is customary not to charge them to Purchases until they arrive. If
not charged to Purchases, or other similar account, they must not
be included in the inventory. However, theoretically, this method
is incorrect. The fact that the goods have been ordered and are now
in transit makes the business liable for their purchase price, and
although not actually received, in reality they form a part of the
asset merchandise. It is true that until the goods are received,
inspected, and accepted, the purchaser has the privilege of refusing
them if they are not as ordered, but this privilege is exercised only
in exceptional cases. Generally speaking, therefore, it is better
to consider such goods as a completed purchase, include them in the
inventory and credit the vendor for the amount of his invoice. Instead
of being charged to Purchases account, such goods may be charged to
Purchase Commitments which will better indicate their status.
GOODS RECEIVED BUT NOT YET BOOKED. In concerns where a separate
shipping and receiving department is maintained, it may happen that
the goods received by this department are not immediately transferred
to stock or storage, in which case they may not have been taken up on
the books. At the end of the period it is important to see that all
such goods are properly recorded as purchased and are included in the
inventory.
GOODS IN OR OUT ON CONSIGNMENT. Still another problem in connection
with the inventory has to do with goods which do not belong to the
business because they have been consigned to it for sale on account
of their owner. Inward consigned goods must not be included in the
inventory, if taken into stock, it is very important that they be so
marked as easily to distinguish them from the regular stock.
Similarly, if goods are out on consignment to another market, they
still belong to the business and must not be overlooked at inventory
time. If the proper record is made at the time the goods are shipped,
as will be explained in Chapter XLVIII, the memorandum accounts on the
ledger will call attention to them. In some concerns all such goods
are entered as sales at the time of shipment. If at the end of the
period part of these consigned goods are still unsold and in the hands
of agents, they should be deducted from the sales for the period and
included in the inventory at full cost.
GOODS FOR FUTURE DELIVERY. Goods sold for future delivery are best
handled at inventory time in the manner suggested in Chapter XLVII,
even if they are set aside ready for delivery.
GOODS READY FOR CURRENT DELIVERY. Finally, goods sold for current
shipment but delayed in delivery on account of congestion in the
service or for some other cause are best treated as sales and excluded
from the inventory.
CHAPTER XLVII
SALES
=Importance of the Sales Department.=—Of the major departments into
which business activities are commonly classified, the selling
department ranks first in point of relative importance. Regardless
of the efficiency secured in the other branches, regardless of the
economy in buying and the excellence of administration, the life of
a business largely depends upon the results obtained by the selling
division. Since the sales department plays such an important part in
the development of the business, it is evident that the accounting
and financial problems connected with sales should be given careful
attention and should be handled by the most scientific and up-to-date
methods.
As before stated, one of the most important principles of modern
accounting is that the system by which the records are to be kept must
be planned in advance. The modern accountant must first know the kind
of information that is desired and he then can classify the accounts so
that the information may be obtained from the ledger or other records
at any time, with the least possible effort.
=Basis for Sales Classification.=—The majority of enterprises at the
present time deal in a number of commodities, the kind, quality,
and grades of which are of such variety that careful classification
is imperative. Formerly all goods sold were classed together under
a single title “Merchandise,” with the result that no detailed
information concerning the sale of particular goods, qualities, and
grades was available and the manager or proprietor was unable to study
the movement of specific classes of commodities.
Applying the principle of classification to sales, the basis for
classification depends on the character of the business and the nature
of the goods sold. Where the commodities dealt in are of such variety
that it is impracticable to have a separate account for each kind, a
more general grouping by classes may be necessary. Where the concern
manufactures some of its commodities and buys the remainder in the open
market, an analysis of sales on the basis of “own” product and “other”
product may be wanted. Sales may be classified also on the basis of
the sales contract, as cash, credit, instalment, sales to branches,
consignment sales, approval sales, etc. Accounting problems in
connection with these various types of classification will be treated
in the present chapter.
=Principles Governing Analysis in Books of Original Entry.=—It is
evident that the kind of classification shown in the ledger determines
the journal analysis. That is to say, the analysis in books of original
entry, and therefore their columnar ruling, always depends upon the way
in which the accounts are classified and grouped in the ledger.
The various types of analyses, both in journals and in ledgers, make
use of either (or both) horizontal or vertical distribution. In most
forms or records, except in banking and allied institutions, the
generally accepted practice is to reserve vertical distribution for
showing chronological sequence, and horizontal distribution for any
other kind of classification. The reason for this lies in the fact
that the time basis requires practically unlimited space and the
requirement can be met only by vertical distribution, consecutive pages
being considered as the continuation of preceding pages. Horizontal
distribution, on the other hand, is limited to the width of the page.
