METHODS OF POSTING
=The Journal and Ledger Records Differentiated—Posting.=—When a
correct and complete record of business transactions has been made in
the various journals, practically all the current information needed
by the business has been secured. However, because this information
is recorded in chronological order, it is not available for use. It
requires sorting, grouping, and indexing. To meet this requirement the
original chronological record must be transferred to other records
which provide for the desired grouping. The separation of the general
journal into journals for different classes of transactions such
as sales, purchases, and cash, results in making certain kinds of
information somewhat more available, but more than this is required
for business management. The original records must be grouped and
summarized under proper account titles, so that the total results for
the period may be had under review at one time. The book containing
these account titles is called the ledger, and the transfer of the
original record to the ledger is called posting.
=Time of Posting.=—Where subsidiary journals are used, it is not
customary to post all entries at the same time. The entries affecting
personal accounts, i.e., those of customers and creditors, should
be posted daily. Inquiries from customers as to their balances are
received every day, and in order that this information may be given
promptly and correctly, customers ledger accounts should be kept up to
date in every respect. This is a matter of great importance because, if
the information desired by the customer is not given promptly, or if
an error is made in giving it, thus calling for correction at a later
date, the customer’s good-will may be lost and his trade transferred
to others. For this reason personal accounts, especially those with
customers, should be posted daily, and great care should be exercised
in doing the work.
All other accounts may have their postings made periodically—once a
week or once a month—the frequency depending upon the need of the
business for the information furnished by the accounts. The flow of
cash—always of importance—is shown daily by the cash book record;
the volume of sales each day can be had from the sales journal; but
information as to expenses can usually be had only from the ledger
after completing the weekly or monthly postings.
=Methods of Posting.=—Knowing that errors in posting are easily made
and that when made they may cause great confusion, it is important for
the bookkeeper to know what kinds of errors occur most frequently,
and to study means of avoiding them. Certain methods of posting have
been found to produce a minimum of error. Some points in connection
therewith will be considered here.
One of the chief errors in posting is to make entry on the wrong side
of the account, i.e., to post a debit as a credit, or vice versa. The
use of subsidiary journals has done away with a large part of errors of
this kind, yet it is advisable to keep the following points constantly
in mind when posting:
1. The sales journal is a “charge” journal, i.e., the individual items
represent debits and must therefore be posted to the debit side of the
proper ledger accounts. The sales _summaries_, however, are credits and
must be posted as such.
2. The purchase journal is a “credit” record and all postings, except
summaries, are made to the credit side of the respective accounts.
3. In the cash receipts journal, each individual item represents a
credit, as explained in a previous chapter, and each individual item
in the cash disbursements journal represents a debit. Hence, postings
of the individual items on the debit side of the cash book must be
made to the credit side of the ledger account, and postings of items
on the credit side of the cash book must be made to the debit side of
the ledger accounts. The posting of the summary entries of the cash
book follows the debit and credit designation made at the time of
summarization. The principles here involved were fully discussed in
Chapter XIX.
4. In the Journal the debits and credits of each entry are fully
expressed, i.e., neither element is suppressed. In posting from this
record it is best to transfer all the debits consecutively and then all
the credits. The possibility of posting a debit item as a credit is
thereby greatly reduced.
=Cross-Indexing the Entries.=—An essential part of posting, in addition
to recording the date and the amount, is to cross-index every entry,
i.e., to index it both in the book of original entry and in the ledger.
The “folio” column in each book is used for this purpose. The index in
the ledger consists of the first letter of the book of original entry
followed by the page number, and the index in the book of original
entry shows the number of the ledger page to which the item is posted.
(See Form 22.)
In this way, when the indexing in both books is completed it is
possible without loss of time to trace the entry from the journal to
the ledger, and vice versa. Usually the ledger folio is entered in the
book of original entry immediately after each item is posted. When this
is done the absence of a reference number in the journal indicates that
the item has been omitted in posting. This check is frequently helpful
in tracing errors. Some bookkeepers, however, before doing any posting,
go through the book of original entry and from the account index of the
ledger enter in the ledger folio column of that particular journal the
ledger page numbers. By this method, much time is saved in finding the
account in the ledger, but a _check mark_ should be placed after each
item as soon as it is posted, to indicate the fact. Then the absence of
the _check mark_ indicates an unposted item.
[Illustration: Form 22. Cross-Indexing in Posting]
=Explanatory Matter in the Ledger.=—In posting personal accounts it is
customary to show the terms of credit in the explanation column of the
account. In this way the face of the account shows whether the customer
pays promptly or not, and affords a basis for his credit rating.
Notes Payable and Notes Receivable accounts in the ledger should show
essential data, such as due date, interest rate, etc. However, when a
separate note or bill book is used, these data are given therein and
may be omitted from the account in the ledger.
With all other accounts, except sometimes the Profit and Loss account,
little or no explanatory matter is carried. However, when a posting is
made that is at all unusual, it is well to enter explanatory matter in
the ledger. From the business man’s point of view, the ledger is the
most important book of account, and if its record can be so made as to
require a minimum of reference to original books, it serves its purpose
so much the better. Where possible, the Profit and Loss account should
carry the names of the accounts closed into it; in fact all transfers,
whether made on the face of the ledger or by journal entry, should
carry the account title and the ledger folio to which and from which
the item is transferred. It is a fundamental principle that every entry
must be indexed in such a way as to render reference to it easy at any
time.
CHAPTER XXV
THE TRIAL BALANCE AND METHODS OF LOCATING ERRORS
=The Trial Balance.=—In Chapter XIV the trial balance was defined as
a list of account _totals_, debit and credit, or account _balances_,
debit or credit, for all the _open_ accounts in the ledger. This
list is set up in two columns, debit and credit, and if the original
entries in the journals and the postings to the ledger have been done
correctly, the totals of these two columns should be the same.
Neither method of showing the trial balance has any inherent advantage
over the other. Some concerns desire the account totals to be shown
in the trial balance, as that indicates to some extent the volume of
business. This would be true of all accounts which had been opened
during the current period. As to those carried over from a previous
period little current information would be given. As a general thing,
however, the status of _customers’_ accounts is better indicated when
both total charges and total credits are shown. Where only the balance
is shown, it does not provide any basis for determining whether that
balance is normal for that particular account. In judging a request
for a further extension of credit there is a rather close relationship
between the volume of trade with a customer and the amount of his
unsettled balance.
Sometimes, even the totals of accounts that _balance_ are shown in
the trial balance, thus giving the status of _all_ accounts appearing
in the ledger. Again, concerns desirous of knowing the net amount
owing on customers’ accounts and the net amount owed on creditors’
claims, require _balances_ of all personal accounts and cash, but
debit and credit _totals_ of all other accounts. No unalterable rule
can be given. The manner of showing the accounts in the trial balance
is governed by the way in which the trial balance is to be used and
the purpose it is to serve. Manifestly, however, the trial balance
cannot give information of every kind desired by a manager. As personal
accounts are usually handled by canceling offsetting credits against
corresponding debits and carrying only balances forward, the trial
balance cannot well show at the same time both total transactions and
outstanding balances. Only in small concerns could the trial balance
give the information which in larger concerns would be gathered
statistically and furnished in addition to the trial balance.
The tendency in modern accounting is to make the ledger record so
detailed that all accounts are _currently_ “uniphase,” i.e., have
entries on but one side, and in connection with such accounts the
two methods of entering them in the trial balance are identical,
because the total of the one side of the account is at the same time
the balance of the account. It must be observed that as a matter of
course this modern tendency does not apply to personal accounts nor to
adjustment and closing accounts.
=Errors in the Trial Balance.=—The manner of entering the small pencil
footings of both sides of each account and also the account balances
previous to taking the trial balance, was explained in an earlier
chapter. This preliminary work should be done carefully so as to reduce
errors to a minimum.
It is not purposed here to discuss all the kinds of errors that find
their way into the accounting records. Errors are frequently made in
the original analysis and classification of the transaction, which, as
previously stated, result in an entirely incorrect showing of financial
condition. Such errors do not affect the balance of the books and are
not detected by the trial balance. Their detection is one phase of the
professional auditor’s work. This discussion has been qualified by
saying that _if_ the work of original and secondary entry has been done
correctly, then the ledger should prove. Some points in connection with
errors which often occur in posting will be treated here.
The equality of the two totals of the trial balance proves that for
every debit entry on the books there has been made an equal credit, or
at any rate that the sum of all debit entries equals the sum of all
credit entries; i.e., it proves only the _mathematical_ correctness of
the work.
It might happen that an item, though posted to the _correct side_ of
the ledger, has been entered in the _wrong account_. The trial balance
would not detect an error of this kind. For example, John Doe’s account
might be debited with a charge belonging to Richard Roe, both being
customers. This of course would make the books show wrong balances in
those particular accounts, but would not cause an incorrect showing
in the _total_ assets. However, more serious results may come from an
error caused by posting to the wrong account.
According to the schedules shown earlier, all transactions bring about
increases and decreases in the three main groups of accounts, viz.,
assets, liabilities, and proprietorship. A transaction resulting
in an increase of assets may have its credit in any of the three
classes—decrease of assets, increase of liabilities, or increase
of proprietorship. A credit entry in any one of these would result
in an exact offset to the debit and would therefore so far as that
transaction was concerned, result in equal debits and credits in the
trial balance; but were entry made to the wrong group of accounts, it
would bring about absolutely false results. This would be the case
if a proprietorship account were credited, resulting in an increased
profit, when the credit should have been to the liability group with a
resulting increase of the liabilities—two divergent results.
Thus, while the trial balance does not detect errors in posting to the
wrong account, it has great value in that its equality is considered
as good evidence of the correctness of the books. This is so because
errors of the kind just referred to are not of so frequent occurrence
as those involving only the mathematics of the work.
=Suggestions for Locating Errors.=—Where trial balance totals do not
agree, it is certain that one or more errors have been made somewhere.
The following suggestions may be useful in locating them:
1. If there is a difference of 1 in any column, i.e., .01, .10, 1.00,
10.00, etc., the error very likely results from wrong addition. Check
additions of the trial balance and if the error is not located there,
those of the ledger accounts must be checked as well.
2. If the difference between the two trial balance totals is an even
number, divide this difference by two and look through the trial
balance for an item of that amount but entered as a debit instead of a
credit or vice versa. The amount of the error must be divided by two
because the placing of a given item in the wrong column would result in
a difference of _twice_ this amount in the totals of the trial balance.
If the error is not located in the trial balance, it may be necessary
to look through the ledger accounts because the wrong placing may have
occurred there.
In checking through the ledger for an error of this kind, some aid is
afforded by the fact that all postings from _even_ pages in the cash
book (i.e., the cash receipts) appear on the _credit_ side of the
ledger accounts, and all postings from the _odd_ pages in the cash book
appear on the _debit_ side of the ledger accounts. If, therefore, in
any of the _credit_ reference columns in the ledger is seen a reference
like “C 13” or “C 29,” or in any of the _debit_ reference columns an
index like “C 40” or “C 58,” it is probable that the error is due to
posting to the wrong side.
3. If the mistake has not been found in this way, the trial balance
should be checked against the ledger to be sure that no open accounts
have been omitted. Examine all closed accounts to see that they balance.
4. Examine the posting index column of all books of _original_ entry to
see that no items have been omitted in posting.
5. When the totals of the trial balance are unequal, the error may lie
either in the debit total or in the credit total, or both may be wrong.
Even when the trial balance “proves,” both totals may contain the same
error. In order to determine what is the correct footing, the following
method may sometimes be applied: Take the total of the previous trial
balance, add to it the current totals from the several journals, and
deduct the total of all accounts closed during the period. The result
shows the correct footing for the present trial balance. Where the
number of accounts closed during the period is large, the work entailed
by this method may be prohibitive. The method is of easy application
only when the trial balance is taken by means of debit and credit
totals.
It may be left to the student to prove why this is a correct method for
determining the present trial balance total. Suffice it to say that it
is based on the fundamental fact that for every credit item in any of
the journals there is of necessity a debit or group of debits the total
of which corresponds with the credit item. Duplicating entries in two
or more journals must be eliminated from the journal total.
The following table will serve to illustrate the above method:
Previous trial balance total $12,967.30
Sales journal total for current period 8,429.60
Purchase ” ” ” ” ” 5,627.40
General ” ” ” ” ” 564.90
Cash receipts ” ” ” ” 2,572.60
Cash disbursements ” ” ” 1,962.75
----------
$32,124.55
Closed accounts total 1,211.41
==========
Correct trial balance total $30,913.14
6. If the difference between trial balance totals is divisible by
9, the error may be due to a _transposition_ of figures or to a
_transplacement_, sometimes called a _slide_. A transposition is an
interchange of figures, as 96 for 69, 215 for 512, 6,274 for 4,276,
etc. The first is called a simple or one-column transposition, the
second a two-column, and the last a three-column transposition.
One-column transpositions may also occur in numbers of three or more
figures, as 172 for 712, or 3,129 for 1,329.
