are not impossible to find. In Chicago, there is a manufacturing
corporation which has been in business for more than twenty years and is
doing a business of a quarter million dollars a year, whose books have
been kept by single entry. Not until January 1909 was an accountant
called in to change their books to a modern double entry system.
In the case cited a capital stock account was kept, and dividends were
paid in cash. The routine followed by the accountant was to first take
an inventory of machinery, material, supplies, goods in process, and
manufactured goods. Then the land and buildings were appraised at their
present value. Accounts had been kept with real estate and machinery,
but repairs to buildings had been charged to real estate, thus showing a
fictitious increase in value, and no depreciation had been charged
against machinery. There was also a merchandise account which had been
charged with all purchases and credited with all sales, so that it
furnished no information of value.
For these reasons only personal accounts, capital stock, bank account,
and cash were taken from the books in making up a statement of assets
and liabilities. In making this statement capital stock was included as
a liability and the excess of assets over liabilities represented
surplus.
The statement was entered in the journal and accounts representing each
item were opened in a new ledger. The balance was credited to surplus
account and the books were in balance. Subsequently, the different
expense accounts were opened as the transactions requiring their use
arose.
Had the directors insisted, the accountant would have been obliged to
enter real estate and machinery at the values shown in the old accounts,
but an inventory of merchandise would have been necessary in any event.
A safe rule in changing the books of a corporation to double entry is to
make a statement of assets and liabilities, including capital stock in
liabilities. Then open the necessary accounts and credit the difference
in the statement to surplus account.
[Illustration:
Journal Entries to Change to Double Entry
]
In the case referred to the following facts were shown by the books:
Cash in Office $156.72
Cash in Bank 7,264.20
Accounts Receivable 11,978.50
Accounts Payable 9,647.60
Capital Stock 75,000.00
The inventories and appraisals resulted in the following valuations:
Real Estate (Land and Buildings) $38,000.00
Machinery 27,750.00
Material 11,227.60
Supplies 648.50
Goods in Process 3,984.70
Manufactured Goods 5,290.00
A cost system was desired by the management, consequently in opening new
books it was necessary to provide for the needed accounts. The complete
entries used to change these books from single to double entry are shown
in the model journal illustrated, page 29.
[Illustration:
Ledger After Changing to Double Entry
]
[Illustration:
Ledger After Changing to Double Entry
]
EXERCISE
The books of the Star Coal Company, a corporation with a paid-up capital
of $10,000.00, have been kept by single entry. The following facts are
gathered from the books:
Cash in Bank $3,500.00
Personal Accounts Debit Balances 6,500.00
Cash in Office 200.00
Personal Accounts Credit Balances 2,500.00
An inventory results as follows:
Coal 3,750.00
Horses and Wagons 800.00
Furniture and Fixtures 300.00
Make necessary journal entries to change to double entry. Provide a
reserve of 5% for uncollectible accounts, 10% for depreciation of horses
and wagons, 10% for depreciation of furniture and fixtures. Declare a
dividend of 10% and transfer balance of profits to surplus, making all
journal entries to record these transactions.
[Illustration:
TWO HEMISPHERICAL BOTTOMS FOR 100,000-GALLON ELEVATED TANKS RIVETED
TOGETHER, SHOWING CLASS OF WORKMANSHIP NECESSARY ON WORK OF THIS
CHARACTER
Chicago Bridge & Iron Works, Chicago, Ill.
]
TRIAL BALANCES AND COMPARATIVE STATEMENTS
=14.= The construction of comparative statements is one of the most
important duties of the bookkeeper. The ability to properly classify the
accounts that make up trading and profit and loss statements, and
balance sheets is a valuable asset to the bookkeeper who aims to advance
to the highest position.
Statements of this kind, unless properly classified, are unintelligible
to the average business man. A mere statement of the balances of the
ledger accounts arranged without respect to their relationship, one to
the other, may show that the ledger is in balance, but does not present
information of special value to the manager of a business. What he
wants—and expects—is a statement from which he can readily extract
desired information; it must emphasize the salient points.
The classification of accounts has already been touched upon, but no
harm will be done by placing still greater emphasis on the importance of
this feature. For with the right classification of accounts in the
ledger, the trial balance itself will supply some very interesting
information, instead of being a mere list of balances. The following
rules should be observed in the arrangement of accounts in the ledger.
