A w
llo ance f or D e reciatio n p
(co n tra )
Balance eq ui t , y
Allowance D isc t . A
v ailabl e
(con tra )

We h ave n e xt to re late vari ous ite ms of asse ts an d liabili tie s

th e
t o e ach o th e r in such a way tha t w e may s e e h o w far th e fo rm e r
will tak e car e of th e latt e r on t h e supposi tio n that t h e busin e ss

co n ti nu e s an d pro c e e ds t o con v e r t t h e n atu r ally c on v e rtibl e

asse t s but witho ut takin g in to accoun t any n ew busin e ss (

, or

profits) o th e r than n atu r ally liquidating th e Old Th e S he e t fol .

lo win g d oe s n o t show th e e s tima te d s tatu s of th e busin e ss in th e

34 2 .
TH E F ND AM ENTAL S U OF A C COUNTING

n ew p e ri od fo r that wo uld b e e n tire ly o utsid e th e sc op e o f this

,

so rt of s tate m en t ; it sh ows m ere ly h ow t h e p re s en t asse ts and

liabiliti e s will sta n d with re sp e ct t o e ach o th e r as th e y fo llow
n atu ral pr o gr e ssi o n ; an d thus w e may s e e wh e th e r t h e ass e ts w ill

automa tically t ak e ca re of th e liabiliti e s an d no t re quir e assis t

a n c e f ro m th e n e w p e riod .

S ta tement f
o A ss ets and Liab ilities

A
A ss ets
No t es
A
P ay ab le fi fi
d ue in rs t mon th

ti
c co u n t s
fi
Recei v ab le ,
in rs t mo n th
es ti mat ed collee
A
cco un ts
ccru ed Lia
Pa '

fi
b le d ue in rs t mo nth
ti es d u e in rs t mon t h
fi
ons
M erc ha n d ise r ece n t av erage cas h sales Li
in o n e mo n th
, ab ilit ies
B alanc e
mont h
d ue in rs t mo n t h
o f asse ts av ailab le in fi rst

Assets av ailabl e in firs t month

B ala nce
A
from fi rs t mont h No t es
A
P ay ab le ,
P
due in second mo n th 3
cco u n ts Re c eiv ab le , es t imat e d collee
t io n s in s e co nd mo n t h fr om rese n t A c
c o u n ts Rec eiv ab le
p Li
cco un t s

ab ili ties
ay ab le , d ue in seco n d mo nt h

d ue in seco n d mo n t h
Balance o f asse ts av ailab le in seco nd
M
M
e rch an di s e es t ima t ed cas h s ales in
,

s ec o nd mo n t h , f ro m r ese n t s t oc
erch a n di s e , es t ima t ed collec t ions in
p k mon th

se co n d

p p
mon th fro m c h arge sales
mad e fro m res e n t s toc . based on
av e rage ay me n ts on sales
k
A se t
s s av ailab le in seco nd mon th

B alance fro m secon tf in onth Accounts Pay ab le , d ue in t hird mon th

A t R
cco un s i bl tim t d
ec e v a ll e , es a e co ee Liab ili t ies d ue in t hird mo n th
ti i t hi d m t h
on s n r on
B alan ce of asse ts av ailable in third
M h di
th f m p
t im t d h l i
e r c an se , es a e cas sa es n month
t hi d m r on t t k ro r ese n s oc
M h di
,

erc t im t d
an se , ll ti es in a e co ec ons

f mp
t hi d m t h f m h g
r on l m d ro c ar e sa es a e
t t k b
p ym t l
ro
a
r ese nd
e n s o n sa es
s oc , ase o n av

Am t il b l i thi d m th
o s av a a e n r on

B alanc e of t hird mon t h Do e permanent loan

A
.

Balanc e of cco un ts Receiv ab le

B alance o f M
erch an dis e
Fur ni t u r e an d Fixt ures
Rea l Es ta t e
L p
ess D e reciatio n R E . .

L ess M ort gage No tes Pay

ab le

W e h e re hav e a pro sp e ctus of th e fu ture hi sto ry of pre s en t aff airs ,

an d f ro m it w e s e e that t h e futu r e d o e s n o t n e e d t o l ook ou t f or

an ythin g but its e lf In d e ed t h e pre se n t will p rovid e c e r tai n .

,

re sou rc e s for th e futu re Th e first m on th will con ve rt in to liquid .

form o f ass e ts m o r e than will b e n e e d ed for o ld d e bts an d ,

as t h e se con d an d th e thi rd m on th e ach m o re than tak e s ca re o f

i tse lf, it is o bvi ous tha t th e exc e ss of liq uid asse ts of e ach on th m
344 TH E FUNDAMENTALS OF A CCOUNTING
sta n dar ds by th e se vari o us ag en cie s have lit tl e in c o mm o n In .

d e e d as w e hav e se e n t h e n e e ds o f diff eren t busin e sse s ar e so

, ,

wide ly va rian t that n o stan dard form is g en erally acc e ptable .

Onl y ce r tain gen e ral prin cipl e s can b e com e stan dar d .

Or d e r of As s e t s an d Liabiliti e s It use d t o b e c o mm on we ll
.
,

nigh u n iv e r sal t o a rr a n g e bo th as se ts an d liabiliti e s in o r d e r o f

,

pe rman en c e r e al e stat e machin er y e t c do wn thro ugh ac

, ,
.
,

c ou n ts r e ce ivabl e an d m e r chan dise t o cash an d capital sto ck ,

do wn t o claims d u e an d u npaid Th e n t h e tast e Of acc ou n tan ts

.

swu n g in t h e oppo site dir e cti o n an d le d t o C ash as t h e fir st asse t

an d Re al E stat e as th e last This is pure ly a matt er o f tast e o r
.

e mphasis In t h e balan c e sh e e t ab ov e o n page 3 4 0 t h e latt e r

.
, ,

ord e r is use d b e cause w e ar e putting emph asis on t h e balan c e sh ee t

,

a s a s t at e m e n t Of asse ts an d liabili ti e s fo r pu r po se s o f imm e di at e

solv e n cy If h ow e v er t h e sh e e t we re t o b e use d primarily as a

.
, ,

state m en t o f c o sts an d o wn e rship t h e n atural o r d e r w oul d b e th e

,

r evers e .

Cla s s ifi cati on of As s e t s an d Liab iliti e s Wha teve r g en eral .

ord er f or it ems is adopt e d i t is d e sirabl e t o arran g e it ems e ithe r

,

in groups sugge stin g p e rmanen ce or in groups sugg e sti n g so l ,

v e n cy A c on ve nien t groupin g to sugge st pe rman en ce follows :

.

P roper ty Inves tment Capital S to c k

B o n de d D e t b
Working A ss ets Workin g Lia ilities b
A ccru e d Ass e ts Accrued Lia ilities b
P repai d an d D eferre d Assets f
D e erred Lia ilities b
S urp lu ses
Con tingen t A ss e ts C ontinge n t Lia ilities b
H r wo rkin g as se ts in clude a s se ts of quickly c onv er te d type bu t
e e

n e e d e d t o k e e p t h e busin e ss g o in g lik e C ash M e r cha n dise S up

, , ,

pli e s an d A ccou n ts Re c e ivable

,
A diff e rent gr oup ing more
.

cl e arly sugg e sts so lv e n cy

Cu rr ent Ass e ts Curren t Liab ilities

A ccru e d A sse ts Accrue d Liab ilities
P repai d an d D e ferre d A ss ets D e ferr e d Liab ilities
S ecurities Inve s tmen t B on d e d D e b t
Working Inves tmen t Capit al S tock
M st it o ms c lassifi e d as wo rking in t h e first groupin g would
e
“
h ere app e ar as cur re n t S uppli e s ho wev e r th o ugh wo rkin g
.
, ,

asse ts ar e har dly curre n t asse ts in th e se n se that th e y are av aila

,

b le fo r payi n g d e bts fo r t h e sal e o f suppli e s f o r r aisin g m o n e y

,

wo uld Ofte n n e c e ssitat e t h e shuttin g do wn of t h e busin e ss Um .

d e r this classificatio n th e re fo re supplie s sh o uld rath e r b e in

, ,

clud e d in wo rkin g in ve stm e n t alo n g with plan t an d re al e stat e .

Un d e r b o th classificati on s d e fe rre d asse ts an d liabilitie s would

in clude ite ms e xp e ct e d t o b e d e fe rre d o ve r a c on side rable p e rio d
lik e advan c e s t o subsidiary or allie d c ompani e s and fimds
,

accumulate d for futu r e u se .

G r o wing Inf o rmali ty of B alan ce S h e e t s Of lat e ye ar s with .

,

gre at e r willingn e ss fo r publicity man y busin e ss ho us e s hav e co m e

,

t o p r e s e n t bala n c e sh ee ts in a f o rm that wo uld b e m o r e in t e lligible

t o sto ckh o ld e r s tha n t h e m e r e r e p ro duction o f l e dge r it ems in
par alle l c o lum n fo rm lik e a Clo se d le dge r accou n t This has led
-

,
.

t o t h e gr o wi ng habit o f o mittin g pr o p ri e to r ship e n tir e ly as a lia

b ility o f th e busine ss ( r e pudiatin g in a sen se t h e ide a Of t h e busi
, ,

n e ss as an e n tity liabl e t o its sto ckh o ld e r s fo r t h e ca re o f th e ir

p rop e r ty) an d car ryin g it as a r e sidu e that is sho win g that ,

what asse ts are n o t Claim e d by o utside r s ar e t h e p rope r ty Of t h e

p rop ri e tor s S uch a balan c e sh e e t in summar y fo rm with out
.
,

subdivisio n by gro ups might look as sho wn b e low ,

.

Accoun ts Payab le
L ess A w llo ance for Dis
co un ts

In main s tore
In b ranc h s t o re
Accoun ts Receiv ab le 1 B alance of k
S toc h olders Eq ui t
’
y , re p

All wo
D bt e
an ce
s
for B ad p
res e n t d b y :
e
Ca i tal S tOCk
R ese rv e fo r D e p rea ati on
All w o
cou n ts
an ce for Dis S lus
Un Vi ded Pro ts
.

fi
A
P re pp
ccr ued In t eres t
aid Ins uran ce
Em loy ees Sav ings
’

F nd

3
S u p 1we
Fu rn it ure Fixt u
Real Es ta t e
L A w
es s
D p
llo an ce for
e recia t io n
34 6 TH E FU NDA MENTA LS or A CCOU NTIN G
S pe cial D e s ign a tio n of S pe cifi c It e m s Th e
items must n o t b e
.

so vagu e as t o se rv e as c o ve r f or misr e pre se n ta ti o n Often all .

so r ts of odds and e n ds o f d e b ts d u e hav e be en r epo r te d as cash

i tems such as bad che cks still h e ld in t h e cash drawe r ,

e tc. To av o id suspici o n o f thi s it is w e ll to r e po r t d e tails o f ca sh

, .

S o m e tim e s br a n ch e s an d t h e main busin e ss have be e n in te r

twin ed ; so that mer chan dise was coun ted in bo th place s and th e ,

d e bt d u e th e main h ouse by th e b ran ch for m e r chan dise was

c oun t e d as an acco u n t re ce ivabl e t o th e mai n h ou se but was n o t
c ou n te d as an acc ou n t payabl e by th e br a n ch This r e sulte d in .

cou n tin g th e sam e as se t twice To sh o w t hat this has n o t hap

.

pe n e d it is we ll to d e sign ate th e e xact pla n fo ll owed Trust an d

, .

o th e r fu n ds may w e ll b e d e sig n at e d n o t onl y as fu n ds but in a ,

foo tn o te as sp e cific in v e s t m en ts H ere t h e L ib er ty B on ds are

.

sh own as bo ught an d ca r ri e d at par ; and h en ce e v en if th e y hap

p e n n o t t o b e w o r th p ar o n t h e ma r k e t at thi s tim e th e y di s cha rg e

t h e liability fo r t h e tr us t sh o wn o n th e o ppo si t e sid e o f t h e balan c e

sh ee t . It is also c o mm on t o r e po r t c on tin ge n t asse ts an d liab ili
ti e s in a fo o tn o t e r athe r than in th e body o f th e balan ce shee t .

Fin d in g Te rfd e n cie s A s a matte r of fact a sin gl e balan ce

.
,

sh ee t is n o t n e arly so se rvi ce able fo r sh o win g th e c ondi ti on o f a

c ompan y as tw o in spite o f th e fact that th e e a rli e r o n e may
hav e b e e n lon g d e ad T e n d en ci e s are o f te n quite as impo rtan t as
.

m om e n ta ry con diti on s and o ften an impo r tan t ten d en cy will b e

,

sh o wn by a c ompa riso n o f tw o bala n ce sh e e ts Th e e asi e st way .

t o disc ov e r te n d e n ci e s is t o mak e a li st o f cha n g e s b e twe e n t w o

balan c e sh ee ts an d th en o bse rv e wh e th e r t h e chan ge s are in t h e
right dir e cti on A d e cre ase in cash for in stan c e is a bad thin g if
.
, ,

cash is so re ly n e ed e d but it is a goo d thin g if cash is lyin g idle

,
.

A n in cre ase in accou n ts r e c e ivabl e is a goo d thin g if it is d u e t o

in cre asin g sal e s but it is a bad thi n g if it is d u e t o i n cre asin g u m
,

co ll e ctibility o f bills Ofte n table s o f clian ge s in balan c e sh ee ts

.

brin g o u t p romin e n tly facts that w ere ha r dly o bservabl e from t h e

balan c e sh e e ts th e mse lve s par ticularly wh en t h e figur e s are stud
,

fed with figu r e s f r o m t h e o p e r atin g stat e m e n t .

S ummary of B al an ce S h e e t Ch an ge s
-
It is o bvi o us tha t a
.

change in a balan c e sh e e t figu r e of o n e tim e as c ompared wi t h that

-

of an o the r tim e is due ei th e r to a tran sac tion (or se ri e s o f tr an sac

34 8 TH E FUND A MEN ALS or T A CCOUNTING
c hang e in to tal o f n e t a sse t s but also a cha nge in th e character of
ass e ts for c o n v e rsi on s ar e har dly lik e ly exactly t o r epla ce
th ems elv e s in ki n d W e will usually have m o re or l e ss cash m o re
.
,

o r l e ss m e r cha n di s e m o r e o r l e ss in acc o un ts r e c e ivabl e and in

,

accoun ts payabl e ev en wh en th e n e t ass e ts are t h e sam e Th e

, .

purpo s e o f th e summary o f bal an c e sh e e t chan ge s is t o show j us t -

this so that w e may see whe ther we h ave more or l e ss of th e de

,

sirabl e thin gs .

Class ifi cati on of B al an ce S h e e t Ch an g e s -
We have obse rved .

that th e change s themselves mus t b e in two s e ts and in balance , .

This is n o t o n ly ma th ema tically r e as o n abl e but plain busin e ss

c omm on s en s e If we have l e ss o f som e typ e o f asse t than w e h ad
.

a ye ar ago w e hav e m o re o f s om e o th e r ass e t hav e paid off d eb t

, , ,

hav e d rawn o u t i nv e stm en t o r hav e suff e re d a l o ss ; but th e se

,

thi ngs also will sho w o n th e summary o f chan ge s Our change s .

g ro up th ems elv e s in to tw o class e s : d ebit chan g e s an d cr e di t ,

change s A n addi ti on t o ass e ts and a d e cr e ase in own er ship

.

claims c on stitute d ebit change s an d a d e cr e as e in ass e ts an d an ,

in cre as e in own er ship claims con s ti tute c re di t chang e s D ebi t

-
.

chan g e s mu s té e q u al c r e dit chang e s o r e ls e o n e o f o u r balan c e

sh ee ts us ed fo r c ompa riso n is ou t o f bal an c e It happ en s tha t .

d ebit chan ge s always i n dica te wha t was d on e wi th valu e s which

w e r e in po ss e ssio n and credi t chan ge s in dicate wh ere valu e s cam e
,

f rom : fo r d e bi t chan g e s sho w e ith e r an in cr e as e in ass e t s (putting

valu e s in to th e fo rm sh own by t h e balan c e sh e e t as in c r eas ed) or ,

a d e c r e as e in o wn e rshi p claims ( paying o ff d eb t o r withd rawin g

-

by own e r s) ; an d cre dit chan ge s sh ow e ith er r e duc ti on o f ass e ts

( valu e co n v e r t e d o u t o f t h e f o rm sh o w n by t h e e a r li e r bala n c e

sh ee t) o r an in cre ase in o wn e rsh ip claim (r e c e ivin g valu e from

,
-

l o an i nv e stm en t o r pr ofi t fro m op er ation) D ebit ch an g e s th en

, ,
.
, ,

show what was don e wi th valu e s d e s tin ati on s an d c r edit ch ang es , ,

sh ow wh e re valu e cam e from so u r c e s Le t us n ow tak e two ab,

.

b r ev iat e d balan c e sh e e ts o f t h e sam e busin e ss an d tabulat e t h e ,

”
chan ge s lab elin g d e bit change s applicatio n o f valu e s an d
, ,

credit chan g e s source s o f valu e s an d carr ying t o applica ti on

“
,
”
of value s all in c re as es o f asse ts and d e cre as e s o f o wn er shi p
claim 5 and t o s our ces o f valu es all de cr eases of valu e s and
,

in cr e as e s of own er ship claims .

 Compar ative B al ance

G d — i
oo s n -
P rocess
All w o an ce for D iscounts Availab le
Fix t ure s

M achin ery
Real Es tate

A cco un ts Payab le
No te s Payable
Accru e d Liab ilit ies
Allowan ce fo r B ad D e b ts
All o wan ce fo r D is cou nts Ofi ered
Allowan ce fo r D epre ciation
P rovis io n fo r Fir e H azar d
C ap ital S to ck
S urplus

t
In t h e abl e foll owi n g , plus and minus sign s are us e d , for conv en
ie nce , in sh o win g wh e th e r t h e chan ge is o n e o f in cre ase o r o f d e
cr e ase A ll in t h e same c o lumn are t o b e add e d h o we v e r what
.
, ,

e v e r t h e sign us e d for a d e c re ase in a liability is just as much an

,

applicati o n o f valu e as is an in c r e as e in an ass e t .

Su mmary of B alance S heet Changes

-

A pplication f
o values S ource f
o values

Me rc h di
an se C ash
Accoun t s R e ce i v bla e A w
llo an ce fo r D is coun t s Avail
Raw M at e rial abl e

Fix t u re s
Real Es t at e H ”
) All w o an ce b
fo r B ad D e t s
Accou nts P ay a bl e A ll w o an ce fo r D is coun t s Of
Payable
No t e s f d et e

Accrue d Liabiliti es A ll w o an ce fo r D e p re ciation

P vi i
ro s on fo r Fire H azar d
C apital S t oc k
S urplus
35 0 TH E FU D A ME N NTA LS OF A C COUNTIN G
Th e i tems o f d e bi t change are obvious en ough Th e fi rs t fi v e .

S h o w m o r e valu e s pu t in t o m e r cha n di se acc o u n ts r e c e iva b l e r aw

, ,

mat erial goo ds in p r o c e ss an d r e al e state and t h e last three

,
- -

, ,

S h o w a r e ducti o n o f d e bt On t h e cre dit sid e t h e fir st an d t h e

.

thir d ite m S h o w a di r e ct re duc tion o f valu e s cash sp en t an d

fixtu r e s e ith er so ld o r de pre ciate d Th e s e c on d r ep re se n tin g a .
,

shr inkage in t h e h o le in a liability re ally in cre ase d t h e li abili ty , ,

an d S h o ws t h e S o u r c e o f valu e s Th e n e xt fo ur ite ms S h o w in
.

c re ase d h o le s in t h e asse ts an d h en ce are a so u r c e of ass e ts onl y in

,

t h e math e matical se n se : the y ar e m e re ly o ff se ts t o t h e o v e rv alu a

tio n o f asse ts an d might b e d e ducte d o n t h e o th er S id e but are
, ,

k e pt h e re fo r c o n v e ni en c e Th e last t w o ite ms co n stitute in

.

cre ase s in p ropr i e tor ship t h e form e r pro bably by n e w in ve stm e n t

, ,

an d t h e latt e r by p r o fits th ough t h e fo rm e r may hav e o rigi

n at e d in a s to ck di vid en d ; w e hav e n o way fr o m th e b al an c e sh e e t

alon e o f d e te rmini n g thi s matt er .

Inte rpr e tin g B alan c e S h e e t Ch an ge s On th e face of thi n gs

-
.

four ch ange s stan d ou t as favor abl e t h e d e cli n e in acc o un ts

payable n o t e s payable an d accru e d liabili ti e s (sh o win g n o t only
, ,

willin gn e ss b ut ability t o ge t ou t o f de bt) an d th e mcre ase of

, ,

surplus (showin g n o t o nl y th e ability but t h e wi lli n gn e ss t o ac

cumulate a mar gin of s af e ty) Th e cash de crease is appar en tly .

f avor able unl e ss payable s ar e ma turing m or e rapidly than t e

c eiv ab le s ; fo r t h e fo rm e r cash balan c e lo ok e d unn e c e s sar ily large

f or th e appa r e n t siz e o f t h e busin e ss whi ch h owe ve r w e S hall , ,

e xami n e lat e r in c o nn e cti o n with t h e o pe r a tin g stat em e n t Th e .

in c r e as e s in m er chan dise acco un ts r e c e ivable raw mate rial

, , ,

goo ds in pr o c e ss an d re al e state w e ar e n o t ye t in a p o siti on t o

- -

, ,

judge Th e s e we will r e turn t o aft e r w e have se en t h e ope r ati ng

.

state m e n t .

Th e Fo rm of Ope r atin g S tate m e nt Th e o pe r ating statem en t .

,

lik e t h e balan c e sh e e t has n o stan dar d f orm Th e chie f r e quire

, .

m e n t is that it shall group ite ms o f a kin d S h o w th e r e lati on ,

b e twe e n gro ups an d no t in tr oduc e in to an y gr oup ite ms whi ch

,

c o n fuse t h e re latio n s o f that gr oup with an y o th e r T hi s w as .

di scuss e d in c o nn e cti on with cle arin g acc o u n ts in C hapt e r VIII .

B e lo w is S h own an o p e r ati n g state m e n t in tr o ducin g vir tua lly all

t h e n o mi n al acco u n ts di scuss e d in Chapt e r VIII It also sh ows .
35 : TH E FUNDA MENTALS or A CC OUNTING

no t need ad ju
tme nt) and th e operating stateme nt is merely a
s ,

s tatemen t o f co nve rted items : so t h e proce ss o f c lo sing th e b ooks

may give us th e it em for b o th th e b alance sh ee t and t he ope rating

s tatemen t th e unco nv e rted portio n fo r the b alanc e shee t and ,

t h e co nve rted portio n for th e ope rating s tateme nt . S ince mo re

,

over t h e co nve rsi o ns whic h do no t cance l e ac h o th e r re present

,

incre ase or de crease in proprie to rsh ip th ey ge t upo n t he b alance

,

sh ee t in th at fo rm ( as pro pri e to rs claim to asse ts de riv ed from

’

p rofit s ,
or s h rin k a ge of claim b ecau se of lo sses ) ; H e re
, fo r ex
ampl e w e h ave e le ve n ite ms recognizab le as co mmo n to the two
,

shee ts and o ne i tem w hich wo uld b e recognizable if it we re not

,

a me rge r of se v e ral it ems for co nv e ni e nce Th ese fo llo w in the

.

o rde r o f th e ir appearan ce o n th e operating st atemen t : Un expired

D isco unt s Ofi ered is a reductio n of i ncome o n th e operating

s tatemen t an d t he compleme ntary credi t is t o Allowance for
,

D iscoun t s Ofi e red wh ich appears o n th e second b alance sheet ;

,

Finish ed Go ods Inve nto ry is twice on each se t of figures the

'

inv en to ry for J an 1 , 1 92 2 is cred i ted to the old nv en t ory account

.
,

and is de bi ted t o t he clearing account for M e rchandise ( thus get

'

o
t ing o u th e ope rati ng s tateme nt) and t h e new inv en tory is debited
,

t o t he ne w i nv e nto ry account and 18 credited to t he clearing ac

coun t io r M erchandise ; Goods in Process and Raw Mat erial,- -

similarly appear twic e in each se t of fig ures ; Unexpired Discounts

A v ai lable is a re d uc tio n of co sts on th e ope rati ng statement and ,

t he co mple me ntary deb i t is t o A llowance for D iscoun ts A vailab le ,

whic h appears on t he seco nd b alance sh ee t ; th e accrued li ab ili ties
of sh own at t h e end are for v arious expens e s includ ed in

operati ng costs b ut me rged for conv enience ; Depreciatio n o n th e

,

ope rati ng s tateme nt match es t h e increase in A llowan ce fo r De

p rec ia ti o n on t h e b ala nc e sh ee t and thi s sh o ws t ha t t h e w ri ting

do wn of Fixtures o n t h e b alance shee t was due no t t o de preciation
b ut t o sale or exchange for o th erwise Depreciation would b e
,

deb i ted from t he increase in t he allowan ce and

from t h e decrease in fixtures ) ; De b t Loss Es timated is a
cos t o n th e o pe rating s ta t emen t and th e complemen tar credit is
‘

, y
t o A llo wance for Bad De b ts which appears on th e seco nd b alance
,

shee t ; S urplus on t he operating s tat ement is t h e fi nal figure meas ,

uring t he excess of credi ts to nominal accounts ov er the deb its to

 INTERPRETATION OF FINAN CIAL S TATEMENTS 35 3
n omi nal accou n ts and h en c e th e in cre ase o f propri e torship by
,

c o nve r sio n s adde d o n t h e bala n c e S h e e t t o th e pre vious surplus ;

,

and as t h e n e w asse ts an d liabili ti e s a r isin g f ro m t h e c on v e r si o n s

have also b e en carri ed by adjustm en t t o t h e balan c e S h e e t as w e ,

have just s e en this b rin gs b o th S ide s o f th e balan c e sh e e t i n to

,

acc o r d with t h e p r e s en t status .

Re lati on of B alan ce S h e e t Ch ange s an d Ope rating S tate me nt

-
.

We po stpo n ed discussion o f t h e i n cre ase of M e rchan dise A C ,

c o u nts Re c e ivable Raw M aterial Goods in Pro ce ss an d Re al

, ,
- -

E stat e u n til w e c ould se e t h e o p er ati n g stat e m e n t

,
I nde e d w e .
,

n e e d t w o o p er ati n g stat e m e n ts o r at l e as t parts o f t h e p r e c e di n g

,

stat em e n t f o r c ompariso n with t h e n ew S upp o se w e fi n d that .

t h e p r e c e di n g stat e m e n t sho ws us ne t sal e s o f What

te n d e n ci e s d o e s t h e n e w op e r ati ng state m e nt S how ? Fir st w e ,

fi nd an in c re as e o f sal e s in 1 92 2 am ou n ti ng to 30 % as
c ompar e d with in No w w e can fo rm so m e judg
m e n t ab o ut balan c e S h e e t in cr e ase s o f asse ts o n J an 1 1 92 3 as
-
.
, ,

c ompar e d with assets o n J an 1 1 92 2 We fi nd th e in v e nto ry o f

.
, .

m e rchan di se or fi nish e d goo ds o n J an 1 1 92 3 larger than

.
,

o n J an 1 .
,
1 92 2 an i n c r e as e o f 4 5 % as c ompar e d with
an d ye t w e hav e just f o u n d t h e busin e ss i nc r e asi n g o nl y

Is it favorabl e t o accumulat e a 4 5 % in cre ase o f stock with

o nly a 30% i n cre ase o f sal e s ? R aw M ate rial has in c re ase d
A ccoun ts re ceivable again S how an in cre ase of 4 9% (an in cr ease
, ,

of ove r t h e o f J an 1 an d ye t sal e s as w e
.
, ,

have se e n in cr e ase d o nly

, D o e s this m e an slo w er co lle c
tio ns and accumulatio n o f bad accou nts ? Let us exami ne thi s .