=Transpositions.=—The following rules will be of help in locating
errors of transposition. To determine divisibility by 9, the easiest
way is to “cast out” the 9’s.
(a) If the difference between the trial balance totals is divisible
by 9 and consists of less than three figures, i.e., 9, 18, 27, 36, a
one-column transposition may be the cause of the error. Divide this
difference by 9. If the quotient is 1, the difference between the two
transposed figures is 1. If the quotient is 2 or 3 or 4, the difference
between the transposed figures is 2 or 3 or 4, etc. For instance:
Correct Transposed
Number Number Difference
54 45 9 divided by 9 = 1
87 78 9 ” ” 9 = 1
75 57 18 ” ” 9 = 2
97 79 18 ” ” 9 = 2
30 03 27 ” ” 9 = 3
85 58 27 ” ” 9 = 3
Thus the figures in the last column indicate the difference between the
figures of the original item.
(b) If the difference is divisible by 9 and consists of two significant
figures followed by one or more naughts, the error may be caused by
a _one-column_ transposition between columns of a higher order. For
instance:
The correct amount being 6,394
and the transposed amount 3,694
-----
the difference is 2,700
which divided by 9 gives 300. This indicates a transposition between
figures in the “100” and “1,000” columns, the difference between these
figures being 3. Reference to the example given will show this to be
the case.
(c) When the difference between the trial balance totals is divisible
by 9 and lies between 99 and 1,000, the error may be due to a
_two-column_ transposition. Here the middle figure of the error is
always a 9, e.g., an error of 297 resulting from writing 512 as 215.
Dividing the number (27) formed by the two outside figures of the
difference by 9, the quotient (3) is the difference between the two
transposed figures, i.e., the 5 and the 2. For instance:
Correct Transposed
Number Number Difference
514 415 99 9 divided by 9 = 1
735 537 198 18 ” ” 9 = 2
981 189 792 72 ” ” 9 = 8
Thus, the figures in the last column (1, 2, 8) indicate the difference
between the two transposed figures in the correct item. Instead of
dropping the middle figure of the difference and dividing by 9 as
above, the entire difference figure may be divided by 99 with the same
result.
(d) Similarly, when the difference is 999 or a four-figure amount with
two 9’s in the middle, a three-column transposition may be indicated
thereby. For instance:
Correct Transposed
Number Number Difference
5,174 4,175 0,999 09 divided by 9 = 1
6,392 2,396 3,996 36 ” ” 9 = 4
7,081 1,087 5,994 54 ” ” 9 = 6
the figures in the last column (1, 4, 6) again indicating the
difference between the transposed figures in the original.
Instead of dividing the number formed by the outside digits (9, 36, 54)
by 9, we might divide the full amount of the difference (999, 3,996,
5,994) by 999; this would give the same result.
The reason for the divisibility of this difference by 999 in an error
of this kind is apparent when a number is given algebraic notation
instead of Arabic. The Arabic number 2,197 expressed algebraically
would be 2,000 + 100 + 90 + 7. Generalizing, we may formulate any
number of four figures by 1,000a + 100b + 10c + d, in which a, b, c,
and d may have values from 0 to 9 inclusive. A transposition between
the thousands and units digits, the “a” and the “d,” would result
in the following number: 1,000d + 100b + 10c + a. The error would
therefore be:
Original number 1,000a + 100b + 10c + d
Transposed number a + 100b + 10c + 1,000d
----------------------------
Difference 999a - 999d
This error is plainly divisible by 999, and the resulting quotient
(a-d) is the difference between the two transposed digits.
It may be shown similarly why 99 is a divisor of the error cited under
case (c) above.
=Transplacements.=—A transplacement or slide occurs when some or all
of the digits of a number are moved one or more places to the right
or left without change in the order of the figures; for instance,
736 written as 73.60, as 7.36, or as 700.36. The first is called a
one-column slide, the second and third two-column slides. The error
caused by a one-column slide is always divisible by 9, a two-column
by 99, a three-column by 999, etc. The division by 9, 99, 999, etc.,
disregarding decimals, always gives the figures whose transplacement
has caused the error. Thus the error caused by writing 736 as 73.60
is 662.40, which divided by 9 is 736; or 736 written as 7.36 produces
an error of 728.64, which divided by 99 gives 736; or 736 written as
700.36 causes an error of 35.64, which divided by 99 gives 36, the
part transplaced. The reason is similar to that given above for the
transposition.
When a whole number of dollars is written as cents, the resulting error
is divisible by 9 and moreover the cents _added to_ the dollars gives
99 in each case. For instance in writing:
.73 instead of 73.00, the resulting error is 72.27
.58 ” ” 58.00, ” ” ” ” 57.42
.16 ” ” 16.00, ” ” ” ” 15.84
When the error in the trial balance is of this kind, the amount
transplaced may be found by subtracting the cents of the error from
100. In the above examples this difference would be 100-27, 100 -42,
100-84, or 73, 58, and 16 respectively, which are in each case the
figures of the transplaced amount as seen in the example. Having
determined this, the trial balance and ledger accounts should be gone
over to look for a slide of the given number.
=Checking the Postings.=—From the above discussion, the impossibility
of determining in all cases the nature of the error is quite
evident—particularly as to whether it is one caused by a transposition
or a slide. Unless the kind of error is readily discernible, it is
usually advisable to employ the method of checking, i.e., going over
all the work of posting to determine its correctness—or other methods
to be discussed in Chapter LI. After all, careful work in making the
record with legible figures and in proving additions and subtractions,
wherever possible, more than pays for itself in the time saved hunting
for errors caused by slovenly and inaccurate work.
CHAPTER XXVI
THE CLASSIFICATION OF ACCOUNTS
=Accounting Routine Related to Account Classification.=—The basic
relationships between the accounts and the statements of financial
condition were explained in Chapter IX, where a chart of accounts
was given to illustrate the fundamental equation of the ledger. The
complete record-making routine, comprising the use of business papers
for memorandum entry, the use of the journals for the first formal
record of transactions, and the use of the ledger for the classified
entry, has now been explained. There remain, however, two classes
of entries, the adjusting and closing, whose relationship to the
journal-ledger routine has not yet been fully discussed although their
relationship to each record has been separately considered. Since
the closing of the books contemplates the drawing up of financial
statements and since all record-keeping must have in view from the
very beginning a proper classification of accounts giving the desired
information to be reflected finally in the statements, it seems best
at this point to consider some phases of account classification before
proceeding with a detailed explanation of the method used in adjusting
and closing the books.
=The Need for Classification.=—As explained in preceding chapters,
accounts may be broadly classified into the three main divisions of
assets, liabilities, and proprietorship. This threefold division,
however, is inadequate for the purpose of presenting detailed
information as to the kinds of assets owned by the proprietor, the
nature of his liabilities, and the causes that have produced increases
or decreases of proprietorship. Subdivisions of the three main
groups must, therefore, be made, the minuteness of subdivision being
determined by the amount of detailed information desired.
One of the main purposes of account-keeping is to summarize results on
the financial statements. The items which appear on these statements
represent the balances of one or more groups of accounts. Items, for
instance, such as “Land” and “Buildings,” may each represent a single
ledger account recording the value of the land, the factory, and the
office buildings respectively; whereas the item “Accounts Receivable”
represents the group of customers’ accounts, the number of which may
run into the hundreds and even thousands and which may be kept in
a ledger devoted exclusively to the recording of their detail. The
reasons for grouping assets and liabilities on the basis of degree of
liquidity, and the advantages resulting from such grouping when drawing
up the summary statements of the period, were discussed and illustrated
in Chapter III.
It is evident from the above that the classification or grouping of the
ledger accounts is reflected in the items on the financial statements;
and that, conversely, the kind of information which it is desirable to
present on the statements will to a large extent govern the groupings
in the ledger. This dependence of the account titles and groupings in
the ledger upon the end and aim in view makes it necessary to draw
up the original classification with great care. To aid in securing a
record correct in the first instance, certain fundamental groupings or
classification of accounts must always be made.
=Basic Classification.=—While other groupings of accounts have been
made, the classification used here has been from the beginning a
three-phase one, consisting of an asset, liability, and proprietorship
nomenclature. The third group of accounts, proprietorship, is further
divided into the two subclasses, temporary and vested, as explained in
Chapter XII. At the end of the fiscal period, after the ledger has been
closed, there appear only asset, liability, and vested proprietorship
accounts; but during the fiscal period, the temporary proprietorship
accounts come into being and certain asset and liability accounts take
on a mixed character resulting from the method in which the record is
kept. This method is dictated not by a pure accounting theory, but by a
theory designed to accommodate itself to the practical requirements of
the average business. It is because the practical method of making the
record falls short of the theoretically exact method, that adjustments
must be made before summarizing.
For this reason, a record is not made daily of the portion of
assets which has been consumed each day, but the asset accounts are
adjusted at the close of each fiscal period to separate their asset
and proprietorship elements. Also, when a note is discounted at
the bank, its entire face value is set up as a liability. From the
standpoint of accurate accounting, however, the face value of the
note overstates the liability for the current fiscal period, if the
note falls due in the following period, by the amount of the prepaid
interest charge belonging to that next period. Only on the due date
of the note does the record show the true condition of the liability.
Thus, a “practical” method of keeping the record necessitates the use
of certain “mixed” accounts. Fundamentally, however, the three-group
classification given answers every necessary purpose.
=Fundamentals of a Good Classification.=—In judging the fitness of
a particular classification, the end and purpose for which it is
made must always be the criterion. Any classification of accounts
must, therefore, have in view the fact that all accounts lead up to
the balance sheet and profit and loss statement, and that they must
provide the data necessary for the summaries of these statements.
Classifications may be made from many different viewpoints and for
many different purposes, but a classification which is logical and
carries titles clearly indicating the purpose for which the accounts
are intended, and which therefore needs little or no explanation, is
a satisfactory classification. The three-group classification—assets,
liabilities, and proprietorship—meets these requirements.
A two-group classification—real and nominal—is frequently used. Under
this classification, asset and liability accounts are grouped as
real, and proprietorship accounts comprise the nominal class. This is
the standard classification. The student should be familiar with it,
although the meaning of the groups is not so apparent as in the case of
the three-group classification, referred to above.
=Classifying Business Transactions.=—When making the record of business
transactions on the books of account, it is necessary, first, to
determine the main account group or groups affected by the transaction.
After this is done, it is usually easy to determine which particular
account in the group is affected. Great care must be used in the
determination of the main groups, since a wrong classification results
in an incorrect showing in the summary statements at the close of the
fiscal period.
To illustrate, in Chapter XIII reference was made to the fundamental
distinction between capital and revenue expenditures. When making the
original entry of some transactions this difference is frequently lost
sight of and what should be charged to an asset account is charged to
some expense account or vice versa. This charging to an asset account,
of items which are rightly expense items and therefore cut down the
proprietorship element of the business, is one of the easiest ways of
inflating the profits for a period and so of making a better showing
than would be the case if the facts were recorded correctly.
Correct classification of transactions is a matter of vital
importance. An accurate analysis of every transaction must therefore
be made before bringing it on the books. After determining the _main_
group of accounts in which record is to be made, further analysis as
indicated above is necessary in order to fit a particular transaction
into its place under a suitable _account_ title belonging to the main
group.
=Detailed Classification.=—In dealing with account classification, the
more detailed groupings must also be considered. Such consideration
deals, (1) with account titles in detail and even with the kinds and
classes of transactions to be recorded under particular titles, and
(2) with the arrangement and use of these detailed accounts in the
various sections of the summary statements at the close of the fiscal
period. Certain broad principles have already been laid down which are
to be followed in the selection of the account title, and the objection
to the inclusion of unlike items under the same title, and the care
to be exercised against a more detailed analysis than is required by
the needs of the business, have also been explained. That system of
accounts which groups only one kind of data under each particular
account title is better than a system which mixes its records by
grouping dissimilar data under a single head. Yet, caution is always to
be exercised against too great detail and an unnecessary multiplication
of accounts. Oftentimes essential facts and forces of business activity
are lost sight of in a maze of detail.
Below is given a somewhat detailed classification of accounts in
accordance with the two considerations stated above. No attempt is
made at completeness; only the more usual titles are presented. This
classification will be used throughout the rest of the volume.
CHART OF ACCOUNTS
_Asset Accounts_
CURRENT
Cash
Petty Cash
Notes Receivable
Accounts Receivable
_Reserve for Doubtful Accounts_[3]
Merchandise Inventory
Stocks and Bonds (for current investment)
Accrued Income
DEFERRED CHARGES TO OPERATION
Shipping Supplies
Insurance
Interest
Office Supplies
Etc.
FIXED
Furniture and Fixtures
_Depreciation Reserve Furniture and Fixtures_
Delivery Equipment
_Depreciation Reserve Delivery Equipment_
Buildings
Depreciation Reserve Buildings
Good-Will
Etc.
_Liability Accounts_
CURRENT
Notes Payable
Accounts Payable
Dividends Payable
Accrued Expenses
DEFERRED INCOME
Rentals
Interest
Subscriptions
Etc.