All asset accounts should be assembled in the first section and grouped
according to their classification; i. e., active, fixed, and passive or
fictitious.
The liabilities should be divided into secured or funded, unsecured or
floating, and capital; the latter includes any reserve accounts that may
be maintained.
The expense accounts should follow and should be subdivided as to
selling, general, and administrative.
The trading accounts should be grouped and divided into purchases,
in-freight, and sales.
If a manufacturing business, the manufacturing accounts should be
divided as to purchases, labor, and expenses.
The advantages of card and loose leaf ledgers are apparent in connection
with the proper arrangement of accounts. They readily lend themselves to
any desired classification, and new accounts as needed can be inserted
at any point.
For the purpose of showing some of the possibilities in the
classification of accounts, we give a few examples of model trial
balances.
TRIAL BALANCE
_Assets_
Cash $264.20
Bank 4,728.50
Accounts Receivable 6,270.00
Inventory (Jan. 1) 7,860.00
Real Estate 10,000.00
Furniture and Fixtures 5,000.00
_Liabilities_
Mortgage Payable $3,000.00
Bills Payable 5,000.00
Accounts Payable 6,120.00
Capital Stock 20,000.00
_Profit and Loss_
Advertising 475.00
Salesmen's Salaries 300.00
Traveling Expenses 189.70
General Expense 74.00
Interest and Discount 22.60
Building Maintenance 37.00
Taxes and Insurance 42.00
Salaries 525.00
_Trading_
Purchases 5,500.00
In-Freight and Cartage 96.20
Sales 7,219.00
--------- ---------
41,361.60 41,361.60
If the accounts in this trial balance were listed without regard to the
groups in which they belong, it would merely show that the ledger
balances. In its present form, it gives at a glance much valuable
information. Total expenses and expenses of each class are readily
ascertained, sales are shown, and expenses can be compared with sales.
With the exception that it does not show the changes in the account of
the inventory, this trial balance exhibits the condition of the
business.
Supposing that an inventory is taken, the following statements are
quickly prepared.
BALANCE SHEET
_Assets_
Cash $264.20
Bank 4,728.50
Accounts Receivable 6,270.00
Inventory (Feb. 1) 7,995.00
Real Estate 10,000.00
Furniture and Fixtures 5,000.00
_Liabilities_
Mortgage Payable $3,000.00
Bills Payable 5,000.00
Accounts Payable 6,120.00
Capital Stock 20,000.00
Surplus 137.70
--------- ----------
34,257.70 34,257.70
TRADING STATEMENT
Inventory (Jan. 1) 7,860.00
Purchases 5,500.00
In-Freight 96.20
----------
13,456.20
Less Inventory (Feb. 1) 7,995.00
----------
5,461.20
Sales 7,219.00
Gross Profit 1,757.80
--------- ---------
7,219.00 7,219.00
--------- ----------
PROFIT AND LOSS STATEMENT
Gross Profit $1,757.80
Advertising $475.00
Salesmen's Salaries 300.00
Traveling Expenses 189.70
General Expense 74.00
Interest and Discount 22.60
Building Maintenance 37.00
Taxes and Insurance 42.00
Salaries 525.00
Net Profits 137.70
--------- ---------
1,780.40 1,780.40
--------- ---------
The facts that sales were $7,219.00, or that the expense for salesmen's
salaries was $300.00 mean nothing in themselves. It is only when
compared that they exhibit vital facts. If we find that last month's
sales were $8,400.00 and salesmen's salaries the same as this month, we
know at once that our present selling cost is proportionately higher
than during the preceding period.
The following trial balance should be compared with the preceding and
the difference in their values, in respect to the information given,
carefully noted. The accounts in this trial balance are arranged in the
order in which they were found in the ledger.
TRIAL BALANCE
Dr. Cr.