Accoun t s Re ce ivab le and S al e s S uppose we now consult th e .

b ooks an d fi n d som e facts ab out t h e pre vious ye ar S uppo se we .

fi nd that o n J an 1 1 92 1 t h e balan c e of A cc o u n ts Re c e ivable was

.
, ,

an d that in 1 92 1 t h e disc o u n ts give n t o cust om e r s o n

sale s of t hat ye ar w ere S uppo se w e also fi n d that in

1 92 1 t h e disc ou n ts charge abl e t o t h e A ll owan c e for D isc ou n ts

Offe re d se t up in t h e p revious y ear was an d in 1 92 2

was Now w e ar e in a positi o n t o l e arn how t h e disc ou nts

of 1 92 2 c ompare with t h e discou nts of 1 92 1 We must first .

fi nd t h e amou nt o f accou nts rec eivable se t tl e d in e ach o f the se

years thu s :
,
35 4 . U
TH E F ND AM ENTA LS OF A C COUNTING
A ccounts Receivable on b alance sheet , 1 /1 /2 1 , r / r/ 2 z ,

S ales o f 1 92 1 , 1 92 2 ,
b
C o llec t i le in 1 92 1 , 1 92 2 ,
Accounts Rec ei vabl e on b alance sheet,
A ccoun ts se t tle d in 1 9 1
2 , 1 92 2 ,

Th e xt st e p is t o S how wha t discou nts wer e ac tually tak e n

ne

th e se se ttle d bills .

D is coun ts gi e n ( v
in year , for y ear) 1 92 1 , 1 92 2 ,
h d
D is c ou n t s c arge in lat e r year t o
w
allo an ce o f e arlier ye ar 1 92 1 , 1 92 2 ,
To tal di
s coun ts o n se ttle m ents of 1 92 1 , 1 92 2 ,
P ercen tage of di s counts to se ttlements

We fi n d th e n that t h e ave rage disco u n t r ate is high e r o n t h e sale s

, ,

of 1 92 2 S O f arse ttle d than o n tho se o f 1 92 1 ; and if th ere has b ee n

n o cha n ge in t h e g e n e ral le v e l o f rat e s off e r e d it is o bvio us that ,

paym e n ts are quite as p romp t e ls e t h e disc o u n ts c o uld n o t

have b ee n t ak e n Th e writi n g off of any acco u n ts as bad d ebts

.
,

m oreo v er t e n de d t o re duce t his av e r age (raisin g th e figu re o f se t

,

t le me n t s b u tfi n o t that o f disc o u n ts) On ly in ca se t h e do ubtful

.

acc ou n ts hav e b e e n carri e d o n th e b o oks lo nge r in 1 92 2 than in

1 92 1 which th e re is no re aso n t o supp o se c ould t h e figu re of
, ,

av e rag e disc ou n t as calculate d fail t o pro ve that c o lle ctio ns we re

b e tte r in 1 92 2 than in 1 92 1 H ow th e n e xplai n a 4 9% i n c r e as e in
.

acc ou n ts r e c e ivable with o nly a 30 % in c re ase in sale s ? Will col

l e cti o n s fr om acc ou n ts re c eivable ke ep pac e with i n cre ase s in sal e s ,

p r e c e d e th em o r fo llow th em ? S ale s o f Octob e r are c o ll e ctible in

,

late Octob e r o r No ve mb e r ; man y of t h e sale s of D e c emb e r ar e no t

c o ll e ctible u n til J anuary A s lo ng as a busi n e ss is gr owi ng th en
.
, ,

its c o ll e ctio n s n e ve r catch up with its sale s ; for while bills are ma
tu ri ng sal e s ar e pili n g up faste r ; but a pe rio d o f e quilibrium o r of
d e cli n e e n able s co lle cti on s t o catch up .

G e n e ral Efi e ct of Expa n s ion S imilarly u nle ss a busi ne ss can

.
,

i n c re as e its rat e o f tur nove r its s to ck of goo ds must i ncre ase

,

ah e ad o f its sal e s ( fo r a busi n e ss doe s n o t o rdi n arily se ll goo ds tha t

it do e s n o t posse ss) ; so that t h e re aso n for stocks o f goo ds ru nni ng
ah e ad o f sal e s is t h e re ve rs e o f tha t u nde r which accou n ts receiv
abl e balan c e s k eep ah ead of sal e s A s a general tendency, what
.
35 6 TH E FUNDA MENTA LS OF A CCOUNTING
Prin cipl e of Arra g m t f S t t m t f A fi i
n e en o a e en o a rs. S i n c e th e
purp o s e ofa state m e n t o f aff ai rs is t o S ho w ad e quacy o r i made
q u ac y o f ass e ts ,
t h e g r o upin g o f it e ms has r e ga r d lar g e ly t o c an

c ollati o n s o f ass e ts agai n st liabiliti e s in t w o g en e r al ways : pl e dged

ass e ts ar e s e t o ff it e m by it e m agai n st t h e spe cific liabiliti e s

, ,

which th e y p ro t e ct an d th e n t h e surplus valu e o f pl edge d ass e ts

,

( ab o v e t h e s e cu r e d cl a ims agai n st th e m ) an d t h e valu e o f um

pl edge d ass e ts ar e s e t o ff as a lump sum again s t t h e u n se cure d

li abili ti e s s o as t o S h ow t h e d eficien cy (or in so lve n cy) o n o n e h an d
,

or t h e balan c e o f p ro pri e to rship o n t h e o th e r S in c e m or e ove r .

, ,

in d r awi n g up such a stat em e n t it is e asy t o omit or duplicate

s om e it e m o r pa r t o f an it e m by i n adv e r t e n c e it is d e sir abl e t o ,

in c o rporate in t h e statem en t figure s from th e trial balan c e o r th e

balan c e S h e e t by way of pr oo f If any allowan c e acc ou n ts are o n
.

t h e b ooks it is w e ll t o S h ow bo th t h e gro ss an d t h e n e t b o ok valu e

,

o f ass e ts as a ch e ck agai n st e rr o r an d as assu r a n c e that all balan c e

sh e e t figu re s have b e e n utiliz e d an d acc ou n t e d for .

D e tail of Arra n ge m e nt of S tate m e nt of Affair s It is w e ll t o .

S h o w s ou r c e s o f figu r e s s o tha t it will b e cl e a r that n on e hav e b e e n

,

juggl ed If we b e gin with li abilitie s as is c omm on w e will divide

.
, ,

th em in to gr oups acc or din g t o se curity tho s e who lly s e cured

o
,

th os e partly s e cur e d an d those unse cured U sually tho se who lly

,
.

s e cu re d ar e still fu r th e r subdivid e d in to th o s e havi n g a p r e fe re n c e

by law with ou t sp e cial s e curity , commonly calle d p re fe rre d “

”
claims chi e fly wage s taxe s an d expe n s e s of liquidation an d
, , , ,

th o s e s e cure d by c on tr act Unde r th o se prefe rre d by law will b e

.

plac e d t h e ass e ts availabl e for m ee ti ng th em ; an d if t h e immedi

at e ly available ass e ts are in ade quate th e am oun t is e xt e nd e d as a
claim agai n st o th e r ass e ts whe reas if a surplus is S h own it is car
,

ri e d t o t h e o th e r sid e of t h e s t at em en t as availabl e f or m ee tin g

u n se cu re d claims It is w e ll t o S how th e full figu re wh e re ve r an
.

i t em is us e d t o S h ow tha t n o j ugglin g has tak e n plac e In .

t h e fo rm f o ll owi n g f or e xample th ough onl y

, ,
o f c as h is to

b e appli e d t o e xp e n s e s o f liquidation it is we ll t o S how th e wh ol e ,

availabl e fo r paym e nt Wh en prop e rty is pl e dg e d but is

.
,

n ot w o rth t h e b ook valu e it is we ll in c onn e cti on wi t h t h e liab il

, ,

it y t o S h ow b oth t h e b o ok valu e an d t h e e s tim ate d val u e

, in
ord e r that all th e r e lati on ships may appear in their natu ral con
 INTERPRETATION OF FINANCIAL S TATE MENTS 35 7
t xt
e . On th e ass e ts side it is we ll t o S how thre e colum n s one for ,

l e dg e r valu e s o n e for n e t l e dger valu e s an d o ne for e stimate d

,
-

availabl e balan c e s applicabl e t o u n se cu re d claims Th e n e t .

l edge r c o lum n is t o sh o w th e n e t valu e o f ass e ts afte r any allow

an ce s have b e e n subtract e d an d aft e r an y applicati o n s have b e e n

made of th os e particu lar ass e ts t o s e cu re d claims al re ady shown

o n t h e le dg e r ; that is t h e purpo s e is t o S h o w an y valu e s that will
,

rem ai n o n t h e le dge r aft e r d ebits an d cr e dits have b ee n s et off

again st o n e an o th e r as far as th e y will go Th en th e diffe ren c e .

b e tw e en t h e n e t l e dg e r valu e an d t h e e stimate d availabl e value

-

repre se n ts t h e S hrin kage in valu e s through liquidation a matte r

o f lar g e statistical impo rta n c e It is w e ll wh en of any particu lar
.
,

typ e of ass e ts s om e are pl edged an d s om e are n ot t o S how th e ,

t o tal in th e le dg er c olumn agre e in g with t h e balan c e S h e e t s e par ate

, ,

th e m in t h e n e t l e dg e r c olumn an d con tinu e t h e subdivision s in

-

t h e last c o lumn Th e diff e r e n c e b e twe e n t h e last c o lumn o n th e

.

asse ts sid e an d t h e last o n t h e liability S ide is th e d eficien cy in cas e

o f in s o lv e n cy or th e n e t w or th in cas e o f s olv en cy
, N 0 stan da rd .

f orm is in u s e h owe v e r ; t h e who le matte r is o n e of makin g cl e ar

,

all t h e n e c e ssary re lation s .

Ill u s trati on of S tate me nt of A fi air s Fo r illustrati on by a S im .

p le cas e ,
le t u S sta r t with a balan c e S h ee t mak e c e r tain additi on al ,

supp o siti on s ab out valu e s an d pledge s an d liabiliti e s and p ro c ee d ,

to a statement of aff ai r s Th e balance S he et follows

.

Cas h Proprie tor

A ccts Receivable A ccts Payable
Notes Payable
. .

M erchandise
Fixtures

The t s payabl e are se cure d by a lien o n me rchandise havin g a

no e

book valu e o f an d o f t h e acc o u n ts payable are

se cu r e d by a lie n o n acc o u n ts r e c e ivable having a boo k valu e of

Th e e xp e n s e s o f liquidati o n are e stimat e d a t
Of t h e acc ou n ts re c eivabl e in cludi ng t h e,
pl e dg e d ,

are e stima te d go o d d oubtful (p robably 5 0 % go o d)

, ,

bad Th e fixtu re s are w or th

. t h e m e rcha n dis e pl e dge d is
deem e d wo rth $3 5 00 and th e r e st o f th e m e rch an dise
,
 x q id t i imat ed
as s ets

E pe nse of li u a on est

Fully m
se cur e d clai s
A P y bl (p t)
cco un t s a a e ar

A t R iv bl pl dg d
cc ou n s e ce a e e e

B l hw
a an ce s o n co nt ra

P ly
art d l im
se cur e c a s

N P y bl
o t es a a e

M h di pl dg d
e r c an se e e

B l d
a an ce unse cure

U d l im
nse cu re c a s
A t P y bl (b l
cco un s a a e a an ce ,

Totals 1

A ss ets
Es ti mated

Le ss e xpe nse s of liquidat ion

B alan ce a v il bl
a a e

Le ss required for Accounts

Payable
B alan ce v bl
a aila e

U pl dg d
n e e

Lien for Not e s Payable

x
Fi t ures

D e fi ciency

i This fi ure balance, proves wit h the b alance sheet total 011 3 7 9 00.
’
g , lus the propriet or s -

‘ This t o th e b alance she et .

‘ The difi m b e W em M mmh sho m t he u d mated b u m flq uidafion ind uding

. a pM
360 U
TH E F ND AMENTAL S OF A CCOUNTING

Q UES TIONS A ND PROB LEM S

1. (a) What specifi c inf o rmation is gi v en b y t he f ll wi
o o ng s tatement ?
Trial B alance, D ecember 3 1 1 92 4
Capital S t oc k
B ills Pay a le b
Accoun ts Payable
Merch an dise
Acco un ts Receivable

Adverti s in g

Co mm i ssion
Re n t
G en e ral E pense x
P e t ty Cas h
Cas h
S urplus

(b ) C t h f ll w
an i g t t m
e o o n s a e en t refer t o t h e same b us in ess as o f t he
sam date ? If
e xplai t h di so , e n e s cr epan cies If n o t wh at inf ormation
d th d tat m t giv ?
.
,

oes e s e co n s e en e

M h di er c an se C apital S t oc k
A R iv b l
cco un t s ece a e B ills Paya le b
Fix t u res Accoun t s Payable
C mmi i
o E d
s s o ns arne Allowan ce for B ad
C h as Accrued Wages
S urp lus
$1

2. A b usin es s h ad th e following b alance sh eet on January

Re al Estat e Capital S tock
Plan t No t es Payable
Raw Mat erial Accoun ts Payable
Accrued it ems
Fini s hdG d
e oo s

Accoun ts Receivable
x
Fi t ur es
C as h

D urin g th e year it b oug t h w th

or material, pai d for
o f raw

o f raw mate rial , iss ued ort w h

of raw mate rial , p aid

in w
ages (including accrued b roug t o er rom t h eh v f
 INTERP RETATION OF FINANCIAL STATEMENTS 3 6 1

ye r a b f ) paid
e o re of general expe nses ( in clu in g d o f old
d it m ) ld d d
,

accru e e s so o f fi nish e goods , collect e on

vd d h
,

s ales ,
an d pai d in di i en s . I ts b alance s ee t a year later was

Real Es at e t Capital S toc k

Plan t No t es P y bl
a a e

Raw M at e rial t P y bl
Accoun s a a e
d l

Goo s in Process Accrue te s dI m

hd d Allowance for B ad
- -

Fin i s e Goo s
A cc o un ts Recei a le vb b
D e ts
S urp lus

a
() h w mma y j al
S o su r our n t
e n ries for all th e transactions of th e
y d
ear , anh k t h m wit h t hc ec e e ne w b la
a n ce s h ee t
(b ) S h w t h i m h t
.

o e nco e S ee

() S h w i a tat m t t h application o f values utilize d

.

c o n s e en e so ur ces an d

d i g th y a W h t d t h
ur n e e r . a oes e s tate m e n t t ell you a bo u t t h e con di

tion of th e b usin ess ?

3 . A t rial b alance of ledger totals at the close of b usiness for a year reads

Part n er A
Partn e r B
P rt n er A Salary
a

Partn er B Salary
B ills Payable
B ills Recei v bl a e

Acco un ts P bl ay a e

A coun t s
c R iv bl ece a e
M erc h dian se

x
Fi t ures
S alaries and Wages
Re n t
Ta es x
Ins uran ce
In t eres t
h
Freig t and Cart age

Ot h er x
E penses
36 2 TH E F ND AM ENTAL S U OF A CCOUNTING
Th e in co me s h ee t was t
repo r e d as f ll w
o o s

S ales
Less re tur ned sales
Ne t sales

In v b gi i g
en t ory at e nn n

L dp h
es s re t ur n e u rc ases

N p h et ur c ases

M h di h dl d
e rc an se an e
I v
n y t d
en t or a en

C t fg dos ld o oo s so

G p fi ro ss ro t
S l i d w g
a ar es an a es
R en t

T x
a es

In s uran ce

h
Freig t and cart age
Adv e rt i si ng

Lo ss b y b ad e ts db
Ot h xper e e n ses

N et pro fi t
Partn er A sh are
P rt ne r 9 share
a

Rese r v e hikg
for losses and s r n a es

(a) S h w th bala o h t i a f m imila t that h w

e n ce s ee n or S r o s o n on

t h b gi
,

pag 3 4 5 f e i g f th w y a
or e e nn n o e ne e r

(b) Wh at mm t hav y t mak t h ha dli g f m ha

.
,

co en e ou o e on e n n o e rc n
di th b
se o nk? e oo s

() H w f
c o th fi g p t d f
ar ar e p h d al
e i t
ur e s r e or e or u rc ases an s es co ns s

t with t h fi g
en f th t i l b l ? e u res o e r a a an ce

H w m h
o uc a y i f mati if y d
n e cess r th f ll wi g b l
n or on , an o es e o o n a an ce

h t fail t giv ab t lv y i wh t q ti if y d
,

S ee o e ou so en c : e a u es on s , an n ee

a w i g f m th b f t h i t llig t ad j dg f
. .
, ,

ns er n ro o e r so u r ces e o re e n e en re e r can u e o

solv y?en c[ Giv y a w i t h f m f q tie o ur ly tat

ns er n e or o u es on s o n or s e
that f th i f mat i i
,

no ur er a y] n or on s n ec es s r .

R lE ea s t at e C pi l S t k a ta oc

M h di e r c an se N P bl otes ay a e
N R
otes iv bl ece a A e P bl c co un t s aya e
A R
cc oun t s iv bl ec e R v f D p i ti
a e ese r e or e rec a on

G d Will
oo S pl ur us
Fix t u res
C h as

w t ll y
’

5 .
(a) H ow much do th e two b alance Sh ee ts b elo e ou ab out th e
Ope rations of th e y e ar elapse d b etw een th eir dates ?
 6
3 4 U
TH E F NDAM ENTALS OF A C CO UNTING
b ad , f w
doub t ul , orth p rob ab ly 5 0 pe r cent , The e uip q
m w h
ment , es ti ate d ort d d
is ple ge as s e curity for t h e n otes
p a y a leb A ccr u e d b
lia iliw
ty f or ag ,es no t o n t h e oo b k
s , is Lia
d d hv v b v
.

b ili t y o n e n orse pr otes t e d n otes , a ing no re co e ra le alue , is

x q d
Th e e pe ns es o f li ui ation ar e estimate as d
hw m f
8 S o a S tate en t o f Af airs an d a D e fi cie ncy S tat ement for t h e fol
w
.

lo ing conditi on :
B alance
Prop rie t or
No t e s Payable
Accts Payable
.

Sales

Th ere are accrue d wages unpaid amoun ting t o an d accru ed

liab ilities fo r a dvertis in g s tation e ry p rin tin g an d o th e r offi ce e xpe nses

Th e n o te s payable are s e cur e d b y a m o rt gage
, , , ,

amounting t o
o n t h e m e r ch an di se Th e merchan dis e is e s t imate d s al ab le fo r
an d t h e fi x tures fo r $ 5 00 Th e acco un ts re ce ivable are es tim ate d as
.

b ad an d th e b alan ce wo rth
.

ggo d Th e expenses
of liquidation are es timate d at $ 3 00
, ,

.
 TH E EFFE CT OF INTERE S T ON VALUES
Th e Pr e s e n t Value of Futur e Re alization s It is u ni versally
.

re c ogn ize d that an asse t in han d t o day is wo rth m o re than an

-

as se t of t h e sam e in trin sic valu e which will c om e t o han d a ye ar

h en c e On e wish e s c ompe n sa ti on for waitin g for on e c ould b e
.
,

maki n g u s e of t h e ass e t (ei th er e arni n g p rofit o r d e rivin g ple as ure

o r be n e fit f r o m its u se ) if o n e had it n ow Futu r e r e alizati ons as
.
,

a matter o f simple busi n e ss th en ar e di sc ou n t e d in c ompariso n

, ,

wi t h p r e s en t p r ope rty Th e rate of in tere st t o b e us e d fo r dis

.

c o un tin g d oe s n o t c on c e rn us h ere exc ept as w e must n o te that it

vari e s with thr e e c o n diti o n s : th e pre s e n t mark e t r at e o f in ter e st ,

t h e d eg r ee o f risk in vo lve d in t h e d e lay an d t h e p r obability of a

,

Cha n ge in t h e mark e t r at e of in te r e st b e fo r e t h e day o n which t h e

asse t un d er c on sider ation will b e re alize d Th ough in a s e n se t h e

.

p rin cipl e o f valuati on for asse ts r ealizable in t h e futur e is always

th e sam e it appe ar s in t w o as pe cts that may we ll b e o bs e rve d
, .

A sin gle value t o b e r ealiz ed at a future time give s a simpl e cal

culati on o f disc o un t ; an d a s e rie s o f valu e s t o b e r e aliz e d at succes
sive futu re tim e s re quir e s tha t e ithe r man y s e par ate valu e s b e
add e d to ge th e r o r a fo rmula b e fo un d for makin g on e calculati on
f o r t h e s e ri e s
. Wh en h owe ve r t h e s e ri e s is with out lim it o f tim e
, , ,

th ough math ematically t h e prin cipl e is t h e sam e th e pr actical ,

workin g m e th od is difi e re n t Th e valu e of a S in gl e paym en t of

.

du e in o n e y e ar at 5 % disc o un t is of t w o pay

m en ts th e fir st in o n e year an d t h e s e co n d in t w o ye ar s is
, ,

( o r f o r t h e first plus f o r t h e s e c o n d );
but t h e valu e of o n e su ch paym e n t a ye ar c on tinu e d forev er c ould
n o t b e calculat e d by this m e th o d fo r th er e w o uld b e n o st oppin g
,

po in t th ough on e would reach a po in t at which on e would

se e that t h e valu e c ould n e v e r go a c en t high e r b e caus e t h e di s

c ou nt would absorb t h e added Th e usual way t o calcu

lat e t h e valu e o f pe rpe tual paym en ts is t o fi n d what capital
would produc e that in c ome an d thus s e e what t h e in c ome is
—
wo rth as w e saw in c onn e ction with t h e e arn in g capacity basi s -
3 66 TH E F ND AM ENTAL SU OF A C C OUNTIN G
of capitalizati on Wh e n in ter e st is
. it tak e s t o pr o
duc e in c om e and h e n c e a p erp e tual in c om e of
, is
w or th $ 2 0 000 ,
l
.

Th e Valu e of S to cks Th e c ommon e st ki n ds o f future r e aliza

.

tion s en ter ing in to busin e ss transacti on s ar e r epre s en ted by stocks .

A share of sto ck r epre s e n ts part o wn er ship of a busin e ss an d u n ,

le ss that own er shi p is de sir e d for s om e o th e r than t h e usual r e as o n

( d e si r e f o r t h e in c o m e which it may brin g ) its valu e is d e p e n d e n t ,

o n t h e p r o babl e e a rn i n gs o f t h e c ompa n y If in t er e st is . an d

t h e st o ck h o lds go o d p r o sp e ct o f p e rp e tual a nn ual divid e n ds o f

a S hare it is w o r th $ 1 00 a shar e If in t e re st is 8 % wh e re
, .

such r isks ar e i n vo lve d an d t h e pro sp e ct is still for divid en ds o f

,

a shar e t h e sto ck is wo rth

,
a S hare ; but if 8 % is satis
factor y in t e r e st (risk in vo lve d tak e n i n t o c o n side r a ti on) an d t h e
sto ck h o lds p ro sp e cts o f a S hare divid e n ds t h e sto ck is ,

wor th $ 1 5 0 a S har e Th e rate o f in t er e st us e d in t h e calculati on

.

always tak e s in to c on sid e ration t h e risk in vo lve d t h e risk that

a lo we r r at e may b e paid that a l o ss may b e in cu rr e d that e ve n
, ,

capital maye b e sacrific e d ; in o th e r words th e r at e us e d at o n e en d ,

o f t h e calculati on is t h e r at e d e e m e d n e c e ssa r y u n d e r n o rmal co n

di t io n s t o mak e t h e i n v e stm e n t attr activ e an d th e am o u n t o f ,

di vid e n d us e d at t h e o th e r is t h e e stimat e d divid e n d of t h e com

pan y u n de r n ormal c ondi tion s If th e t w o ar e in agr e em e n t th e
.
,

stock is wo rth p ar ; if t h e in te re s t is hi gh er than t h e di vid en d t h e ,

sto ck will b e w o rth pr o p or ti on at ely le ss than par an d if th e di vi ,

d e n d is hi gh e r than t h e in t ere st th e sto ck will b e wor th p ro p or

tio n at e ly m ore than par Thi s it sh ould b e n o te d is supp o sing
.
, ,

n o o th e r c o n sid e r ati o n s en t e r in t o t h e mark e t If on th e o th e r .

,

han d t h e sto ck is d e sire d for c on tro l (pe rh aps by a c omp e ting

,

busin e ss) o r if sto ck has b e en s o ld sh ort o n t h e mark e t an d scar

,

city of o fi e rin gs has put it at a scar city pric e o r if a ge n e r al tight ,

n e ss in t h e m on e y ma rk e t fo rc e s o wn e r s t o s e ll in o r d e r t o r ais e

r e ady cash t h e pric e may b e t e mp o rarily v e r y diff e r e n t f r o m that

,

n atu r ally d e t e rmin e d by e arn i n g capacity Ab out thi s there is .

n o myste r y an d in it n o acc o u n tin g is i n vo lv e d e xc e pt e n tr y fo r

,

pur chas e an d sale o f sto ck and fo r di vid en ds re c e iv e d S imi lar t o .

1
A discu ssio n o f the S imple mathemati cs of f
u ture realizati on s will b f d ie oun n
dx C
A ppe n i .
36 8 U
TH E F ND AM ENTAL S OF A CCO UNTING

but sin c e t h e ext ra e arn ings are th ems e lve s o nly es timated al ,

m o st wholly problematic al it wo uld b e absurd t o calculate t o so

,

fi n e a p oin t as t h e valu e o f a daily in c om e as co n tr aste d with an

ann ual in c om e an d th e re fore th e m e tho d o f calculati on is sim
,

ply t h e capitaliz e d valu e o f t h e e xtr a ann ual earnings M an y a .

busin e ss has b e e n s o ld for an am oun t far in e xc e ss of t h e valu e o f

its ass e ts e xclusive o f t h e goo d will an d th e trade has b een fair ;
but m any an o th er has b e e n similar ly sold an d t h e buy e rs have
fo un d t h e g oo d will worth n o thi n g Few thi ngs in de e d ar e m o re
.
, ,

p roble matical than go o d will ; for a S hift o f for tun e may d e str oy it ,

as a shi ft o f t h e win d may d e str oy a yacht s cha n c e at a priz e tha t

’

is alm o st in sight .

Accounting f or G ood Will B e cause th e value of goo d will is so

.

pr oblematical t h e usual practic e in acc ou n tin g is t o r e fr ain from

,

sh owin g it as an ass e t upo n th e b o oks u nl e ss it has b e en paid for

by s om e thin g give n in e xchang e Thi s prac tic e h as n o t only
.

c omm on s e n s e but c on ven i e n c e t o r e c omm e n d it To put good .

will o n b o oks o f acc o un t m e re ly b e caus e it has d e ve lo p e d withi n

t h e b u sin e s sJ i s t o att e mp t t o S h ow chan g e s in valu e s o n t h e bal
a n c e sh e e t and on e mi ght as w e ll sh o w gai n o r lo ss of p r op ri e to r
,

ship th r ough rise s an d falls in th e valu e o f r e al e stat e still h e ld .