FIXED
Mortgages Payable
Long-Time Notes Payable
Bonds Payable
Debentures
Etc.
_Proprietorship Accounts_
VESTED
Proprietors, Capital
Proprietors, Personal
Capital Stock
Surplus (Profit and Loss)
Reserves of Profit (not valuation items)
TEMPORARY
Income, Operating
Sales
_Sales Returns and Allowances_
_Cost of Sales_:
Initial Inventory
Purchases
Inward Freight and Cartage
_Purchases Returns and Allowances_
_Final Inventory_
Expenses, Operating
Selling Expenses
Salesmen’s Salaries and Commissions
Salesmen’s Traveling and Entertainment Expenses
Delivery Expense (wrapping, shipping room, horse and
motor expenses, delivery salaries, etc.)
Outward Freight
Sales Management Salaries and Expense
Advertising
Depreciation on Salesroom Equipment,
Delivery Equipment, etc.
Sundry Selling Expenses
General Administrative
Officers’ Salaries
General Salaries
Stationery and Printing
Legal Expense
Postage
Telephone and Telegraph
Sundry Office Expense and Supplies
Depreciation on Office Building, Equipment, etc.
Light, Heat, and Power[4]
Taxes
Insurance[5]
Financial Management Expense and Income
Interest Expense
Rent[6]
Bad Debts
Sales Discount
Collection Expenses
_Interest Income_
_Purchase Discount_
Non-Operating Expense
Non-Operating Income
[3] The items in italics in this chart are to be handled as subtraction
items from the account below which they are placed or from the group in
which they appear.
[4] Light, heat, and power expense should in strict theory be
distributed over the departments using it; the selling department to be
charged with its share and the general administrative with its share.
Where such procedure is difficult or undesirable, the expense is best
classified as above.
[5] These items are sometimes distributed partly to Selling and partly
to General Administrative where an equitable basis for distribution can
be determined.
[6] These items are sometimes distributed partly to Selling and partly
to General Administrative where an equitable basis for distribution can
be determined.
=Method of Arranging Accounts in the Ledger.=—As to the order of
arrangement of accounts in the ledger, one principle governs: Arrange
all accounts in such a manner as to facilitate the drawing up of the
final statements. Thus, assets should come first, arranged in the
degree of their liquidity or availability, and each valuation account
following its particular asset. Liabilities, coming as they do after
the asset accounts, should be arranged in a similar order. Next should
come the proprietor’s accounts, the summary Profit and Loss account,
and the income and expense accounts in the order in which they are to
be used in the statement of profit and loss. Where only one ledger is
kept, the personal accounts receivable and payable are usually recorded
in distinct groups, after all the other accounts, towards the back part
of the ledger rather than in the position required by the principle
just stated.
A trial balance taken from a ledger in which the order of arrangement
of the accounts is strictly in accordance with this principle, is
called a “classified trial balance.”
CHAPTER XXVII
THE WORK SHEET AND SUMMARY STATEMENTS
=Procedure Preliminary to Adjusting and Closing.=—Before tracing
the detail of the adjusting and closing entries through the books,
explanation will be given of the usual method of insuring the accuracy
of this periodic work preliminary to the formal closing of the books.
This preliminary work comprises the technical procedure employed in
drawing up the balance sheet and profit and loss statement before the
books are closed. It thus brings about a summarization of the period’s
results made _outside_ the books instead of _in_ them. Therefore, a
proof of the accuracy and correctness of the work of adjusting and
closing can be secured before the summarization entries are made in the
books. After proof of accuracy has thus been secured, the statements
are used as a guide in making the formal adjusting and closing entries.
The information for the balance sheet and profit and loss statements
comes mostly from the regular monthly trial balance taken at the end
of the period just _before_ the adjusting entries are made. This trial
balance must of course be modified in order to include the effect of
the adjustments. For the purpose of incorporating the adjustments
in the trial balance and then separating the accounts into the two
groups, namely, those which are to be summarized in the profit and
loss statement and those which are to be used for the balance sheet, a
regular form is used known as the accountant’s “work sheet.” This form
and the method of its use will now be explained.
=The Work Sheet.=—For the work sheet “analysis” paper is used, which
is ruled in its simple form as shown in the illustration on pages 226
and 227, space being provided for:
1. Account titles
2. Trial balance items
3. Adjustment items
4. Profit and loss items
5. Balance sheet items
For the purpose of illustration, a trial balance and a list of
adjustments are given below, followed by the work sheet and the
necessary explanatory detail.
The student must understand that the work sheet is no part of the
formal accounting record, nor is the procedure employed by it a part
of the formal work of closing the books. It is only a means by which
a rough summarization of the period’s results may be made _outside_
the regular accounting records and all the data needed for the formal
statements be brought together. Its purpose is to secure and prove
the accuracy of results before the formal adjusting and closing work
is entered on the books. Where many or complicated adjustments are to
be made, with a resulting probability of error and difficulty in an
orderly arrangement of the adjusting entries, the method of the work
sheet is almost indispensable. The formal adjusting entries are then
made up from the adjustment columns of the work sheet.
=Illustration=
TRIAL BALANCE, December 31, 19—
1 New York National Bank $ 17,600.00
2 Petty Cash 100.00
3 Notes Receivable 15,000.00
4 Trade Customers 35,000.00
5 Reserve for Doubtful Accounts $ 875.00
6 Liberty Bonds 3,000.00
7 Merchandise Inventory 30,000.00
9 Office Furniture and Fixtures 2,800.00
10 Depreciation Reserve Office Furniture and
Fixtures 700.00
11 Store Furniture and Fixtures 12,000.00
12 Depreciation Reserve Store Furniture and
Fixtures 3,000.00
13 Delivery Equipment 4,500.00
14 Depreciation Reserve Delivery Equipment 2,250.00
15 Buildings 35,000.00
16 Depreciation Reserve Buildings 7,000.00
17 Land 15,000.00
18 Notes Payable 12,000.00
19 Trade Creditors 25,000.00
20 Mortgages Payable 17,500.00
21 U. R. Smart, Capital 90,000.00
22 U. R. Smart, Personal 10,500.00
24 Sales 195,000.00
25 Sales Returns and Allowances 1,850.00
26 Purchases 135,000.00
27 Purchases Returns and Allowances 5,400.00
28 In-Freight and Cartage 1,350.00
29 Salesmen’s Salaries 13,500.00
30 Selling Supplies and Expense 1,600.00
31 Advertising 4,800.00
32 Out-Freight 400.00
33 Delivery Expense 3,300.00
34 Office Salaries 5,000.00
35 General Expense 2,000.00
36 Office Expense 4,500.00
37 Printing and Stationery 750.00
38 Taxes 2,840.00
39 Insurance 1,750.00
40 Interest Cost 900.00
41 Collection and Exchange 85.00
42 Sales Discount 850.00
43 Interest Income 1,500.00
44 Purchase Discount 1,300.00
45 Sub-Rentals Income 650.00
46 Special Police on Strike Duty 1,200.00
----------- -----------
Total $362,175.00 $362,175.00
=========== ===========
ADJUSTMENT DATA, December 31, 19—
Inventory of Merchandise $26,500.00
Estimated Depreciation:
Office Furniture and Fixtures, 10% of original cost
Store Furniture and Fixtures, 10% of original cost
Delivery Equipment, 16⅔% of original cost
Buildings, 4% of original cost
Doubtful Accounts, ¼% of Net Sales
Accrued Income:
Interest Accrued on Notes Receivable 150.00
Deferred Expenses:
Insurance Unexpired 250.00
Advertising Paid in Advance 300.00
Printing and Stationery Supplies on hand 150.00
Selling Supplies and Expense 200.00
Accrued Expenses:
Taxes 340.00
Salesmen’s Salaries 175.00
Interest on Notes Payable 50.00
Special Police on Strike Duty 150.00
Office Salaries 100.00
Deferred Income:
Sub-Rentals Paid in Advance 50.00
The initial step in the use of the work sheet is to enter the trial
balance in the first two columns, as shown on pages 226, 227. The
accounts in the trial balance should be arranged in classified form
before being entered on the work sheet, as this aids greatly in
drawing up the statements. The various adjustment entries, debit and
credit, which are almost the same as in the ledger, are then entered
in the adjustment columns. The work sheet may be looked upon somewhat
as a ledger, entries in whose accounts are to be made horizontally
instead of vertically. The analogy to the ledger cannot be carried
too far, however. It should be noted that when it is necessary to
adjust any account in the trial balance by increasing its debit, this
is accomplished by entering the item in the debit adjustment column
on the same line with the account to be adjusted. On the other hand,
if a subtraction is to be made from a debit amount shown in the trial
balance, the amount to be deducted is entered in the credit adjustment
column. A complete debit and credit entry must be made in the
adjustment columns for each adjustment.
There is given below a debit and credit _list_ of these entries
as they are to appear on the work sheet. The manner of making
and cross-indexing these adjustment entries is indicated by the
cross-reference letters used. It will be noted that, while in most
instances these entries are exactly the same as the formal adjusting
journal entries, there is a difference in the case of the merchandise
inventories.
The student should understand that the _list_ of adjustment entries
given below does not appear anywhere in the formal accounting records.
It is shown here in _journal form_ only to indicate the debits and
credits of the entries to the work sheet. Entries of the adjustment
transactions are always made direct to the work sheet, never being set
up in journal form. Each of these entries should be traced into the
adjustment columns of the work sheet. The figures in parentheses just
preceding the debit and credit amounts are, of course, not _ledger
folios_ but refer to the similarly numbered items on the work sheet so
that the student will have no difficulty in tracing them.
(a) Merchandise Inventory—Final ( 8) 26,500.00
(a) Merchandise Inventory—Final ( 8) 26,500.00
(b) Depreciation Office Furniture and
Fixtures (51) 280.00
(b) Depreciation Reserve Office
Furniture and Fixtures (10) 280.00
(c) Depreciation Store Furniture and
Fixtures (51) 1,200.00
(c) Depreciation Reserve Store
Furniture and Fixtures (12) 1,200.00
(d) Depreciation Delivery Equipment (51) 750.00
(d) Depreciation Reserve Delivery
Equipment (14) 750.00
(e) Depreciation Buildings (51) 1,400.00
(e) Depreciation Reserve Buildings (16) 1,400.00
(f) Bad Debts (50) 482.88
(f) Reserve for Doubtful Accounts ( 5) 482.88
(g) Interest Income (Accrued) (52) 150.00
(g) Interest Income (43) 150.00
(h) Insurance (Deferred) (53) 250.00
(h) Insurance (39) 250.00
(i) Advertising (Deferred) (53) 300.00
(i) Advertising (31) 300.00
(j) Printing and Stationery (Deferred) (53) 150.00
(j) Printing and Stationery (37) 150.00
(k) Selling Supplies and Expense (Deferred) (53) 200.00
(k) Selling Supplies and Expense (30) 200.00
(l) Taxes (38) 340.00
(l) Taxes (Accrued) (54) 340.00
(m) Salesmen’s Salaries (29) 175.00
(m) Salesmen’s Salaries (Accrued) (54) 175.00
(n) Interest Cost (40) 50.00
(n) Interest Cost (Accrued) (54) 50.00
(o) Special Police on Strike Duty (46) 150.00
(o) Special Police on Strike Duty
(Accrued) (54) 150.00
(p) Office Salaries (34) 100.00
(p) Office Salaries (Accrued) (54) 100.00
(q) Sub-Rentals Income (45) 50.00
(q) Sub-Rentals Income (Deferred) (55) 50.00
[Illustration]
[Illustration: Form 23. Work Sheet]
In order to set up some of these adjusting entries, it becomes
necessary to add some new accounts on the work sheet. The student will
note these appended at the end of the regular trial balance shown on
the work sheet. They are, first, Bad Debts and Depreciation, under the
latter of which the detail of the fixed assets subject to depreciation
is given, and then follow in order the balance sheet classifications
of Accrued Income, Deferred Charges to Operation, Accrued Expenses,
and Deferred Income, provision being made to show under each of these
titles the detail of the accounts involved.
It will be noted that some of the adjusting entries are not set up
in the adjustment columns in exact accord with the way in which the
same items are entered on the ledger, but rather in accord with the
use to be made of the particular items in drawing up the periodic
statements. The purpose of the columns is not to make the adjustments
and summarization in a formal manner as is done in the books, but to
gather together all the adjusting data so that a correct separation
of the balance sheet and profit and loss items can be made for use
in the formal summary entries and in the statements. Thus, instead
of transferring the initial inventory to the Purchases account, it
is allowed to remain under its own title, because it will be needed
as a separate item in drawing up the cost-of-goods-sold section of
the profit and loss statement. Similarly, the final inventory is not
shown deducted from Purchases, but is set up, debit and credit, in the
adjustment columns, opposite the title “Merchandise Inventory—Final,”
which is inserted immediately following the account “Merchandise
Inventory—Initial.” At the time of summarizing, the debit item goes
into the balance sheet, while the credit item goes into profit and
loss. This method of handling provides in the profit and loss columns
the detailed information needed for the cost-of-goods-sold section of
the statement, comprising Initial Inventory, Purchases, In-Freight,
Purchases Returns and Allowances, and Final Inventory.