By reference to Chapter XLI, “Handling the Cash,” it will be noted
that for the purpose of horizontal classification the sheet contains a
number of money columns, each headed by an individual class title, and
that each item is first entered in the general column and then extended
to one of the subsidiary columns. This serves as a check against error,
since it is evident that the total of the general column must be equal
to the sum of the totals of the other columns, thus furnishing a fair
though not complete proof that the extensions have been made correctly.
All books where analytical processes are involved should provide some
kind of internal check. The student should refer to Chapters XVIII, XIX
and XX, where form of analytic journals and explanation of them were
given.
=Use of the Sales Ticket in Analysis.=—Since the sales invoice or
ticket is the basis for entry and analysis in the sales journal,
it must give on its face the information necessary for making the
analysis. In accordance with the basis of classification used, it
should show the department number, the kind of goods sold, whether
for cash or credit, etc. The use of invoices with printed department
numbers and of different colors for cash, charge, and C.O.D. sales, aid
in making the record effective.
In a business of any size, the entry on the main sales journal only
shows the total for the day’s sales. The sales tickets lend themselves
easily to grouping, and therefore a day’s sales may be analyzed by
sorting and grouping the sales tickets. Under any method of this sort,
of course, each ticket must be used for the record of only one class of
goods. Thus the totals of each of these sorted groups may be entered
in the sales journal at the end of the day. Besides furnishing the
totals for each group of sales, the individual tickets are used also
for the purpose of posting the sales to the accounts of the particular
customers.
After use in these various ways the tickets are filed away in
binders for reference. Thus, the main books are freed of a mass of
comparatively unimportant detail, to which it is necessary to refer
only in rare cases.
=Analyzing Sales Returns.=—Attention should be called to the necessity
of analyzing returned sales, allowances, and rebates, on the same basis
as sales. Provision should also be made for a separate sales returns
journal since the ordinary journal does not lend itself economically to
an analyzed record of that kind.
=Purchases and Returned Purchases.=—It has been pointed out that the
basis of classification of sales in the ledger determines the analysis
in the sales journal. The same classification should also be applied to
purchases, returned purchases, and inventories, because only in this
way is it possible to determine the profit from the different classes
of merchandise.
Similarly, all inward costs, such as duty, freight, insurance,
handling, etc., which enter into the cost of goods sold must be
analyzed on the same basis and apportioned to each group on some
equitable basis. Because of practical difficulties, however, this
analysis or apportionment usually is not made upon the first entry
of these items on the records, but a distribution on a more or less
arbitrary basis is made at the close of the period. In a large concern
where very detailed information as to results is desired, an analysis
of many other expenses and costs applicable to each sales group is
made. Such a distribution of expense, however, leads into the field of
cost accounting which is beyond the scope of the present discussion.
=The Handling of Cash Sales.=—Where an analysis by kind of commodity
is unnecessary, a simple method of booking cash sales is by entry in
a “Sales” column provided in the cash book, the total of which is
posted to the credit of “Sales” in the ledger. Under this method, cash
sales need not be entered in the sales journal. In previous chapters
where the functions of the subsidiary journals were discussed, the
practice of entering a cash sale in both cash book and sales journal
was advised, so that the summaries of each may show true totals for
those groups of business activities. However, this principle is often
departed from and the method just described for booking cash sales is
followed. Where an analysis of the sales is desired, the practical
difficulty of providing analysis columns in the cash book for the cash
sales in addition to analysis columns in the sales journal for the
sales on account gives added weight to the principle stated.
It is sometimes desirable to distinguish between cash and charge
sales, thus requiring two accounts, the “Sales on Account” and the
“Cash Sales,” to show the total sales for the period. This is easily
accomplished by the use in the sales journal of the “On Account” and
“Cash” columns whose totals furnish the amounts for posting to the two
ledger accounts. Even were it desired to have two sales accounts, the
cash and charge, for each department, the necessary information can be
secured by providing in the sales journal two columns, a cash and a
charge for each department and posting their totals to the two sales
accounts carried for each.
A more complicated problem arises when it is desired to keep an
account to show the total cash sales of _all_ departments and at the
same time to keep one sales account for each department, in which
will be recorded both cash and charge sales. The information can be
placed on the ledger, but not without destroying the usual meaning
of the Cash Sales account. The purpose is accomplished by providing
the sales journal with two total or general columns—in addition to
the departmental columns—one for charge and one for cash sales, and
by carrying a Cash Sales column in the cash book. The items in the
Cash Sales column in the sales journal are distributed to the proper
analytic columns for classification. At the end of the period the
totals of these analytic columns (which include both cash and charge
sales items) are posted to the credit of the proper departmental
accounts in the ledger. The total of the Cash Sales column in the sales
journal, however, is posted to the _debit_ of Cash Sales in the ledger,
which will be offset by a corresponding credit item from the Cash Sales
column in the cash book. These two totals should agree provided the
books are completely posted.