To put on t h e b ooks what is paid for g o o d will pur chas e d h ow ,

e ve r is t o S h o w c o sts an d o ne must S h o w what was go t fo r what

, ,

was give n u nle ss i n d e e d on e wish e s t o charge so m e n ominal

, ,

acc ou n t an d thus c r e at e a s e c r e t re s e rv e (which of c ou rs e is bad

, ,

acc oun ti n g for t h e purpo s e of acc oun tin g is n o t t o hide t h e truth

,

but t o S h ow it) If th e s e e arn in gs are assum e d t o b e p erp e tual

.
,

goo d will o n c e pu r chas e d is an ass e t f ore v er ; an d n o r e as on ap

p e ar s for d e p r e ciatin g it A s a matte r o f fact h ow e v e r it is n ot
.
, ,

u n c o mm on ly w ritt e n off th e b ooks ove r a s eri e s of ye ars large ly ,

o n t h e th e o r y that t h e o ld good will d oe s w e ar ou t an d n e w g o od

will tak e s its plac e it is c e rtainly tru e that t h e old would n ot

last lo n g if n o e fi ort w e re mad e t o c r e at e n e w ; but if t h e n ew
main tai n s o r r e plac e s t h e old n o r e as on exc ept c on se rva tism
,

(v ir tually a d e sir e fo r a s e cre t re s e rv e) e xists fo r writin g o ff Goo d

Trad e M arks A kin t o go od will is th e right t o a tr ad e mark

. .

Ind e e d t h e posse ssi on of a trad e mark may b e on e o f th e e l em en ts

 TH E EFFE CT OF INTERES T ON VALUES 6
3 9
of good will L ik e go o d will h owe ve r t h e p o ss e ssion of a trade
.
, ,

mark S h ould n o t b e e n t ere d as an asse t u nl e ss it has b ee n pur

chas e d Th e valu e m ore ove r is ve ry hard t o le arn for n o thin g
.
, , ,

can t e ll h ow much o f g e n e r al p ro fits c om e s fr o m th e p o ss e ssion o f

such a mark an d h ow much c om e s fr om o th e r s ourc e s .

Fra nch i s e s Akin t o g oo d will ar e als o fr an chi s e s o r rights to

.
,

con duct ce r tain busin e ss e s par ticularly public utility s e rvice s

,
-

If t h e fr an chis e is p e rp e tual its valu e d e p e n ds up on t h e e arni n g

,

capacity If t h e e arn i n g capacity is n o gr e at er than a r e ason able

.

re tu rn o n th e i nv e stm e n t of p ro pe r ty th e fr an chis e has n o valu e ,

( u n l e ss f o r s o m e e xt r an e o us r e as on n o t c o n n e ct e d with t h e o p e r a

ti on of t h e pr op e r ty as an e n tity) ; but if it assu re s larg e pr ofits in

p e rp e tuity it has a valu e e qual t o th e capitaliz e d valu e of t h e
,

e a rn in gs ab o ve n o rmal .

C once s s ion s Akin t o franchise s and ye t of a type s o differen t

.
,

that in a s en se w e c ome n ow t o a n ew field are c on ce ssion s for a ,

fix e d p eri o d of tim e like t h e right t o main tain n ews stan ds in

,
-

railr o ad station s e t c If t h e right t o main tain a n ews stan d will

,
.
-

bri ng a y e ar ab ov e t h e n atural rat e o f pr ofits on t h e capital

i nve ste d t h e valu e o f that c on c e ssion is
,
a y e ar ; but as it
w ould always b e give n for a limite d tim e on ly its valu e would n o t ,

b e t h e capitaliz ed valu e o f an in c om e of a ye ar Th e pric e .

p ai d would d e p e n d up on t h e durati on o f t h e c on c e ssion an d up on

t h e tim e o f paym e n t If for exampl e t h e c on c e ssion w ere f or on e
.
, ,

ye ar an d t h e paym en t w e r e on e lump sum payable in advan c e ,

t h e pric e sh ould n o t b e fo r n o on e w ould pay n ow

for t h e privileg e o f g e ttin g by t h e e n d of t h e ye ar Th e .

purchase r S h ould pay in advan c e th e p re s en t wor th of what is

virtually a ste ady stre am of in stallm e nts that will c om e t o a t o tal
of at t h e e n d o f t h e y e ar If t h e c on c e ssion is for t w o
.

ye ar s an d paym en t is made in advan c e th e pric e will b e th e

, ,

pre s en t w orth of a str e am that will c om e t o a t o tal of in

t w o y e ar s . If h ow e v er t h e paym en ts are t o b e mad e m on thly
, , ,

we sho uld fi n d a s eri e s o f m on thly paym e n ts that e qual in valu e a

st e ady str e am that will c om e t o a to tal of in t w o ye ars .

In p r actic e t h e matt e r is not work e d out s o fin e ly as thi s for n o

“

o n e k n ows what t h e p ro fi t s ar e g oin g t o b e an d it is absu r d t o

'

work out t o a high de gr ee of refinem en t th e math ematical e nd of

37 0 U
TH E F ND AM ENTAL S OF A CC OUNTIN G

th e problem wh e n th e basis figure of t h e wh ole thing is itse lf prob

lematical We shall la te r fi n d kin ds of kindred tran sacti ons
.
,

h o w e v er in which t h e basis figu re its e lf is a matt e r of c on tr act

,

an d th e r e f o r e k n o w n an d h e n c e t h e calculati o n may b e an d as a
, ,

matte r of busi n e ss p r actice actually is v e r y fi n e Th e di scussi on , .

o f acc o u n tin g for con c e ssio n s w e will p o stp on e un til w e hav e o b

s erv e d s om e oth e r in tan gible pr op e rti e s o f s om ewhat t h e sam e

t yp e .

Pat e nt s an d C opyr igh ts Th e valu e of a pat en t an d of a c opy

.

right will b e d e t e rmi n e d o n similar c o n sid e r ati on s f or t h e mon op ,

o ly p rivil e g e which e ach c o n f e r s may hav e an e arni n g capacity

an d is by law limi t e d t o a t e rm o f y e a r s If t h e po ss e ssion of a

'

pat en t or a c opyright e n able s me t o s e ll at a hi gh er pric e o r t o s ell

m o re goo ds t h e p o ss e ssion is w or th payi n g for as a S in gle sum or
, ,

as c ommut e d t o an a n nual o r a m on thl y charg e or as a ro yalty of a ,

c er tain sum for e ach ar ticl e pro duc e d an d s old u n d e r th e c on tract .

Accounting f or C once s s ions Pate nt s , C opyrigh ts If a con

, .

c e ssion a pat e n t o r a c o pyright is S e cure d u n d e r t erms whi ch

, , ,

call for a p eri odi c paym e n t e ith e r fixe d or on a u nit royalty b asis
,
-

t h e acc ou n ting is S impl e It m e an s simply an o pe rat in g charge

. .

Wh en h oweve r a lump sum is paid w e ge t a n ew s ituati on

, , , .

Thi s lump sum re p r e s e n ts an ass e t of c ours e fo r i t e s tablish e s a

, ,

right t o c e rtai n privileg e s that are e xp e ct e d to b rin g a re tu rn ; bu t

it is n o t a pe rpe tual righ t as good will and fran chises may b e and
, ,

c ons e qu e n tly it c ann o t remain in d efinite ly on t h e books It dis .

appe ar s with th e lapse of tim e In ord e r to se e wh at t o d o wi th

.

it w e mus t s e e j us t wha t it is S uppos e a paten t is purchas e d o n

, .

t h e supposi ti on th at t h e own e rship o f tha t pat en t will e n able t h e

own e r t o mak e a y e ar profit ab ove a no rm al re turn o n hi s
,

inve stm en t in manufactu rin g an d s e lli n g th e goo ds for t h e next ,

t e n y e ar s Th e pric e o f t h e pat en t suppo sing it is fixe d on this

.
,

b asis will th en b e o n a 5 % basis for t h e us e of money

, , ,

t h e pre s en t w o rth o f an a nn uity o f a ye ar for t en ye ars

at Wh en purchas e d at that price Pate nt Right may b e ,

d e bite d as an ass e t at tha t figu re A y ear late r howe ve r th e .

, ,

right is n o l on g e r d ee m e d wo rth tha t fi gur e for i t is n ow e stimated ,

t o yi eld a pr ofit o f for n in e ye ars o nl y ; and th e pre se n t

wo rth of an annui ty of a y e ar for nin e y ears is o nly $ 2 1 ,
37 2 U
TH E F ND AMENTA S L OF A CCOUNTING

(e v e n all o wi n g f o r t h e fu t u r e ) t h at
e t im e t h e l e as e was m ad e .

Th e p ro pe rty may b e com e e ith e r t oo goo d o r t oo poo r f o r t h e pur

pose for which i t h as b een use d and a Chan ge of te n an cy may b e
,

wis e S uppo se th e le as e has ye t t e n ye ar s t o run at an annual

.

ren tal of but b e caus e o f chan ge s in t h e cours e of trade th e

Obviously t h e h olde r
‘

p rop e rty is n ow wo r th a ye ar .

o f th e l e as e has in hi s p o ss e ssion a righ t worth a ye ar

t h e right t o u s e at a c o st t o him of what has an e arn ing
capacity o f This righ t has th en a valu e e qual t o t h e
pre s en t wor th of a y e ar fo r t e n y e ars which w e saw in
t h e last par agraph t o b e at , A buye r of t h e
l e as e from him at that p rice will de bit L e as eh o ld f or that sum .

Th e s ell e r in turn sin c e h e ge ts thi s as a pure chan c e gain n ot

, ,

c onn e ct e d wi th th e o p e ra ti o n s of his busin e ss will cr edi t S urplus , ,

o r pr e f e rably C apital S urplus

, , Th e buye r on t h e o th e r han d
.
, ,

must r e aliz e tha t this le as e hold doe s n o t c on stitute a p e rp e tual

ass e t but o n e rapidly disappearin g
, In t h e first y e ar o f his
.

tenancy h e will have thr ee items to c on side r in his ren tal

t o b e paid t o th e la n dlo r d as r e qui r e d by t h e l e as e which
h e has pu rclfase d S hrink ag e o n t h e le as e ( s imilar t o t h e
~

shrinkage in th e pat e n t right as sh own in th e p re c e ding par agraph ) ,

an d in t e re st o n his inve stm e n t Th e s e t og e th e r mak e

.

t h e fair ren tal charg e Th e n e xt ye ar t h e r en t will b e

.

t h e shrink age in t h e l e as eh o ld right wil l b e (t h e

pre s e n t wo r th o f an a nn ui ty of for e ight ye a r s is
an d t h e in t e r e st o n t h e i n ve s tm e n t will b e (
l e ss tha n

b e fo r e b e caus e a part o f t h e in v e stm e n t has b e e n re tu rn e d in t h e

,

first ye ar s u s e o f th e buildin g and t h e balan c e o f inve stm e n t re

’

main in g a t th e e n d of th e firs t ye ar is only This '

again giv e s t o t al rent .

B on d s Wh en w e turn to bo nds we fi n d future re alizati ons

.

that are n o t problematical but stipulate d by con tract A b ond is .

a pr omis e t o pay t w o thi n gs

. a c e r tain sum calle d t h e p rin cipal
, ,

at a dat e n am e d usually rath e r rem o t e (

,
s om e tim e s in as few as fi v e ,

an d s om e tim e s in as man y as s e v e n ty fi v e ye a r s ) an d i n t e re st
-

p e ri o dicall y u n til th e prin cipal is p aid Th e valu e of th e b on d is

.

t h e pr e s e n t w or th o f th o s e t w o thin gs t h e p r e s e n t wo r th o f t h e
pri n cipal plus t h e pre sen t worth o f th e s eri e s of t aymen m .
 TH E EFFECT OF INTERES T ON VALUES 37 3
Th e ly e lem en t of un c e rt ain ty in t h e
on situa ti
on is t h
e r at e o f

in te res t t o b e us e d in valuin g th o se futur e paym e n ts It sh ould .

b e n o t e d that th e rate o f in t e re st us e d f o r this pu rp o s e may o r may

“
n o t b e t h e sam e as th e r at e o f in t e r e st n o mi n ate d in t h e b on d

as payabl e u n til t h e p rin cipal is pai d S upp ose a railr o ad issu e s

.

b on ds in d e n omin ati on s o f payabl e in t en ye ar s with ,

i n te r e st T hi s m e a n s that t h e ro ad pro mises t o pay f or

e ach b on d at th e e n d Of t en y e ar s an d in t eres t amo un tin g
t o $ 4 5 pe r ye a r du rin g that tim e If t h e cr e dit of t h e road is goo d
.
,

s o that n o o n e qu e sti o n s its ability an d willin gn e ss to pay t h e

pri n cipal an d in te r e st (exc e pt as busin e ss is subj e ct always t o

risks s om e busin e ss es t o m ore an d s om e t o l e ss e v e n in t h e sam e
,

g e n er al li n e b e caus e of l o cal or in dividual c on diti on s) t h e b on ds

, ,

will b e d e sir able just in p rop o r ti o n as t h e in te r e st payable on th e

prin cipal of th e bon d is d e e m e d by in ve stor s satisfactory If t h e .

c onditi o n s of risk su rr ou n di n g t h e issu e of th e s e b on ds o r t h e ro ad,

which issu e s th e m ar e such that in v e stor s think t h e b on ds ought

,

t o pay 5 % in t e r e st r ath e r tha n t h e b o n ds will n o t b e wo r th

but if i v st r s w o uld b e satisfi e d with t h b n ds will b e
p a r
,
n e o e o

w or th a p r e mium Th e r e as on m o re ov e r will b e e xactly simi lar

.
, ,

t o t h e r e as o n that giv e s a valu e t o st o cks go o d will pat e n ts

, , ,

le as e h o lds e t c ; but it can b e appli e d m or e e xactly for h e r e th er e is

,
.
,

o nly on e e l e m e n t o f u n c e rt ain ty t h e r at e o f in t e r e st that o ught

,

t o b e us e d in disc ou n t in g t h e futu re r e alizati o n s wh er e as in t h e

,

o th e r cas e s n o t o n ly that r at e but t h e am o un t t o b e r e aliz e d in th e

futu r e was p r obl ematical .

Fin d ing th e V alue of a B on d It is obvi ous that if t h e r ate o f

.

in t e r e st t o b e paid by th e b on ds is what in ve st or s d e e m a fair

rat e t h e b on ds will b e w orth p ar : fo r u n til t h e p rin cipal of th e
,

b on ds is paid t h e in ve stor ge ts as in te r e st what h e thin ks is a fair

r at e t o c omp e n sat e hi m f or t h e u s e o f his m on e y an d th e risk h e

tak e s S O in that cas e t h e valu e o f t h e bo nd is auto matic ally

.

fou n d For t h e sak e o f an illustrati on t o fo llow h o we ver le t us

.
, ,

fi n d t h e valu e o f this b on d by t h e m e thod of valuin g t h e futur e

r e alizati on s t o c om e from it thus ,

Presen t wort h of pay ab le in 1 0 years discoun t ed at $ 64 3 93

Prese nt worth o f annuity o f $4 5 for 1 0 years
, .

, di scoun t ed at
Presen t worth of b ond
37 4
~

TH U
E F ND AM ENTAL S OF A CCOUN TING

We s ee th e p r o of statem e n t that t h e b o n d is worth par

of our

t h e in t e r e st fo r th e t e n y e a r s c omp e n sat e s t h e buy e r of th e b o n d

f or waitin g t o ge t back th e which h e pays fo r i t Now le t .

us supp o s e that th e in te r e st p r o vid e d by th e t e rms Of t h e bo n d is

n ot or $4 5 a y a e r but o r $ 4 0 an d s til t h e in v e sto r
,
I
,

thi n ks that in vi e w of th e risks in vo lve d h e shoul d b e p romis e d

o n his m on e y We saw a f e w m om e n ts ago that h e will n o t
.

pay p ar fo r th e b on d H ow much wi ll h e pay ? Thinkin g that

.

h e o ught t o hav e o n his in v e stm e n t h e wi ll pay a pric e that ,

will yi e ld an d will pay n o m o r e ; that is h e will disc o u n t th e ,

futu r e r e a lizati on s o n t h e b on d at in te r e st an d pay what th e y

ar e w or th as f o ll o ws
,

P resent wor t h o f payabl e in 1 0 yrs dis counte d at $ 6 4 3 93

Pr ese nt wor t h o f ann uity o f $ 4 0 fo r 1 0 yrs dis coun t e d at
. .
,

.
,31 6 5 1 .

P res ent wo rth of b ond

Th e d ro p in valu e is d u e t o t h e fact that n ow t h e in te r e st pay
m e n ts of f or ty d ollar s ar e n o t ade quate t o c omp e n sate t h e buye r
for t h e t e n y e a r s that h e has t o wait t o ge t his m o n e y back if h e
pays an d S O h e will n o t pay for t h e b o n d If on .
,

t h e o th e r ha n d t h e b o n d w e r e t o pay $ 5 0 a y e ar i n t e r e st or 5 %
, ,

o n t h e fac e valu e th e valu e of t h e b o n d would b e ab o v e par as

, ,

sh own b e l ow .

Prese nt w th
or of p aya le in b 10 yrs dis cou nte d at $6 4 3 93
t w th d d at
.
, .

P res e n or o f ann uity o f 5 0 fo r 10 y rs .

, is co un te
Prese n t w o r t h

It S h ould n ow b e Obs e rv e d that t h e pr e mium o r t h e am ou n t by ,

which t h e b o n d is w or th m ore than p ar is in this last case ,

but t h e disc ou n t o r t h e am ou n t by which t h e b on d is w or th le ss

,

than par was in t h e pr e vi ous cas e also

,

IS this a c oi n cid e n c e ? B y n o m e an s This is a cas e e xactly .

par alle l with g o od will fr an chis e s pat en t rights e t c If thi s b on d

, , ,
.

will pay i n te r e st high e r than that which will give a n ormal r e turn
o n t h e i n v e stm e n t which is c o mm o nly call ed t h e
,
“
basis ra te
”

“ ”
or th e yi eld it is w o rth a pr emium : if it pays a lower in te r
,

e s t it will b e at a disc o un t
,
Le t us wo rk this ou t by m e th ods
.

an al og o us t o t h e m e th o d us e d in t h e o th e r cas e s Wh e n t h e bo n d .

pays 4 % (that is , $4 0 a year) and th e fai r rate would b e (or

37 6 U
TH E F NDAM ENTAL S OF A C COUNTIN G
b on d s e lls for b e caus e th e buye r is willing t o len d mone y
at an d h e f o u n d that by payin g 5 6 h e c o uld g e t his
m on e y back and n e t in te re st Le t us s e e wh e t h e r h e d oes
.

that if h e must suff e r a shrink age in th e valu e of his b on d Of

in th e fi r st ye ar Th e cash in t e re st that h e r e c e iv e s is by suppo
.
,

siti ou , ( 5
o r % o n a par valu e o f t h e b o n d ) . If h e

lo se s shri nkage (thi s ye ar s in stallm e n t o f t h e $39 5 6 that

’
.

will n o t c om e back wh e n th e b on d is paid Off as his n e t

i n te r e st e arn e d is What ought h e t o
hav e ? H e has inv e st e d 5 6 a
,
n d e xp e cts o n his i n ve s t
m en t whi ch is e xactly
,
In o th e r wo r ds h e h as paid just
,

e n o ugh f or t h e b on d an d must r e aliz e that o u t Of e ach y e ar s in

’
,

t e re s t r e c e iv e d a par t must b e lab e le d o n his acc o u n ts as partial

r e tu rn of his p remium Wh en h e re c eiv e s his in t ere st th e re fore
.
, ,

h e will d e bit C ash cre dit B on ds an d c r e dit In t e re st

E arn e d C o n ti nuin g this p r o c e ss fo r t h e t e n ye ar s at t h e ,

e n d o f t h e tim e h e will hav e r e duc e d t h e valu e o f t h e b o n ds t o

which o f c ou r s e h e will th en re c e ive in c ash if t h e b on ds are

go od an d will have cr e dit e d In t ere st E arn e d for
, on th e

m on e y in v e st e d If t h e b on ds had b e e n b ought at a discou n t th e

.
,

con v er s e would have b e en tru e : t h e b on d in t e re st w ould always

have b e en l e ss than o n t h e i n v e stm e n t but t h e b o n ds w o uld
,

b e d ai ly gro wi n g m o r e valuabl e as t h e day of matu rity ( with a

valu e o f th ough th e y we re b ought at appro ach e d .

Th e e n t r y f o r t h e fi r st ye ar w ould d e bit C ash ( f o r u n d e r

this suppo siti on onl y 4 % in tere st on th e face value was t o b e
paid) de bit B on ds (for t h e in cr e ase in valu e)
, an d cr e dit

I n te re st E ar n e d ( which is o n t h e in v e stm en t o f
$960
Tabl e s f or B on d Valu e s It is cl e ar tha t wh e n o n e buys a b on d
.

a t e ith er a p r emium o r a di sc ou n t th e in t ere st re c e ive d o n t h e b on d

is m or e o r l e ss than t h e in t e r e st e a rn e d an d t h e diff e r en c e b e tw ee n
,

t h e in t e r e st r e c e iv e d an d t h e i n t e re st e a rn e d is t h e d e c r e ase o r in
cre as e in t h e valu e of t h e b on d itse lf Table s have b e e n wo rk e d
.

o ut an d publish e d t o c o v e r t h e valu e o f b o n ds o f diff e re n t t e rms ,

b e arin g diff eren t r at e s o f in te re st an d at diff er e n t basis r ate s

,

i e t o yi e ld difl e re n t rate s o f i n t e re st o n t h e in v e stm en t

. .
, Th e
.

diff e re n c e b e tween t h e valu e of a b on d havin g t en ye ars t o run

 TH E EFFE CT OF INTERES T ON VALUES 37 7
an d th e valu e wh e n i t h as nin e years to run is th e in cr e ase or de
c re as e in t h e valu e o f t h e b o n d in th e te n th ye ar be for e matu rity .

Y e t witho ut such tabl e s o n e can fi n d t h e valu e f o r e ach ye ar an d ,

”
h en ce th e accumulati on of valu e as in cr e as e is call e d o r
, ,
”
aw rfi safi o n o f valu e as d e c r e as e is call e d
,
In de e d this is
.
,

e asily d o n e by an y o f th r e e m e th ods We have already f ou n d t h e

.

valu e o f such a b on d by t w o m e tho ds for t e n ye ar s an d by on e o f ,

th e s e f or ni n e We c ould similar ly fi nd t h e valu e fo r e ach of t h e

.

t e n ye a r s. This h owe ve r doe s n o t p r ove o ur figur e s an d it is

, , ,

c onveni e n t t o u s e a m e th o d whi ch p r ove s as w e go Fo r b on ds at.

a p remium a s o call e d am or tisati on table acc omplishe s thi s For

-
.

e ve ry y e ar it d o e s what w e did in t h e last pa r agr aph sh ows that ,

t h e b o n d in t e r e st min us th e am o rtisati on is e qual t o t h e basis

( )
fair in t e r e st o n t h e am o u n t still in t h e in v e stm e n t In th e.tabl e
fo llowin g t h e first co lumn sh ows t h e in te re st paid by th e b on d ;
,

t h e s e c on d c o lumn sh o ws t h e basis r at e ( th e r at e agre e d up o n as

fair for this s o rt of in ve s tm e n t) on t h e p re c edi ng b oo k valu e Of t h e
bo n d as sh own by t h e tabl e ; t h e third c olum n shows t h e diff e ren c e
be twe en t h e first c o lumn an d t h e se c ond and the re fore t h e am ou n t
,

by which t h e o wn e r o f t h e b on d has re c eive d m or e than t h e basis

rate an d th e r e fore th e am o un t actually re turn e d t o him of t h e
,

p re mium paid by him (an d it was thi s ext r a i n te re st that in duc e d

him t o pay that p remium ) ; an d t h e last c olumn sh ows th e re
mainin g valu e of t h e b on d th e origin al c o st le ss what t h e
own e r has alr e ady go t back as e xtra in te r e st an d h en c e what ,

s till re mai n s in ve ste d in th e b on d .

B and I Mares ! B as is I n ter es t B ook Value

5 %
37 8 U
TH E F ND AM EN TAL S OF A CCOUNTING

Th e to tals als o s e rv e by way of p roo f Th e t o tal b on d in tere st

‘

f o r t e n ye ar s $ 5 00 l e ss t h e basis in t e r e st
, ,
give s th e
am o r tisati on $ 39 5 6 ; an d this subtr act e d fr om t h e o rigi n al price
,
.

o f t h e b o n d giv e s t h e p ar valu e E ach y e ar s e n tr y th e r e f o re

’
.
, ,

de bits C ash f or th e b on d in t ere st credi ts In te re st E arn e d for

,

t h e basis in t e r e st and c r e di ts B o nds f or t h e am or tisati on

,
Th e .

fin all y paid o n th e b on d plus t h e am or tisation s r e c eive d

, ,

g iv e s t h e t o tal o r igi n a lly paid f o r t h e b o n d o r , 5 6 an d in ,

t ere s t e ach ye ar at o n t h e am ou n t n o t am o r tis e d is als o sh o wn

as r e c e ive d Th e figur e giv en in t h e b ook valu e co lumn at e ach

.
-

date is t h e valu e o f t h e b on d o n that dat e e xclusiv e Of t h e in ter est

du e o n that day ( that is it is t h e valu e o f all futu re paym e n ts t o b e
,

made o n t h e b on d b o th p r in cipal an d in te re st) ; for a s e lle r o f a

,

bo n d w ould n o t o r di n a rily wh en s e lli n g o n an i n ter e st date s e ll t h e

in t e re st claim du e o n that day (that w ould b e like s e llin g m on e y) .

Th e accumulati on tabl e t h e c o nv e rs e o f thi s fo ll ows

, ,
Th e o n ly
.

e xpla n ati on n e e d e d is a r e min d er that si n c e n o w t h e o wn e r is n o t

c oll e ctin g full fair in t e re st t h e am ou n t of de ficien t in te re s t sh ould

,

b e c omp o u nd e d as is sh own by t h e calcula ti on of t h e basis rate on

,

t h e gr o win g b oo k valu e .

B asis Rate Book Value

Impo rtan ce of A mgrfi sati on an d Accum ulati on That th e

Th e .

disappear an ce o f premi um an d o f disco un t asW h es

matu rity is impo rtan t may b e sh own by tw o simple illustr ati on s .