Capital Stock $30,000.00
Sales 45,411.40
Accounts Receivable $7,190.00
Accounts Payable 2,720.00
General Expense 727.00
Salesmen's Salaries 3,000.00
Salaries, General 3,600.00
Interest and Discount 126.70
Returns and Allowances 942.20
Inventory 9,687.00
Purchases 26,250.00
In-Freight $396.40
Bank 6,470.00
Traveling Expense 1,759.00
Taxes and Insurance 236.50
Real Estate 25,000.00
Fixtures 3,000.00
Surplus 10,000.00
--------- ---------
88,258.10 88,258.10
--------- ---------
[Illustration:
Fig. 15-a. Working Balance Sheet
]
WORKING BALANCE SHEET
=15.= A form much used by accountants combines the trial balance with
the balance sheet, trading and profit and loss statements. The
compilation of the information required for this form is greatly
facilitated by a proper classification of accounts in the ledger. The
form is known as a working balance sheet.
A working balance sheet is shown in Fig. 15 a. The figures used are
taken from the last trial balance shown, and furnish a graphic
illustration of the difference between proper and improper
classification of accounts. It will be noticed that the first two
columns constitute the trial balance. Following this are columns which
classify the accounts under the headings of _Trading, Profit and Loss_,
and _Balance Sheet_. The balance of each account is extended to its
proper group.
At the bottom of the form, trading and net profits are extended as a
memorandum only. Since no inventory has been taken these figures are not
exact, but represent approximate results on the supposition that the
inventory would be practically the same as when the last inventory was
taken. Of course, if there was a noticeable change in the quantity of
merchandise in stock, an estimate would be made and taken into
consideration in making this statement of probable profits.
EXERCISE
From the following trial balance, prepare a working balance sheet
showing actual gross and net profits.
TRIAL BALANCE
Bank $8,460.00
Capital Stock $25,000.00
Sales 11,201.00
Purchases 10,000.00
Returns and Allowances 400.00
Interest and Discount earned 260.00
General Expense 425.00
Salaries 360.00
Rent 300.00
Taxes and Insurance 37.60
Selling Expense 421.00
Inventory (Jan. 1st) 8,864.00
Fixtures 2,500.00
Accounts Receivable 5,680.00
Accounts Payable 1,274.00
Cash in Office 287.40
--------- ---------
37,735.00 37,735.00
Inventory (Feb 1) 9,650.00
COMPARATIVE STATEMENTS
=16.= The trial balances shown in the preceding pages illustrate some of
the advantages of properly classified accounts. The information gained
can be made of still greater value by the construction of comparative
statements; for, as has been stated, the chief value of many of the
figures shown lies in the opportunity for comparisons. Statements which
permit of comparison of items of a like nature from month to month
furnish a valuable survey of the progress of the business.
The following is a trial balance taken from the books of a manufacturing
business, and will be used as a basis for the construction of
comparative statements.
TRIAL BALANCE
Dr. Cr.
Cash in Office $162.50
Bank 8,500.00
Accounts Receivable 7,500.00
Bills Receivable 4,500.00
Inventory, Materials (Jan. 1) 9,500.00
Inventory, Manufactured Goods
(Jan. 1) 6,000.00
Real Estate 20,000.00
Machinery and Tools 17,500.00
Furniture and Fixtures 3,500.00
Bills Payable $7,000.00
Accounts Payable 5,000.00
Capital Stock 50,000.00
Surplus 10,000.00
Undivided Profits 900.00
Advertising 1,200.00
Salesmen's Salaries 1,000.00
Salesmen's Expenses 720.00
General Expense 430.00
Interest and Discount 97.50
Salaries Administrative 900.00
Factory Expense 850.00
Factory Labor 1,750.00
Repairs to Machinery 150.00
Depreciation 175.00
Taxes and Insurance 25.00
Material Purchases 4,600.00
In-Freight and Cartage 126.00
Sales 16,491.00
Returns and Allowances 400.00
--------- ---------
89,488.50 89,488.50
--------- ---------
In Fig. 16 _a._ is shown a working balance sheet in which the accounts
as found in the trial balance are segregated in the four groups,
_Manufacturing, Trading, Profit and Loss_, and _Balance Sheet_. First,
the trial balance is entered in the two columns at the left. Next, the
manufacturing account is made up by extending the inventory of material
at end of preceding period, the manufacturing expense accounts, material
purchases and freight on same. This gives the total charges to
manufacturing account, but not the month's expenditures, for the present
inventory of material must be considered. An inventory shows the value
of material in stock to be $4,550.00. Deducting this leaves $12,626.00,
the total operating cost for the month. To find the cost of goods
completed during the month an inventory is taken of work in process, the
amount is deducted from the total operating cost and the result,
$9,126.00, represents cost of goods manufactured.