=Sales to Branches.=—Sales to branches are made on different bases
in different concerns. Sometimes such sales are charged to the branch
office at cost, sometimes at full selling price, and sometimes at a
fictitious figure. The first method is theoretically the best, but is
not always desirable because head offices frequently prefer to keep
their branches ignorant of cost prices. For this reason such sales are
frequently charged to the branch office at the regular selling price.
By this method, however, the books of the head office record the goods
as if actually sold, while in reality they have been merely transferred
to a branch office. Consequently, the books show a profit which is not
yet earned. In order to correct this, it is necessary at the end of
the period to make an adjustment entry covering all goods still in the
possession of the branch office unsold at that time. By billing the
goods at a fictitious figure the branch is also kept in ignorance as to
real profits, but proper adjustment should be made at the close of the
period for the reason explained just above.
Whichever method is followed, sales to branches should always be kept
separate from the regular sales accounts. Where shipments of goods
to branches are frequent and a matter of regular routine, a branch
shipments journal similar to the sales journal should be provided;
otherwise a special column in the sales journal will suffice. The
total of such sales should be credited to a Branch Shipments, Branch
Consignments, or some similar account, so as not to confuse these
transactions with regular sales. The subject of accounting for both
domestic and foreign branches is treated in Volume II.
=Consignment Sales.=—Consignment sales—which in some respects
resemble branch sales—should also be recorded separately from regular
sales. This is so because the title to goods out on consignment is
still vested in the consignor and no element of profit appears in the
transaction until an actual sale is made. However, in the case of
an _occasional_ consignee as distinguished from a factor who deals
regularly in consigned goods, it has usually been held that the title
has passed to the consignee so far as the consignee’s dealings with all
except the consignor are concerned. Only in this way can the interests
of innocent third parties be adequately protected.
The accounting for consignments is treated in Chapter XLVIII.
=Instalment Sales.=—The instalment sale should be treated in a
different manner from regular sales because of certain special features
connected with it. The chief characteristic of the instalment sale is
the probability of the goods coming back into the seller’s possession
through forfeiture because of non-payment of instalments, the profit on
the transaction of course being affected thereby.
The sale of goods with the privilege of payment in instalments is a
well-recognized custom in certain lines, particularly in the furniture,
piano, book subscription, and similar businesses. To protect the
seller, the sale contract almost invariably contains a clause to the
effect that title to the goods shall remain in the seller until final
payment has been made, that failure to pay any instalment when due
shall result in the cancellation of the contract, and that in such case
the goods shall be returned to the seller. Experience with this class
of sales shows that a large number of contracts are forfeited with
or without return of the goods. Where the goods are returned, there
is frequently a large loss through depreciation, the returned goods
having to be treated as second-hand. In some instances, to enforce
return of the goods might entail greater expense than loss of the
goods themselves. These are, of course, questions of business policy
rather than of accounting, although the results shown by the accounting
department enter into their settlement.
=Accounting for Instalment Sales.=—The accounting for sales under
the instalment plan is not different from accounting for other sales.
They are, in their first record, charged to the customer and credited
to Sales or various departmental sales accounts. If the goods are
forfeited and returned, the record is to Returned Sales for the debit
and the customer is credited for the unpaid instalment. Whatever profit
or loss there may be on the transaction will be shown in the Profit and
Loss account when the inventory is taken and the returned goods are
appraised. If the customer fails to pay his instalments but does not
return the goods, the loss is one from bad debts.
=Separation of Instalment from Regular Sales Records.=—Where both
instalment and regular sales are made, as is usually the case since
few concerns limit their activities entirely to the instalment method,
it is best to keep a separate instalment ledger with a controlling
account, called “Instalment Accounts Receivable” or “Instalment
Contracts.” The two classes of customers should be kept separate
because of the greater liability to loss in the one class than in the
other. Before profits for the period can be correctly determined, it
is necessary to estimate the probable loss on contracts closed during
the period. In the balance sheet separate showing should be made of the
reserve for this class of accounts receivable and the reserve for the
other class. The estimated loss on the instalment accounts is of course
a figure based upon experience, but a conservative policy requires that
the amount should be fairly liberal.