W e a will provid e s that t h e in c o m e o f a c e rtain e stat e shall

go to c e rtain indi vidu al b en eficiarie s during th eir lives and on
3 80 TH E FUNDAM ENTALS OF A C COUNTING
rat e while t h e b o n ds are h eld To d e t e rmi n e profit or l o ss th en
.
, ,

o n e must accumulat e o r am o r tis e t h e b on ds t o t h e day o f sal e ,

b r in gin g th em t o b ook valu e on that day an d th en en te r t h e ,

diff e r en c e b e tw e e n tha t valu e an d s e llin g pric e t o t h e appro

i t acc u n t p re vi o usly discuss e d F o r l e ss than a full in t e r e s t
p r a e o .

pe ri od am o r tisati on an d accumula ti on are tak e n at t h e p ro po r

t ion al pa r t Of th e full am o un t f o r t h e pe ri o d This c r e ate s fo r t h e
.

n ovice a da n g e r o f e rr o r in calculati n g am o r tisati on o r a ccumu

lation for t h e r emain d e r o f that p e ri od (t o o c on fusing fo r exam

in ation in a bo ok o f this so r t) : sufii ce it t o say that splittin g a
p e ri o d in this way do e s n o t e s tablish a n e w p e ri od for t h e com
p o un di n g o f in te r e st but t h e c on tin uati o n o f an am or tisati on or
,

accumulati o n tabl e is mad e by takin g f or t h e r e st o f t h e split

p eri od t h e remain i n g p or ti on of th e figu r e s fo r th e wh o l e pe ri od ,

an d th e n g o i n g o n with a s traight tabl e as if n o splittin g had

occu rr e d On e should b e car e ful t oo n o t t o c r e dit th e b on d

.
, ,

acc o un t fo r t h e am o u n t of t h e sal e un l e ss all b o n ds in t h e acc ou n t

,

are s old ; f or if th a t is d o n e an d a p r o fit is mad e t h e c r e dit f o r th e

,

profit app e a rs t o r educ e th e valu e Of t h e b on ds remaini n g an d if ,

a l o ss is suff ere d th e failu re t o take ou t Of t h e acc oun t s o much as

was actu ally tak en ou t in b ook valu e o f b on ds app e ar s t o raise th e
valu e o f wha t r emain s Th e b on d accoun t should b e c re dite d for
.

th e bo ok valu e o nl y of wha t was tak en o u t .

Accoun ting f or Is s ue s of B on d s Th e e n tri e s for issu er s of

.

b on ds ar e t h e c on ver s e o f th o s e for purchas e rs Wh en a c o rpo ra

.

ti on issu e s its b onds at a premium it d e bits C ash for t h e amou n t

,

r e c e ive d cr e dits B on d s Issu e d (distin guishi n g kin ds if m ore t h an

,

on e ki n d is issu e d ) for t h e fac e o f t h e b on ds an d c r e dits Pr emium

,

o n B o n ds Issu e d fo r t h e p r e mium This p r e mium is a liability :

.

n ot f o r r e paym en t wh e n t h e b on ds ar e paid f o r o n ly t h e par will

,

b e paid but for c on ti n u e d extr a i n te r e st paym e n ts as l on g as th e

,

b on ds r e main unpaid Obvi ously e ach ye ar as t h e in t e rest is

.
,

paid this liab ili ty is in part met an d it may b e r educ e d In te re st

, ,
.

C harge s n ee d b e d e bit e d o n ly for t h e basis rat e on t h e b on ds ( say

o n par th ough t h e b on ds b e ar
, an d Pr e mium o n B on ds

may b e de bite d for t h e di ff e ren c e b e tween tha t an d t h e cash paid ,

r ev e rsin g t h e e n t ry mad e by th e r e c e ive r o f t h e in te re st Wh en a

.

compan y issu e s b onds a t a di sc ou n t it d e bi t s C ash for t h e amount

,
 TH E EFFE CT OF INTERES T ON VALUES 3 8 1

r e c eive d d ebits D isco un t on B on ds Issu e d for th e discoun t an d

, ,

c re dits B on ds Issu ed f or t h e par valu e This D isc ou n t o n B o nds .

Issu e d r e p re s e n ts an ass e t th e r ight t o k e e p t h e m o n e y o f

lender s with out payin g n ormal in te re st on it Th e c ompan y pays .

for that ass e t h owe ve r in payin g at t h e maturity o f t h e b on ds

, ,

m ore than it go t f o r th e m at issu e Th e appr o ach o f matu rity d e .

str o ys t h e as s e t an d it must e ach year b e writt e n d own by a c r e dit

'

, ,

whi ch is acc ompani e d by a d ebit t o In te re st C harge s in cr e asin g ,

t h e latt e r acc o u n t t o a n ormal in t e r e st o n t h e m on e y b orr o we d .

Oth e r B on d C on s id e rati on s Th e subj e ct of in ve stm en ts in .

v olv e s man y c on sider a ti on s n ot e v en hin t e d at in th e s e page s f or ,

man y c omplicate d fin an cial arr ange m e n ts ar e o ft e n in vo lve d ,

an d th e s e o ft e n i n v o lv e math e ma tical calculati on s m o r e e lab o r at e

than is wo r th whil e h e re S uch ar e b on ds b e aring t w o r ate s of

.

in te re st on e afte r th e o th e r an d b on ds givin g t h e issu er t h e p rivi

, ,

lege Of re d empti on e ar lie r than t h e n o rmal matu rity This en able s .

t h e issu e r t o tak e advan tag e o f a fall in t h e ma rk e t rat e o f i n t e r e s t

but of c o u r s e t h e inv e stor appr e ciat e s that an d allows f or it in
his willi n gn e ss t o buy If t h e buye r an d th e s e ll er are agr ee d as
.

t o c on diti o n s th e y will fix th e sam e pric e f or th e b o n d

,
fo r th e
pric e is d e te rmin able math ema tically Th e re sp e ct in which peo .

p l e w h o k n o w th e i r busi n e ss hav e diff e r e n t p ric e s in mi n d f or t h e

sam e b on d is t h e r ate of in te re st which th e y u s e for disc ou n ti ng

futu re re alizati on s On e man t h inks for c er tain risks 5 % is fair
.
,

an d a n o th e r thi n ks n o thi n g l e ss than is fair B y t h e sam e .

kind of math ematical calcula tion th e y in evi tably ge t differen t

re sults for t h e fair p ric e f or t h e b ond .

QUESTIONS A ND PRO B LEM S

r. A h ld
o s leas e o f a b uilding for t wo years rental payable $ 600 at
th e
o f e ach h alf y ear H e s ublets t h e b uildin g for
,

th d
e en pe r y ear
-

b at t h e same time that his paymen ts as leas e

.
,

pa y a e se mi an nu ally (
l -

h ld
o er ar e d u e) b u t with t h e un d e rs tan di n g that h e may e n d t h e sub

t enan cy at will at t h e e n d of any s ix mon t h s pe riod ( a) As suming t hat

,
-

h e is ass ure d o f cons tant su b tenancy if h e de s ires it w o u ld h e m ak e a

.
'

h d f h
,

p r o fi t o r a l o s s if h e s o u l a cc ep t a n o f e r o f $ 4 00 f o r t h e le as e o ld
p ri v ile ge s ? ()b W h a t e n tr y s h ou ld h e m a k e o n hi s b oo k s if h e s e lls ?
2. A n author co ntracte d with a publishing hous e to pu blis h a bo ok Th e
author was to receive a minimum royalty of $ 1 00 at t he end o f each of
.
3 8 2 TH E F ND AM ENTAL S U OF A C COUNTING
thr ee years an d in addi tion 20 on each copy sold during t he year abov e
5 00 At t h e e n d o f th ree ye ars all righ ts o f t h e au th o r w ere t o ceas e
,

Th e au th o r imme diately so ld his ro yalty righ ts on th e basis o f his

. .

mini mu m gu aran te e
A ctually 7 00 copies o f t h e boo k w ere sold in t h e fi rst year an d 800
.

in bo th t h e s eco n d an d th e t hir d y ear

,

S h ow th e en tries o n t h e boo ks o f bo th t h e purch ase r an d t h e au th o r

.

fo r all t h e t rans actions Interes t may b e ass um e d t o b e at

d m b ds at a dis
.

a
() A n in u s t ri al co p an y i ss u es o f 4 % o n

co un t o f S houl d th e dis coun t app e ar o n it s b alan ce S h e et ?

If wh h ow an d
so, e re ?

b w h h m
( ) A year late r , it out any c ange in th e cre di t o f t h e co p any or in
m m k
t h e s tate o f t h e k w d d
o n ey d
ar et, th e ac n o le ge prope r i scoun t
is b u tx w h m v
E p lain ( it o u t atte p t in g t o p ro e t h e fi gu r e s )
w h h b k m hw
.

(c) H ow ill t i s c an ge aff e ct t h e oo s of t h e co p any ? S o any

q d d f
e n trie s r e ui r e t o p ro u ce t h e e f e ct
b d f d b
.

Two o n s are o f e re you : o n e is fo r paya le in t w o y ears ,

d
o ff ere h k f b h
at 98 , an d you t in 5 % is a air asis ; an d t h e o t e r is for
b h p ay a ld
e in t r ee yh k
ears o ff e r e at a n d y o u t in a
b f h h b
,

4 % asis air W ic is th e ette r off e r ?

f w b k w
.

Fill in th e mis sin g ite ms o f th e ollo in g ta le , an d tell h ow you no

wh at t o add .
/ 0/ 903K? !
B ond I nter
i s ”

Fill o ut t h e b oo kvl -
a u e co u l mn b y any met hd
o , b u t Sh o w all t h e fi gures
y ou use .

“
W W
s v
’
e

9
( .

1
/ /
1 1 9 S? !

A b usin ess holds a leas e on propert y worth for ren tal purpo s es
a year b u t t h e lease o f long stan di ng an d with th ree years y e t to run
annually Th e company h as no t that
, , ,

calls for a r e n tal o f o nl y

leas e o n it s b oo ks fo r at t h e time o f S ignatu r e t h e re ntal o f

.

w as
fai r Y ou now cons idering th e money to b e wort h
,

b u y t h e leas e
in cas h
.
,

fo r
(a) Wh at e ntry s h o uld t h e s elling b us in ess mak e on it s accoun ts at th e
.

time o f s ale ?
(b ) What e n try s h ould you mak e for th e p urchas e ?
(c) S hould y ou e ve r mak e any o th er e ntry in r es pe ct t o th e leas e ?
If so wh e n an d what ?
,
 APT ER XXII CH
FINDIN G TH E C O S T OF PARTI C ULA R P RO D U CT S OR S ERVI CES

Th Fu d am t l R q ir m t
e n en a A t th b tt m f all att mpt
e u e en s. e o o o e

t fi d c sts must li a syst matic pla f

o n o e th c t t f acc u ts
e n or e o n en o o n ,

so that on e may kn ow that thin gs of th e sam e kin d ar e in t h e

sam e acc ou n t an d t hat n o thin g e ls e is th e re ; for fin di n g c o sts Of
par ticular p r o ducts o r s e rvic e s r e quire s gath eri ng t oge th e r all th e
e l e m e n ts o f c o st that go in t o o n e thi n g an d e xcludi n g all c o sts that

d o n o t go in t o it T hi s m e an s th e n that if o n e s e t of c o sts goe s

.
, ,

i n to c e r tain p r oducts an d an o th e r s e t d o e s n ot th o s e t w o se ts ,

must n ot b e c ombin e d in t h e sam e acc o u n t (e ls e t h e acc ou n t must

b e go n e o v e r an d cut i n t o t w o par ts b e f o r e th e d e sir e d c o sts c an
b e f o u n d) S upp o s e fo r e xampl e that c e r tai n p r oducts r e quire a
.
, ,

v e ry high t e mp e r atur e du rin g manufactu r e (pe rhaps in a long

dryin g pro c e ss) but re quire littl e c o n sumpti on Of p owe r (fo r
,

th e y are m ade chie fly by han d) but c e rtain o th e r pro ducts re quire

,

littl e ar tificial he at e v e n in wi n te r an d r e quire much p ow er (for

th e y are made on h e avy machin e ry in a lon g proce ss) To com .

bin e h e at an d p ow e r in to o n e acc ou n t wo uld mak e it imp o ssible

for t h e acc o u n ta n t t o fi nd h ow much c ost sh o uld b e ca r ri e d t o th e s e
p ro ducts wi t h r e sp e ct t o h e at an d p owe r ; wh e re as if th e y w e re
s eparate d on e k nowin g th e p roporti on s o f t o tal h e at charge able to
o n e p r o duct an d t h e pro p o r ti o n o f t o tal p ow e r charg e abl e t o t h e
,

o th e r c ould dir e ctly fro m t h e acc o u n ts without fu r th e r a n alysis

,

attach t h e c o sts t o t h e e n ds which th e y s e rv e Wh en e ve r t o o .

, ,

o n e wish e s t o m e asur e caus e an d e ffe ct o n e must b e su r e tha t th e

,

re sult o f vari ous caus e s b e n ot carri e d t o th e sam e acc ou n t e ls e ,

o n e can n o t m e asu r e t h e e ffe c t o f any o f th e m Oft e n t o b e su re .

, ,

caus e s are s o th o roughly in te rtwi n e d that t h e e ff e ct cann o t b e

m e asu re d but o ften on t h e o th e r han d th e y can b e s o diffe r
, , ,

e n t iat e d .It is c omm on f or e xampl e t o carry light h e at and

, , , ,

po w e r t o o n e acc oun t p re sumably b e caus e th e y all o rigin ate in

fu e l c on sumpti on Y e t a win te r of warm dull damp days m e an s
.
, ,

a low charge for h e at but a h igh charge fo r light ; but a wi n t e r of

cle ar, cold , win dy days m e ans a high charge for heat bu t a low
 FINDING C S T O OF PRODUCTS OR SER VICES 8
3 5
c harge for light ; and powe r c o st is har dly app r e ciably affe cte d by
this di ff er en c e in we ather To c ombine thes e thre e charge s in to
.

o n e acc o u n t is t o thro w away t h e o pportu nity f o r m o st o f t h e

statistical inf o rmati on particu larly with r e gar d t o e c on omy th at

, ,

o n e might ge t f ro m th e m .

Th e Re s ultin g Accou nt s Th e re sult of th e s e re qui re me n ts is in

.

all la rg e busi n e ss es a v e r y larg e n umb e r o f acc ou n ts hu n dr e ds

or thousan ds an d ye t by t h e u s e o f lab or savi n g d e vic e s akin
-

to th o s e alre ady de scrib e d t h e b ookk eeping lab or is n ot extreme ,

and t h e i nf o rmati o n acquir e d is o f gr e at valu e t o t h e ma n age r .

Le t us e xami n e a littl e m or e fully t h e ne e d of di ff e r e n tiat e d ac

c ou n ts S upp os e w e handl e man y kin ds Of raw mat e rial Even
. .

th ough all go in to t h e sam e product and always in t h e same pro

p orti on s w e sh ould k e e p an acc ou n t for e ach so that w e may
, ,

m e asu re th e eff e ct of a chan ge in p ric e of e ach up on ou r to tal c o st

f or r aw mat e rial an d e sp e cially s o t hat w e may hav e a ch e ck o n
,

was t e fuln e ss o r th e ft (fo r an in c re ase in c o st ou t of r ati o t o t h e

i n cr e as e in pric e an d t o th e in c re ase in p roduction w ould m e an
l o ss s om ewh ere) S upp o s e w e mak e on e u nif o rm p ro duct but s e ll
.
,

i t in di ff e r e n t ways in bulk in ch e ap package s in attr activ e

, ,

package s Not o n ly t h e c o st o f package s an d t h e lab o r of packin g

.

sh ould b e distin guish ed but also th e c o st o f t h e diff eren t type s

,

of package s an d th e difi ere n t lab o r c osts in vo lve d ; o th e rwis e w e

ca nn o t judge th e e c on omy with which e ach kin d Of packi n g is
d on e n or can w e judge th e c ompar ativ e p rofit of e ach class o f
,

sal e This last m oreo ve r r e quire s that w e k e e p a s e par at e sal e s

.
, ,

acc o u n t fo r e ach class Of sal e e ls e w e shall hav e n o thin g wi th

which t o c ompare t h e c o sts o f e ach class o f p ro duct S upp o s e w e .

manufactu re t w o pr oducts which up t o a c e r tain p oi n t f o ll o w

id en tical pro c e sse s but th en s e par at e s o that e ach go e s its o wn
c ourse S e par at e acc oun ts w ould b e kept fo r all t h e e l e m e n ts of
.

t h e c o mm on c o st s o that e c o n omy c ould b e watch e d an d th e n a

, ,

cl e ari n g acc ou n t w ould b rin g t oge th e r all t h e c omm on c o sts o f

t h e t w o p r o ducts up t o that p oin t Th e s e c o sts would th e n b e
.

divid e d b e tw ee n t h e t w o p r o ducts on an e quitable basis (d e

p en din g on Ci r cumstan c e s) an d would b e ca rr i e d t o an acc oun t
,

f o r e ach p r o duct Th e lat e r c o sts for e ach w ould b e k e pt n o t o n ly

.

s epar at e f or th e t wo p roduc ts bu t analyze d by e lemen ts s o that ,

3 8 6 TH E F NDAM ENTAL S U OF A CCOUNTIN G
e ach e l em e n t Of c o st c ould b e watch e d ; an d th e n th e i n dividual
c o sts f o r e ach p ro duct would b e add e d t o e ach p r o duct s shar e of ’

t h e c ommo n c o sts an d t h e fin al c o st fo r e ach wo uld b e th en avail

,

able Th e s e ill ustr ati on s m e re ly typical s e rv e t o sugg e st why in

.
, ,

t h e pa ge s f o ll o win g s o much e mphasis is laid on subdivisi on s o f

acc ou n ts .

Type s of C os t Fin d ing Tw o typ e s of m e th od adapte d t o

.
,

varyi n g cir cumsta n c e s sugg e st th ems e lve s : fin din g t h e c o st of on e

,

in di vidual ar ticl e of p ro duct from e le m en ts of c o st tr ac e d th rough

,

t h e wh o l e p r o ductiv e p r o c e ss ; an d fin di n g t h e av e r ag e c o st o f
gr oups o f p r o ducts an d attachin g that av e r age c o st t o e ach ar ticle .

U sually th e fi r st o f th e se is imp r acticable e ve n wh e n d e sir able , ,

f o r t h e re as on that f e w c o sts ar e in cur r e d fo r o n e in di vidual ar ticl e

o f p r o duct al on e In d e e d w e may say that n o in di vidual article
.
,

o f p r o duct is in o r di n ary bus in e ss t h e r e sult o f c o sts in cu rr e d

e xclusiv e ly f or its p ro ducti o n Th o ugh t h e c o st f o r raw mat e rial

.

may an d usually doe s go e xclusiv e ly t o o n e in dividual ar ticle an d ,

th ough much Of t h e lab or may also b e e xclusive th e c o sts for ,

r en t in su r an c e tax e s sta ti o n e ry p ow e r d e p re ciati o n an d inn u

, , , , , ,

mer ab le o th €r thin gs are in cu r r e d j o i n tly fo r ma n y p ro ducts an d

, ,

it is vir tually imp o ssible t o say abso lute ly h ow much of any of

th e m is charge able t o on e in dividual ar ticl e o f p r oduct E ven in .

c on structi on w o rk with o n e job d on e at a tim e th e e quipme n t ,

us e d is alm o st su re t o b e shar e d with o th e r j o bs an d t h e ge n e r al ,

admin istr atio n is c omm on t o many We may as w e ll give up at .

t h e sta r t t h e n an y att e mpt t o fi n d abs o lute ly i n d e p e n d e n t c o sts

, ,

o f in dividual a r ticl e s e xc e pt in i n sta n c e s s o r are that th e y ar e

Vi r tually n e gligibl e T hi s is n o t th e sam e as sayi n g h ow eve r

.
, ,

that o nl y j o in t o r av e r age c o sts ar e w o r th fi ndi n g In man y .

busin e sse s it is d e sir abl e if n o t actually n e c e ssar y t o fi n d in di

, ,

vidual c o sts as f ar as th e y can b e fou n d an d th e n fall back on

aver age c o sts f or th o s e e le m en ts t o b e add e d t o th e in dividual
,

c o sts whi ch c an b e fo un d on ly as aver ag e s b e caus e th e y ar e

,

always j o in t .

Fin d in g A ve ra ge C o s t s Th e m e th od o f fin din g av e r age c o sts

.

is t o divide t h e to ta l c o st in qu e sti on by t h e n umb e r Of u nits of

pr o duct an d thus ge t t h e co st pe r u nit o r t o divid e th e c o st by ,

s om e o th e r co st and ge t a p e rc en ta ge t o b e add e d t o o th e r cos t .

3 8 8 TH E FUND AM ENTAL S OF A CCOUNTING

fro m th e b oo ks by dividing th e c o sts as sh o wn by ledge r acc oun ts

, ,

by t h e p roduct thus ge tting av e rag e c o sts pe r u nit

,
wh e th er
th o s e ave rage co sts ar e c o sts for sin gle e lem en ts of to tal c o st ar e ,

c ombin a ti on s o f e le me n ts in to a group or sub to tal c o st o r are

-

fi n al c o sts . If for e xample we manufacture four class e s of

, ,

a r ticl e s an d u s e tw elve pro c e ss e s bu t diffe ren t class e s of articl e s

, ,

g o th r o ugh diff e r e n t p r o c e ss e s w e can s o a rr a n g e o u r l e dg e r ac

,

c ou n ts as t o fu rnish ave r age cos ts for e ach class S uppo se t h e .

proc e ss e s f or e ach class o f ar ticle s are as tabulat e d b e low sh owi n g ,

by c ro ss e s in t h e c olum n f or e ach c las s of a r ticle wha t p ro c e sse s

e ach g o e s thr ough ( t h e lin e of t h e tabl e in dicatin g t h e p r o c e ss) ;
an d supp o s e t h e c o s t f o r e ach p r o c e ss is th e sam e which ev e r class

of ar ticle pass e s through it .

Clas s B Class C Class D

For ach pro c e ss t h e c o sts o f what eve r n atu re will alr e ady have
e , ,

b een gath e r e d t o th e cl e arin g a cc ou n t for t h e pro c e ss by m e thods

,

t o b e discuss e d lat e r . Fo r e ach class o f g o o ds m o r eo ve r statisti

, ,

cal r e c or ds will b e k e pt showin g t h e n umb er o f a r ticl e s go in g

thr ough e ach p roc e ss Le t us n ow assum e c e r tain c o sts for e ach
.

pro c e ss an d a c e rtain n umb e r of article s o f e ach class fi n d th e ,

c ost p er u nit f or all class e s for e ach pro c e ss o n t h e assumpti on s of

,

t h e tabl e ab ov e an d fi n d t h e u n i t c o st o f e ach a r ticl e

, It is all.

d on e S imply in t h e table b e low Th e c o st of e ach p ro ce ss is fou n d

.

f rom t h e b ooks ; th e t o tal of t h e u nits passing th rough each

pro ce ss is fo u n d from t h e r e c or ds o f producti on ; th e c o st per u nit
is d e rive d by divisi on ; t h e n umb e r of units of each clas s is t ak en
 FINDING C S T O OF PROD UCTS OR S ER VICES 8
3 9
from th e re c ords of p roducti on ; an d o f co urs e charg e is mad e t o
e ach class o f p r oduct f o r o n ly th o se pro c e sse s which that class

o f p r oduct pas s e s thr o ugh .

P f om s CIGS J C

Total Un its

$ 2 90
-

Proof : To tal cos t o f all p rocesses

Cos t of Class A ,
B , 1 000 @
C,
D 1 3 000 5 05

I t is n ow a simpl e matt e r t o e s tablish a cl earin g acco un t for t h e

gath e rin g o f th e se c o sts o f pro c e sse s an d di stribut e th e m
,

t o t h e acc o un ts f o r t h e g oo ds p r oduc e d Th e adva n tage o f mak

.

in g t h e distributi o n o n t h e b oo ks is that wh e n w e ge t thr ough

clo sin g our b oo ks w e kn ow wh e th er an ythin g h as got in to t hi s
tabl e e rr o n e ously or has b e en omi tte d for w e shall e ith e r still fi n d
,

o n our b oo ks s o m e acc o un t that sh o uld b e clo se d or fi n d o ur b oo ks

,

o u t o f balan c e .

Fin din g S pe cial C o st s It is obvious that co sts of art icl e s made

.

in small quan titi e s o r in dividually cann o t b e fo un d fr om th e

ledger in t h e way m en ti on e d in t h e p re c e ding paragr aph for that ,

wo uld in vo lve a le dge r acc oun t with e ach S pe cia l c o st of ea ch

spe ci al job Thi s is n o t fe asible What is d on e th e r e fo re is t o
. .
, ,

k e ep what in e ff e ct ar e c on tro llin g acco un ts for th e S pe cial c o sts of

spe cial j obs an d mak e r e c or d on c o st sh e e ts (virtually sub o rdin ate
l edge r page s) o f th e particular shar e o f such to tal sp e cial co sts
charge abl e to each j ob If s ev er al art icle s of a kin d ar e m ade
.
,
390 TH E FUN DAMENTALS OF A C COUNTING

a ve r age c o st will probably b e fou n d rath er t han in di vidual c o st

but u nl e ss t h e n umbe r is large e n ough t o mak e wor th whi le th e
se tti n g up o f a sp e cial acc oun t fo r t h e sp e ci al c o st o f t h e lo t th e ,

wh ole lo t will b e tr e ate d as o n e ar ticl e (that is it will b e given a ,

—
c o st sh e e t fo r t h e lo t a sub ordin at e le dg e r acco u n t rathe r tha n
-

a ge n e r al le dg e r acc ou n t) an d all c o sts o f t h e lo t will b e p o sted

-

t o that sh e e t an d th e n th e t o tal will b e divid e d by t h e n umb e r of

article s in t h e lo t t o fi n d th e average c o st for e ach .

Th e Ul timate C o s t Accoun t Th e fin al accumulati on of c o sts

.

in o n e o r m o r e cle arin g acc oun ts will d e pe n d up on t h e busin e ss

an d t h e ki n d o f in fo rmati o n d e si r e d We assum e d a m om en t ago
.

tha t th e c o sts would b e carri e d t o s e par at e acc oun ts for class e s of

pr oduct Wh e n t h e n umb e r o f class e s is small that is p robably
.
,

d e sir able Wh en on t h e o th e r ha n d p ro ducts are n um e rous

.
, , ,

varyin g from m o n th t o m on th and par ticular ly wh en th e y ar e

,

mad e t o sp e cial sp e cificati on an d n o t t o sta n dar d o r d er it is o n ly ,

b u r d en s om e t o e sta b lish l e dg e r acc o un ts for e ach kin d o f p r oduct .

Th e usual practic e is t o have on e acc o u n t fo r all product an d k e e p

sub o rdi n ate, acc o un ts for class e s o f pr o duct of which man y are
made of a kin d fo r lo ts of which few o f a ki n d are mad e an d f or
, ,

in dividual a rticle s B y t h e u s e o f cl e arin g acc o u n ts h ow e ve r as

.
, ,

w e hav e alr e ady s e e n much d e taile d inf o rmati on may b e k e pt

,

al on g t h e way an d ye t t h e to ta l may b e sh o wn o n t h e b o o ks in a

summary acc oun t Th e me tho d o f s e curin g such d e tail e d in

.

formati on o f c ombini n g it in to gr oups o f c o sts an d of fin ally di s

, ,

tributin g it over products o r s e rvic e s may n ow b ri efly en gage our ,

atte n ti on .