The bad debts adjustment is entered in the adjustment columns as a
debit to Bad Debts and a credit to Reserve for Doubtful Accounts.
Similarly, the depreciation entry is shown as a debit to Depreciation
in detail, the credits going to the various depreciation reserve
accounts.
The adjustments covering deferred charges are shown as debits to
the “Deferred Charges to Operation” classification in detail, the
offsetting credits being to the various expense accounts as shown in
the trial balance. These credits in the adjustment column will, when
combined with the corresponding debit in the trial balance column,
indicate the net amount of the charge to profit and loss. The other
classes of adjustment entries follow the same procedure.
After all adjustments have been made, a complete distribution of the
items in the trial balance and adjustment columns is made either to the
profit and loss or the balance sheet columns. The difference between
the profit and loss columns will thus show the net profit or loss for
the period and must be transferred to the balance sheet as a vested
proprietorship item. Instead of being shown as a definite addition
to the proprietor’s capital, the transfer is indicated as the final
item on the work sheet, being a debit in the profit and loss columns
to balance them, and a credit in the balance sheet columns. This
difference, $14,747.12 in our illustration, constitutes the net profit
for the period, and when added to the credit side of the balance sheet
columns should give a total equal to the total of the debit balance
sheet column. This transfer of net profit effects a proof of the
accuracy of the work.
When this proof has been secured, the formal profit and loss statement
should be drawn up, all of the material for which will be found in the
profit and loss columns of the work sheet, where it is arranged in
almost the exact order needed for the formal statement. The information
for the balance sheet is found similarly in the balance sheet columns,
all of the detail being properly grouped but a rearrangement of the
order of some items being necessary. Thus, while the detail of the
deferred charges to operation has been gathered together in one place
in the work sheet, in the formal balance sheet this group of items must
appear immediately after the current asset section. See page 234 for
the profit and loss statement and page 232 for the balance sheet.
It is thus seen that the work sheet provides a convenient method of
passing through the trial balance the adjustments necessary to a
summarization of the results of the period and of effecting a rough
summarization of these results. The work sheet becomes the source of
information for the formal statements and a preliminary stage to the
adjustment and closing of the books.
The purpose of the formal adjusting entries and the manner of framing
them are fully explained in Chapter XXVIII. After the information on
which they are based is brought together and entered on the work sheet
and after the work of summarization has been proven, the adjustment
columns of the work sheet are made the source for these entries. The
formal adjusting entries as they appear in the journal are given on
page 245. They should be compared with the debit and credit list for
the work sheet as given above and the differences noted.
=Need for the Summary Statements.=—Before setting up the formal journal
entries necessary to adjust and close the books, the balance sheet
and statement of profit and loss will be shown. These two periodic
statements do not form an integral part of the books of account. They
are drawn up periodically and submitted to the proprietor, because
the latter does not always have ready access to the books of account
and often lacks sufficient knowledge of accounting to interpret
correctly the information shown by the journal and ledger. The periodic
statements are intended to show the results of the year in a concise,
non-technical form, so that a proprietor, even though not versed in the
science of accounts, can readily understand them.
=The Two Forms of Balance Sheet.=—The balance sheet may be arranged in
either of two forms. The first form (illustrated on page 232) follows
the principles already laid down in Chapter III. This is called the
“report form” and is based on the proprietorship equation when written
Assets - Liabilities = Proprietorship
Being non-technical, it is perhaps more favored by executives not
versed in technical account-keeping.
The second form (illustrated on page 233) follows the proprietorship
equation when written
Assets = Liabilities + Proprietorship
This form shows financial condition by means of the account form, the
subtraction of the liabilities from the assets being indicated by
their respective debit and credit positions in the account. It will be
noticed, however, that this method of showing the subtractions is not
strictly adhered to, some deductions being actually performed, as for
instance in the case of the valuation reserves which are subtracted
from the respective assets to which they apply. This is done in order
to render the statement more intelligible. The same principles govern
the arrangement of the items and groups of items as in the first form,
viz., degree of liquidity for the assets and a similar arrangement
for the liabilities. The account form is used almost always when the
statement is submitted for publication.
=Two Forms for the Profit and Loss Statement.=—The statement of profit
and loss is also made up in either of two forms, called the report form
and the account form, based on the same principles as the two forms
of balance sheet just discussed. Explanation of the report form has
already been given in Chapters V and VI. The account form (illustrated
on page 235) is very nearly a transcript of the ledger Profit and Loss
account. It differs chiefly in that the information concerning “sales”
which is summarized in the Sales account on the ledger is here set up
in an inner column and shown summarized on the face of the statement.
The information as to cost of goods sold is similarly summarized.
[Illustration]
[Illustration: Form 24. Balance Sheet—Report Form]
[Illustration: Form 25. Balance Sheet—Account Form]
[Illustration]
[Illustration: Form 26. Statement of Profit and Loss—Report Form]
[Illustration: Form 27. Statement of Profit and Loss—Account Form]
=Interim Statements.=—In many businesses, where the fiscal period
is six months or a year, it is often desirable and important that at
least approximate results be secured at interim periods. This can
be accomplished by means of the work sheet without entailing the
burdensome work involved in a formal closing of the books. At the time
of the taking of any trial balance, the work sheet can be used as a
means of making the necessary adjustments before securing results as
to financial and operating condition. Accurate results would of course
require as careful work as at the end of the regular fiscal period. The
purpose of interim summaries is to indicate trends rather than to show
accurate and definite results. At such times, therefore, the inventory
is usually estimated, oftentimes the same amount being used as at
the beginning of the period. Accruals and deferred items are not so
carefully estimated nor in so great detail. Bad debts and depreciation
must be taken into account. In this way approximate results for any
period—frequently every month—may be secured without interfering with
those for the regular fiscal period.
CHAPTER XXVIII
ADJUSTING AND CLOSING THE BOOKS
=Adjustment Entries—Kinds and Place of Record.=—In Chapter XV it was
shown that the records as they are usually kept do not reflect the true
condition of the business at any time _during_ the fiscal period. For
this reason before summarizing the book record for the current period
it is necessary to bring onto the books a number of entries the purpose
of which is to “adjust” the mixed accounts and thus make the ledger
reflect the true condition. These adjustments may be effected by entry
made directly on the face of the ledger, but it is better to run them
through the journal, thus making it possible to give ample explanation.
A further advantage of first recording the adjustment entries in the
journal is that in this way all such entries appear in one place in
the books of account. The ledger should always be kept as a book of
_secondary_ entry, with supporting data in some book of _original_
entry.
Seven types of adjustment entries are needed for the ledger of a
mercantile concern. They are:
1. Merchandise Inventory
2. Depreciation
3. Bad Debts
4. Accrued Income
5. Deferred Expenses
6. Accrued Expenses
7. Deferred Income
All such items must be given consideration and entered upon the books
before the final results for the period can be correctly shown. It is
oftentimes necessary to make correcting entries for items the improper
entry or the omission of which are not detected until the close of the
fiscal period. These errors, whenever discovered, should of course be
corrected at once. Because entries of this kind are in the nature of
adjusting entries, consideration of them is included in this chapter.
It may be observed here that if a business manager has an intelligent
insight into the development of his enterprise, and carefully watches
the volume of sales, purchases, and expenses, he may be able to
forecast with some degree of accuracy the approximate results for a
given period; but only by making the actual count of stock now on hand
and by carefully estimating the classes of items just mentioned, can
accurate and dependable results be assured.
All these types of adjustment entries are not always found in every
such business, however. Each type will be discussed in turn.
=Inventory of Stock-in-Trade.=—One of the most important adjustment
entries is that by which the inventory of stock-in-trade is set up
separately on the books. By reference to Chapter XIII it will be
seen that none of the accounts connected with merchandise, viz.,
purchases, sales, returns, etc., contain any definite and up-to-date
information as to the value of merchandise on hand. To determine the
gross profit on sales this value must be known, and until the gross
profit is determined the net profit cannot be ascertained. The balance
sheet, the statement of profit and loss, and the Profit and Loss
account, call for this information. Therefore, before these statements
are made, and before the books can be closed, the value of goods on
hand must be determined. The process by which this is done is called
“inventory-taking.”
Without discussing the detail of a system of inventory-taking, three
fundamental principles can be stated relative thereto:
1. Make sure that all goods belonging to the firm on
the date of the inventory are included.
2. Make equally sure that there is no duplication of
count, i.e., that no goods are counted twice.
3. See that the condition of the goods, viewed from
the standpoint of salability, is indicated.
Two factors of importance enter into the determination of the
inventory, viz., the quantity of the goods on hand and their value per
unit. Inaccuracy in either factor may lead to a gross error in the
final amount. By falsifying the count of the goods the inventory can,
of course, be inflated. A usual and more elusive method, often resorted
to, consists in raising the price per unit, since the addition of
even a fraction of a cent per unit may have the effect of converting
an actual loss into an apparent profit. Without further indication of
the reason for such valuation, it is now generally required that the
inventory be valued on the basis of cost, or market if market is lower
than cost. The term “cost” should include all costs, incurred up to the
point of placing the goods in condition ready for sale, not only the
purchase price, but also duties, freight, drayage, insurance during
transit, etc.
After the amount of the inventory has been determined, it is placed
on the books. However, before this is done it is necessary that the
Merchandise Inventory account be cleared of the goods on hand at the
_beginning_ of the period by transferring the amount to Purchases. The
following journal entry effects the transfer:
Purchases
Merchandise Inventory
To transfer the opening inventory
to Purchases.
The posting of this entry automatically clears the Inventory account
and, by its addition to Purchases, causes that account to show the
“total goods to be accounted for.” Purchases, as it now stands,
contains both the cost of goods which have been sold during the current
period and those which are still on hand as shown by the inventory just
taken. Accordingly, to separate the two items, the following journal
entry is necessary:
Merchandise Inventory
Purchases
To set up the inventory of
goods now on hand.
This entry when posted shows in the Merchandise Inventory account the
asset element, and leaves in the Purchases account the cost of the
merchandise sold. The effect of these two entries, then, is to adjust
the books to true conditions so far as the merchandise is concerned.
=Depreciation, and Loss on Doubtful Accounts.=—As indicated in Chapter
XV, the amount of depreciation of particular assets and the losses due
to bad and doubtful accounts are carefully estimated at the close of
the fiscal period. The individual depreciation items are all summarized
in a _single_ depreciation account—an _expense_ account—whose total
debit is closed out to Profit and Loss. The _depreciation reserves_,
however, which are credit items, are handled under separate account
titles, and constitute the valuation account of the corresponding
assets. The journal entry covering depreciation reads as follows:
Depreciation
Depreciation Reserve Buildings
Depreciation Reserve Furniture and Fixtures
Depreciation Reserve Delivery Equipment
Depreciation Reserve Machinery
The Reserve for Doubtful Accounts is the valuation account of Accounts
and Notes Receivable. Assume, for instance, that the debit balances of
the latter two accounts are $15,900, and the credit balance of their
valuation account is $600. The difference between these two accounts,
viz., $15,300, represents the present estimated value of Accounts and
Notes Receivable. The journal entry made _periodically_ to record the
estimated loss from uncollectible items is:
Bad Debts
Reserve for Doubtful Accounts
When the two entries above, for estimated depreciation and bad debts,
are posted, the present appraised values of those particular assets
are brought on the ledger; i.e., from the values, as shown by the
respective asset accounts, are taken the portions estimated to have
been used up, lost through depreciation, or uncollectible. These lost
portions are set up as expense items, leaving in the adjusted asset
accounts true asset values as existing at the close of the period.
=Accrued Income.=—As to the asset portion of items of this kind, it is
indicated in the account in a manner similar to deferred expenses, as
explained on page 242. Take the case of interest income earned but not
due. The entry for adjusting it is:
Interest Income (Accrued)
Interest Income
The credit part is posted immediately, thereby showing an addition
to the income already recorded as earned during the current period.
The debit part is posted after the current account is adjusted and
allowance made for the closing transfer entry to Profit and Loss. The
debit part of the adjusting entry is then entered on the debit side of
the _new_ portion of the account. Assume this debit item to be $50,
and the interest received during the next period to be $170. The new
account will indicate a _credit balance_ of $120, which is the amount
actually earned during that period, since the previous period took
credit for the $50 accrued or earned during _that_ period.
=Deferred Expenses.=—When a part of the expense paid during the current
period applies to the next period, the prepaid portion must be taken
out of the current expenses and held over—deferred—as a charge to
the expenses of the next period. Taking insurance as an example, the
following journal entry effects the required adjustment:
Insurance (Deferred)
Insurance
In posting this entry, the credit part is posted first in order to take
out of the excessive cost shown chargeable to this period the portion
equitably belonging to the next period. When this is done, the _debit
balance_ of the Insurance account indicates the amount to be charged
to the current period and is the correct charge against the Profit and
Loss for the period. After making allowance for the space needed for
closing the account, the debit side of the above entry is posted, this
debit becoming the first charge in the account for the next period.