=Delinquency Records.=—Forfeiture of contracts is not usually enforced
upon first failure to pay an instalment, but such delinquencies should
be brought to the attention of the management and particularly of the
credit and collection department. Delinquency may even be recorded in
the books by transfer from the Instalment Accounts Receivable to a
“Delinquent Instalment” account. This makes an up-to-date analysis of
the Instalment Receivable account and so furnishes a better basis for
estimating losses from bad debts than where no separation is made.
=Chief Considerations in Handling Instalment Sales.=—From the
accounting standpoint, the chief question is that of making the
estimate for loss from uncollectible accounts. From the standpoint
of financial management, instalment sales present the problems of
passing on credits before taking the risks and afterwards of pushing
collections so as to prevent, whenever possible, forfeiture and
consequent loss. It is not purposed to treat of these phases here,
for which the student is referred to standard works on credits and
collections.
=Sales for Future Delivery.=—From a legal point of view, the receipt
of a purchase order gives rise to certain rights and obligations
enforceable at law between buyer and seller. While the seller may not
be able to enforce specific performance of the contract, yet he is
entitled to the damage incurred through nonperformance. Every merchant
knows, however, that the cost of securing the remedy is usually higher
than the resulting gain and, furthermore, an action against the
customer frequently causes the loss of his trade.
Sales for future delivery do not always materialize, since either the
buyer or the seller may wish to cancel the contract. A conservative
policy therefore demands that the sale be not booked until delivery is
made. The order, however, may be received in one fiscal period and the
sale be credited to the period in which the goods are delivered, while
the major part of the expenses in connection with the sale may have
been incurred during the period in which the order was received. The
current period then is charged with the expenses but does not receive
the credit to which it seems entitled. Therefore, the portion of the
selling expense incurred during the period in which the order was
secured should be deferred to the period which receives the credit for
the sale.
This policy should be followed even when the goods covered by the
future sale are set aside specifically for future delivery and the sale
should not be booked until delivery is made. At inventory time such
goods should be included at cost, with the deferred expense charge as
above. Occasionally an unscrupulous merchant in need of cash will bill
such goods and discount the invoice; but for the reason given above
such goods should not be charged to the customer until delivery is made.
=Department Store Sales.=—As indicated above, in a department store
sales are usually classified by departments. The two classes of sales
tickets, cash and credit, are sorted by departments and the totals are
entered daily either in the sales journal or on the loose sales sheets
which, when filed in a binder, make up the sales journal. At the end
of the month the journal is posted to the various department sales
accounts. Each day the entries on the sales journal are checked against
the cashier’s record of cash received from sales and the bookkeeper’s
record of charges posted to customers.
=C. O. D. Sales.=—For this class of sales the credit is booked in the
usual way but the debit is made to a C.O.D. account. The packages are
charged on the shipping department’s memorandum records to the various
delivery men who are credited with the collections turned in. These
collections form the basis for the credit to the C.O.D. account on
the ledger. Any balance in the C.O.D. account shows the amount of the
undelivered goods still on hand in the shipping department or on the
wagons and therefore charged against the various drivers.
=Approval Sales.=—In many lines of business approval sales are
common. Merchandising concerns frequently send goods to customers for
trial and inspection, with the privilege of return if the goods prove
unsatisfactory. Publishing houses often send out books—both single
volumes and whole sets—with a few days’ examination privilege. This
class of business is often handled in a rather unsystematic fashion.
Usually it is impossible to discriminate among prospective customers,
since offers of this kind must be made to all alike. Consequently the
privilege is often abused by the unscrupulous.
=Accounting for Approval Sales.=—This abuse creates the problem of a
correct method of handling approval sales. The difficulty is rather
one of organization and administration than of accounting procedure;
the record-keeping presents no new difficulties and under certain
conditions may be likened to the methods of recording outward consigned
goods. In no sense are such transactions to be regarded as sales and
handled in the regular sales records, thereby showing a profit not
yet earned. The correct method, both from an accounting and a legal
viewpoint, is to keep a memorandum record of approval sales similar to
that made for consignments.
Unlike consignments, however, the price shown in the invoice is the
actual selling price of the goods, and the sale if consummated is
treated as a regular sale, no effort being made to keep the profit
or loss on approval sales separate from the profit on regular sale
transactions.
In the retail trade the prevailing practice in handling approval sales
is to enter the charge to the customer’s account when the goods are
sent out and to credit the account for all returns. In this way the
books keep record of all goods out on approval and provide an adequate
check against lost or misplaced goods.
When transactions of this kind are large in number, subsidiary books
devoted exclusively to their record may be kept.