D ir e ct an d In dir e ct C o s ts Wh ere ve r mo re than on e kin d of

.

pro duct is mad e it is Obvi ous that t h e c o sts gr oup th e ms e lv e s

,

n atu r all y i n t o t w o classe s : di re ct th o s e whi ch ar e i n cu rr e d f o r on e

,

ki n d of pro duct on ly ; an d in di re ct o r j o in t which are in cu rr e d

, ,

fo r t w o or m or e ki n ds or e v en fo r all t h e kin ds Th e dir e ct c o sts .

can b e e asily char g e d t o t h e p r o duct f o r whi ch th e y w e r e in curre d

pro vid e d that e ith er such c o sts ar e ke pt in s eparat e le dger ac

c o un ts f or e ach o r m e m or an dum re c o r d is k e pt daily o f th o se
,

c o sts out o f t h e t o tal which sh o uld b e charge d t o t h e par ticular

r ups f p duct T h i di ct c sts o n t h e o th er han d ar e n o t
g o o r o e n . r e o , ,

easily cha rg e d t o p ro duc t for usually th e re is n o e xac t m e th od of

,
392 TH E FUND AM ENTAL S OF A CCOUNTIN G
price s are attach e d ; and an e n try d ebiti n g t h e vari ous cost ac
c oun ts an d c r e ditin g Raw M ate rial (which r e p re s en ts store s in
t h e sto r e r oo m) is made If i n dividual o r lo t c o sts ar e d e sir e d an
.
,

e n try is mad e t o t h e c o s t sh e e t ( a virtual sub ordin ate le dge r) as

we ll as t o t h e c on tro llin g acc o un t .

Oth e r D ir e ct C o s t s Occasion ally o th e r di re ct c o sts are in

.

v o lve d such as sp e cial fre ight sp e cial in su r an c e in cas e of e xtra

, ,

risk o utsid e pu r chas e s or fe e s ; an d th e s e will b e han dle d in th e

,

sam e way as di re ct wage s an d mat erial in cludi ng en try on c o s t

sh e e ts if sub ordi n at e l e dge r acc ou n ts are k e p t
-

B ur d e n C o st s If all dire c t ch arge s ar e n ow take n care of

.

t h e ta sk o f distribu tin g j oi n t c o s ts c o mm on ly call ed burd e n

“
, ,

or
“
overh e ad must b e un d e r tak e n Th e v ery e ssen ce of th e se
, .

cos t s is that b e cause th e y ar e j o in t th e re is n o k n own abso lutely

,

right way o f dividin g th em T0 tak e a simpl e illustr ati on : w e

.

n ee d an en g in e e r an d a fi r ema n p e rhaps t o ru n o u r p ow e r pla n t ;

, ,

i n cre asin g ou r output o f c e rtain a r ticl e s calls fo r an in cre ase of

1 0% in t h e p ow e r p r oduc e d by ou r po w e r pla n t this i n c r e ase in ,

p ow e r maym o t n ec e ssitate m o re h e lp In th e p ow e r house ; an d ye t

if th e fi reman i s alre ady working a t full capacity th e In cr e as e will
n e c e ssitat e a n e w man Is it tru e th en in case n o n e w man is
.
, ,

h ir e d that n o addi ti on al cha rge f or po w e r wage s sh o uld b e mad e

,

t o t h e ar ticl e s o f which p r o ducti o n is i n cr e as e d ( b e caus e t h e c o st

is n ot in c r e as e d) an d in cas e a n ew man is e mpl o ye d that all t h e
,

wage c o st o f t h e n e w man sh ould b e charg e d t o t h e addi ti o n al

articl e s p ro duc e d ? Th er e is always s ome thi n g t o b e said on th e
o th e r sid e M o st division s of j oin t co st are more o r le ss arbitrary
.

though the y may have so much s oun d s en se b e hind them that

for p r actical pu rp o s e s th e y are satisfacto r y Th e task o f dis
.

t rib u t io n o f bu r d e n is t o mak e char g e s as fair as it is p o ssible t o

mak e the m with ou t making t h e lab or of di stributi on u nn ece s
s arily gr e at an d th e re f o r e p r ohi bitiv e ly e xp e n siv e .

Th e Impo rt an ce of Fair D i s tributi on of B ur d e n Th ough i t is .

tru e that distributi on o f j oin t c o sts is usually m ore or l e ss arbi

t rary b e caus e t h e v e r y n atur e of th em mak e s pe rf e ct di stributi on
,

imp o ssibl e th er e is always a way t o appro ximat e a c orr e ct dis

,

t rib u tio n an d a distributi o n bas e d on a r e as on abl e app r oximati on

,

is far b e tte r than o n e wh o lly arbitrary Eve ry j oin t c o st has .

 FINDIN G C S T O OF PROD U CTS OR V
S E R I CE S 393
so m e re lati o n t o th e pr oduct an d virt ually e v ery p ro duct has in it
,

so m e (usually much) j oin t c o st If th e n th e j oin t c o sts ar e .

, ,

a nalyze d s o that t h e r e lation o f e ach t o t h e vari ous ar ticle s of

,

p roduct is f ou n d an d th en e ach j o in t c o st is distribute d ove r t h e

,

p r oduct with r e gard t o such r elati on t h e di stributi on th ough , ,

m ore o r l e ss a rbitr ary at b e st is far m or e n e a rly fair t han on e

,

whi ch is n o t bas e d on an alysis o f bur d e n but distr ibute s all b u r

d e n o ve r all pr o duct in blank e t f o rm r e gar dle ss o f what a n alysis
mi ght S h o w If as a c on s e qu en c e of arbitr ary distribution t h e
.

c o st of c e rtain p ro ducts o r s e rvic e s is re p ort e d t o b e hi gh an d of

o th e r s t o b e low wh e r e as distributi o n o n an a n alyz e d basis w o uld
,

rev e r s e this t h e n e glec t of an alysis may b e s e rio us Th e busin e ss

, .

may b e s e llin g large ly at a low p ric e t h e p roduct S h own by its c o st

acc o un tin g t o b e low an d may b e s e lli n g ve ry little of t h e p ro duct
,

sho wn as Of hi gh c o st wh er e as in r e ality it will b e s e lli n g at a low

, , ,

pric e wh at r e all y c o sts it much (an d that may b e t h e re as on f or

sale s) but it cann o t re c oup its e lf by s e llin g at a high pric e what
,

r e ally c o sts it littl e : t h e bad acc o un tin g has le d t h e ma n age r t o

mak e p ric e s that cre ate a d eman d for goods on which l o ss is suf
f e r e d an d d e st r o y d e man d for goods o n which p rofit would b e
made if t h e g oo ds c ould b e s old at t h e pric e us ed D istribu ti on .

o f bu r d e n th e n sh o uld b e as fair as f e asibl e ; an d s om e tim e s it

, ,

c on stitute s s o la rge a par t of th e to tal c o st s e ve n ty fi v e p er ,

-

c e n tum for e xample that care le ss distr ibuti on s eri ously disturbs
, ,

t h e valu e o f c o st figu r e s .

G e n e ral M e th o d s of D i s tributin g B ur d e n Co st s A s w e have .

alre ady o bs erv e d bu r d e n may b e distribute d e ith e r as a blank e t

,

cha rge o n t h e sam e basis fo r all p roduct o r it may b e an alyze d

, ,

an d th e n b e distr ibut e d pi e c e m e al s o t o S pe ak so m e pa rts in o n e

, ,

way an d s om e in a n o th er In de ed t h e bu rde n may b e an alyz ed

.
,

an d t h e r e sult o f t h e a n alysis may l e ad t o t h e c on clusi o n that a

blank e t m e th o d (distributin g all bu rde n on all pr oducti on o n t h e

same basis) is satisfact or y Thr e e forms of blank e t di stributi on
.

ar e c o mm on : t o tal bu r d e n distribut ed t o t h e vari o us divisi o n s Of

pr oduct in t h e r ati o o f (I ) th e dire ct lab or h ours in e ach divisi on of

product t o th e to tal dir e ct lab or h ou rs of all product ; (2 ) th e di
re ct wage s in e ach di vision of product t o t h e to tal dire ct wage s of
all product ; ( 3) t h e sum o f dir e ct wag e s an d raw mat e r ial in e ach
394 . TH E F ND AMENTA S U L OF A C COUNTING
divisi on o f pr oduct t o th e to tal dire ct wag e s an d raw mat e rial in
all pr o duct Oth er b lank e t bas e s are p o ssibl e an d in u se but
.
,

th e s e ar e c omm on an d typical Th e pie c e m e al m e th ods o f dis.

t rib u ti o n ar e ma n y but th ough all di stribute di fi e r e n t po r ti on s o f

,

bu rde n o n diff er en t bas e s as in dicat e d by an alysis o f bu r de n all

, ,

c ombin e i n to o n e basis as m an y kin ds of bu r den as p o ssible so ,

that t h e lab or o f di stribution will b e r e duc e d t o a minimum We .

will fir st o bs e rv e th e blank e t m e th ods .

D i s trib ut i on of B ur d e n on Lab o r H our s M ath ematically th e .

distribution of bu r de n on lab or h o u r s is e asily mad e If t h e to tal .

di r e ct lab o r h ou r s o f a factory are for th e ye ar an d t h e

h ou r s on a lo t o f goo ds ar e o n e o n e hu n d r e dth o f all t h e -

h ou r s w e r e sp en t on that lo t of go ods Un d e r this m e th o d o f dis .

t rib u t io n o f burd e n th e n o n e o n e hu n dr e dth of t h e t o tal bu r d e n

, ,
-

is charg e able t o this lo t o f goo ds M ore di r e ctly if th e to tal bur .

,

d e n is t h e bu r d e n r at e is fo rty c e n ts an h o u r
divid e d by an d t h e cha rg e t o thi s lo t o f g oo ds f or b u r

d e n is Wh e th er this is s e n sibl e o r n ot d e pen ds wh o lly on

t h e cir cums tan c e s o f t h e cas e Our bu rde n charge s c on sist of all
.

s or ts of thin gs such as h e at light d epr e ciation o f buildin gs an d

, , ,

o f machin e r y Cl erical s e rvic e an d b oo kk e e pi n g

, , If s om e p r oduct .

is mad e by machi n e r y an d s om e by han d th e first in vo lv e s p owe r ,

an d mai n t e n an c e o f machin er y an d t h e o th e r in v o lv e s n e ith e r ; so

,

that a blank e t r at e bas e d on h ou r s will n ot s e rv e If s om e pr od .

u ct r e qui r e s a gr e at d e al of r o o m fo r ma n ipulati o n as in cu r i n g o r ,

dryin g an d o the r pro duct r e quire s little on e in v o lve s large c o st

, ,

for re n t an d h e at an d t h e o th e r li ttl e ; an d a bla nk e t rat e bas e d o n

,

h ours give s wr on g figu re s If o n th e o th e r han d t h e prod uct is

.
, ,

s o n e a r ly of t h e sam e typ e that e v e r y h o u r o f lab or go i n g i n t o an y

p ro duct in vo lve s app ro ximat e ly t h e sam e c o st fo r t h e buildin g ,

for po we r for machi n e r y for supe rvision fo r cl e rical s e rvic e an d

, , , ,

f o r a hu n dr e d o th e r thin gs as e v e ry o th e r h ou r o n any o th e r
,

p roduct this is a satisfacto ry basis

,
.

D i s tributi on of B ur d e n on W age s Th e subs t ituti o n o f wages .

f or lab o r h o u r s is lik e ly t o simplify th e task o f bu r de n distributi o n ,

f o r wage s ar e m or e lik e ly t o b e k n own for o th e r purpos e s than ,

c o st acc ou n tin g than are h ou r s ; but th e n umb e r of cas e s in which

,

bur d e n can b e di stribute d ad e quat e ly o n a wage basis is much

396 TH E F ND U AMENTALS OF ACCOUNTING
ducti on If th e diff e re n e e e en r o
. c b tw p duc ts is chi fly a diff
e e r e nc e

o f o n e o r t w o e l e m e n ts an d t h e o th e r e l e m e n ts o f c o st go al on g
,

pa ralle l with th em a blan k e t m e th o d is b o th e asy t o apply and

,

satisfacto r y ; but th e m om e n t so m e c o sts go in o n e di re cti on and

o th e r s in a n o th e r s om e thi n g e ls e tha n a bla nk e t m e th o d must b e
,

ad opt e d .

B rie f A n a ly si s of B ur d e n Th e sub j e ct of distribu ti on of bur

.

d en is big e n o ugh f or a b o ok much large r tha n this We can h ope .

h e re th er e fo re on ly t o no te t h e principle s of distributi on an d can

, , ,

obs e rve o n ly v e ry b ri e fly t h e m e th o ds of distributi o n o n an an a

lyze d as c o n tr ast e d with a bla nke t basis
,
Fo r this w e must n o t e
,
.

that bu rd en n atu r ally has r e latio n s with at le ast fi v e aspe cts of

p roducti on an d that a mi nimum a n alysis will p r o c e e d t o mak e
,

di stributi on with r e gar d t o tho s e asp e c t s th ough p ossibly in

p ractic e a c omm o n m e tho d may apply t o t w o or m ore of them .

The s e fi v e are Raw M ate rial L ab or B uildings M achi ne ry an d , , , ,

A dministration Vir tually every e lement Of production can b e

.

attach e d as a part of or tributa ry t o on e of th e s e It will b e

, , .

f oun d m o re oOv e r that bu r d en c o sts d o n ot n e c e ssarily ru n paralle l

, ,

in all fi v e o f th e s e asp e cts : that is t h e bu rd e n c o sts c o nn e ct e d ,

with raw mat erial lik e in suran c e may go up with a gr e at er valu e

, ,

o f r aw mat e r ial g o i n g i n t o t h e p r o duct whil e this v e r y cha n ge in ,

t h e cha r act e r o f t h e r aw mat e rial may mak e p o ssibl e th e u s e o f

l e ss sup e rvisi on o f lab o r le ss h e at an d light l e ss p ow er an d we ar
, ,

an d t e ar f or machin er y an d l e ss e xp e n s e o f admini str ati o n

,
In .

s t alla t io n o f aut omatic machi n e r y may in c r e as e h e avily main

t e n an ce an d d e p r e ciati o n o f machin e r y but at t h e sam e ti m e ,

r educ e sup e rvisi on o f lab or spac e r e quir e d for h ousin g t h e work

, ,

an d admi n ist r ativ e e xp en s e Th e s e illustrati on s mak e cl e ar that

.

anythi n g app r o achi n g a sci e n tific me th o d fo r di stributi on of bur

d e n will re c o gn iz e s ev e r al di ff e re n t bas e s th ough of c ou r se
wh e r e t w o differ en t base s give t h e sam e m e th od of distribu ti on
th e y may b e c ombin e d Th e m o st c omm on m e th o d of attachi n g
.

bu r den as a r e sult of an alysis (c on trast e d with blank e t m e th ods)

“ ”
utiliz e s a machi n e rate S O call e d fo r a c on sid e rabl e par t of t h e
,
-

distribution With out atte mpti n g a c ompl e te discussi on o f ma

.

chin e r ate s or e ve n of an y on e ou t of th e vari e ty in use w e may

, ,

we ll no te t h e un de rlyin g prin ciple .

 FIND IN G C S T O OF PROD U CTS OR S ER VICES 397

Th e Prin cipl e Ma ch ine Rate s In factorie s making use o f a

of .

vari e ty o f machi ne ry o f whi ch n ot all is us e d u n ifo rmly for all

,

pr o duct a lar g e par t of th e bu r de n is f o un d t o b e r e lat e d t o th e

,

vari ous machin e s and can b e di stribu te d on t h e basis o f t h e n um

,

b er o f h ou r s that t h e vari ous machi n e s we r e e mplo ye d o n t h e vari

o u s p r o ducts This h owe v e r d oe s n ot th row all machi n e s t o
.
, ,

g e th er t o giv e machi n e h ou r s as c ould b e d on e t o f orm a blank e t

,

rat e substitute d f or t h e lab o r h ou r rate but e stablish e s a diff eren t

-

rate for each machin e o r type o f machin e o n th e stre n gth o f an

a n alysis o f e ach machi n e s r e qui re m en ts of bu rd e n Th e m e thod
’
.

o f p r o c e du re is r o ughly as f o ll o ws : all c o sts c o nn e ct e d with t h e

lan d an d buildi n gs ar e gath e red t o fi n d t h e t o tal c o st for space ;,

this spac e c o st is th e n appo rti on e d t o various de partm en ts lik e ,

store hous e p owe r h ous e sh op an d offi c e on square fee t or cubic

, , , ,

f ee t of spac e o ccupie d ; t h e sh o p share of spac e c o st is th en appor

t io n e d am o n g t h e machin e s or typ e s o f machi n e s in t h e sh op ; th e
, ,

t otal p o w e r c o sts are gath e re d an d this is app orti on ed am on g ,

machin e s o n t h e basis o f h o rs e po we r c on sumpti on ; th e n c o sts -

pe culiar t o e ach machin e or typ e of machine ar e calculate d such ,

as in suran c e tax e s main te n an c e an d d ep re ciati on ; t h e sum of all

, , ,

such c osts f or e ach machin e or gr oup of machi n e s is th e n divid e d

by t h e numb e r of workin g h ours for t h e p eri o d us e d for figurin g
c o sts (usually a ye ar) an d th e qu o ti en t is th e h ou r ra te for this
,
-

machi n e th e r at e t o b e charg e d pe r h our t o all p r o duct makin g

u s e o f this machi n e Th e de tails of calculati n g an d distributin g
.

S pac e c o st p ow e r c o st e t c
, ar e han dl e d di ff e r e n tly u n d e r diff er
,
.
,

e n t machi n e r at e m e th o ds ; but in g e n e r al p ri n cipl e virtually all

-

aim at th e sam e thi ng th ough th e diff e re n c e in re sults is som e

tim e s wid e b e caus e o f wis e or u nwis e han dlin g of t h e figure s ob
tain ed . B o th g ood and bad machi n e r at e s ar e in u s e .

S uppl e m e nt s t o M a ch in e Rat e s Th e machin e r at e s even .

,

wh er e t h e y are m o st c omple te do n ot tak e care of all burd en ,

fo r th e y cann o t e xc e p t by m e re a rbitr ari n e ss which it is th eir ,

pu rp o s e t o avoid tak e care of th e burd en c onn e cte d with store s

, ,

with ge n e ral sup e rvisio n of lab or or with administr ati on an d , ,

th e y have tak en care of space costs only so far as space costs are
c onn e ct ed with th e machine s Th e s e r emaini ng items of burden .

may b e at tach e d in vari ous ways though th e m o st common is as ,

398 TH E F ND AM ENTALS U OF A C COUNTING
pe rc en tag e s of t h e co sts wi th which th ey are dir e ctly c onn e c ted .

S om e o f th e s e ar e illustr at ed with ou t c omm e n t in t h e f ou r th co s t

, ,

sh ee t sh o wn be l o w Ro ughly thi s c omple t e s o ur bu rd e n charges

.
,

to b e di stribute d for pr oduction th ough w e have no t di scussed

min or items that will fall in to t h e gen e ral plan o r bu rden for s e ll ,

ing c o st whi ch f o llows t h e sam e ge n e ral p ri n cipl e s

, .

C o s t S h e e t s Illu s trate d In o rde r that w e may s e e th e s e four

.

gen e r al m e th ods to g e th e r summary c o st sh ee ts ar e app e n d ed by

, ,

way o f r e vi e w or summary for t h e sam e p roduct u n d e r t h e f our

,

plan s d e scrib e d Th e diff e ren c e in c o st sh o wn thr ows n o cre di t

.

o r discr e dit o n an y m e th o d : t h e fact is t hat each me t h od is goo d in

its plac e an d n o t w o of th e s e m e th ods would of t e n p r oduc e quite

,

th e sam e r e sult It happ en s in thi s case that t h e machine rate

.
-

m eth o d was adapte d t o t h e circums tan ce s an d th e o th e r s we re n ot .

Cos t S heet Cos t S keet

B urden on H our B as is B urden on Wages B asis
Raw Material Raw Mate rial $7 00
Labo r Lab or
.

12 h rs 80¢ 1 2 h rs 80¢
wag
. .
, ,

B ur de n , 1 2 h rs 4 o¢ . B ur den , 4 0% of es

Cos t S heet Cos t S heet

B urden on P r ime Cost B asis
-
A nalyzed B as is
Raw Mate rial Raw Material
Labo r, 1 2 h rs . 8 0¢ A dditional 1 0% , 70
Labo r 1 2 hrs 8095
A ddi tional 1 2 hrs
.

d
,

B ur en , of P rime , .
3 515 .
36
Machi ne Rate , 3 h rs . 25 ¢ .
75

Administration 5 % ,
.
92

It will b e o bs erv e d that t h e t tal burd

last cas e is
o en in th e
much l e ss than in t h e o th e r thre e cas e s This is b e caus e this j ob .

happ en e d t o in v olv e som ewhat le ss machin ery than m o st j obs ,

wh e re as u n d e r all thr e e of th e o th e r m e thods t h e u s e of machin e ry

is no t r e c o gn iz e d as a se parate e lem en t and each job is charge d for
an av e rag e u s e o f machin e ry whate ve r act ual u s e it mak e s o f ma

chin e ry This job m or eove r h ad m o re raw material in pro po r

.
, ,

tion to lab or than th e ave rage job , and hence is ch arged more for
4 00 TH E F ND U AMENTALS OF A CCOUNTING
c as e i t is admi tte d tha t t hefigur s f th t w produc ts a e
e or e o r

n ot c ompa r abl e f o r o ne pro duct n e e ds t o hav e add e d t o it p rofit

,

of o n e magni tud e an d th e o th e r p rofi t o f ano th er Y e t one of t h e .

pu rpo s e s of ou r co st acc ou n tin g is t o ge t c omparable figure s

fi gu r e s that e n abl e us t o s ee what price s must b e Obtai n e d f or
vari ous p r oducts t o mak e th e m w or th o ur makin g o r if p ric e s , ,

ar e i n d e p e n d e n t o f o ur o pe r ati o n s what articl e s w e can an d can

,

n o t aff o r d t o mak e . Y e t if afte r w e have got our c ompar ativ e

figu r e s w e must go o v e r th e m agai n an d calculate diff e r e n t r ate s
o f p r ofi t t o b e add e d t o diff e r en t a r ticl e s t o brin g th e m up t o n e ce s

sary sta n dar ds of s e llin g pric e w e have vas tly in cr e as e d ou r lab o r

,

f or t h e m e r e sak e o f mai n tain in g a p o in t o f pu r e th e o r y ab o ut

t h e r e lati on b e tw e e n c o st an d p r o fit ( virtually e v ery w ell kn own -

e c o n omist c o n sid e r s i n t e re st a c o st) . Th e c o n v e ni e n t thin g th e ,

n atu r al thi n g by c o st acc ou n tin g m e th o ds t h e thi n g whi ch ac

-

c or ds with e c on omic te rms an d usage is t o tr e at in t e re s t on in

,

v e stm en t as (I ) on e of t h e d e bits t o op er ati on so that w e may ,

mak e c omparis on s b e twe en diff e ren t article s o f pro ducti on by

putti n g th e m n t h e sam e basis an d (2 ) o n e Of th e cre dits t o in
g ,

c om e o n in ve stm en t in t h e busin e ss Th e eff ect of this is t o

.

cha rg e p r o duct thr ough bur d en (particularly th r ough machin e

,

rate s an d vi r tually all machin e rat e calculation s in u s e i n clude

,
-

in t e re st on t h e in v e s t m en t in t h e machin e ) an d t o c r e dit In te r e st
,

E arn e d : a c o st o f pr oduc ti on ( an d h e n c e a r e ducti o n o f p r ofits

b el ow what th e y would b e if in te r e st we re n e gle ct e d) offs e t by ,

in c om e on inv e stm en t a charge t o on e d e partm e n t o f t h e busi

n e ss s o t o sp e ak by a n o th e r d e p ar tm e n t an d p r o ducin g com
, , ,

par able figur e s of p r oducti on in t h e d e par tm e n t charge d .

Inte r e st a s C o st on th e B alan ce S h e e t On e obj e ction mad e t o

.

tr eatin g in t ere st as co s t Of producti on is that for go ods (fini sh ed

01 u n fin ish e d) l e ft on han d at t h e e n d o f a p e ri od t h e balan c e

sh e e t sh ows n ot only e xt e rnal c o st c o st ou t o f p o ck e t but also t o

, , ,

t h e e xt en t o f th e in t er e st e le m e n t in t h e go ods still on han d c o st ,

t o o n e d e partm e n t o f th e busin e ss ( t h e fact o ry) which in clud e s a

profit (in ter e st) for an o th e r de par tmen t ; an d h e n ce th e p rofits are
t o that e xt en t o n ly o n pap e r an d th e ass e ts are als o t o that e xt en t
o n ly o n pap e r . This obj e cti on w o uld hav e much m o r e w eight if
th e re we re any general prin ciple th at could b e applied to all th e
 FINDING C ST O OF PROD U CTS OR VICES S ER
4 01

items on a balan ce sh e e t alike ; bu t w e a e r e h v al ady s

een that s m
o e

are p r e f e rably ca rri e d at c o st an d so , e m at mark t

e an d s m at
o e ,

colle ctibility an d som e at gr o ss an d s ome at n et E ach item in

, , .
,

a se ns e h as its fo rmula f or in te rp re tation Then why n o t goo ds

, .

in pr o c e ss an d fini sh e d goods ?
A n oth e r Ph as e of In te r e st as C o st A ny wh o wish furth e r to
.

consid e r in t ere st as co st ar e ur ge d t o c on sider th e cas e o f th e pur

chase of a le as eho ld as given o n page 3 7 2 B y in ve st ing in th e .

pu r chas e o f a le ase th e pu rchas er w as able t o hire fo r

, a
year a bu ildin g wo r th a ye ar Th e am or tisati on of th e
.

le ase howev e r am o un te d t o
, , in th e fi rst ye a r D oe s .

this mean that th e ren t in th e fir st ye ar was

f or th e lan dl or d an d , f or am o rtisati on ) ? Fo r th e fir st
year th e pu rchase r of t h e l e as e had lo ck e d up in th e
han ds of t h e buye r an d n on e of it co uld b e e v er go t back exc e pt
,

as h e r e aliz e d a savi ng of o n hi s r en tal cha rg e Th e o rigi .

n al calculati on whi ch fix e d t h e valu e of t h e l e as e calcul at e d on e

, ,
’
ye ar s in t er e st o n this inve stm en t as an d c o un t e d it as a

part of what t h e pu r chas er must give up in r e turn f or t h e

that h e was t o ge t in a savin g o f r en t as a par t o f th e c o st .

What s or t o f acc ou n tin g inf orma ti on sh o uld w e ge t in thi s case if

w e e n t e r e d r e n t as an d le t it appe ar that of

th e pu r chas e r s m o n e y was lyin g idl e ? H ow sh ould w e fi n d c o sts

’

o f d o in g busin e ss pe r c e n tage s o f n e t p r ofits fr o m sal e s an d o th e r

, ,

figur e s o f imp o rtan c e for c ompa rative purpo s e s if r en t w ere take n ,

h e re at an d w e had a similar st o r e n e xt d oor which ,

sin ce th e old leas e had r e c e n tly expir e d was n ow paying ,

in cash as re n tal ? C omparison s cann o t b e mad e with o ut com

parable figur es an d if s om e figur e s ar e on a cu rr en t basis an d
,

o th er s ar e partly o n a capital basis adjustm e n t must b e m ad e t o

,

c onve rt t h e capital figure s in to curren t ; but wh e th er on e calls th e

item of adjustm en t co st or profit is larg ely a matter o f taste .