The trading account is now made up, this $9,126.00 taking the place of
purchases, and the gross profit is carried to profit and loss account.
The manufacturing, trading, and profit and loss accounts are now ready
for analysis, which is made on a percentage basis. In the analysis of
the manufacturing account, the total operating cost is used as a basis
and the different items of manufacturing cost are figured on this basis.
We find that the expense items are 23.3% and the material 76.7% of the
total which furnishes a tangible basis for a comparison of the same
items in other months. Having the percentage of each item, we can note
the fluctuations from month to month, and know where to retrench if any
item appears to be increasing too rapidly.
The basis of the analysis of the trading and profit and loss accounts is
the turnover. Figuring on this basis, we find the total expenses,
exclusive of manufacturing costs, to be 41% of the turnover, and the net
profit, 20%. The gross profit is 60% of the turnover. Ordinarily the
total expense and net profit would equal the gross profit, but in this
case there is a capital profit of $97.50 from interest earned.
Sometimes these comparative percentages are figured on the gross sales,
but the turnover is considered the proper basis, for it is less subject
to marked fluctuations. The sales in one month may show abnormal
profits, while in the next these profits may return to normal. If based
on sales, the cost percentages would fluctuate accordingly, when in
reality they may have remained stationary.
PROOF WITHOUT A TRIAL BALANCE
=17.= A comparison of the accounts in the last trial balance with the
working balance sheet shows them to be arranged in the order in which
they would appear in the balance sheet and profit and loss statements.
[Illustration:
WORKING BALANCE SHEET
]
[Illustration:
Fig. 16a. Working Balance Sheet for a Manufacturing Business
]
It should be remembered that manufacturing and trading accounts are
subdivisions of the profit and loss account, and that the profit and
loss account is a statement of income and disbursements including
differences in inventories.
If it is desired to show the actual condition of the business at the end
of each month, the inventory must be added. There may be objections to
actually closing the books each month, but the complete statement can be
made by adding the current inventories as shown in the working balance
sheet illustrated. The amounts of these inventories and the gross and
net current profits are, in such cases, memoranda only. The inventories
may be arbitrary estimates, and while the results shown may not be exact
they will be found of value for purposes of comparison; and care in
estimating inventories will greatly increase their value.
Reference to our working balance sheet shows that the profit and loss
statements—with current inventories added—agrees with the balance sheet
in one respect. The current profit exactly agrees with the difference
between assets and liabilities as shown by the balance sheet.
To prove the ledger without the usual trial balance these rules should
be followed:
_First:_ Make up trading and profit and loss statements, taking balances
direct from the ledger accounts, deducting current inventories.
_Second:_ Make up balance sheet using current inventories in listing
assets.
If the current profit and loss agrees with the difference between assets
and liabilities the ledger may be assumed to be in balance. This is, in
effect, a sectional trial balance, since the accounts in the trial
balance are all represented in the two statements. The reliability of
this proof is not affected by the fact that the inventories are
arbitrary—and perhaps inaccurate—since the same amounts are used in both
the balance sheet and profit and loss statement.
BOOK INVENTORIES
=18.= To make the foregoing plan still more effective, perpetual
inventories should be carried in the ledger. A perpetual or book
inventory is an account showing the value of merchandise received, sold,
and on hand. If an accurate account is kept of merchandise received and
sold, the perpetual inventory will show the amount that should be in
stock. To prove the accuracy of the account, it is necessary to take an
actual inventory of the merchandise in stock, just as it is necessary to
count the cash before we can know that the amount on hand agrees with
the cash account.
A detailed perpetual inventory should be kept on cards or in a loose
leaf book. A card or sheet is used for each article or class of material
carried in stock. The sheets or cards should be arranged alphabetically
according to the names of the articles. To make the system effective one
person should have charge of these records and no goods should be taken
from stock without an order or other proper record.
At the end of the month the receipts will be shown by the purchase
accounts. The deliveries will be tabulated from the cards, and the
necessary adjustments made on the ledger account. Adjustments should be
made by journal entry debiting inventory accounts and crediting trading
account for increase in inventory, and _vice versâ_ for decrease in
inventory.
Fig. 18 _a._ is a typical form of stock ledger sheet for a loose leaf
book. The form should in all cases be made to suit the requirements of
the business in which it is to be used.