=Tickler File Method of Handling Approval Sales.=—Approval sales
transactions must usually be completed within a comparatively short
space of time, either by acceptance or by return of the goods, and in
such cases a shorter method of recording them is followed. The sales
tickets or invoices covering approval sales are made with some kind
of a distinctive mark—color of paper, title, etc.—to allow their easy
separation from the regular sales tickets. These tickets are kept in
a temporary tickler file in the order of the expiration dates of the
approval period. If the sale is consummated, the ticket bearing a stamp
to that effect is sent through for record as a regular cash or credit
sale. If the goods are returned, the ticket may be filed as a part of
that particular customer’s record; in this way a cumulative record is
secured which would in some cases give an interesting commentary on
human nature. If the customer is one who makes it his or her practice
to buy on approval to secure the free use of nice wares for an evening
or for some social function, the record would show it. A rigorous
and unrelenting collection and follow-up system, supplemented by a
full credit and information record, is the only safeguard against
unscrupulous customers and oftentimes even this proves inadequate.
At inventory time all goods out on approval as shown by the approval
sales file must be included in the inventory at inventory price, for
the goods are still owned by the firm. As stated above, they must never
be treated as sales.
=The Bill and Charge System.=—By this name is known the method of
writing up the customer’s bill and using it as the basis for the
charge to his account. The system is operated somewhat as follows: The
duplicate sales tickets go to the auditing department, where they are
first sorted by departments to secure the departmental analysis of the
sales, and then re-sorted according to customers. Thus, if a customer
has made purchases in more than one department, the tickets covering
all his purchases are brought together. Each customer’s monthly bill
or statement of account is started at the beginning of the month on a
folded billhead perforated at the fold, the duplicate or under portion
usually being somewhat wider, with loose-leaf binder punchings. On
these bill and duplicate blanks the charges for the day are entered
from the sorted sales tickets. This work is usually done on a billing
machine with carbon roll or with carbon paper insertion.
At the end of the day the total amount of the charges entered on all
monthly statements is either found by means of an adding machine or is
indicated by the “tally strip” of the billing machine. This total must
of course be equal to the aggregate amount of all sales tickets for
that day, thereby proving the work of the billing clerks.
Customers’ bills after entry each day may either be passed on to the
bookkeepers who charge each customer’s account with the day’s total
purchases as shown by the bill, or the bills are returned to the file
until used again for subsequent purchases. In such case the bookkeeper
enters the total monthly charge to the customer’s account, only once a
month.
Returned goods and allowances are also entered on these customers’
bills, but in a separate column or on another portion of the sheet.
The total charges entered on these statements must check against the
total credit sales for the month, thus proving the additions of the
bills.
At the end of the month the bill is torn from its duplicate and is
passed to the bookkeepers. They enter the previous month’s balance,
if there is one, and the current payments on account, and extend the
amount now due. After the bills or statements have been mailed to the
customers, the duplicate bills are filed away, being virtually the
detail of the ledger account, for use in case of dispute.
This method of handling credit sales provides a ready means of getting
the bills out on time, of assuring agreement between the ledger
accounts and the bills, of freeing the ledger accounts of unnecessary
detail, and of checking the total billings against the total sales
tickets.
=Salesmen’s Commissions and Efficiency Records.=—Salesmen are often
paid a commission in addition to salaries. Where the commission is
based on the amount of sales, the sales ticket is made use of as the
source of information for computing the commissions earned. To this
end the tickets are sorted according to salesmen, and a record sheet,
either separate or as an adjunct to the sales journal sheets, is filled
in with each salesman’s total sales for the day. These totals should
prove against the salesman’s record in the back of his book of sales
tickets. At the end of the month his total sales are shown by his
record sheet and his commission is determined therefrom. Of course, the
total for all salesmen as shown by these sheets must equal the total
sales for the period.
If the commission, often known as “spifs” or “P. M.’s,” is allowed
only on certain classes of sales in order to encourage the movement of
old stock, each sales ticket should indicate the amount of premium or
commission due, so that a record can be made without the necessity of
depending on the records of the individual salesmen.
Salesmen’s records besides being used for the particular purpose of
computing commission, or bonuses due them, serve a wider object in
that they contain fairly complete and reliable data in regard to the
value and efficiency of individual salesmen. For this reason such
records should be kept at all times, no matter whether a commission or
bonus system is operated or not. Whenever an increase in a salesman’s
salary is considered or when the sales force is to be decreased in
number, these efficiency records are a valuable aid in making the right
decision.
CHAPTER XLVIII
CONSIGNMENTS
=Definition.=—When goods are shipped to another party to be sold by him
for account of the shipper, the transaction is called a “consignment.”
In its original sense, to “consign” means to seal, sign, mark, or
label in a formal way. In commerce this term has come to signify goods
sent for sale through another party. Usually such goods are marked or
labeled to distinguish them from those belonging to the consignee.