Note that the use of the bracketed “Deferred” is as a guide in posting.
It indicates that that portion of the entry is not to be posted until
provision has been made for closing the account. After posting is
completed, the Insurance account appears as follows:
INSURANCE
====================================
Jan. 2 125.00 | Dec. 31 200.00
Apr. 10 250.00 |
Aug. 15 300.00 |
------ |
675.00 |
====== |
Jan. 1 200.00 |
There remains, of course, the transfer to Profit and Loss of the
current balance before the account is _closed_. This closing work is
treated later in the chapter.
=Accrued Expense Items.=—These items cover expenses which the business
has incurred but has not yet paid, and which are properly chargeable to
this period but have not yet been charged on the books. For instance,
salaries earned up to the close of the period but not paid at its close
constitute an additional charge to the period’s operations which must
be entered on the books before they will show true conditions. This
amount also constitutes a liability of the business. Accordingly, the
journal entry is:
Salaries
Salaries (Accrued)
thus charging the Salaries account with the amount due but not paid,
and bringing this amount down as a credit balance to the new account
for the next period. Assuming this unpaid amount to be $72, the account
after closing will show this $72 as a liability on the _closing date_.
Its effect, however, during the next period will be to _reduce_ the
amount charged to salaries during that period, because this $72,
although paid during that period, has already been charged to the
previous period.
The credit to Salaries, therefore, serves two purposes, viz., that of
showing the outstanding liability at the _close_ of the current period,
and that of effecting a reduction of what would be, without this
credit, an overcharge to _next_ period’s salaries. For example, if the
total salary paid during the next period is $600, the _balance_ of $528
is the amount applicable to that period, although the amount actually
paid is $600.
=Deferred Income.=—Income received by the business during the present
period which, however, belongs to the subsequent period is called
“deferred income,” as for instance, rent received in advance from
a tenant. As to the liability portion of items of this kind, it is
indicated in a manner similar to the accrued expense items. In this
case the journal entry is:
Rent Income
Rent Income (Deferred)
the effect being to decrease the amount of rent income for the current
period and to show the portion belonging to the next period deferred to
that period’s account.
=Corrections.=—When an error has been made in any entry on the books,
it should not be erased or scratched out, because by so doing suspicion
may be raised as to what was expunged. The wrong item should be ruled
out and the correct item written above it or wherever it belongs. This
applies particularly to books of original entry whose use as evidence
has often been destroyed because many erasures appeared in them.
Another way of making a correction, when an amount has been posted to a
wrong account, is first to cancel the wrong posting through a similar
entry on the _other side_ of the same account, and then to post it to
the correct account. Cross-reference to the two accounts must be made.
When an amount has been posted to the _wrong side_ of _the correct
account_, e.g., $100 to the credit side of John Doe’s account, when
it should have been posted to the debit side, the incorrect credit
may be canceled by a debit of $100, and after this the original $100
should be entered on the debit side; or the cancellation and correction
may be combined by entering $200 on the debit side. Better still,
the incorrect posting may be ruled out and a correct posting made of
the _original entry_ whose wrong posting caused the error. Adequate
cross-reference should be given so as to make the tracing of the items
easy and to indicate exactly what was done.
As these entries are of a somewhat unusual nature, their exact purpose
should be plainly indicated in the explanation columns. According to
the methods mentioned above, the various correcting entries are made
directly on the face of the ledger. It is often preferable, however,
first to make the required correction entries in the journal with full
explanation, and then to post them to the ledger.
=Adjusting Entries Illustrated.=—In order to indicate clearly the
routine and method to be followed in summarizing the books at the
close of the fiscal period, the formal adjusting and closing journal
entries needed for the books of U. R. Smart will now be set up, the
illustrative data being the same as were used for the work sheet in
Chapter XXVII to which reference should be made. In connection with the
work sheet it was stated that the adjustment columns of the work sheet
are used as a guide to making the adjusting entries. As to sequence in
the journal, these follow immediately, without break, the last current
entry for the month. The adjusting entries for U. R. Smart are:
Purchases 30,000.00
Merchandise Inventory 30,000.00
Merchandise Inventory 26,500.00
Purchases 26,500.00
Depreciation 3,630.00
Depreciation Reserve Office Furniture
and Fixtures 280.00
Depreciation Reserve Store Furniture
and Fixtures 1,200.00
Depreciation Reserve Delivery Equipment 750.00
Depreciation Reserve Buildings 1,400.00
Bad Debts 482.88
Reserve for Doubtful Accounts 482.88
Interest Income (Accrued) 150.00
Interest Income 150.00
Insurance (Deferred) 250.00
Insurance 250.00
Advertising (Deferred) 300.00
Advertising 300.00
Printing and Stationery (Deferred) 150.00
Printing and Stationery 150.00
Selling Supplies and Expense (Deferred) 200.00
Selling Supplies and Expense 200.00
Taxes 340.00
Taxes (Accrued) 340.00
Salesmen’s Salaries 175.00
Salesmen’s Salaries (Accrued) 175.00
Interest Cost 50.00
Interest Cost (Accrued) 50.00
Special Police on Strike Duty 150.00
Special Police on Strike Duty (Accrued) 150.00
Office Salaries 100.00
Office Salaries (Accrued) 100.00
Sub-Rentals Income 50.00
Sub-Rentals Income (Deferred) 50.00
=Purpose of Summarizing.=—After the adjusting entries are posted,
the ledger reflects the true financial condition as of the date of
these entries. However, at this stage the information contained in the
ledger is usually scattered over a large number of accounts. To obtain
a concise view of the results of the business, it is necessary to
summarize this information. The Profit and Loss _account_ is the means
by which the temporary proprietorship accounts are summarized and the
net results as to profits or losses are indicated.
In this connection it will be remembered that the adjusting entries
have already effected a separation of the elements of the mixed
accounts, so that the temporary proprietorship items—expenses and
income—applicable to the current period are now separately shown. The
transfer of these _temporary_ proprietorship items to the _vested_
proprietorship accounts constitutes the work of closing. The use of the
Profit and Loss account as a place of summary—a clearing house—through
which the _net_ result can be passed on or transferred to the vested
proprietorship accounts, constitutes a part of the method or technique
of closing.
=The Closing Entries.=—The student is already familiar with the
principles of debit and credit involved in making the closing entries.
As indicated above, these are transfer entries and merely effect a
transfer of all temporary proprietorship items to the Profit and Loss
account for summary there and for the transfer of the net result to
some vested proprietorship account or accounts. Like all other entries,
these are made first in the journal and are posted from there to the
ledger. The current sections of the various expense and income accounts
are then ruled off and the ledger is said to be “closed.”
=Method of Closing the Books.=—As explained on page 129, the Profit
and Loss account in the ledger is used for summarizing the temporary
proprietorship accounts before transferring them, i.e., their net
result, to the vested proprietorship accounts. The use of Purchases and
Sales accounts for a partial summarization of the various merchandise
accounts has also been explained. After this partial summarization
has been made, the debit balance of the Purchases account, showing
cost of goods sold, is transferred to the Profit and Loss account; and
similarly, the credit balance of the Sales account, representing net
sales, is transferred to the Profit and Loss account. Profit and Loss
then shows on the credit side net sales and on the debit cost of goods
sold, the difference being the income portion, i.e., the gross profit
of the merchandising activities for the period. If it is desired to
show on the face of the account the actual figure of gross profit, the
Profit and Loss account may be balanced at this stage, though this is
not usually done. The rest of the work of summarization is accomplished
directly through the Profit and Loss account.
=Closing Entries Illustrated.=—The formal journal entries necessary to
effect this summarization in the ledger are given below, being based
on the illustration used for the work sheet and being made up directly
from the various sections of the formal profit and loss statement shown
on page 234. The way in which this is done should be carefully noted.
As to their sequence in the journal, these closing entries will, of
course, immediately follow the formal adjusting entries illustrated
above.
Purchases 1,350.00
In-Freight and Cartage 1,350.00
Purchase Returns and Allowance 5,400.00
Purchases 5,400.00
Profit and Loss 134,450.00
Purchases 134,450.00
Sales 1,850.00
Sales Returns and Allowances 1,850.00
Sales 193,150.00
Profit and Loss 193,150.00
Profit and Loss 25,225.00
Salesmen’s Salaries 13,675.00
Selling Supplies and Expense 1,400.00
Advertising 4,500.00
Out-Freight 400.00
Delivery Expense 3,300.00
Depreciation 1,950.00
Store Furniture and Fixtures 1,200.00
Delivery Equipment 750.00
--------
Profit and Loss 18,560.00
Office Salaries 5,100.00
Office Expense 4,500.00
General Expense 2,000.00
Printing and Stationery 600.00
Taxes 3,180.00
Insurance 1,500.00
Depreciation 1,680.00
Office Furniture and Fixtures 280.00
Building 1,400.00
--------
Profit and Loss 2,367.88
Interest Cost 950.00
Sales Discount 850.00
Bad Debts 482.88
Collection and Exchange 85.00
Interest Income 1,650.00
Purchase Discount 1,300.00
Profit and Loss 2,950.00
Profit and Loss 1,350.00
Special Police on Strike Duty 1,350.00
Sub-Rentals Income 600.00
Profit and Loss 600.00
Profit and Loss 14,747.12
U. R. Smart, Personal 14,747.12
U. R. Smart, Personal 4,247.12
U. R. Smart, Capital 4,247.12
It will be noted that after the net sales and cost of goods sold are
transferred to the Profit and Loss account, all expenses directly
connected with sales, such as Salesmen’s Salaries, Advertising,
Delivery Expense, Depreciation of Delivery Equipment, of Store
Furniture and Fixtures, and similar items, are closed into the Profit
and Loss account.
The groups of accounts closed next are those covering General
Administrative Expenses, Financial Management Expenses, Financial
Management Income, Non-Operating Expense, and Non-Operating Income. It
will be noticed that the _order_ of closing follows the order in which
the same items appear in the profit and loss statement.
The Profit and Loss account now shows on the credit side the items
of income and on the debit side the costs and expenses applicable to
the current period. Its balance then gives the net profit (or loss)
covering the period’s transactions.
Throughout the period, as the profit accrues, the proprietor may have
drawn against it for personal use, as shown in his Personal account.
To show the amount of profit remaining in the business, the balance of
the Profit and Loss account is transferred to the Personal account, the
balance of which then gives the amount of undrawn or overdrawn profit.
The balance of the Personal account is closed into the Capital account,
the credit balance of which then represents the net worth of the
business at the end of this period and at the commencement of the next.
=The Profit and Loss Account.=--In posting the closing journal entries
to the Profit and Loss account in the ledger, usually only the group
totals as indicated by the entry will appear. In small concerns where
expenses and income are not classified in much detail, the individual
items composing the group total are often shown. These items are, of
course, the same as appear in the part of the journal entry which is
contra to the group total charged or credited to Profit and Loss. The
ledger Profit and Loss account for the illustration will appear as
follows when completely posted:
[Illustration: Form 28. Profit and Loss Account in Ledger]
=Profit and Loss Not an Account for Current Entry.=--It should
be kept clearly in mind that the process of closing the books is
merely a method or device by which the transactions for the year are
_summarized_ and the net result determined. This net result, whether
a profit or a loss, belongs to the proprietor and must ultimately be
shown in his account. It is, therefore, manifest that the Profit and
Loss account is _only_ a summary account and should never be used for
current entry. It is the means by which the _temporary_ proprietorship
accounts are summarized and the medium through which the net result is
cleared into some vested proprietorship account or accounts.
=Effect of Closing the Ledger.=--The transfer of net profit to a
vested proprietorship account completes the work of closing the ledger,
all temporary proprietorship accounts for the _current_ period being
closed out. All open balances now shown on the ledger constitute either
assets, liabilities, or vested proprietorship. A post-closing trial
balance contains only the accounts shown on the corresponding balance
sheet. The income and expense accounts, having been cleared of their
current record, are prepared to receive the record of the next period.
The business cycle for this particular business has been completed and
its correct history recorded.
CHAPTER XXIX
TYPES OF ACCOUNTING RECORDS AND THEIR DEVELOPMENT
=Evolution of Analytical Journals.=--Though the only books absolutely
necessary for an accounting record under the double-entry method
are the journal and the ledger, even the small business finds some
subdivision of the journals advantageous, and so makes use of sales,
purchases, and cash receipts and cash disbursements journals. As a
business grows and its transactions increase in volume and complexity,
further subdivision is needed. When the scope of its organization
becomes too great for a personal oversight, a method or system must
be devised for keeping the proprietor or manager in close touch with
the various departments and lines of business endeavor. This is
accomplished by means of reports from the accounting department, which
exists largely for the purpose of furnishing this kind of information.
=Principle to be Followed in Securing Analysis.=--In an earlier chapter
it was laid down as a fundamental principle that the information
desired by the management should be furnished from analytical records
made at the time of original entry, rather than by analyzing a
composite record at the time the information is wanted. Such analytical
records make possible a quicker and more up-to-date report to the
management, and they save labor in securing the information by making
the analysis at the time of record when all the facts related to it are
readily available.