Fin d in g C o s t s Illu s tr at e d B y way o f summary l e dg e r ac

.
,

c ou n ts ar e sh own b e low for a simpl e s e ri e s o f c o st tr an sacti on s .

No att empt is mad e t o S h ow m o r e than a fe w typ ical acc ou n ts ,

but e n ough ar e sh own t o in dicat e th e ge n er al c our se o f pr o ce dur e .

For simplicity small am ou n ts ar e us ed fo r fin an cial figu r e s an d

, ,

th ey may b e tak en as hundre ds or thousands of dollar s if one can

4 02 TH E F NDAM ENTALS U OF A C COUNTIN G

a pp re cia te th e m be tte r in th a t way Th e d ebits t o t h e f o ll o wing

.

acc o un ts r e p re se n t d e alin gs with t h e o utside w or ld : Raw M ate

rial Fu e l Re n t In su ran ce Tax e s A dmin istrati on (cash part
, , , , ,

o nly ) . Th e s e wi t h t h e c o rr e sp on di n g cr e dits t o C ash an d t o A c

,

c oun ts Payabl e w e re put o n t h e b ooks in t h e o rdin ar y c ou r se o f

,

busin e ss in de pe n d en tly of any spe cial th o ught of c o st acc ou n ting .

Th e o th e r e n tri e s f or c o sts f o ll o w : a d e bit t o M a nufactu rin g ( th e

c on tr o llin g acc o u n t for c o sts of pr oduct ide n tical with Go ods in
,
-

Pr o c e ss) an d a c r e dit t o Raw M at e rial f or sto r e s issu e d ; a cr e dit

t o W ag e s f o r pay ro ll with a d e bit t o M anufacturin g fo r di re c t
,

labo r o n j obs t o Powe r for po we r h o us e wage s t o S upe rin te n d

,
-

e n c e f o r sup e rvisi o n o f lab o r ; a d e bit t o Wage s an d a c r e di t t o

C ash f or actual paym e n ts made o n wage s A debit t o Power and

.

a c r e dit t o Fu e l f o r fu e l use d in t h e p o w e r h o us e ; an d dist ributi o n

o f p o w e r c o sts by a cr e dit t o Po w e r an d a d e bit t o H e at an d to

B ur d en ( th e latt e r for po w e r us e d in t h e ma n ufactu ri n g p r o c e ss e s) ;

a d e bit t o S pace C o st and a c r e dit t o H e a t ; a d e bit t o S pac e C o s t

an d a c r e dit t o Re n t ; a cre dit t o S pac e C o st an d a d e bit t o B u r d e n

for t h e s h ar eo of spac e c o st cha rg e able t o di r e ct man ufacturing

proc e sse s an d t o A dmi n istration for th e share char ge abl e t o gen
,

e ral purpo s e s ; a d e bit t o B u r d e n I n t er e st an d a c r e di t t o I n te r es t

E arn e d f o r in t e r e st o n th e in ve s t m e n t in ma nufactu rin g faciliti e s .

a d e bit t o B u rd e n an d a c r e di t t o I n su r a n c e t o B u rd e n In t e r e st
, ,

t o Tax e s t o S upe rin t e n d e n c e an d t o A dm i nistrati on t o clo se all

, , ,

but th e fi rst ; a d e bit t o M a nufactur in g an d a c redit t o B u r de n t o

cl o se t h e latte r ; a debit t o Fini sh e d Go ods an d a c re di t t o M anu
f ac t u rin g for t h e goo ds t ra n sf e rr e d fr om t h e fact or y t o t h e ware
h ouse at co s t as sho wn by th e c o st sh ee ts ; a d e bit t o S o ld Goods
,

an d a c r e di t t o Fin ish e d Goo ds f o r t h e c o st o f go ods so ld for

t h e sam e am ou n t as t h e d e bit t o Fin ish e d G oo ds wh e n th e par
t icu lar go o ds s o ld w e r e s e n t in t o t h e wa r e h o us e ) It will b e .

o bs e rv e d that s e v e r al cle a r in g acc o u n ts hav e b ee n us e d : Powe r ,

S pac e C o st Admi nistra tion B ur d e n an d M an uf ac turin g

, , , .

B al an ce
 0
4 4 U
F ND AM ENTA L S OF A CCOUNTING

S UPERINTEND ENCE
1 8 I” B ur den

ADMINIS TRATI ON
1 1 B urden
8
1 9

B U RD EN
P o we r I7 Manufacturing
S pace Cost 18

Ins uran ce
B ur d e n In te rest
Taxes
S upe rin ten de n ce
Admi nistration

M ANUFACTURI NG
21 8 h
Fini s ed Goods
31 5 B alance
87
6 20

B alan ce

FINIS H D GOOD S
E

5 80 S ol d Goods
B alan ce

B alan ce

Finis hdG
e oods

ACCOU NTS P AYAB L E

Raw Mate rial 24 6

I t w ill hav e b e e n Obs e rv ed that tho ugh h e re all co s t s go ultima tely

t o M anufac turin g som e go in dir ec tly for we wish t o ge t c e r tain
, ,
 FIND IN G C S T O OF PROD U C TS OR V
S ER I CES 0
4 5
s tatistical figu re s by t h e way S ome wage s fo r exampl e go di
.
, ,

r e c t ly t o M a n ufactu rin g s om e to Po w e r an d so m e t o S up erin

, ,

tend e n ce but the se latte r are cl o se d in t urn t o M anufac tu ring .

Th es e figur e s give th e f o llowing trial balan c e

Tr ial B alance
R aw Material
Wages
Fuel
In t eres t Earn ed
M an ufacturing
Finis e Goohd d
s
d
S o l Goods
Cas h
Acco unts Payable

A ll acc oun ts h er e but t w o are r e al S old Goo ds is t o b e t rans

.

f e rred t o Tradin g an d In t e re st E arn e d t o In c om e

,
.

Ancie nt or Curre nt H i st ory? Th e closin g o f th e b ooks as de

scri b ed ab ove has b e e n o n t h e assumpti on that th e year s busin ess ’

was over b e fore t h e clo sin g en tri es were mad e This may d o for .

b ooks but it will n o t d o for cost sh ee ts o r f or gui dan c e in quick

,

d e cisio ns du rin g t h e ye ar On e cann o t wai t un til D e c emb e r 3 1 t o

.

kn ow t h e c o st o f bu rde n o n j obs t o b e bid for in M ar ch an d if c o st ,

sh ee ts c o uld n ot b e fille d out un til afte r D e c 3 1 for an y ye ar m o st

.

o f th e m p r obably w o uld n ev e r b e fille d o u t at all Th e m e t hod .

actu ally us e d is t o apply th e expe ri en c e of th e past t o t h e calcula

ti on s of t h e pre s en t adjus t ed t o th e chan g e d c onditions of t h e pre s
,

e n t an d t o e mpl o y th o s e adjust e d figur e s f o r cu rr e n t w o rk

, Th e .

figure s for raw mat e rial and fo r lab o r may b e kn own curren tly :
o nly t h e bu r d e n charg e s n e e d e stimat e ; but if car e ful r e c o r d has

b e e n k e pt o f past bu rden (e spe ciall y if it is an an alyze d an d n o t a

blanke t burd en) adjustm e n t to curren t change s may b e r e adily
,

made Th en in ord e r t o sh ow what bu rde n has actually b een

.
,

absorb e d b y j o bs e n t r y is mad e on t h e b oo ks d e bi tin g M anuf act ur

,

ing an d cre diting B urden ( or wha te v e r acc ou n ts are k e p t for bur

d en ) wh en eve r burd en is calculated and en t er ed on c os t sh ee ts .

This d ebits M an ufac turin g curren tly for ac tual raw ma te rial for ,

actual wages, and for es timat ed b urden ; and i t credi ts B urd en

4 06 {
:
U
TH E F ND AMENTALS OF A CCO UNTING
cu rr en tly fo r th e e s tima t
e d burd e n charge d t o j o bs B ur den will
'

n o t b e d e bit e d h o w e v e r u n til actual c o sts o f bu r d e n are kn own

, ,

at t h e en d of t h e p e ri od as t h e o th e r acc ou n ts ar e clo s ed t o it
,
.

Wh en it is so d e bited for actual c o sts t h e balan c e of th e acc oun t ,

whi ch is th e difl e r en ce b e twe en th e c o sts as fou n d an d th e e sti

mate s (c o rr e cte d by c on stan t o bse rvati on) actually u sed is t h e ,

m e asu re of in accu r acy a h elp t o gr e at e r accu racy in th e sub se

qu en t p e ri o d This discrepan cy is th e n tran sfe rr e d t o M an ufac
.

tu rin g t o b rin g that acc ou n t in to agre em e n t with th e fin al facts .

Wh e r e th e wo rk is w e ll d on e th e fin al adjustm en t at th e e n d of
,

t h e p e r i o d is t r iflin g in am o u n t .

Th e Purpo s e s o f C ost Acc o u nti ng Now that w e hav e s e e n

.

what c o st acc ou n tin g can d o le t us n o tic e what w e shoul d hav e in

,

min d as t h e pu rp o s e s that it ought t o s e rv e Th e se are th re e : (1 ) .

t o guid e in p r ic e maki n g wh e n w e can mak e p ric e s ; (

-

,
2 ) t o guid e

in e limin ati n g wast e an d o th e r unn e c e ssa ry e xpe n se ; ( 3 ) t o guid e

in d e cidi n g what w e had b e tt e r d o an d what w e had b e tt e r avo id .

Th e fir st o f th e s e is acc omplish e d by S h o wi n g t h e to tal c o st o f

sp e cific p ro ducts o r s e r vic e s Th e s e con d is accompli sh ed by
.

sh owi n g d e tails o f co st e l e m e n ts p r o c e s se s g r o ups o f e l em e n ts

, , ,

g roups Of p ro c e ss e s Th e thi rd is acc omplish e d by sho win g e ith e r

.

that t h e to tal c o st is so gr e at that n o satisfacto ry mar gin of p rofi t

r emai n s o r that s o m e sp e cific e l em en ts c o st so much as t o b e n o t
,

w or th whil e ev e n th ough o th e r c o sts ar e n o t e xc e ssiv e In this

, .

last cas e w e may fi n d that still it pays t o manufactu r e th e p roduc t

, ,

f or w e may hav e s om e e l em e n ts o r p r o c e ss e s c o n tr ibute d f r om o u t

sid e o f o u r own e stablishm en t If w e did n o t hav e d e tail e d c o sts
.

w e c ould n o t kn o w t h at t h is is d e si r abl e We may o n t h e o th e r

’

.
,

han d d e cid e that it is w or th ou r whil e t o e quip o u r s elv e s t o d o

,

t h e w o rk in sid e e v e n at appa r e n t gr e at e r c o st f o r d e pe n d e n c e o n
, ,

o th e r s is Oft e n t oo haza r d o us Ou r c o st acc o un ts can at l e ast indi

.

cate t o us h ow much in d ep en den c e co sts an d this w e sh ould ,

k n ow .

W i d e Appli cabi lity of Th e s e Prin ciple s What has b een said .

o f fin din g c o sts f o r particular pr oducts app li e s e qually t o va ri ous

kin ds o f s e rvic e s lik e th o s e re n d e re d by r ail ro ads e le ctric light

, ,

c ompani e s h o spitals sch o ols an d ho tels , an d t o s e llin g o rga niza

, , ,

tio ns lik e d e par t m en t sto r e s A n importan t e l em en t in th e ad

.
4 08 TH E F ND AM ENTAL S U OF A CCOUNTING
f m th ro p di t e ex e n d t h i g w it h i a
u r e , an h d p t m t f
e n us n n e c e ar en or '

di t ib ti g d pa tm tal t t t h v al p d t f th t
s r u n e r en co s s o e se er ro uc s o a

d pa tm t t h m th d d ib d d (b) applyi g t ll
e r en e e o es cr e un er as n o a

d p t m t t g th
e ar en s o e er

C mm t p vi ab ili ty f a h f th m th d f thi
.

o en th u on e s er ce o e c o es e e o s or s

i tit ti
ns u on .

D pa t m t A f a b i
e r en i d v t d
o ti ly t p d i g fi
us n ess s e ab i
o e en re o ro uc n ne c

ne t w k or p ia l
on s d b y ec mb i d h
or a ders d m a h i p d ti
co ne n an c ne ro uc on ,

th f m
e or p d mi ati g
er re D pa tm t B m ak
o n n ta da d a ti l e r f en es s n r r c es , o

v w d m d h d
.

in ex e n s
p i e a hi
oo t
on t f tc i p ti
nes co ns ru c e d or s ro uc o n an

q i i g littl lab d l p vi i D pa tm t C t k
,

re u r n e o r an es s s u a
er s on . e r en a es c r e

o f a va i ty f r e d hi fly t h ma fa t f h ap v lti
o or e rs , c e e d nu c ur e o c e no e es , an

u tili b t h ha d d ma hi w k b t t h p p ti
ze s o n an c nef ha d ord u e ro or on o n an

m hi w k i ta tly va yi g with t h j b i ha d
,

ac ne or s co n s n r n e o s n n

Wh at mm t hav y t mak a h f t h f ll wi g m th d
.

co en e ou o e on e c o e o o n e o s

o f di t ib ti g b d
s r u n t? ur en cos s

()a F i d i g
n t h anm t f di e t la b ou n t i a oh a ti l recf p d or cos n e c r c e o ro
t
uc d atta hi g b d
an apc n tag f th at labur e n as t e rcen e o or co s

(b) D i t ib ti g b d b tw d pa tm t th b i f m
.
,

s r u n ur en e e en e r en s on e as s o co

p tiara t f w mat ial

v e cos s md i
or r a a h d pa tm t er cons u e n e c e r en

d th di t ib ti g that b d withi d pa tm t v th
,

an en s r u n ur en n e r en s o er e

p d t
ro i puc p ti nt t h ro m b or f la bon h oi h e nu er o or -
ou rs n e ac

ti l
ar
g e.

( ) S pa ati g ll b d
c e r n t i t f
a ur g p th
e n co s s that n o our rou s ose are

t d with lab th
co nn e c e th at or , t d with m a hi ose ar e conn ec e c nes ,

th that
o se t d with b th
ar e co nn e c e d th that o an o se are co n

t d with it h ; d ividi g t h t tal f th

,

ne c e ne er f th fi t g n p e o o os e o e rs ro u

b y th mb f lab
e nu h er od atta hi g th q t i t or -
o u rs , an c n e uo en as an

ad di ti al ha g t on h a ti l f p d t f a h h f l
c r e o eac r c e o ro uc or e c o ur o a

b ; dividi g t h t t l
or t f th
n e dg p b y th
o a cos s o mb f e se con ro u e nu er o

ma hi h c ne -

d ha gi g t
o ur s run an a h a ti l t h c lt f r n o e c r c e e r es u o

m ltiplyi g th at q ti t b y th
u n mb f h th a ti l w
uo en e nu er o o ur s e r c e as

on a ma hi ; dividi g th t tal f t h thi d g p b y t h t t l

c ne n e o o e r ro u e o a

ma hi h c ne d m -
ho urs an mbi d ha gi g a h a ti l an -
ou rs co ne c r n e c r c e

th q ti t m lt ipli d b y t h t tal h fw k m d ma
,

e uo en u e e o o urs o or an an

d v f th g p
,

hi c p t
ne , s t h a tienl ; i i di
on g t h t
e tal f
r t h c e n e o o e o ur ro u

b y th t tal f ll t h e o th ot d applyi g t h
a e o l ti g p
er co s s an n e r es u n er

tag t t h t tal f ll th
cen e o e t f a h a ti l p d d
o o a o e r co s s or e c r c e ro u ce

mm t y that t h t p it i fi t d b y th v l m f
.

3 It i s co on o sa e co s e r un s a ec e e o u e o

tp t S h w
.

ou u o :

(a) h w f thi fa t ff t th mb d ki d f a
.

o ar s c a ec s t t b
e nu e r an n o ccoun s o e
k pt d what h ld b a i d t th m
e , an s ou e c rr e o e ,

(b ) h w f t h ao ar t t ll t h fl t f ha g i
e ccoun s can tp te e c ec o c n es n ou u

mp y a ti ipati g a i i t h p i f l b ght la g ly
.

4 Ag as co an n c n r se n e r ce o co a ou r e

wh p i w l w P i apidly th at at th b gi i g f
.
, ,

en r ces e re o r ce s rose so r e e nn n o

xt Op ati g y a th i v t y at ma k t p i w high tha

.

th e ne er n e r e n en o r r e r ces as er n
t
a cos t by Th di t wi h d t tak that i e rec ors a i vl s e o e ncre se n a ue
 FINDIN G C ST O OF PROD U CTS OR S ER VICES 0
4 9
in to t h ebl h t d t th i a d p i f t h t f
a an ce s ee an o u se e n cr e se r ce or e cos o con
mp ti f al i t h b q t y ; b t h t f dt
,

su on o co n e su se u en ear u t e r eas ur e r r e us e o

use a ythi g b t t At t h
n n d f th y
u p fit w
co s s hi gh f e en o e ear ro s e re or
had b b d t h m k t p i f al
.
,

ne w t ra es e en ase on e ar e r ce o co

t k f al w till l g b t th t a f dt a y
.

Th e s oc o co as s ar e , u e re s u r e r re u se o c rr

it ort i it ab v
o t Th
s sue pply l t d i m th
o e cosd th e su as e s x on s , an ese
h w d l g p fi t N a th d f t h p i d h w v t h m
.

s o e ar e ro e r e en o e er o o e er, e co

m ity di v d t hat t h al w b gh t at th ld p i
.
,

un sco e re d at e co as ou e o r ce , an r es

w f d d w th i ld fi g
e re
’

o rce o I th n b q t p i d th
to e r o ur e n e su se uen er o e

mpa y w b yi g at t h w p i h gi g at th ld t
.

co n as u n d e ne r ce , c ar n e o ra es , an

a m l ti g a d fi it (t h p vi p fi t had b
ccu u a n e di t ib t d)
c e re o us ro s ee n s r u e

F m th p ti g ta dp i t mitti g t h q ti
.

ro e u r e ac coun f n s n o n o n e u es o ns o no n

ti g b i p li y h l d t h d hav b k pt f th
,

a cco un n u s n ess o c s ou e re co r s e e en e or e

d a half f xha ti f ld t k h w t fp
,

y e ar an o t e us on o o s oc so as o S o cos o ro

d ti f g at th ld t f al at th w ?
uc on o as e o co s o co or e ne

W ld i t bou i t t with g d a ti g t h w i v t i at
e co ns s e n oo c co un n o s o n e n or es

co st b tt i th
u pply fo ma fa t i g p p at th ma k t
ss u e e su or nu c ur n ur o ses e r e

p i ? E xp lai
,

r ce n

What th f ti g? S h w h w th y vd
.

ti
are f ta e un c o ns o co s ccoun n o o e are se r e

b y th f ma hi
e u se o at c ne r es

A f t yh v al m hi id ti al i t f Op ati d i
.

6 ac o r as s e er ac nes en c n co s o er on an n

p d t b t b ght at diff t tim tf m

.

ro uc u ou d a gi g i e re n es , an r n n n co s ro

t f th p d t m d ma hi l
,

to I th s th
e cos o e ro uc a e on e c nes ess
tha that mad
n th ma hi ? Wh y
e on wh y t?
e c n es or no
4 12 APPENDIX A

s erves th e same purpose as if drawn t o th e o ther payee in th e first ln

stan ce Th e dr a w ee may or may not ow e t h e mon ey t o th e dr a w er
. .

H e is un der n o l e gal o bligation t o p ay th e dr a f t in an y case un le ss h e ,

has signe d a contract t o do s o be cause for r eas on s o f h is own h e may

,

p r e f er t o p a y hi s cr e dit o r d ir e ct r ath er tha n s o m e o n e e ls e at hi s c r e di

tor s order ; an d if h e doe s n ot owe t h e mon ey h e has n o r eason t o pay
’

t h e d ra f t exc ep t as an accommod ati on o r lo an t o th e dr a w e r Th e .

dra w e r may ow e mon ey t o t h e payee and dra w t h e dr af t as a mean s of ,

paymen t or h e may draw it as a mean s o f makin g a l oa n t o t h e payee

, .

If t h e draw er w ish e s t o b orrow mon ey on t h e str ength o f funds payable

t o him in th e fu ture h e may dr a w a dr a ft payabl e at t h e t ime p aymen t
,

t o h im is du e an d s ell that dr aft t o a ban k

,
whi ch o f course will take , ,

o u t in t er e st an d pay hi m l ess than t h e f ace o f t h e dra f t .

With res pe ct t o matur ity a dr af t may b e dr aw n payabl e at sight

,
”
,

s o man y day s
“
aft er sight so man y days af ter date
” “
,
”
If dra wn at .

sight th e dra w ee p ays it if h e choo ses or r efu se s t o p ay it If h e r e fuses

, , .

t o pay it th e dr a f t is w o r thl e ss p ap er (
,
but as h e may chan ge hi s min d
later it S hould n ot b e l e ft about car elessly) If h e pays it h e k ee ps it
,
.
,

as a r e ce ip t for t h e mon ey p aid If a dr af t is payabl e a f te r sight it

.
“ ”
,

must b e pres en ted for acceptan ce in advan ce of pr es en tation f or pay

ment el se it will n e v er b ecome du e Accep tan ce con sists in wr iting
,
.

t h e w o rd Acce pt ed an d s ignin g t h e n ame o f t h e d r a w ee acr o ss th e

“ ”

face o f th e dra f t If on t h e o th er han d it is payable af ter date it

.
,
“
,
”
,

b ecome s n omin ally du e on t h e date in dicated whe ther it has b e en pre

v iou s ly accep ted or n o t ; but as t h e dr a w e e has t h e op tion o f acc ep tin g

o r r e fusin g th e dr a f t h e may r efu se t o pay it w hen n omin ally d u e e ven

,

though h e w ou1d hav e accep ted it (an d w ould n ow p ay) if it had be en

p r e se n t e d t o him f o r acc e p ta n c e p rom tl
p y g iv in g him c o u r t eo us
n o tice o f its existen c e If p ayabl e after sight th e accep tan ce must
.
“ ”
, ,

of c our s e b e dated ; if payabl e

,
“
a f ter date n o date is n e eded in t h e
”
,

accep tan ce b e cause th e pe riod before matur ity run s fr om t h e date of

,

th e d raf t its elf .

A debtor can n o t b y dr aw ing a dr aft in fav or of his cr edi tor ge t rid of

his responsibility for th e debt unl ess t h e dr af t is paid ; for th e draf t may
n o t b e a cce p t e d an d it may n o t b e pa id e v e n th ough acce p t ed
,
Th e .

drawe r in o ther w ords is still co ntingen tly liable on hi s original debt

, ,

un t il actual payme n t of t h e draft A tr an sf er b y th e payee moreover .

, ,

h olds him also res pon sible b y en dorsemen t t o th e tran sf ere e

, , .

Th e en t rie s fo r drafts ar e obvio us w hen t h e han dl in g o f drafts is

clear Th e mere draw ing of a draft doe s not in its elf n e ce ssitate any
.

e n try f o r t h e dr a f t may n e v e r b e paid o r e v e n acc ep te d

, Usually only .

a memoran dum is made for re cord in th e bill b oo k discu ssed in Ch ap

, ,

t er XV Often however sight drafts are enter ed in full at on ce as if

.
, ,
 APPENDIX A 4 13

paid ,
sin ce th ey are due at on ce o n e will hear pr omptly in case they
for
ar e n o t paid an d i t is in so me b u sin esses l es s w o rk t o make corr e ctio n
en tr ie s f o r th o s e n ot paid th an t o w atch an d r eme mb er t o e n t er later
,

those fro m whi ch o n e may h ear no thin g (b ecau se p aid an d n o l et ter of

ackn o wl edgmen t w as se nt) With time draf ts en try is customarily
.
,

made only when accep tan ce is kn own In an y cas e when e v er entry is .

,

made for dr awin g a dr aft t h e dr aw ee is cr edi ted for h e has either p aid
, ,

his debt t o that degr ee or has made a loan ; an d t h e p ayee is debited for
t h e r e v er s e r easo n exce pt w hen t h e dr a f t is dr a w n in t h e draw er s
’

own f av o r in whi ch case th e d eb it is t o t h e ac co un t r epr e se n tin g th e

,

asse t got whi ch is No te s Rec eiv abl e if t h e accep ted d raf t is kept is
, ,

C ash ( les s di s co un t) if th e draft is sold f or cash or is t h e t ran sf err ee in ,

case t h e dr af t is trans ferr ed b y en dorse men t t o so me o n e else Th e .

draw ee on th e o th er h an d if h e p ays th e dr af t at sight w ill debit th e

, ,

dra w er an d cr edi t cash ; if h e accepts t h e draf t fo r f uture paymen t h e ,

will debit th e draw er an d cr edit Notes Payabl e Th e payee will in any .

case cr edit th e dra w er as th e so ur ce of t h e ass e t an d will debit cash in

, , ,

case t h e dr af t is paid at sigh t o r No tes Receivabl e in cas e it is accepted

, ,

for futur e p aymen t It will b e no ted that th e dr aw ee do es n ot car e to

.

whom h e p ays t h e amoun t o f th e dr aft b u t onl y f or whom h e p ays ,

it ; an d th e p ayee doe s no t car e f rom wh om h e coll ects but only on ,

whos e or der h e coll e cts .

QUES TIONS AND PROB LEM S

1. John Richardso n draws a sigh t draft for o n Richar d Jo hnso n

w h o ow es him for m erchan dise pur ch as e d in favo r o f S P e t er

,

so n t o wh o m Ric har dso n o w es for th e pur chase o f materials

.
,

Th e dr aft is acce p te d an d pai d What e n try o r en t ries will b e ma de

.

o n t h e b oo ks o f Ric har dso n o f J o hn so n an d o f P e t e rso n ?

.

M Layt o n draws a dr aft for payable 3 0 days afte r dat e o n John

, ,

2.
Ames w h o owes hi m that amoun t du e on that day on accoun ts receivable
.

Ames accep ts th e draft Ten days late r Layton e n dors es th e draft

.

o ve r t o J am es S mi t h in part pay m e n t o f a de b t whi ch falls d u e in tw en ty

.

day s Ames pays th e dr af t at maturity What e n tries will b e made

o n t h e boo ks o f each o f th e parties co n ce rne d ?
. .

A B Co draw a dr aft on H I 81 Co in favor o f S T Co for

payable in t e n day s p ayable in t en
. . .

S T C0 o w e H I 81 C o
days an d at H I Co s acceptan ce o f th e draft leave it with them ask
. . .

ing t o have it applie d agains t th eir o w n d e b t Wh at en tries shoul d b e

, .
,

ma de on th e b ooks of each of th e parti es concerned?