Fig. 18 _b._ is a card form of stock ledger which gives more detailed
information about the article in stock. On the top line is recorded the
name of the article, size or kind, where kept, and date of verification
of the record. The second line gives the unit and maximum and minimum
limits. The unit represents the unit in which the article is bought—as
pounds, tons, dozen, feet, yards, etc. It is customary to establish a
minimum limit, below which the stock is not allowed to go before
re-ordering, and a maximum limit of a quantity sufficient for the needs
of the business. The record of receipts and disbursements includes a
detailed record of cost, including freight and cartage, and columns for
costs per unit. This makes it possible to calculate the value of the
stock in hand without referring elsewhere for prices.
In some lines of business it is possible to ascertain the quantities
sold, at the end of each month, from the sales records. This applies
where an article is sold in but one grade or size, and necessitates
keeping sales records which show sales of each article. An example is
the coal business. For such a business a card like the one shown in Fig.
18 _c._ can be used to good advantage. This provides for a monthly
record of purchases and sales.
[Illustration:
Fig. 18 _a._ Loose Leaf Stock Ledger
]
In this illustration the manner of indexing is shown. The cards are
first arranged alphabetically under the names of the articles. If there
is more than one size, the cards bearing the records of a certain
article are filed in the order of their sizes. Indexed in this manner
any card that may be desired is quickly found.
[Illustration:
Fig. 18 _b._ Stock Ledger Card
]
[Illustration:
Fig. 18 _c._ Stock Ledger Card and Indexes
]
DEMONSTRATION OF PROOF WITHOUT A TRIAL BALANCE
=19.= Taking the accounts in the following trial balance, a model ledger
is illustrated which demonstrates the manner of proving the ledger
without the aid of the conventional trial balance. It is assumed, of
course, that a book inventory or stock ledger is kept, and in this
demonstration the figures showing the change in inventory are used. Only
the ledger is illustrated, it being expected that the student will
understand the necessary journal adjusting entries.
TRIAL BALANCE
Cash in Office $575.00
Bank 8,750.00
Accounts Receivable 8,871.00
Bills Receivable 5,000.00
Inventory (Jan. 1) 12,500.00
Furniture and Fixtures 2,250.00
Bills Payable $4,000.00
Accounts Payable 3,325.00
Capital Stock $25,000.00
Purchases $6,750.00
Sales 15,000.00
Advertising 960.00
Salesmen's Salaries 450.00
Traveling Expense 190.00
Office Expense 46.50
Office Salaries 225.00
General Expense 34.20
Rent 175.00
Taxes and Insurance 21.30
Discounts Allowed 47.90
Interest Paid 33.10
Interest and Discount Earned 54.00
Administrative Salaries 500.00
On Feb. 1st the inventory shows a decrease of $3,500.00. A reserve of 3%
on accounts receivable is to be created to provide for uncollectible
accounts. To make these adjustments the following journal entries will
be required:
Trading _a/c_ 3,500.00
To Inventory 3,500.00
Decrease in Inventory
A study of this entry will show that the result is the same if we make
up the trading account by using purchases and adding or subtracting the
decrease or increase in inventory, or if the preceding inventory is
added and present inventory is deducted. The result in either case is
the turnover and the above entry makes the necessary adjustment in the
inventory account without closing the account through the trading
account.
The entry for the reserve for uncollectible accounts is
Profit and Loss 266.13
To Reserves 266.13
Reserve of 3% to provide
for uncollectible accounts.
At the end of the next month this account will be adjusted by charging
or crediting the amount necessary to maintain the total at the desired
percentage of accounts receivable.
[Illustration:
UNDERWOOD TYPEWRITERS USED IN MELBOURNE UNIVERSITY COMMERCIAL
EXAMINATIONS
]
[Illustration:
Ledger with Accounts Classified
]
[Illustration:
Ledger with Accounts Classified
]
[Illustration:
Ledger with Accounts Classified
]
[Illustration:
Ledger with Accounts Classified
]
[Illustration:
Ledger with Accounts Classified
]
REVERSE OR SLIP POSTING
=20.= To feel absolutely sure that his work is correct is the ambition
of every bookkeeper. The fear that an error will throw his books out of
balance is always present, and is only dispelled when the ledger is
proved at the end of the month.