=Types of Sales Journals and Methods of Handling.=--The first step in
the analysis of business transactions is the subdivision of the general
journal into separate journals, and this analysis is carried still
further by the use of columnar journal records. Reference has already
been made, in Chapter XVIII, to the use of additional columns in the
sales and purchase journals. Here a brief sketch will be given of the
methods of recording sales in various kinds of sales journals.
1. The earliest type of sales journal, not often used today, consisted
of a letter impression book containing the press copy of invoices
sent to customers, with columns for the extension of the amounts and
sometimes with additional columns for purposes of analysis. Such a
journal has the advantage that the original entry is an exact copy of
the invoice. Oftentimes, however, the impression is poor and nearly
or quite illegible; it takes much room; the detail shown is not often
used; and it increases the work of making and handling the record.
2. Another method makes use of a perforated invoice book with a
columnized interleaf solid-bound between the perforated invoice sheets.
The sales invoice is written on one of the perforated sheets and a
carbon underneath gives a duplicate on the interleaf, the latter
constituting the formal sales record. The advantages and objections are
practically the same as for the impression book method.
3. Another method is to make a separate carbon copy of each invoice
and use the duplicate as the source of entry in the sales journal.
The journal entry gives only the file number of the duplicate invoice
so that in case of need the duplicate can easily be referred to. Such
a sales journal may, of course, contain analytical columns with any
desired heads.
4. Still another method uses the duplicate invoice for posting to the
customer’s account, after which it is filed in binders. The latter
are usually provided with recapitulation sheets which show the totals
and analysis for each day, week, or month as the case may be. Just as
above, the invoice file provides the detail in support of the ledger
account and the recapitulation sheets constitute the journal from which
credits to the various sales accounts are made. Either one of these
last two methods eliminates most of the objections and embraces most of
the advantages of the other methods mentioned above.
Where several sales ledgers are used, the sales journal is sometimes
subdivided on the same basis as an aid in posting and for the purpose
of securing controlling figures as explained in following chapters.
=The Sales Returns and Allowances Journal.=--The use of any special
form of sales journal, particularly if it provides for an analysis of
the sales, requires a similar record of sales returns and allowances.
Either a separate book, similar in form to the sales journal, may be
employed for recording these items or the pages in the back of the
sales journal may be used instead.
=Development of the Purchase Journal.=--The development of the purchase
records from the old-time scrapbook for invoices to the modern analytic
voucher record resembles the development of the sales journal. The
old-fashioned invoice book was usually a big, loose-bound, coarse paper
volume in which were pasted the invoices for goods bought. An extension
column was provided for the amount of the invoice, and the total of
this gave the purchases for a given period. The use of columns for
various classes of purchases provided the required analysis, but, as
it was a cumbersome, nondescript record, it was bound to give place to
something better--the formal purchase journal or register of today.
The purchase journal or register consists of a bound or a loose-leaf
book ruled to suit individual needs and purposes. Where sales are
analyzed by classes, an exactly similar analysis of purchases must be
made in order to secure a gross profit figure for each class. Therefore
its form follows very closely that of the sales journal. Entries are
made in the purchase journal of the name of the creditor, the amount of
his invoice, and the number of the file where the invoice can be found
in case of need.
Where a separate purchasing department is maintained, the duplicate
purchase orders, corrected if necessary to correspond with the purchase
invoice received, may be used as the basis of the purchase journal. In
this case recapitulation sheets are inserted just as with the sales
journal. The handling of purchases is simplified by the fact that as
a rule they are much smaller in number than sales. The same general
considerations apply to the handling of returned purchases as to
returned sales.
=Handling Expenses through the Purchase Journal.=--It is the practice
of some concerns to treat expenses such as labor, rent, salaries,
supplies, etc., as purchase transactions. Under this method, instead
of postponing the entry until the item is paid, it is made at the time
of securing the service or supplies. The basis for the entry may be
either: (1) the bill or purchase invoice; (2) a formal purchase memo or
voucher made out for each transaction; or (3) the fact that the expense
has been incurred may suffice for the entry on the books with no formal
paper to vouch for it. The use of such formal papers as the basis for
entry is known as the voucher record system. The details of this system
are fully explained in the second volume. Discussion is here limited to
a brief outline of the method and of the advantages of its use.
When expense invoices are entered and analyzed in the voucher record
form of purchase journal, their posting requires debits to the various
expense accounts and credits to the individual creditors’ accounts
in the ledger. If the ledger contains only a controlling account,
this account must be credited with the total of the expense and other
purchases, while the individual accounts in the creditors subsidiary
ledger must be credited with the details which make up the total. When
the bill is paid, entry in the cash book will not be, as usual, to the
debit of the expense account in the general ledger, but to the debit of
the creditor’s account in the subsidiary ledger. The reason for this
procedure will be made clear in the discussion of controlling accounts
to follow.
The entry of expense invoices in the above manner secures an immediate
record of all liabilities as incurred and therefore makes the books
show at all times the true state of affairs as regards liabilities. The
method, however, necessitates a little more work in making the record,
and for this reason many concerns do not enter expenses until paid,
making the debit to them through the cash book. In this latter case all
unpaid expense bills should be kept in an expense file for reference
when information as to the unrecorded liabilities is desired.
=Note Journals.=--As explained previously, note journals are
sometimes used instead of the general journal for the record of note
transactions, where these are sufficiently numerous. Provision is
sometimes made for securing a proper analysis in order to distinguish
between notes from customers and notes from other sources. It will be
seen later that such an analysis is necessary when controlling accounts
are operated.
=Analysis in the Cash Book.=--The cash journals may be ruled to furnish
any desired analysis, showing on the debit side (i.e., the cash
receipts journal) the sources of receipts, and on the credit side the
objects of expenditure. As the sources of cash receipts are usually
more limited than the objects of expenditures, they do not require so
much analysis. The analysis may be very detailed, the only limit to the
number of columns being the width of the page. A minute analysis of
expenditures, however, is usually made, not in the cash journal, but in
the purchase or voucher record, which thus relieves the cash book of a
mass of detail.
The chief advantage of using additional columns in books of original
entry lies in the fact that time and labor are saved in posting. The
column total is posted in one item, whereas each of the numerous items
composing it would have to be posted separately to the account named
in the column heading if no analytical column were provided. Hence it
would be a waste of space to provide separate columns for items which
recur so infrequently as to make their summarization unnecessary. Care
should be taken to avoid needless columnization.
It is customary to have the following columns on the debit side of the
cash book: General or Sundry, Accounts Receivable, Sales Discount,
and Net Cash or Bank; on the credit side: General or Sundry, Accounts
Payable, Purchases Discount, and Net Cash or Bank. (See page 282 for
illustration.) The proof of the distribution is secured by checking the
sum of the net cash and discount columns against the sum of the totals
of the other columns. In both receipts and disbursements journals every
item must appear in the respective Net Cash columns, and from these
distribution is made to the other columns. For example, in the cash
receipts journal, receipts from customers are distributed into the
Accounts Receivable column for the gross amount of each item, and into
Sales Discount for the discount, if any is taken. All other items are
carried into the General or Sundry column. Where several sales ledgers
are kept, additional columns may be provided so that instead of having
one accounts receivable column, there are columns for each ledger.
Similar treatment is given to the disbursements.
=Analysis in the General Journal.=--Where the general journal is used
for returned goods, allowances, and other adjustments with customers
and creditors, use is made of analytic columns with these captions for
both the debit and credit: Accounts Receivable, Accounts Payable, and
General. Here, however, there is no column in which to enter all items
for distribution to the other columns. If a customer’s or a creditor’s
account is affected, entry is made in that column in the first place.
All _other_ entries are in the General column. (See page 281 for
illustration.)
With regard to analysis columns in the general journal, some
accountants maintain, with good reason, that if the number of
transactions of a particular kind is sufficiently large to justify
their segregation in a separate column, this in itself would be ample
justification for the use of a separate journal to record these items.
Whenever the analysis of recurring transactions in the general journal
is facilitated by the use of separate columns, the advisability of
opening a new journal for the record of such items as appear in the
general journal most frequently should be considered.
=Subdivision of the Ledgers.=--The next step in the subdivision of the
records is made in the ledgers. The general or impersonal accounts
of the business are of a more permanent character than the accounts
with persons--customers and creditors. Consequently, when once it
is determined under what account titles information is desired and
those accounts are set up, there is usually little need to change
their titles. Personal accounts, however, are constantly changing
as some customers are lost and new ones are added, and also because
creditors change with purchases in new markets. Hence, when a business
outgrows its small beginnings, it is customary to keep these changing
accounts in separate books. The basis for the first subdivision of the
ledgers, therefore, is the separation of the accounts into personal
and impersonal. The accounts with customers are carried in a separate
ledger called variously the sales, customers, or accounts receivable
ledger, and those with creditors in a ledger called purchase,
creditors, or accounts payable ledger. All other accounts are kept in
the main ledger known as the general ledger. One advantage of this
subdivision is that several bookkeepers can work on the various ledgers
at the same time.
A further subdivision of the customers ledger is frequently made
into “city” and “country,” the former containing the accounts with
customers located within the city where the business is situated, and
the latter the out-of-the-city accounts. Other subdivisions may be made
on an alphabetical basis, i.e., customers ledger No. 1, containing all
accounts from A to G; customers ledger No. 2, H to M, etc. Sometimes
the concern’s sales territory is divided into arbitrary districts and
the ledgers are subdivided to correspond with such districts.
[Illustration: Form 29. Standard Ledger--Divided Column]
[Illustration: Form 30. Standard Ledger--Center Column]
[Illustration: Form 31. Balance Ledger Rulings]
[Illustration: Form 32. Balance Ledger Rulings]
=Kinds of Ledgers.=--There are several kinds of ledgers, which may be
classified (1) as to their rulings, and (2) as to their bindings.
1. RULINGS. As to their rulings, ledgers are either standard, balance,
or progressive. The standard ruling has two duplicate parts, a debit
and a credit, and is usually divided in the center of the page, one
money column appearing at the extreme right of each part, although
sometimes the arrangement is symmetrical with both debit and credit
money columns at the center, and the date columns at either side of the
page. (See Forms 29 and 30.)
The balance ruling is a three or four-column ledger with the money
columns either at the center or at the right-hand margin, or at both
the center and the right-hand margin. The extra columns are for the
account balances. If the balance is usually either a debit or a credit,
only one balance column would be necessary; where it is apt to be a
debit at one time and a credit at another, a debit balance column
and a credit balance column are advantageous. The balance ruling is
used particularly with personal accounts where there is need for an
up-to-date balance. Where this kind of ledger is used, entry of new
debits or credits should always be on the next blank line as shown in
the balance column, so as to allow the extension of the new balance
opposite the last entry even though this should leave blank several of
the preceding lines on the debit and credit sides. Typical forms of
some of these are shown in Forms 31 and 32.
The Boston, progressive, or tabular ledger, as it is variously called,
makes provision for a _horizontal_ progress of the account as to
sequence of time; the title of the account is written at the left-hand
margin, and one or more lines are allowed to each account according to
the degree of its activity. The account title is written once at the
left margin of the master or main sheet, and is sometimes repeated at
the right margin if the sheet is very wide. The page is divided into
columns for each day of the period. To effect this, short-margin insert
sheets must be bound in to give the desired room for accommodating a
whole period’s record. This style of ruling was formerly much used in
banks where a daily balance for each depositor’s account was necessary.
It is capable of adaptation to other uses, however. One form is shown,
Form 33.
[Illustration: Form 33. Boston Ledger Sometimes Used for Depositors]
2. BINDINGS. Ledgers may be classified also as solid-bound,
loose-leaf, and card, the titles being self-explanatory. One of
the great advantages of the loose-leaf and card ledgers over the
solid-bound ledger is their flexibility. They lend themselves easily to
any desired grouping of the accounts; they may be numerically arranged
where accounts are numbered instead of named; they may be arranged
as to classes and each class made self-indexing; or a geographical
grouping may be made. Another great advantage of this form of ledger
is the ability to discard or file away in other binders all “dead”
accounts, thus making for ease and facility in the use of the “live”
ledger. Also it is possible for several clerks to work simultaneously,
since the leaves or cards are removable and may be distributed among
any number of clerks. There is always the danger, however, of failure
to return a leaf or card, or of placing it out of regular order when
returning it, or of destroying it, if it were desired fraudulently
to do away with any particular account. The use of loose-leaf and
card ledgers for personal accounts is pretty thoroughly established,
notwithstanding the disadvantages just mentioned.
CHAPTER XXX
CONTROLLING ACCOUNTS
=Introductory.=--Reference to controlling accounts has been made
several times in preceding chapters. It is purposed now to define them
and explain their use. The separation of the various journals on the
basis of an analysis of transactions frees the general journal of a
vast mass of detail it formerly carried. This separation, however, in
no way affects the underlying debit and credit scheme of the whole
system. Each journal is an integral part of the whole; every entry
therein has its equal debit and credit which are in due course posted
to its proper account, thus maintaining the equilibrium of the ledger.