.
 A PP E ND IX B
SI M PLE INTERE S T A ND A
B NK D IS COUNT

FOR or dinary purp ose s of business n ot conn ected with investment ,

M ple in tere st an d bank di scoun t are common ly used V irt ually .

ev er y busin ess tran sactio n involvin g t h e fut ur e involve s in o n e way o r

ano ther in ter e st o r discoun t E v en when n o men tion is made of in te r

.

es t o r disc oun t th ey are like ly t o b e taken in to c on side ratio n in t h e

bargain Theore tically in that case t h e b ooks should S how th e facts ;

.

but usually th e amoun t is t oo small or t oo un cer tain o r t o o mu ch in , ,

volve d with o ther things t o make w o rth while th e r e co gnition of in ter

,

es t un l es s it is n ame d as a pa r t o f t h e ba rgain though in lon g te rm -

tran saction s inv olvin g in v es tmen ts it is al ways worth r ec ogni tion in

t h e accoun ts When go o ds ar e sold with te rms o f payme n t in th e
.

futur e in te re st is an e lemen t in th e price e ve n though n o t named ; for

, ,

o n e can al w ays b u y che ape st fo r cash ; but it is n o t u sual t o att empt t o

distin gui sh that part whi ch is i nter est an d that which is t h e equi valen t
o f t h e cash price o f t h e goo ds .

Wh ere in tere st is in vol ve d in a tran sact io n w ith a n ego tiabl e in s tr u

men t ho w e v er a n o te o r a dr af t it is al ways taken in to con sideration
, , ,

an d e n t ry un l e s s in de e d as in rar e cas e s o f whi ch w e sh all o bs e rv e

, , ,

some later in t eres t is S h own b y t h e con sideration t o b e not r ea lly in

,

vol v ed Note s may or may n ot b ear in terest Th ey d o n o t un less

. .

int er est is spe cifi ed in t h e text of th e n ote If they d o n ot b e ar in t er e st .

,

th ey ar e n ot w o rth face v alue until t h e d ay when they become du e

for t h e o wn er must un til then wait f or his mon e y an d h e e xp e cts com ,

p e n s at ion f o r wa it in g If th e r
. e f o r e I w,
ish t o bo rr o w,
m o n e y an d ,

wi sh t o giv e my pro misso ry n ote payabl e in 6 0 days w ith o u t in t er es t as

evide n ce o f my debt I mu st make t h e n o te for a lar ger amo un t tha n
,

t h e amo un t that I wish t o b orro w ; f or n o on e w ill ( exc ep t as a ma tte r

of chari ty) l e n d mo n e y t o d ay an d w ait with o u t comp e n s atio n t wo

-

mon ths for r epayme n t Th e n o te must b e enough larger than th e loan

.

t o co v e r in t e r es t o n t h e l o an f o r t w o mo n th s If o n t h e o th e r hand .
, ,

t h e n o t e b ea r s in t er est it w ill b e w or th its face v alu e f or t h e delay in

, ,

paymen t is b y t h e terms of th e n ote its elf t o b e compen sated b y a

, ,

paymen t at maturity larger than t h e face of t h e n ote A sample f orm .

o f n o t e f o llo w s If it di d n ot b ear in t er e st t h e w ords wi th in t e r es t

“ ”
.
,

w o ul d b e omitte d A place of paym ent may or may n o t b e spe cifi ed

. .

When n o t so sp e cifi ed t h e usual place of busin ess of t h e maker of

,

t h e no te is un der st oo d .
4 16 APPENDIX B
po in t off t wo decimal places (on e per For an addition al mon th
we ta k e hal f o f w hat w e already ha v e an d add it Fo r S ix days w e h ave .

merely t o poin t off thr ee de cimal place s (for six is on e ten th o f sixty -

an d fo r S ixty w e po in t o ff t wo ) ; an d so f o r e ight e e n w e may e ither

write an d add t o it d ou bl e itse lf o r multip ly o ur origin al ,

figure , b y thr ee but write t h e pr oduct down o n e place far th er

,

t o t h e right than our fi gur e s d eri v e d fr o m 60 days Th e whol e calcula .

ti on then with all th e work is as foll o w s :

, , ,

M eth od I M eth od I I
( mo )
2 .
( mo )
2 .

(1 mo ) .
(1 mo ) .

24 7 2 (6 ds ) .
74 1 5 (
. 1 8 ds ) .

.
4 94 4 (1 2 ds ) .

What is t h e intere st on for se v en mon ths an d s eve n t ee n days

at Withou t other explan atio n than can b e given paren the tically
in t h e solution t h e working out follo ws
,
.

m
(t wo on ths)
12 3 04 6 f m h
(our on t s w
t ice two on t s b uil ing up m h d to wa d
r se ven)
m h
(o ne on t h al o f tw o o n t s f
t o comple te m h sev en)
1 5 381 (fif teen days one al o f on e on t ) -
h f m h
2 05 1 d
(tw o ays on e thir d of six days ) -

(at
(les s o n e thir d) -

(at

Though th e or etically there is n o reas on wh y it sho uld b e so in prac ,

tice t h e rate of disco un t is usually hi gher than t h e r ate o f in tere st If I .

b orr o w $ 5 00 an d gi v e my n ote for $ 5 00 with in tere st fo r t w o mon ths , , ,

at th e e n d of th e time I pay $ 5 05 suppo sin g in ter e st t o b e at

If I make a n o te fo r $ 5 00 payabl e in t w o mon ths withou t in ter e st an d
, ,

discoun t it I ge t $ 4 95 an d at t h e en d of t h e time pay $ 5 00 In th e

, .

fir st cas e I p ay $ 5 in tere st for t h e us e of $ 5 00 and in t h e se con d case I ,

p y 5
a $ in t e r e st f o r t h e u se o f $ 4 95 In t h e s ec on d cas e I p y in te rest
a .

o n t h e fac e o f th e n o te thou gh I b o r ro w e d o n ly th e p r e s e n t w or th o f it
, .

This discoun t is n ot true disco un t which will b e disc ussed in Appendix ,

C but ban k disco un t so call ed It is th e discoun t common ly take n

“ ” -
.
, ,

b y banks an d for shor t terms b e tw e en man an d man

, Whe n banks .
,

moreov er mak e lo an s on n otes b ear in g in ter est they usually add t h e

, ,

inte rest t o t h e f ace o f t h e no te take t h e discoun t on t h e sum o f face an d

,

inter e st an d give th e borrower th e balance They thus get th eir in

, .

t er es t in adv an ce .
 APPENDIX B 4 17

Le t us now obs er ve a few n otes an d fin d the ir value

Value Value
Ter m Due I nteres t J an. 1

2 mos . Mar . 1 Non e 995

2 mos Mar 1 6% 1 000 1 005

b k) b k)
. .

(at a an (at a an

1 000 2 mos . M ar . 1 6% 1 01 0

If th e first n ote men tioned ab ove is discounte d on January 1 or on

Febru ary 1 t h e in te r es t is paid in advan ce
,
Th e pur chas e r or di s .

counte r on t h e o th er h and is colle cting money in adv an ce o f re n derin g

, ,

t h e se rvi ce Th e sec on d n o t e is al ways except at a ban k (

. an d suppo s
,

ing it is goo d) w orth its f ace an d t h e lon ger it is h eld th e greater is th e

, ,

accr u e d in t e re st upon it ; t h e thir d is t h e same n o te as t h e s e c o n d .

If a n o te is giv en in paymen t o f a debt it may for t h e purpo se of ,

payin g th e debt have a valu e diff e ren t fro m its mar k e t value If a .

man b uys w orth of go ods on January 1 with a four mon ths ’

term o f cr edi t an d th en on Mar ch 1 giv es hi s cr edi tor a n o te payabl e in

,

t wo mon ths for what is th e n ote worth? It is w orth $ 990 ; an d

it could b e discoun ted for that o nly (at b u t f or t h e purpo s e o f
paying th e bill it is w orth an d must b e cr edit ed t o t h e custo me r

at that fi gur e ; for it calls for w h e n th e is d u e an d h en c e is

good payment Th e simple fact is that n eithe r t h e n ote n or th e mer
.

ch an dis e is w or th (els e w h y w as f our mon ths given for pay

an d on e is as goo d as t h e o th er .

QUE S TIONS AN D PROB LEM S

1 .
(a) Fin d th e in teres t on fo r 7 7 days
(b ) Fin d th e in te res t o n from February 1 to June 3 0
2. A holds tw o notes whi ch h e discoun ts on Feb ruary 1 at his b ank Th e
fi rs t is for $ 5 5 0 is payable o n Fe b ruary 2 8 an d does n o t b ear in te res t
.

Th e secon d is for is d ate d January 1 is du e o n M ar c h 1 5 an d

.
, ,

bears interes t H ow m u ch wi ll t h e bank giv e him for each n ote

, ,

if its rat e o f di scoun t is

A has a note fo r dated January 1 and due July 1 bearing in t er
On March 1 A gives t h e note t o B in exact full payment of
,

es t
a bill On July 1 B collec ts th e note What en tries for th e note will
. .

b e made on th e b ooks oa nd o f B on March 1 an d on J uly 1 ?

 A PP E N D IX C
C OMPOUND INTERE S T C OM POUND D I S COUNT
, ,

A ND A NNUITIES

WH E N a l oan or other fin an cial relation has a lon g exist en ce its value ,

can n ot b e determine d b y a multiplication of th e annual r ate o f inter est

b y t h e t er m o f t h e l oan or o th er re lation ; for it is t h e cust om of b u sin e ss
t o p ay in t e r e st at l e ast as o ft e n as ann ually an d a l oan run n in g fif ,

te e n year s (an d lo an s on bon ds comm only run longer ) would normally

have in t er e st paid at l east fi fte en time s durin g its life rath er than at
t h e en d o f t h e l o an on ly In or der t o comp ar e t h e value of t w o in v est
.

men ts w e mu st put them o n a comparabl e basis Mon ey a ctive ly

,
.

in v e ste d in bu sin e ss b y a proprie tor or partn er or sto ckholder is

, , ,

suppo sed t o b e earn ing in come con stantly an d that in come may b e ,

r e ali ze d (an d is alm o st un iv er sally calculat e d an d availabl e f or w ith

dr aw al) at l e ast as o ft e n as ann ually If w e ar e t o compar e loan s an d

.

o th er in v e stmen ts w e mu st put th e m all o n a p eri odical s e ttl e men t

,
-

basis S o all lo n g term fi n an cial r elation s ho w e ve r paymen t is ac

.
-

t u ally mad e at e v alu e d o n a basis o f p erio dic s e ttl e me n t o f i n t er est

, .

If t h e actu al s ettl emen t of in ter est is sel dom they are le ss v aluabl e , ,

for t h e r e cipien t o f t h e in ter e st w ill hav e t o wait l o n ger for his mon ey
an d w ill th er e f or e disco un t mor e he avily : if t h e se ttl eme n t o f in t er e st

is fr e qu en t they ar e mor e valuable

,
f or t h e in t er e st p ayme n ts may
b e th e ms e l v e s in v e ste d an d e ar n mor e in ter e st Un l e ss stip ulati on is .

made t o t h e con tr ary in terest is suppo sed t o b e payable annually an d

, ,

calculatio n s are based on that assumption .

N0 in t er e st can b e calculat e d without a r ate and con se quently ,

when a fu tur e v alue is t o b e de t ermin e d a r ate must b e fi xed upon .

Th e r at e o f in t er est is al w ays depe n den t in part o n th e risk in volve d .

To some p e opl e w e w ould n ot l en d for t h e pr omis e o f tw o hun dr ed per

c ent in ter est b ut t o o thers we might len d for fi v e ; for in some case s we
.
,

should thi nk t h e chan ce of losin g e v en o ur prin cipal was large Th e .

fir st step in calculatin g a futur e value is fi xin g upo n t h e rat e t o b e us ed ,

“
called t h e basis rate ”
That is not a matter of math emati cs or of
.
,

accoun tin g b u t of busines s j udgmen t with which accoun tin g has

,

n o thin g t o d o but t o us e t h e r ate f oun d .

We commonly have tw o class es of value t o fi nd : fu ture values of

futur e sums an d pres ent values of futur e sums ; thes e sums mor eo ver
, , ,

whether pr esent or futur e may b e singl e sums or a se ri es of sums pay

,

ab l e periodically commonly call ed

,
“
annuities ”
We wish a means of .
4 20 APPENDIX C

and tru e discount of Th e

for on e ye ar at then is , or th e di sc oun t
o n t h e p rin cipal s um ,
is t h e same as t h e in t er e st o n t h e pr e se nt
worth That is wh y bank discoun t is at a higher r ate : it take s inte rest
.

o n th e p rin cip al r athe r than o n t h e p re sen t wor th ( w hich is all that

has be en len t) .

What is th e valu e t o d ay of
'

-
due in t w o ye ar s ? It is n ot
minus t wice t h e tru e discoun t for on e year or $1 , fo r that
would negl e ct t h e fact that if inter e st wer e paid ann ually on e could in
vest t h e inte re st of t h e fi rst year and earn some thin g with it in th e
sec ond an d th at th e in terest o n what is b ig en ough t o amoun t t o
,

at t h e en d of a year is less than th e in ter es t on what will

amoun t t o at t h e e n d o f a year Th e v alu e o f .
p ya abl e

in t w o ye ar s w ill b e f o un d b y co n tinuin g o ne step f arth e r th e pro ce ss

us ed in fi n din g th e value for on e year We have f oun d that if any on e
.

had t o d ay an d inve st ed it at
-

, h e wo uld b e in t h e same
con dition at th e en d o f t h e ye ar as if h e wer e t o r e ce iv e th en .

We now wish t o kn o w h ow much h e must have on e year earlier than

that or t w o ye ar s b e for e t h e $ 1 000 is du e t o ha v e
, , ,
o n e year

b efore th e is d u e This is foun d of cour se b y dividi n g

.
, ,

by for t h e same r e aso n that w e divided $ 1 000 b y in th e ,

o th er cas e ? This giv es u s an d t h e disco un t f or t h e se c on d

p eri od b e f or e maturity is th eref or e This is easily pr oved :

in o ne ye ar will earn this added t o gives
th is in t h e se con d ye ar will earn an d at t h e e n d of

t w o yea rs w e have Our discoun t f or th e t wo year s is $ 1 1 0 ,

an d t h e pr es e n t w o rth f o r tw o ye ar s is $ 890 that is t h e valu e t o ,

day of a
p y abl e in t w o y e a r s F o r thr e e.
y e a r s w e ca rr y t h e ,

process an oth er st ep and divide by an d ge t

As this is th e valu e of $ 1 000 three times this is t h e v alue for

, ,

which w e start ed t o fi n d or ,
We shou ld have go t
t h e same r e sul t o f co ur s e b y dividin g
, ,
by an d t h e

quotien t b y an d that quo tie n t in turn b y If on e pr e fer s ,

how ever on e may appr oach from t h e o th er e n d an d make u s e of

, ,

what we foun d r egardin g accumulations of inter e s t We hav e j ust .

seen that t h e presen t w orth of any future s um is th e prin cipal which

will amoun t t o that sum in t h e gi v en number of perio ds ; an d w e foun d
o n t h e pre cedin g p age h ow t o fi n d what any prin cipal will amo un t t o in

any numbe r o f p er iods S o n ow we may fin d th e pr e sen t w or th of an y

.

s um b y dividin g it b y t h e amo un t of on e do llar for that n umb e r of

per iods Those wh o des ir e a formula can con struct on e from that given
.

P 1
ther sort of case Actually It Is 1
f or th e o
r) p or , In th i s case 1 22
,
(
.
,

This applies t o any sort of future value . Wh en th e numb er of

 APPENDIX c
4 2 1

We may n ow turn t o pe riodic paymen ts These are much more .

common th an most peopl e r ealize an d ar e call ed annuiti es wh atev er ”

A n y p eriodic fixed paymen t is an annui ty — r ent

, ,

t h e per iodicity .

m
,

salaries in tere st and In sur an ce pr emiu s for e xample Th e value of

, , , .

an y annuity wh e th er pres en t o r fu tur e 15 simply t h e sum of t h e values

of t h e se p ar ate in stallme n ts o f w hi ch it is made up

, ,

Th e amoun t o f an .

ann uity of a yea r for thr e e years o n a 6 % basi s (which ass umes ,

that all sums rec eiv ed ar e t o b e in v est ed and accumulated b y adding

t h e in t er es t) is t h e sum o f t h e amoun ts O f t h e fi rst $ 1 000 for thr ee
, ,

y e a r s (if t h e in stallm e n ts b e g in imm e diat e l y) t h e am o u n t o f a n o th

, er
f or t w o years an d t h e amoun t o f a third tho usan d for on e
,

y e a r ; o r ,as w e f o u n d ab o v e o n a
p g 4 19
,
e for t h e fi rst
,

in stallmen t $ 1 1 2 , ,
for th e se co n d an d , for th e third or ,

for t h e ann uity If on t h e o ther hand t h e in stallments of

.
, ,

annuity w er e paid at t h e en d of th e year th e fir st would earn interest ,

onl y t w o year s an d amoun t t o only t h e second for on e

y e ar a n d am ou n t t o a n d t h e th ir d w ould ha v e no opport unity t o
ear in t er es t an d t h e t o tal amoun t w ould b e only F mulas
n , or

for th e v al u es of ann uities can b e co n struct ed an d ar e publis hed ; but ,

e v en t o exp lain o n e o f them h er e w o ul d carry us b eyo nd our fi eld .

Th e pr e se n t w or th of an ann uity is mer ely t h e s um of t h e pre sen t

wor ths o f t h e var ious in stallmen ts o f th e ann uity A n an nuity o f .

$ 1 000 a year for thr ee years o n a 6 % bas is th er e for e is th e s um of th e

, , , ,

p r e s e n t w o r th o f p ya abl e i n o n e y e ar (s u pp o s in g t h e a nn u i ty is
first payable a year fr om n ow) o f th e pre se nt w orth of an o ther ,

a
p y abl e in t w o y e a r s a n d o f,
t h e p r e se n t w o r th o f a th ir d $ 1 000 payabl e ,

in thr ee year s ; or as w e f o un d abo v e o n page 4 2 0

, , for t h e fir st ,

in stallme nt , for t h e sec ond an d ,

f or t h e third or a t o tal ,

of for t h e annuity If on th e o ther h an d th e fi rst in stallm en t

.
, ,

w ere p ayable at on ce t h e values w o uld b e fo r th e fi rst ,

f or th e sec o n d an d ,
f or t h e thir d o r a t otal of , f or t h e
annuity Formulas ar e av ailable for calculatin g t h e pres ent w or th of
.

annuities b ut they w ould carry us t oo far from th e fi eld o f this book

,
.

One type of annuity is a sin kin g fun d A sin kin g fund is a s um of .

money se t as ide periodi cally an d inv es ted along with th e in ter es t e arn ed ,

b y t h e fund in o r der t o accumulate b y a cer tain s e cifi ed time a cer tain

,
p
sum of mon ey f or a defi nite purpo se such as paying debt o r replacing , ,

worn o ut machin er y Th e organizers of t h e fund n ee d t o kn o w h ow

-
.

much mon ey t o se t aside pe riodically In order t o build up t h e pr oper

amoun t at t h e prope r time Th e me th od is simply t o divi d e t h e re
.

q uir e d am o u n t b y t h e am o u n t o f a n ann uit y o f o n e d olla r f or t h e t e ,

;4 2 2 A PPEND IX c

quired number of per io ds and at t h e rate availabl e If for illustr ation

,
.
, ,

w e wish t o kn o w h ow much w e must se t aside an nually t o accumulate

in thr ee ye ar s at w e di vide that amoun t b y
t h e amo un t that an an n uity o f o n e dollar w ill amo un t t o in thr e e y e ar s
( t h e am oun t sh o w n o n a
p g e 4 2 1 f o r wh en a
p y m e n ts b e g in

at o n ce di vided b y an d ge t

When in t ere st is assumed t o b e or is actually paid O ften er than

ann ually t h e calculation in all the s e cas e s u s es t h e adjus te d rate for
,

th e adj u ste d number o f p eri ods . If in ter e st is semi ann u al r ather than
-

annual we for e v ery case ab o ve u se 3 % for s ix p er iods (in teres t o r dis

,

co unt) in stead oi 6 % for thr ee p er io ds an d t h e r e sults are differ ent

be cause of th e more fr e que n t compo un din g .

For th e con v e n i en ce o f t h e reade r in s e ein g h ow th e s e thin gs w ork o u t ,

an d in trying pr actic e pr obl ems tabl e s f or t h e four kinds o f v al u e s j ust

,

discusse d ar e given on pages 4 2 4 an d 4 2 5 for six p eriods an d for e ight

rates o f in terest . It should b e n o te d that th e valu e s ar e f or th e mo st
common S ituation for each kind of case and that th e tabl es ar e n o t ,

un if orm in respe ct t o time Th e tabl e of pres en t w orths gi v e s t h e

.

p r e s en t v al u e o f a si n g l e d o lla r t o b e p a id at t h e en d o f th e p er i o d n a m e d.

Th e tabl e of amoun ts giv e s t h e accumulat e d amoun t at t h e end o f t h e

p e r i o d n am e d for a d o lla r i n ha n d n ow. T h e tabl e s f o r a n n u it i e s
,
b o th
p r e s e n t w o r t h c a n d a m o un t
,
a r e f or a n a nn u i ty o n w hich n o p ya m e n t
is made u n til th e end o f th e fir st p erio d . To gain famil iar ity with
t h e sign ifi can ce o f th e tabl es th e reader is re c o mm e n ded t o ob s erve :
,

()1 that an y g fi u r e in t h e tabl e f o r p es e n t w or th o f a s in gl e paym e n t

r

when multiplied b y th e fi gur e for th e correspo n din g rate an d period

in th e tabl e for amoun ts w ill gi v e (for this pu ts th e pr es e n t w o r th
at int er est t o earn back t h e discoun t taken off ) ; (2 ) that t h e pr es ent
w orth of an ann uity for on e p eriod is th e same as th e pr esen t w orth
o f a sin gl e p ayme n t fo r o n e p e rio d ( fo r th ey ar e t h e same thin g) ;
3 ) that t h e p r e s e n t w o r th o f an a nn u ity is t h e sum o f th e c orre spo n din g
p r e s e n t w o r ths o f t h e in sta l lm e n ts o f t h e a n n uity ; ( 4 ) that t h e p ar all el
ism do e s n ot hold w ith th e tabl es for amoun ts for t h e tabl e for singl e ,

paymen ts is f or a pr es e n t o n e dollar wher eas th e tabl e for ann uities is

,

f or a dollar paid at th e e n d o f ea ch p eriod ; 5 ) that as we go do w n t h e

p e r i o d s
,
th e di ff e r e n c e b e t w e e n e a c h p r e s e n t w o r th a n d t h e n e xt g e ts
small er wh er eas th e diff eren ce b e t w e en e ach amo un t and t h e n ext
,

ge ts lar ger ; ( 6 ) that t h e pr e s en t w or th o f an y sin gl e paymen t is s ome

what more th an th e pr esen t worth at h alf th e rate for t wice t h e num
b er o f p eriods ( for disco un tin g at 3 % fo r 4 per iods takes o fi mo r e
di scoun t than discoun tin g at 6 % f or 2 p er iod s b e cau se o f mor e fr e ,

qu ent co mpo un di n g ; (7 ) that t h e amoun t oi any sin gle paymen t is

some what less than t h e amoun t at half th e rate for twice th e numb er
,
4 26
I
APPENDIX , C

d w
Each of th e cases in dicate b elo r eprese n ts a sum or sums o f money
v h
t o b e re cei e d In t h e fu tur e W at Is th e diff er e n ce In prese nt alue v
w h md k
b e t ee n t h e sums w e n th e interes t n a e 15 t o b e ta e n as annual
an d wh k
e n it is t o b e ta en as in s emi ann ual in s tallmen ts ?
-

(a) h
d ue in t r ee years , wh m w h
en o n e y is o rt

( b) d u e in t w o y e arswh m e w
n o n e y i s o r th
b w
,

( c) I n ter es t o n a 5 % o n d fo r t o run t wo y ea rs , h en

(d) m h
Th e a ou n t t at can b e accumul ated in th ree
’

y ears by i v
n es t
in g at 4 % t h e in teres t t hat is received on a 6 % b ond
w ith th ree years to run .
4 28 APPENDIX D

s on of balance sheets (with allowance for supposed profits with

t wo
drawn ) shows pr ofi ts under do uble e ntry .

S o f ar as si ngl e entry go es th er efo re it attain s t h e same r esult as

, ,

doubl e en try We must n o te ho w ever what is missing In Chapter

.
, , .

XIV we saw that b y a six column statemen t w e derive pro fi ts in t wo

-

ways an d that th e t wo ways actually Sho w t h e same r esult On such

, .

a statement w e compare no t on ly re sour ces and liabilitie s but also ,

losses and gains We kno w no t only h ow much w e have made an d

.

what it co st but also fro m what sour ce s w e made it and h ow th e cost

,

was in curr ed S ingl e e ntry can d o this t o b e sur e b y k eepin g extr a

.
, ,

accoun ts ; but so far as it does s o by sin gl e en try me thods double labor -

is invol v e d In doubl e en try as was sho wn in Chapter XI t h e labor is

.
, ,

not only n ot doubl e but practically sin gl e

,
In dee d full doubl e entry .
,

by double en try methods is far less lab orious than par tial doubl e e ntry
-

by singl e en t ry me thods A ny b o oks kept so that any e ntry fails t o

-
.

have a cr edit for its debit or vice ver s a is kept b y single en try : as th e
, ,

str en gt h o f a chain is de termin ed b y t h e strength of its we akest link ,

t h e do ubl e e ntry o r singl e en try char act er of b ooks is d et ermin ed b y

- -

th e char act er of its weakest e ntry for with on e singl e en try r e cord th e
,
-

b ooks are no longer in balance and th erefore no longer have t h e doubl e

aspect C on seque ntly th e w ork can not b e che cked b y th e doubl e
.

en try t ests agr eem e n t o f t h e t w o sides o f th e trial balan c e agr ee ,

me n t of th e t w o sh owings of loss and gain on a six column statement -

and consist en cy b e twee n t h e b al an ce sh ee t and th e in come sh ee t .

 IND EX

ti tle o f,
5 6 , 84 , 8 7 , 2 2 1
d m
.

Accoun ts accrue asse t , 1 02 1 05 ul ti ate cos t , 3 90

d li bili —y b
-
. .

t 5 uncollec ti le ,
d d
accru e 1 1
w
a , .

allo an ce , 1 07 A cc ountin g e fine , 5

b kk
1 1 1 . .

asse t , s pec ifi —
c , 88 1 06 re lat io n t o oo ee ping, 4 — 6
m b
. .

b alarice s o f , eaning of, 60, 1 5 8, 339 A cco unts aya le P accoun t fo r, 1 1 4 ,

b
.

alan ci n g o f , r 4 4 . 1 78 .

clea rin , 1 30 1 3 5 as co n trolling accoun t , 1 7 9

g
b k
-
.

dis t n b u ti v e , 1 3 1 , 1 34 oo for, 2 3 9
d d
. .

illus t ration o f , 1 3 2 , 1 33 , 1 3 5 e fine ,

b
.

nature o f , 1 3 0 . A ccount s Receiv a le account for , 95 ,

I 7s
as co n t rolling account , 1 7 9
mm b k
.

su ary, 1 31 oo for , 2 39
h
. .

f
d od ng o , 4 4 ,1 2 0 —
9 23 1 . cas sales as , 95 .

co n ten t o f , 84 , 3 84 3 8 5
d bfl
-
.

contingent , 93 , 1 06 , 1 1 6 ou t u , account f 95
o r,
d l 35 3
. .