The owner or sender is designated “the consignor”; the selling or
receiving party “the consignee.” Sometimes the word “shipment” is
used by the consignor to designate the goods sent away for sale,
and the word “consignment” to indicate the goods received by the
consignee. Differentiation on this basis is convenient, but the terms
“consignments-out” and “consignments-in” are more descriptive and will
be used here.
=Legal Status.=—Before treating the accounts required to record
consignment transactions, it is well to understand the legal relations
between the consignor and consignee. The general law of bailments and
of agency applies in a restricted sense to consignments. A bailment is
defined as, “A delivery of goods for the execution of a special object,
beneficial to the bailor, the bailee or both, upon a contract expressed
or implied, to carry out this object, and dispose of the property in
conformity with the purpose of the trust.” Agency is the term used
to indicate the legal relation between a principal and the agent who
represents him. A person appointing another to act for him in his
dealings with third parties is called the principal. The one appointed
to represent the principal is the agent. A bailment is therefore a
special class of agency transactions with particular rules governing
the safe-keeping of the goods of the principal in the possession of the
agent. In the case of a consignment, the consignor is the principal and
the consignee the agent. The relation of the consignee to the consignor
as regards the care to be exercised in handling the consignor’s goods
is a bailment relationship.
=The Broker.=—A broker, although he acts as agent, usually is not
a consignee. He acts “as a middleman, bringing people together to
trade, or trading for them in the private purchase or sale of any kind
of property, which property, ordinarily, is not in his possession.”
The charge for his service is usually in the form of a commission,
sometimes called brokerage. There are several classes of brokers, named
according to the kind of commodity they deal in; for instance, there is
the exchange broker, the note broker, the insurance broker, the stock
broker, the real estate broker, the merchandise broker, etc.
=The Factor.=—Other types of middlemen are the manufacturer’s agent,
who is a broker or sales agent, effecting sales usually by means of
samples; and the factor or commission merchant who actually handles and
sells the goods of his principal. The chief distinction between the
broker and the factor is that the broker sells goods in the name and
for the account of his principal, but the goods are delivered directly
to the purchaser by the principal, who also collects the account;
whereas the factor has the goods of his principal in his possession and
sells them either in his own name or in the name of his principal.
The factor may operate under a specific contract with his principal,
covering a single consignment, or under a general contract governing
all consignment transactions between the two parties. Again, there
may be no formal contract between them, in which case the law sets
up a contract relationship based on trade usage and customs in any
particular line. Where the factor operates under a specific or general
contract, certain points may arise which are not provided for in such
contract, and on these points trade custom governs.
=Duties of the Factor.=—Barring specific instructions, the factor may
conduct the consignment transactions for his principal on the same
basis and in the same general way as he would conduct them were the
goods his own. In other words, he is expected to exercise the same care
in the handling of consignment goods as he employs in handling his own
property. In selling goods consigned to him he may extend credit to the
buyer if it is the custom in that particular line to do so, and he must
exercise due care as to the rating of the customer. He must push his
collections with ordinary diligence. He may warrant the goods sold if
that is customary. He can give good title to goods sold, and this title
may even be better than the one possessed by the owner of the goods. A
bona fide purchaser who does not know the principal is protected in a
sale made by a factor even if the factor exceeded his authority.
=Factor Must Protect Goods.=—So long as any part of the principal’s
goods are unsold and in the possession of the factor, he must protect
and safeguard them. He is not liable, however, for damage from forces
or conditions over which he has no control. The degree of diligence
required of him largely depends on the nature of the goods. What would
be considered due diligence in one case, might be construed as gross
neglect in the case of more valuable or perishable goods.
=Consignments to be Kept Separate.=—It is a fundamental requirement
and of the very essence of the factor relationship, that the
principal’s goods must be kept distinct from all other goods in the
factor’s possession. This applies not only to the consigned goods as
such, but also to the assets received by the factor upon the sale of
such goods—as cash, accounts and notes receivable, etc. To satisfy
this latter requirement it is usually held that actual separation is
not necessary, but that it is sufficient to record these properties in
such a manner that they can always be separated if the need arises. The
principal’s properties are held in trust for him by the factor but are
subject to the legitimate claims of the factor.
=Expenses Charged against Consignment.=—Barring specific instructions
to the contrary, the factor may incur certain expenses necessary to
safeguard the interest of his principal and to effect the sale of his
goods. These include such items as freight, insurance, duty, handling
charges, allowances and rebates to customers for unsatisfactory goods,
etc. All these are proper charges against the consignment, i.e.,
against the principal.