The separation of the ledger into three or more special ledgers in the
interest of economy of effort and ease of use has also been mentioned.
Still, each of these special ledgers is an integral part of the whole
ledger and the accounts in the special ledgers must be entered in the
trial balance to secure proof of equilibrium.
The customers ledger is usually the most active of the various ledgers,
i.e., more postings are made in it because the majority of business
transactions involve dealings of various sorts with customers, and
more accounts are required to keep the records with customers. It
is usually, therefore, the largest part of the whole ledger, but
its accounts are all of the same kind, viz., accounts receivable.
When taking a trial balance, the total of the balances of the
customers ledger accounts is usually set up under the title “Accounts
Receivable,” leaving the details to a supplementary list or schedule.
=Advantage of a Controlling Account.=--The advantage of thus
condensing the trial balance is apparent and suggests the desirability
of obtaining the “accounts receivable” balance independently of
the customers ledger. If this is done the bookkeeper in charge of
the general ledger can not only draw up his trial balance without
reference to the customers ledger, but has also the correct figure for
the total of the account balances in the customers ledger. In other
words, he has a figure which controls the customers ledger and which
therefore furnishes him with a check on the accuracy of the ledger
clerk or bookkeeper who keeps that ledger. The most convenient method
of recording the accounts receivable figure is evidently by means of a
formal account on the general ledger. When such an account is kept, the
effect is to make it a summary account whose detail is carried in the
customers ledger.
=Controlling Account Necessitates Changed Idea of Ledger
Equilibrium.=--By having a customers controlling account (or “Accounts
Receivable” as it is commonly called, though other terms are also used)
in the general ledger, the customers ledger is no longer used as an
integral part of the whole ledger and becomes a “subsidiary” ledger;
that is, its function is reduced to that of a supporting schedule or
list of detail for the summary controlling account. The equilibrium
of the general ledger is now maintained by summary posting to the
controlling accounts. Though the customers ledger has ceased to be a
“ledger” in the proper sense of the term, it is still a vital part of
the system, carrying as it does the detail of the summary controlling
account. Moreover, it is linked up to the system by being provable
against its summary account. Yet it should be borne in mind that its
scheme of debit and credit is now an independent one and is not linked
up to the debit and credit equilibrium of the general ledger; that is,
the postings in the subsidiary ledger are merely memorandum entries
of the detail posted in summary form to the general ledger. Thus the
mathematical basis of the controlling account is simply that the whole
is exactly equal to all its parts, the balance of the summary account
being equal to the total of the balances of all the customers’ accounts
of which it is the summary. To illustrate, if we have customers’
accounts whose balances are $1,000, $2,000, $3,000, $4,000, and $5,000
respectively, then the summary account must have a balance of $15,000.
=Debits to the Controlling Account.=--The principle and the purpose of
the controlling account having now been explained, the next problem to
consider is how best to gather the summary figures for its debits and
credits. If every debit to a customer’s account must be posted also to
the controlling account and every credit to a customer’s account must
be shown as a credit in the controlling account the work involved would
be almost doubled and little would be gained by thus duplicating the
postings in another ledger. Therefore it is important to secure the
figures for entry in the controlling accounts with the least effort,
i.e., in the form of debit and credit summaries. Hence, to determine
the sources of these debits and credits of the controlling account,
analysis must be made of the sources of the debits and credits to the
customers’ accounts.
Most of the debits to customers’ accounts are from the sales journal.
Additional debits may be from the cash disbursements journal when cash
payments are made as a rebate or a refund for overpayment or some
other similar transactions; still others from the general journal for
adjustments of various kinds. The debits to customers, however, for
cash paid them are very few in number, because such adjustments usually
are not made by means of cash payments. The sales journal, as usually
operated, carries a column for credit sales, whose total represents in
one amount the total of all detailed debits to customers’ accounts. The
total of the credit sales column, therefore, controls the total debits
to all customers on account of charge sales to them. In summarizing
the sales journal the summary entry should show that this total is to
be posted not only to the credit side of the Sales account but also to
the debit of the controlling account in the ledger. This is so because
the customers ledger has ceased to be an integral part of the general
ledger, the controlling account having taken its place. Accordingly,
the general ledger contains no record of either the debits or credits
of the entire group of sales transactions until the end of the month,
when this group must therefore be brought into the general ledger in
summary form, both debit and credit.
Where the total sales in the sales journal include an analysis of sales
into cash sales and credit sales, the following summary entry should be
made:
Accounts Receivable
Cash
Sales
The cash debit is set up only to show the equilibrium of the summary
entry and is not posted, because it is entered also in the cash book
and is posted from there. This debit posting to “Accounts Receivable”
in the general ledger secures in one posting a debit amount equal to
all individual debit postings to the customers ledger from this source.
The controlling account in the general ledger is variously termed
“Sales Ledger,” “Accounts Receivable,” “Trade Debtors,” “Customers,”
etc.
The two other sources of debit posting to customers’ accounts are
the general journal and the cash book. The debit side of the journal
is provided with an Accounts Receivable analysis column in which,
as explained in the previous chapter, debits to customers’ accounts
are entered. At posting time the total of this Accounts Receivable
column will therefore give in one figure a debit posting item to the
general ledger Accounts Receivable account equal to all individual
debit postings from the general journal to customers’ accounts in the
customers ledger.
Usually it is not necessary to provide an Accounts Receivable column
on the credit side of the cash book, since debit postings from
there to customers’ accounts are very infrequent. Hence no total or
controlling figure for entry in the Accounts Receivable account can be
obtained. Every item which is posted from this source to the debit of a
customer’s account must be also posted--item by item--to the debit of
Accounts Receivable in the general ledger. This is of course a double
debit posting, but one of these debits is to a subsidiary ledger which
is no longer a part of the equilibrium scheme and therefore does not
throw the general ledger out of balance. Great care must be exercised
to make sure that each of these items is posted both to a customer’s
account and also to the Accounts Receivable account.
=Credits to the Controlling Account.=--An analysis of the credits to
customers’ accounts shows four main sources:
1. The cash receipts journal for payments made by
customers.
2. The sales returns journal, if one is kept, for
goods returned by customers.
3. The note journal for notes received in payment.
4. The general journal for various adjustments and
also for the purpose of recording notes and
returned sales where special journals are not kept
for these transactions.
Accordingly, analytic columns for accounts receivable are provided
in the cash receipts journal and the general journal. The totals of
their columns are posted to the credit of Accounts Receivable, and the
detailed amounts to the credit of the various customers’ accounts. The
credit postings from these sources to the customers ledger accounts
and to the general ledger Accounts Receivable account are therefore
the same so far as totals are concerned. The sales returns journal is
summarized at posting time by means of an entry similar to that in the
sales journal, as follows:
Sales Returns
Accounts Receivable
In this case the credit posting to the Accounts Receivable account is
equal to the detailed credits to customers’ accounts.
Similarly, a summary entry for the notes receivable journal secures
a controlling figure for Accounts Receivable. If the notes are all
received from customers to apply on their accounts, the summary entry
is:
Notes Receivable
Accounts Receivable
the amount being the total of that journal.
In this way the total of all debits and of all credits to the
individual customers’ accounts is represented by the summary items
entered in the general ledger controlling account, Accounts Receivable.
Consequently, the balance of this single account is equal to the
balance of the customers ledger. For the trial balance, therefore, one
account takes the place of hundreds or even thousands of customers’
individual accounts. As a result of this, much time is saved and the
possibility of error on the general ledger is greatly reduced.
=Proving the Customers Ledger.=--The use of a controlling account
in the general ledger, however, does not eliminate the necessity
of proving the accuracy of the customers ledger. It merely makes
it possible to take a trial balance without bringing the numerous
customers’ accounts into it. It is just as much a part of the proof
of the work to make a list of customers’ accounts balances and check
it against the balance of the Accounts Receivable general ledger
account, as it is to prove the general ledger by means of a trial
balance. If there is a discrepancy between the subsidiary ledger and
its controlling account on the general ledger that discrepancy does not
necessarily prevent a trial balance of the general ledger, but it does
show error in the work which must be searched out and corrected.
=Accounts Payable Account.=--A similar arrangement will make possible
a controlling account on the general ledger for the creditors or
purchases ledger. This account is variously termed Accounts Payable,
Purchase Ledger, Creditors, or Trade Creditors account. Its mechanism
is the same as for Accounts Receivable. Analysis of credit postings to
creditors’ accounts shows the purchase journal as their main source.
Other credits come through the general journal and a very few through
the cash receipts journal. The summary entry for the purchase journal
is:
Purchases
Accounts Payable
Cash
This shows a debit to the Purchases account for the total amount of the
purchases, a credit to Accounts Payable for the liability to creditors,
and to Cash for the amount paid on cash purchases. The cash item is not
posted. The Accounts Payable column total on the credit side of the
journal, and the separate items from the cash receipts journal, furnish
the other credits to the Accounts Payable account in the general ledger.
The debits come from the Accounts Payable columns in the cash
disbursements journal and in the general journal, and the summaries for
the notes payable and purchases returns journals.
=Basic Principle as to Postings to Controlling Accounts.=--In the
handling of controlling accounts, the one fundamental requirement is
to make sure that every entry in books of original entry which affects
any account in the subsidiary ledger is reflected in the postings to
the controlling account in the general ledger. This principle resolves
itself into the mathematical axiom stated above that a whole is equal
to all--not just some--of its parts. Only thus can a true control be
established.
=Making the Subsidiary Ledger Self-Balancing.=--Through the use of
the two controlling accounts explained above, the trial balance is
relieved of a large number of accounts, and the general ledger is
made independent of the subsidiary ledgers. On the other hand, the
subsidiary ledgers are dependent for their proof on the controlling
account balances in the general ledger. In an effort to make every
ledger “self-balancing,” a further refinement of the controlling
account idea is frequently incorporated in each subsidiary ledger. It
is accomplished in the following manner: An exact duplicate of the
controlling account on the general ledger is set up in the subsidiary
ledger, _with this difference_, that the sides of the account are
reversed so that the subsidiary ledger account has for its debits the
credits of the general ledger account, and for its credits the debits
of the general ledger account.
Take the Accounts Receivable controlling account for illustration.
On the general ledger its balance is of course a debit balance
representing the total outstanding accounts due from customers.
Similarly, the schedule or list of customers’ accounts taken from the
sales ledger will represent debit balances whose total is the same as
the controlling account balance. If, then, the controlling account
itself is placed on the customers ledger as an additional account,
the sides being reversed, the balance of this one account will be a
credit equal to the total debit balance of all the other accounts in
the customers ledger. Therefore, if the customers ledger is correct,
its own balance will be offset exactly by the credit balance of the one
additional account, and the ledger then is said to be self-balancing.
There is no theory or principle of debit and credit involved in this;
the device is simply introduced in order that the ledger may provide
an internal proof of its correctness. The title of the balancing
account on the subsidiary ledger is “Adjustment” or “Balance” and has
no significance other than that mentioned. In a similar manner any
subsidiary ledger may be made self-balancing.
CHAPTER XXXI
HANDLING CONTROLLING ACCOUNTS
Chapter XXX concerned itself with the statement and explanation of
the principles on which the controlling account rests, the manner of
its construction, its advantages, and with the changed application of
the fundamental scheme of debit and credit under a system of records
operating controlling accounts. The present chapter will be devoted to
a consideration of the problems met with in the practical operation of
these accounts.
=Introduction of the Controlling Account.=--Upon the installation of
a new system or set of books, the controlling account feature may
be incorporated from the start. The new system must provide for the
separation from the general ledger, of the ledgers over which control
is to be established. The method of securing controlling totals for
posting to the general ledger controlling accounts was indicated in the
preceding chapter.
Where it is desired to introduce controlling accounts into a system
which has not formerly used them, certain adjustments must be made,
i.e., the accounts to be controlled must be segregated and controlling
account columns must be provided for in the books of original entry.
With the transfer of these accounts to a separate ledger, together with
the introduction of the controlling accounts into the general ledger,
the equilibrium of that ledger is maintained. The opening entry in
the newly established controlling account is of course the sum of the
balances of the transferred accounts.
If it is desired to establish the new controlling account by journal
entry, that entry would appear somewhat as shown on page 279, Form 34,
with suitable explanation added. All these items should be posted to
the general ledger as shown by the entry, and in addition the detailed
items should be posted as debits to the accounts in the customers
ledger. The effect of these postings would be, first, to close the
individual customers’ accounts formerly carried in the general ledger
and open up in their stead the controlling account; and second, to set
up on the subsidiary ledger the detail of the customers’ accounts.
=Recording Withdrawals of Stock-in-Trade.=--The original basis for
separating the main journal into its subsidiary parts was the analysis
of transactions by kinds, such as sales, purchases, cash, etc. The
sales journal was presumed to contain only sales of stock-in-trade.
Departure from this principle was advisable in the case of goods
drawn at cost, for use in the business or by the proprietor or for
other purposes. This is done because withdrawals of stock-in-trade,
at whatever price and for whatever purpose, can be recorded more
conveniently in the sales journal than elsewhere.