—
co n t ra , 1 07 1 1 2 l
re at e t o sa es ,
B d d bt
. .

co ntrollin g applica ions of , 1 8 2 t ll

un co ec tib ili y f
t o , see a e s
h k A ml i b d 3 7 7 3 79
. .

o n , 1 80 ccu u at o n o n on s ,
Adj m fb d
c ec
d d
-
. .

e fine , 1 80 us t e nt o ur e n , 4 0
5
Admi i
. .

purpo se o f , 1 8 1 i 3 8
n s t rat on , 9 , 4 02
Adv i i g 5
. .

corporat io n , e rt s n , 1 0 , 1 2 7
All w mp d wi h v 67
.

cos t . 5 0— 6 3 , 3 84 386 . 4 02 4 06 o ance co are t rese r e , 2

b d d b
- -
.

d e fi ned , 2 0 f or a 8 6 34
e ts , 1 0 , 1 2 4 1 2 , 0
d w dp i i
-
. .

ra in g, 1 1 2 f or e rec at o n , 1 0 ,
7 3 3 3 5 340 , 0 , 0
f m di
. .

or of, 2 1 4 3, 1 5 1 1 5 2 f or scoun t , 1 1 0, 1 1 4 , 1 2 0 1 2 2 ,
f p m
- -
.

impe rso , 86 . f o r u t ur e ay en t s , 2 0
3 .

interpre tatio n of , 3 39, p p f f

u r ose o ac coun t or, 1 0 ,7 3 3 3 5 0 , 0
v Am i i f b d 3 7 7— 7 9
.

in e n t ory, 89, o rt sat o n o

b
on s,
3
Am
.

lia ilit y , pec ifi c 1 1 2—117 oun t (p i ip l

r nc a l us ) In t ere s t
mix d 7 9
s
f m l f l lpi g 9
, .

° o r u a or ca cu t n , 4 1
mi l d fi d 7 8
e 9,
.

d 94 4
.

no na ne illu st rate , 4 1 ,
d bl p f 7
e 21 , 22
bl f
. .
,

ou e as ec t o r1 ta e or, 4 2 4 , 4 2 5
,

m
.

f 78
nat ure o A nnu ti y f 4
a o un t o ,
f m8
21 .
dfi d 4 8
.
,

p fi ro dl t an oss ro 0. e ne 1
,

w h f4
.
,

p p f
u r os e o p resen t o rt o 21 .
l d
re a t e t 85
to
,

accoun 1 1 7, 1 28. i ki g f d
s n n un
,

bl f 5
, , as , 4 21 .

p ifi
s ec 7 3 c, 1 1 1 0 ta
h—ip l im 8
-
. es o , 4 2 .

owne rs 3
-
c a , , 21 -
2 , 2 6, 2 8 —
31 , Appreciation 8 1 2 84 2 90 , , , .

1 12 11 7 . Appropriations accoun ts for , , 24 6.

part ne rs , 1 1 2 11 3 Asse ts accoun ts for 2 1 3 1 87 1 06.

d 86
- - -
.
, ,
1, 86 1 02 10
pe rso n
3 5
. accrue , ,
-

pre paI asse t , 1 03 1 05 cap i l 8

ta 6 88
d
2
l ifi d 8 6 34 4
-
. .
, ,

pre pai liab’ ih Ili ty , 1 1 5 c ass e

fu d wi h p fi t 63
. .
, ,

p ro prie t o rs , 1 1 2 1 1 3 co n t
v
-
. se ro s, 2 .

pro isio n , 1 1 1 i g
co nt n e nt , 6 8 7 34 4 10
d d v i f 5 —5 6 8
93
.
, , 2 , .

real e fi ne , 8 co n e rs on o 2 0, 0
m v d 4 7 76
. .
, ,
re lat t o no inal account , 85 ,
gd
11 7, con e rt e , account or, 2 -

, 80, 1 34 .
1 2 current , 86 34 4
v d f d 86 34 4
.
,

re se r e . t or, 1 08, 266 , e e rre

d mi i g w hip l im
.
, ,
mling of . 1 4 5 e te r n n o ners ca s
di p i i f
-

sus pense , 1 06 . s os t on o , 1 0.
4
13C)

mp m
i er f 88
an ence o bl k b f 395
an e t ase s or,
d d d38
. .
,

P l ge 5 5 5 8 3 3 ill u s t rate

p p id l b h b if 9
e 9
-

. , .

re a 5 34 4 10 a or o ur as s or ,
m hi b i f 397 3 4
-
-
.
, , .

so u rce s o f 1 0. ac n e ra t e
ibl 86 d fp
,
-
as s or , .

t an g nee
p i f 395
ro e r,
w i p im
e, . o 3 92 .

as t n g, 31 0 r e cost
w ki g 86 3
as s or ,
w g b i f 39
-
. .

or n , , 44 . a es as s or , 4 .

nat u re o f , 2 8 2 , 390, 3 92
B d d b ll w
.

a e ts , f a o 8 4 6 ance o r, 1 0 , 12 -
12 ,
B usin e ss as e n tity , 1 8 .

3 40
l f m
os s ro 5 3 1 C apital c arging t o , 3 1 1 h
Sh dj m f 39
.
,

B l a ance eet a ust e nt or , gain s o f, 2 90

d
.
,

5 3, 5 6 5 8 6 67 7 75 9 3 2, 20 2 in cre as e b y pro fi ts , 2 69
d3
1 , .
-
1 .

l
an a yze 4 loss o f , 2 88
w k
,
1 . .

lc as sifi i cat o n o n
3 44 o r ing, 2 60
m iv 6 3 5 d
. .

co parat e, 34 0 C apital e fi cit , 2 89

f m f3336 k
-
.

— C apital s t oc — account s for, 2 5 0,

f i f3 35
or o , 4 4 . 25 2 ,
u n ct o n o 25 5
d 8 6 5 34 34 5
1
h i d
3 ,
1 -
. .

ill u s t rat e , —1 2, 0, au t or ze 25 2
di mm
,
1 3 , 1 .
, .

i din i
cat ng c re t, 31 4 co o n , 2 5 0.
vl 3 5 34 di b w
.

i i
ca t n g go n g a ues , s t in ct io n et ee n is sue and sale of ,
i v m 39
1 2 -

i
cat n g n e s t e nt , 25 1
i di lv
1

d
. .

n i
cat n g so e n cy , 3 4 o n ati o n s o f , 2 5 8—2 6 1
i f m li
1 . .

n o r a ty o , 3 4 f 5 in t reasury , 1 01 , 2 5 5 , 2 60
d b
. .

i i
n t e r re t at o n o ,
p f 339 3 3
h g
4 is sue at a o v e par , 2 5 5
d b w
-
. .

i i — issue at e lo par , 2 5 7
n t e r re t n g c an e s o n ,
p 34 6 3 5 0
d
. .

f 7
na t u re o , —1 0 is sue at par , 2 5 2—2 5 5
l m d
. .

no t e s su e n tar t 3
o,4 6 o wn e 1 01

p f d 5
p p e y
d f i m 34 4
. .
,

or er o t e s on , re e rre 2 0
d m t 47 b ip i ,
. .

l
re ate to o per i g
at n s tat e en , su scr 53 6 t ons to , 2 2 1
v l f 5 3 66
.
, ,

s ss a ue o 2 0,
a s
wi h p v l 7
y

gb k
-
.
,

B l a an c m g,Cl see o s1 n oo s. t ou t a r a u e , 2 2 .

k
B an r up t cy , 1 2 5 , 2 4 9, 3 5 5 3 5 9 C pi l
a l
ta su r us , 2 0,
p 9 37 2
b
-

Ba m s rat e , 4 1 8 C p i li
a t a zat wn f —
3 3 4
ase s o , 1 2 2
m d d
. .

B e t t e r e n t s e fin e , 301 act u a co s , 3 1 9—3 2

l t 4
b k f d pli
-
. .

B ill oo , 2 3 8 co s t o i cat o n , — ‘

u 3 5 3 7 3 4 1 1 , 2
b b
- -
. .

e ammgm paa t Yr 3 1 7 3 1 92 3 2 4
.

B ills paya le , se e No t es paya le

vb vb
-

Bills re ce i a le , se e No t es rece i a le d e fi ned , 3 1 2

d b
. .

B on s accou n t in g f o r , 3 75 , 3 80 p u li c in t e re s t in 3 2 4
m h
.
.
,

accu ulati o n o n , 3 7 7 , 3 7 8 Cas ac co u n t for , 8 9

m
. .

a or t isa t ion o f , 3 7 7—3 7 8 Pe t t y, 89, 2 3 6

b kv C h b k 68 7
.

alue of , 3 7 7 — 87 —
2 37 2 3 8
oo as oo 1 1 0, 1 1 90,
d d Ch i y 7
-
.
, .

e fin e , 2 7 3 ar t
Ch ki g 7
3
d
. .
,

is cou n t o n , 3 7 4 , 3 80 . ec 8 n , 1 2, 1 0, 1 95 ,
1 98, 24 1 .

in t e re s t on , 3 7 2 Clearin g accoun t s , se e Accounts clearing

d ,
. .

issu e , 1 1 3 , 3 80 Clie n t s , 95
dm b k
. .

op t io nal re e p tion , 3 8 1 Clos ing oo s t i

illus f rat on o 1 44 ,
w d
-

,
— —
2 1 4 2 1 9, 4 02 0
ne 1 00. 5 5 4 5
m hd f 3 3
o 1 1 2,

p mi m
,
-

1 .

re 37u38 on , 4 0 et o s o 21 22
-
. .
, ,

l f 3
sa e s o 79 f 20
h hj l — 7 9
u r o se o
v l f fi di g 3 7 3 3 76 , p p 9
. .
,

a ue o n t rou g — o urn a 21 21 21
4
h gh l d
n
B kk pi g dfi d
.

9 (
, , , ,

ee n ne t 7 bi ) e s
C l m l b v
oo e , 4 . rou ge r , 21 21 .

l i
re a t o n i g to accou n t n i g by p i l
ns , ec a 1 65 ~
B ildi
, 4 . o u a o r sa -
n s ,

n gs , 1 07 . 68 8 —
u 7 5
C mmi i
99, 1 99 1 9, 1 1

b pi f
.
,

t on o 5 8 35
04 , 1 1 , 1 2 ,
on , 4 1 1
dj m f C mmi m
a so r , o ss , 1 .

a us t e nt o , o 6
t ent s , 2 4 .

ly i
an a f 3 6 s s o Co nces sion s , 3 69, 3 70
im
, 9 . .

f
cu rre n t e s t 5 at e o 40 Co n tinge nt as se t s , 93 , 1 06 , 2 8 7 , 3 4 4
di ib i f 3 3 399 b
. .
,
st r u t on o , 9
-
. Co ntinge n t lia ili tie s , 93 , 1 1 6 , 3 4 4 .
432 INDEX

correc tion , 1 (bis) dx

In e ing. 95 . 1 4 2 . 1 74 . 1 99
dfi d ne
53 .

In solv e n cy , see B an rupt cy k

divi i f
e , 1 49 . .

s on o 7 2 1 74 Ins urance , 3 5 2 3 6 1 5 4 ) 6 4 1 1 04 ) I I I ) 2 88 9
d bl p i , 1 -
.

nciple o f , 7 , 1 2
ou
d
e, r .

ori i l g na as po s t ing. 1 93 In t e re s t — accrue 1 02 , 1 1 5 1 2 9, 209.

dfi d , ,
.

48 as COS t , 5 4 , 3 5 : 399 4 01 ) 4 02 1
b
e ne 14 2, 1
f m f
-

. 0
, .

146 as1s rat e fo r , 4 1 8

h
or o , . .

illus n —
tratio s o f , 1 4 9 1 5 0, 1 66 , 1 68, c arge s , 1 04 , 1 1 5 , 1 1 8 , 1 2 9, 2 09, 3 80 .

1 69, 1 7 1 , 1 92 , 1 98 . ear ne d : 1 02 : 1 1 7 2 1 2 9; 2 09: 3 7 1 3 3 7 6 :

t .

po s ing of , 1 4 2 , 1 4 9, 1 5 1 4 00, 4 02
vl
. .

sin gle , 4 2 efi ec t o f , o n a ue s , 365 381

wh m d
-

. .

en a e, gene ral is cussio n 209, 4 1 4 of, 1 2 8,

Eq ipm e nt , 4 23
b
u 99 . .

E rasures , 1 5 2 lia ility , 1 1 5 , 1 2 9, 2 09

m hd
. .

Erro rs , 1 5 2 , 1 5 g 1 6 3 et o f fi gu ring, 4 1 5 , 4 1 8 4 23
o
id
-

:
‘
.

Ev ide n ce , b oo lt s of original t
en ry as , p re pa 1 03 , 1 2 9, 2 09
i , .

S n gle acco un t f o r , 2 09
5 74
m hd d
1 2 1
x
.

E pan sio n , e fi ec t o 35 4 six pe r ce n t et o for fin ing, 4 1 5

d ff d
. . .

E pense s
x — d1ifi ere ntiate d , 5 0—
5 3 85 Q u nearne , 1 1 6 , 1 2 9, 2 09
v
2, .

In e n t o rie s acco un t s fo r, 2 1 6 , 2 2 1
b i f 8 87
.

as s o , 2 4
-
2 .

o pe rati ng , 1 t kmg
a 7 4 97
I v m
34 , . .

—
s tatis tics o f , 1 8 2, n est 7 8 e nt , 1 1 1 2, 25 0 2 5 8, 2 7 2, 3 20
I v m
24 3
-
.
. ,
n e st e n ts , 1 00, 1 01
I v i b k 7 9
.

Fact ory accoun ting, 1 8 2 , 3 84 4 07 n o ce oo 1 0, 1 1

hd d
-
.
. ,

Finis e goo s . 5 5 . 90. 5 1 . 4 0 2 ,

Fire , lo s s b y , see J i
o nt cos t , see B d ur en .
xd h
Fi e c ar ges , 4 07 Jo urna l h 68 c as 1

m l i g h gh
.
. ,

Formulze fo r a oun ts , 4 1 9 c os n 4 t rou 7, 2 1 9.

l m
. , 21 -
21
f or de pre ciatio fi , 303 (
’
n) co u 66 n ar , 1

w h d fi d 7— —8
.
.

for re se n t o rt s , 4 20 e ne 1 4 1 4
d 49 5
.
. ,

Fran se , 3 69 ill u s t rat e 1 0.

p iv
1

h
. ,

Fre ig t and cart age , 1 1 9, 3 5 1 r a t e , 2 01

h 7 9
.
.

Fue l, 5 1 , 5 9, 6 4 , 7 2 , 1 3 5 , 2 1 4 , 2 1 6 , 21 8, p urc ase , 1 0, 1 1 .

7 1 1
21

d 9. 3 5 1 4 02
bdi vi i f 6 7
.
, ,

Fun s ac coun t s fo r, 1 01 su s on o 1

dfi d
.
. ,

e ne 1 02 . u se o f , 1 6 7, 1 72
m
.
,

pl
re ace ent , 309. Journalization , 147 -
1 5 0.
sinki ng, 1 01 33 3, 4 21
x
.
,

Furnitu re and fi t ures , 98 .

in b k oo s of original e n try, 1 65 -
1 75 ,
Gains , 2 90, see also Loss & gain 8 2 06 .
d
1 -

d
.

Goo s in process , 5 1 — —
60, 70 7 3 , 96 , in le ge rs , 1 7 8 1 83
1 34
h d
-
- -
.

Lease ol s , 3 7 1
5 3 1
d will 6 3 6 7 3 68 d b k
.

Le ger — as oo of o riginal entry,

,

Goo 1 93 .
2 2,
b
-
.
,
alance s o n , use of , 2 6, 1 5 8
d p vi i f b
.

H azar ro s on o r, 1 1 1 33 2 alancing o f 1
,
b k
.
, ,
H eat . 5 4 , 4 02 . 4 03 oo of o e n t ry as , 1 91 .

closing of , 1 5 1 1 5 2 , 2 1 4 , 2 1 6, 2 1 8, -
2 1 9,
4 02 4 05
d
-
.

cre it o rs , 1 7 9, 1 91
m
.

cus to e rs , 1 7 9, 1 83
x
.

e p e nse , 1 8 2
f
.

opera t ac t o ry 1 8 2
m f m :
.

ing s ta te e nt , 65 . or of 14 3, 1 5 1 -
1 5 2.
illus t ration of, 46 . e ral, acco un t fo r, 201 .

m
us t ratio n o f , 1 5 4 02 4 04 .
d tOfb l
1 ,
-

relat a anc e priv ate , 1 99 206

z
o -
.

(see lso Operating )

 INDEX 4 k33
p urpo se o f ,
1 4 8. relate dt o in co m e shee t , 65 .

ruling o f , 1 4 5 . so urces o f , 6 4 , 80, 30 1 3 5

b d
1 -
.

saleS . 1 7 9. 1 83 Op tional rede m t io n on s 3 8 1

hipm h d d
-
.
,

8 e n ts , 1 Ov e r ea see ur e n
w h m
s 2. , .

i i
s t at s t cs on , 2 4
5 47 2 O ners ip clai s accounts for
kh ld
- -
.
,

s t oc 23 , 2 6 , 2 8 —
e rs , 2 0
5 31 1 12 1 1 7
b di
o
-
.
, .

78 8
s u o r nat e , 1 83
, 1
0, 1 nature of , 7 1 8
t b l
-
. .

Part nership agree ment 1 1 2

a u ar , 1
93 .

l
t ot a f 6 64 3
s on , use o 0, 1 0,
Li bili i
.
, , ,

t es , 34 3 , Paten ts 1 05 3 70
m
a 1 1 2
-
.
, ,

35 8 Payee 4 1 1
Payme t future 3 4 1 4 4 23
s
(i
.

—
.
,

S rs hip clal -
'

mS n 2 0 — .
, ,

part , 1 73
Pe t ty cash 89 236—2 38
.

.
, ,
Plant 99
Posting check for 1 4 6
.
,

b l ) 14 7, 65
dfi d 7 —
1
Loose leaf books
paya e
-
.
. ,

5 4 , 1 75 e ne 2
d
-

,
1 4 2, 1 .
, .

LOS S gain ) 1 2 1 I 4 : 1 5 1 1 5 11 . 4 6 1 ill u s trat e 5 14 1 2.

6 2 . 74 . 7 7 . 8 x. 1 34 . 2 6 4 . 2 84 . 3 7 9 m h d f 8 4 43
et o — o
,

2
9
1 2 1
f m db Pw 5 3
.
, ,

Loss ro b ad e ts , 39, 1 2 4 1 2 6, 1 3 1 , -
o er , 1 , 1 1 , 4 02 .

P mi m — b d 3 73 3 7 7
35 1 .

re u on on s , 3 80
h k 55
.
, ,

Mac ine rates , 397 , 398 o n s t oc s , 2

h P p ym
. .

Mac ine ry, 99 e n ts , 10 10 —

2 8 1 30,
. re a 3 5 5 , , 1 1 , 1
Maintenance 1 2 7, 2 95 301 , 31 0 3 24 3 2 0
w h dfi d 4 5
- -

,
Pr e se n t o rt e ne
f ml f 4 , 1 .

M or u a or, 2 0.
ill d 6 7 4 94
u s t rate 4 2 2.
bl f 4 4 —5
1 4 1 1
h di
-

, , ,
Merc lan i g as c ear n accoun t , 1 31 ta e42 , 2 o r,
P iv t l d
se
d b y di
.

fia ec t e scoun t s , 1 2 2 1 23, 1 32 r a e e ge r , 1
99 6 20
i v P d i
-
. .

as yn e n to r89 acco un t , i i f 44
ro uct o n , s t at s t cs o ,
mi d
. 2 .

as 9 xe accoun t , 0. Pro fi t an d loss , 2 6 5 , 2 6 8

d p i i f —3 5
.

e rec at on o 2 (see also Lo ss 81 gain )

i v i d 8 f d h
.
,

n en to r e 86 4 2 2 Profits con use W it asse t s , 2 63

dp d v
. .
,

M o rt gage 4 no t e s , 94 , 1 1 e en en t on co n e rsio n , 80, 8 1 , 2 25

M i ip l dmi i
.
,
un c i a 46 a n s trat on , 2 . 2 84 .

dis posit ion of , 2 9, 1 1 2 , 1 5 0, 2 63 , 3 29

Note discoun t 93 , 4 1 5 of , 337
d m vl
.

en orse e nt of , 93 efi ect of , on a ue s , 2 68 .
d f m
.

ill us t rat e
5 4 1 increase of capital ro , 2 69.
b d vd d
.
,

i
nte re s t earing, 4 1 4 -
. un i i e , 1 1 6 , 1 34 , 2 6 4
—
v alu e of , 4 1 4 4 1 7 (see also Lo ss 81 gain)
vb
. .

(see also Notes recei a le ; Notes

paya le) b Pro v isio n for hazard see
b k Purchase book 1 70 1 91
.
,

g
ot e oo , 2 3 8
Purchase ledge r 1 7 9 1 91
. .
, ,

ot es payab 1e . 1 4 . I s. 1 1 3
Purchases 1 1 8 1 1 9 24 2 3 5 1
.
, ,

(see also No te)

b
.
, , , , .

No tes re ce iv a le accoun for , 91 t

d d d
.

iscounte , 93 Railroa s tat is t ics , 2 4

d b b 7
. .

ou tf ul , accoun t fo r, 94 Rates asis , for in tere s t , 4 1 8

d 94 m hi
. .

ro t es t e 3 97 , 3 98
€
ac ne ,
m
.
, .

se e also No te ) . su
p pl e e n tary’ 397 .

Raw M at erial accoun t for, 5 3 , 64 , 96 ,

b
-

O solescence see D epreciation , .

Oil 5 2 inv en ton es of, 97, 2 86 , 3 5 1

d
.
, .

Ope ratin g state ment illustrate 64 , Real es ta te , 99

v h
-
, .

3SI Regis ter, ouc e r, 1 96 , 1 8 .

na tu re o f , 5 0—6 3 , 3 5 2 Rex“: 4 2 : 5 4 : 64 : I Q4
0

s (bu ) :
d b h
. » It
relat e to alance s ee t , 4 7 , 3 5 1—35 5 . 1 1 6, 1 2 3 , 1 3 5 , 4 02 .
4 34 IND EX
Re pairs , 1 2 7 , 2 96 3 00, 301 -
. S tat l s t S, 4 4 4 6’
-

50
-

5 2) 60: 7 11
2 —
Replace me ts , 1 2 7 , 96 3 00, 3 01 , 306
n 1 19, 1 20 1 2 3 , — 1 2 7, 1 30 1 3 5 , 1 4 6
-

3 09 3 84 . 3 8 7 3 89.
d i
1 91 . 24 2 -
24 7. 3 5 1. -

Re pro D pli
uct on , seei u cat o n , c o st of 4 05
v di ti g i h d f m ll k m hd d
.

Re se r e s n us e ro a o S t oc , see Raw at erial ; Finis e goo s

S t ockb k .

b d d b
oo ,
fo r a 8 333 ts , 1 0 , k k v
S t oc t a in g , see In e n t o rie s
dp i i
e
kh d d
. .

for S toc ol e rs le ge r , 2 5 0
’
e re c
7 6 7 33 at o n , 1 0 2 2.
d 33 , ,

k k
.

f or h azar S t oc s , see C apital s t oc

i ki g f d 334
, 3 . .

f or s n n un S t ore s , se e Raw mate rial

b d d
.
, .

n at u re o f , 2 66 , 2 84 33 2 S u o r in ate le ge r, 1 7 8—1 8 2
b k
.
, .

sec re t , 31 0 S u sc rip tio ns t o capital s t oc , 2 5 3, 26 1

m d
.
.

2cso u rce s , see Asse ts S upple e n tary le ge r , 1 7 8—1 8 2

m
. .

Re t ire e n t , 301 . S upplie s , 97 , 1 2 8 , 3 5 1 .

Re t u rns , (bis ) 35 1 S urplu s ac co un t f o r, 1 1 6 , 2 66

v h
.
, .

Re e n ue c ar gin g t, 3r1 . capital , 2 90 , 3 7 2

d d 6
.

( see also Lo ss ga n i o nat e 0

Righ p i d
, 2 .

t s , 1 05 f or 63 6 5
er o 34 9. 3 5
p mi m 5 6
.
. 2 -
2 . !
Royalt y . 5 3 . 6 4 . 3 7° re u ,
2 .

Ruling . 1 4 5 . 1 9° s p i l 66
ec a 2
m f 89 , .

s tate e nt o , 2 .

S ales — accoun t fo r, 5 5 , 60, 6 2 , 7 4 , S uspe nse ac co un t , 1 06 .

of mrt y . 98. t oo . 3 7 9 b d
Ta ular le ge r , 1 93
'

dt x
p
v bl
.

lat e o acco u n t s re ce i a e, 35 3 Ta e s . 5 4 . 1 1 5 . 2 93 . 5 1 . 4 02
3
d m d
.

re t u rn e 9, 3 5 1 Te po rary e pre ci atio n , 3 00

m m
,
1 1 . .

i i f
s t at s t cs o , 24 4 , 35
Te n colu n s tat e e n t , 2 2 8
k
1
S l b k 7
-
. .

oo 75 Tic le r , 2 4 1
d m k
a es 1 1 1
v
. .
, ,

Se cre t re se r e, 1 0. Tra e ar s , 3 6 8

S hipm d
.

e nt s , 82 . Tra ing as cle aring accoun t , 1 31 , 1 33 .

Si l
ng e e n t r 2 7. Tran spo si t io n , 1 6 1
S i ki g f d
y 4
m l ti k
.
,

n un s accu u a on of , 333 Tre as u ry s t oc , 1 0 1 , 2 5 5 , 2 60

b
n . .

as ann ui t y , 4 21 . Trial alan ce , 1 5 7—1 63 .

t f
U divid d p
p p e r o o t . 333 .
v
ro y . r
rese r e fo r , 3 3 4 n e ro fi t s , 1 1 6, 1 34 , 2 64
l m m
. .

S ix t t t —
n s e e n 2 2 3 2 27
v
-
c o u a , .

S o l e n cy . 3 1 4 . 3 4 0 3 4 2 . 3 5 5 3 5 9 Valu ation , 365 3 81

h
- - -
. .

S pace co s t , 1 3 5 , 4 02 (see al so B alance s e e t , in te rpre tation

m d v
.

S ta t e e n t e fi cien cy, 3 5 9 of C apitalizat ion ; In e nt orie s;

h m
.

e ig t c olu n, 2 28 s pec ial acco u n t s )

h b m
-
. .

mso lv oncy . 3 5 5 3 5 9 -
Vouc e r pay a le s ys te , 1 95 —1 99
-

.
.

o f afi au s , 3 5 5 3 5 8
b
-

o f as se t s an d lia ilities , 3 39—3 4 3 Wase S 3 4 . 3 9. 5 1 . 5 3 . 6 4 . 1 04 . 1 1 5 . 2 1 5

b h h . .
.

of al anc e s ee t c anges , 3 4 8— 35 0 . 2 1 9. 3 5 1 . 391 .

Ope rating . 6 3—66 . 7 4 . 8o . 3 5 1 Was t n g as se t s , 3 1 0

i
k d
.

p ro fi t and lo ss , 4 6 Wo r in process , see Goo s in process

m k
- - - -
. .

six co lu
-
n , 2 23 2 2 7 -
. Wo r ing capital, 2 60 .

s urplu s , 2 89 Writing o ff , 3 9
m
. .

Writing up, se e A ppreciatxon

0

t e n colu n , 2 2 8
-
. .