=Factor’s Lien on Consigned Goods.=—For any legitimate expenses
incurred and for any payments made the principal in advance of the
settlement date, the factor has a lien on the consigned goods. It has
been held in some cases that the factor has the right to sell the
goods in satisfaction of the lien, and if the proceeds of the sale are
not sufficient to satisfy the factor’s claims against the principal,
the latter is liable for the amount of the deficiency. The factor’s
commission from the principal is also protected by this lien and, if
necessary, the factor may apply part or all the proceeds of the sale
toward the payment of his commission. A lien, of course, is binding
only so long as the goods are in the factor’s possession.
=Account Sales.=—Upon completion of his service the factor must make
a strict accounting of his transactions to the principal. In case of
dispute he can be required to open to the inspection of the principal
his records covering the consignment dealings. The usual method of
settlement is by means of an “account sales” rendered by the factor
to his principal. The account sales is a summarized statement of all
transactions connected with a particular consignment. It constitutes
the formal accounting for the consignment transaction. It must show
the amount or quantity of goods received, the sales made, and the
expenses incurred, the balance being the amount due the principal. This
amount may be either remitted or credited to the principal’s account,
according to the contract between them. The usual form of account sales
is shown in Form 44.
Goods may be billed to the factor at cost, at the current market price,
or at some fictitious figure. This billing price does not enter into
the accounting of the factor at all. It is the selling price of the
factor which is the basis of income against which expenses are charged.
The principal may indicate a selling price for his goods but this
serves merely as a guide to the factor as to the price desired. If,
however, the principal gives specific instruction as to sale price, the
agent must govern himself accordingly.
[Illustration: Form 44. Account Sales]
=Compensation of Factor.=—The factor usually receives his compensation
on a commission basis—so many per cent of the sales he makes. When the
contract makes specific provision for it, he may sell the goods at a
higher price than that fixed by the principal and retain part or all of
the excess as compensation.
=“Del Credere” Agency.=—Where a factor sells on credit, the accounts
belong to the principal and any loss through uncollectible accounts is
borne by the latter. Sometimes the factor guarantees the collection
of all accounts; in this case he is known as a “del credere” agent
and receives additional compensation for assuming this risk. Such a
guarantee really amounts to a sale of the accounts to the factor.
=Advantages of Consignments.=—While the practice of consignment trading
is not so prevalent now as it was formerly, it still prevails in some
lines and under certain conditions. Shippers to the produce market
frequently consign their goods to city brokers whom they instruct to
take advantage of the prices prevailing in the open market, and in
this way they may realize higher prices than when they sell outright
to the wholesaler. The consignment shipment has another advantage to
the shipper, in that the title to the goods remains vested in him;
hence a consignment is safer than a sale on credit to a consignee
unless his rating is satisfactory. The practice of consignment trading
is of sufficient importance to require a discussion of the accounting
principles involved. These will be given first from the viewpoint of
the consignor, and then from that of the consignee.
=The Consignor’s Entries.=—The chief interest of the consignor lies
in the net outcome of each sale in order to determine the advantage,
if any, of the consignment policy over a straight sale policy. To
accomplish this, he must keep a separate account with each consignment,
either on the general ledger or on a subsidiary ledger with a total
summary account on the general ledger. When the consignor sends the
goods, whether they be invoiced at cost, sale, or some other price,
entry should not be made direct to his Sales account, for no sale has
been made as yet. He has merely placed some of his stock in another
market, being still the owner of the goods.
=Two Methods of Entering Sales on Consignor’s Books.=—There are two
ways of recording correctly a consignment on the consignor’s books at
the time the goods are sent. According to one method, the goods are
transferred from Purchases to another merchandise account, having for
its title the word “Consignment,” followed usually by the name of the
consignee and the number of the particular consignment made to him, as
“Consignment No. 4, J. B. Arscott.” To this account are charged not
only the goods at cost price but also all expenses of the transfer, as
freight, duty, insurance, etc., the corresponding credits being to Cash
or to Purchases as the case may require. This is the only record made,
until the account sales is received from the factor. Upon the receipt
of the account sales, the Consignment account may either be credited
with the net proceeds or be charged with the expenses and credited
with the gross sales, as shown in the account sales. If the money is
remitted by the factor the Cash account is debited; otherwise the
factor’s account is debited for the net proceeds.
The Consignment account is now a true proprietorship account, showing
income on the one side and cost of that income on the other side. The
difference is either a profit or a loss according as the balance is a
credit or a debit. In order readily to distinguish complete consignment
transactions from those only partially completed, it is best to close
the completed accounts by a transfer of the balance to a “Consignments
Profit and Loss” account where it is held until the close of a fiscal
period, at which time it is carried to the general profit and loss.