It is theoretically incorrect, however, to enter such items in the
Sales account because withdrawals at cost do not represent actual
sales, and for this reason they should be regarded as deductions from
purchases or from inventory. The only proper place for their record,
under this view, is the general journal, entry in which would have
to be by detailed debit and credit for each item. However, because
this requires much more work than entry in the sales journal, this
last method is more commonly employed. Usually the volume of such
transactions is not large and would not seriously vitiate the use of
the Sales account as the basis for estimating percentages of cost of
goods sold, gross profit, selling expenses, etc. Moreover, as the total
amount of these withdrawals is often fairly constant as between periods
their record in the sales journal is countenanced.
=The Problem of the Sales Journal Summary.=--When withdrawals
from stock at cost price are recorded in the sales journal, a new
problem arises in summarizing the sales journal when operating under
a controlling account system. The customers or sales ledger is
usually limited absolutely to customers’ accounts. Accounts with the
proprietors, and with all other titles under which withdrawals for
other purposes may be recorded, are almost invariably carried in the
general ledger. Therefore, while most of the items entered in the sales
journal are posted to the customers ledger, these withdrawal items must
be posted in detail to the general ledger. Thus the total of the sales
journal does not represent the correct debit to accounts receivable in
the general ledger. Evidently an analysis of the content of the sales
journal must be made in order to obtain the correct controlling figure.
Such analysis may be made in several ways. Where possible, three
columns in addition to the departmental columns should be used. The
column titles would be “Sales Ledger,” “Cash,” and “Sundry.” The sum
of these three would give the total to check against the total of the
other distributive columns, but only the “Sales Ledger” total would be
posted to Accounts Receivable, and the individual items in that column
would be posted to the customers’ accounts in the sales ledger. The
items in Sundry column would be posted to their named accounts in the
general ledger. This method secures an automatic separation of the
controlling account total from other items, and should be used where
possible.
If the number of these extraneous items is too small to warrant the
use of a separate column, they may be recorded in the Sales Ledger
column and indicated by means of an “❌” or some other mark. At summary
time, the sales journal must be looked over and these items picked out.
Subtraction of their sum from the Sales Ledger column total would give
the correct controlling account posting.
Still another method requires a correcting general journal entry at
the time the sales journal entry is made. Under this method these
special items are included in the Sales Ledger column, thereby causing
an overcharge to Accounts Receivable. The correcting general journal
entry must therefore credit Accounts Receivable by the amount of the
overcharge for each item. For instance, if stock has been drawn by the
proprietor, the general journal entry at the time the sales journal
entry is made would be:
Proprietor, Personal
Accounts Receivable
the debit to proprietor being checked here and posted from the sales
journal, or vice versa. This method, however, results in a duplication
of work. It would be preferable not to enter these items in the sales
journal and to make the record only in the general journal, and so
leave the Sales Ledger column total in the sales journal the correct
controlling figure.
In a complicated controlling account system, where for current entry
a simple bookkeeping routine must be established and all items
of whatever kind be handled in the same way, the withdrawals by
proprietors are recorded in accounts opened with them in the sales
ledger just as with customers. At the end of the period, before closing
the books, these proprietors’ accounts are transferred by general
journal entry to the general ledger, requiring one entry--like the one
last shown above--for the drawings of the period.
Cash sales may also be handled without the use of a separate column in
the sales journal. Two methods are used for this. Under the one, cash
sales are included in the Accounts Receivable debit total of the sales
journal, although the individual items are not posted to the subsidiary
ledger, and they are also included in the Accounts Receivable credit
total of the cash receipts journal. The inflated debit in the general
ledger controlling account is thus offset by an equally inflated
credit, the balance therefore being the correct amount to control the
sales ledger.
Under the other method the postings to the general ledger controlling
account are the same as in the first method. The two methods differ,
however, in that under the second method an account is opened in the
subsidiary ledger entitled “Cash Customers” or “Cash Sales,” to the
debit of which are posted in detail the cash sales items from the sales
journal and to the credit of which are posted in detail the cash sales
items from the cash receipts journal. The account is thus only a “wash”
or clearing account. This method, however, prevents the inflated debits
and credits in the controlling account.
The methods last described for handling proprietors’ withdrawals and
cash sales are the ones most frequently used in large businesses where
simplicity of routine for current entry must be secured.
=The Problem of the Purchase Journal Summary.=--The practice of
recording extraneous transactions in the purchase journal brings about
at summary time a situation similar to that of the sales journal, when
a controlling Accounts Payable account is maintained. The purchase
journal is, and should be, the place of record for purchases made for
the business. If the proprietor (or other person), for his personal
account and use, purchases through the business merchandise which never
goes into stock, accurate accounting requires such transactions to be
charged direct to the proprietor and not to the Purchases account of
the business. Inasmuch as the liability is assumed by the business
and the creditor’s account will appear in the purchase ledger, the
use of the purchase journal total for credit to the Accounts Payable
controlling account gives the correct figure. The trouble comes in
because this same figure cannot be used as the debit to Purchases.
Subtraction of these extraneous items must be made to determine the
proper amount chargeable to the Purchases account, thus necessitating
an analysis at summary time.
=Accounts Both Receivable and Payable.=--It frequently happens that
purchases from, and sales to, the same party are made, i.e., goods are
sometimes bought from and sold to a customer. If the account of this
debtor-creditor is normally a purchase account, it is set up in the
purchase ledger. If a sale is made to this debtor-creditor and charged
to his purchase ledger account, such transaction should not be included
in the Accounts Receivable controlling figure from the sales journal
unless an adjusting entry is made through the general journal. Such
entry would affect only the controlling accounts and would be:
Accounts Payable
Accounts Receivable
Or the item might be omitted from the sales journal controlling figure
and stated separately in the summary entry for the sales journal.
A more satisfactory method is to set up two accounts with such
parties--one as a creditor, the other as a customer. Then no adjustment
need be made at the time of summarizing the journals, because the
two accounts are treated as entirely independent of each other. The
settlement of these two accounts may be handled separately or by a
payment of the balance between the two. If settled by balance, an
adjusting journal entry should be made to show on the books the two
separate elements involved. This would of course affect both the
controlling accounts and the two individual accounts.
=The Problem of the Note Journals Summaries.=--Of notes receivable the
large majority are usually received from customers. The summary entry
for such is:
Notes Receivable
Accounts Receivable
Where notes are received from other sources, as from officers,
partners, or from outside parties to whom loans have been made, it
is evident that these must not be included in the credit to Accounts
Receivable, and it may be advisable also to eliminate them from Notes
Receivable unless they are short-term, current items, as only such
should be carried under Notes Receivable. These special notes may be
carried in a “Notes Receivable Special” account.
If, as sometimes happens, interest is included in the face of a note,
this must be adjusted by the summary entry, as follows:
Notes Receivable
Accounts Receivable
Interest Income
The considerations stated above as applicable to the notes receivable
journal, are of equal importance in handling the notes payable journal.
A very careful analysis of the note journals should be made at a
summary time, which analysis should be shown by the summary entry.
=Summary Entries for Columnar Books.=--Illustration will now be given
of some standard forms for summarizing the columnar journals. Sometimes
the summary entries for the various subsidiary journals are made in
the general journal. This seems to accomplish no good purpose and
is not usually recommended. Theoretically it is desirable to show a
formal debit and credit summary for each journal footing posted to the
ledger. If, however, the number of columns is small and it is readily
seen that the debits and credits are equal, the formal summary is often
dispensed with. So also, if there are many distributive columns of
the same effect, i.e., debit or credit, as in the large departmental
sales journal or the voucher register referred to on page 144, formal
summary is not shown, the posting being made from the column totals as
illustrated for Petty Cash on page 369.
=The Sales Journal Summary.=--An illustration of the sales journal
summary is given in Form 35. The Sundry items should be posted in
detail from their column and their total checked in the summary entry.
Where a Sundry column is not used and the Sundry items are included
in the Sales Ledger column, they must be separated before the summary
entry can be made.
[Illustration: Form 34. General Journal]
[Illustration: Form 35. Sales Journal Summary]
Where, also, a Cash column is not carried, as is so often the case,
there being just one column for Sales Ledger, Cash, and Sundry items,
from which distribution is made, the separation of the Cash items need
not be shown in the summary entry, provided those items are entered
also in the Sales Ledger column of the cash book. Where, due to the
large number of distributive columns, the sales journal can ill afford
the room for a Cash column, the above method offers the best solution
of the problem.
The purchase journal summary is similar to that of the sales journal,
and therefore no separate illustration need be given here.
=The General Journal Summary.=--As shown by the illustration in Form
36, in summarizing the general journal the Accounts Receivable and
Accounts Payable columns are formally totaled, ruled off, and their
totals brought into the General columns on both debit and credit
sides and these columns are totaled and ruled off, thus showing the
equilibrium of the journal. This summary entry is posted to the proper
accounts in the general ledger. There is no particular advantage,
however, in this formal summary entry because the postings could easily
be made directly from the column totals.
=The Cash Book Summaries.=--As illustrated in Forms 37 and 38, the
formal summary for each side of the cash book shows the equality of
the Bank and Discount columns total against the General and Accounts
Receivable and Payable columns. To show the correct debit to the bank
for the present month, the balance brought forward from last month and
entered in both the General and Bank columns on December 1, must now be
subtracted from both.
On the disbursements side no explanation of the summary entry is
necessary. It will be noted that, to show the balance of the bank
account, a restatement of the Bank column total is necessary.
[Illustration: Form 36. General Journal Summary]
[Illustration: Form 37. Cash Summary Book--Receipts Side]
[Illustration: Form 38. Cash Summary Book--Disbursements Side]
=Other Controlling Accounts.=--It is frequently desirable to keep some
accounts of the business private, such as those showing partners’
investments, drawings, ratios of sharing profits, the adjusting and
closing entries, the profit and loss, etc. This can be accomplished
through the use of a private ledger supported by a private journal
and sometimes a private cash book. For their operation a controlling
account of the private ledger is set up in the general ledger, and
similarly a controlling account of the general ledger appears in the
private ledger. The use of private books is explained in Volume II of
this work.
Sometimes subsidiary expense ledgers are used to carry a minute
division of each expense group, with corresponding controlling
accounts, such as Selling Expense, Office Expense, General Expense,
Factory Expense. Similarly, if the consignment sales of a business are
large enough to justify a separate record in a consignments ledger, a
controlling account is set up in the general ledger. In a manufacturing
business, Raw Materials, Goods in Process, and Finished Goods accounts
are often controlling accounts for the stores, jobs, and finished stock
ledgers. In a corporation the Capital Stock account (or accounts) is a
controlling account over the stock ledger.
=Principle Governing Content of Subsidiary Ledgers.=--Before closing
this chapter, it should be stated as a fundamental principle that no
accounts should be carried in a subsidiary ledger except such as are
of the same general kind and can without misrepresentation be carried
under the group title of the controlling account.
CHAPTER XXXII
PARTNERSHIP FROM THE BUSINESS VIEWPOINT
=Partnership Defined.=--In Chapter II, reference was made to some
of the features of a partnership--the purpose of its formation,
advantages, disadvantages, etc. The laws of the state of New York
define a partnership as follows: “A partnership, as between the members
thereof, is the association, not incorporated, of two or more persons
who have agreed to combine their labor, property and skill or some of
them for the purpose of engaging in any lawful trade or business, and
sharing the profits and losses as such between them.”
This definition brings out in a general way the reasons for the
formation of the partnership and its essential features. Under this
type of organization, where several persons combine their capitals,
it is possible to secure a larger fund of capital than under the sole
proprietorship. This opens to the partnership avenues of business
usually closed to the sole proprietor. The bringing together of the
man with a special aptitude or skill, or of a man with a following in
the community on account of social standing and acquaintanceship, with
another who has money or a plant for the operation of a business, often
makes successful an otherwise unpromising undertaking.
=Operating Feature and Working Organization.=--Mutual agency is the
essential operating feature of the partnership. By this is meant that
any one of the partners can act for the others, and in the eyes of the
law all are equally responsible for the management of the business.
Except in the case of a limited partnership, to be explained later,
each partner has an equal voice in the management and control of
affairs. Unlike the corporation where for management purposes the
owners’ powers are delegated to a controlling board, the essential
character of the partnership is that each partner has, regardless of
the amount of his investment, an equal right in the direction of its
business. As between themselves, for purposes of division of duties
and specialization of effort, definite power to exercise control
over certain features of the business may be delegated to individual
partners. But such delegation means nothing more than a method of
dividing the work and is simply the working organization of the firm
which may be changed at any time the majority of the partners see fit.
Thus, while a partner may be limited in his actions for the firm by
agreement among the partners, so that he is not a general agent for
the firm, still as to outsiders who know nothing of this internal
arrangement, he has power to bind the partnership by his acts, because
an outsider has a right to expect that any partner has power to act as
an agent for the firm. This is so because such power is of the essence
of the partnership form.