The second method of recording the transaction at the time of sending
the consignment is to set up two memorandum accounts, Consignment
and Consignment-Out (or Consignment Sales), debiting and crediting
these respectively with the invoiced value of the consigned goods. In
this case there is no credit to the Purchases account as under the
first method given above. Any expenses incurred are charged to the
regular expense accounts instead of to the Consignment account. For
handling the consignment shipments no special books are required,
original entry being in the general journal. If there are many such
transactions, however, a special column in the sales journal or a
special consignments-out journal is desirable.
Upon receipt of the account sales, the regular sales account is
credited either with the net or with the gross proceeds; and the other
accounts—as cash, the consignee, and expenses—are debited according to
the manner of booking as explained in connection with the first method.
The two memorandum accounts, having served their purpose of calling
attention to the fact that some goods have been sent to other markets
for sale, should now be canceled by a reversing entry, since the goods
have been sold and the record of their sale has been made in the
regular sales account. The effect of this second method is to merge
consignment and regular sales transactions into one record, making
impossible a separate showing of the profit or loss on consignments.
The particular method to be used, therefore, will depend upon the
information desired.
=Consignor’s Inventory.=—If the consignor’s fiscal period closes
before an account sales in full settlement is received, and if
accounting treatment is by the first method, the goods shown in the
Consignment account are included in the inventory of goods on hand and
so represented in the balance sheet. If the second method is used,
the Consignment and Consignment-Out accounts are both omitted from
the balance sheet, being merely canceling memorandum entries, and the
unsold portion of the consigned goods are included in the inventory.
In determining the value of consigned goods, the expenses incurred in
sending the goods to the new market may properly be included as a part
of the cost.
=The Consignee’s Entries—First Method.=—Two methods of making entries
on the consignee’s books at the time of receipt of goods are used.
In the first method, two memorandum accounts, Consignments and
Consignments-In, are set up, Consignments being debited for the billed
value of the goods received, and Consignments-In being credited for the
same item. The purpose of these accounts is merely to set up on the
general books a reminder of the transaction.
A third account, John Doe, Principal, is used for current record.
This account is charged with the expenses incurred in connection
with the consignment and is credited with the sales made therefrom;
it is charged also with the consignee’s commission. The balance of
the account is, at the completion of the sale, the amount due the
consignor, Doe. When this is paid, the account is closed by a debit to
John Doe, Principal, and a credit to Cash or Notes Payable. So long
as the balance is unpaid, the account, John Doe, Principal, shows
the factor’s liability to his principal. This is a special kind of
liability, that of a trustee, which is indicated by the inclusion of
the word “Principal” in the account title; in case of insolvency a
portion of the assets equal to the balance of John Doe, Principal’s
account belongs to John Doe and, unless merged beyond possibility of
separation, must be so treated. When the sale has been completed, the
memorandum accounts, Consignments and Consignments-In, are canceled
against each other, having served their purpose.
=The Consignee’s Entries—Second Method.=—Under the second method,
instead of an entry on the general books, the receipt of the goods is
recorded in a blotter or memorandum book of consignments received, in
which are entered all essential data, covering the name of consignor,
quantity, price, legend or distinguishing marks, etc. Expenses incurred
are charged to John Doe, Consignment account on the general books, and
sales are credited to the same account. Settlement is made as with
John Doe, Principal, as explained above, except that when the balance
is not paid it frequently is transferred to a simple John Doe personal
account, where so far as account title is concerned it loses its
character as a trust account and is merged with all other creditors.
=Consignments Must Have Distinguishing Marks.=—In making his sales from
the various consignments, the factor must be careful to record them in
a way to distinguish the goods taken from different consignments. This
is particularly true of sales on account, for if the accounts prove
uncollectible it is important to know to which lot the loss must be
charged. This is accomplished by recording the consignment legend or
mark with the sale.
=Factor’s Books at Close of Fiscal Period.=—When the factor’s books
are closed, the commissions earned to date on consignment sales,
whether the entire consignment transaction is fully or only partially
completed, should be taken into account. Commissions earned on
completed consignments should already be on the books as debits to
the various principals’ accounts and credits to “Commissions Earned.”
The commissions on incomplete consignments are brought on the books
by entry of the accrued income in the Commissions Earned account, the
amount being based on the sales made from the incompleted consignments
during the period. The accounts with these incomplete consignments may
show either debit or credit balances. If a debit balance is shown, the
account is an asset representing the consignee’s claim against his
principal for expenses incurred in excess of sales made. If a credit
balance is shown, the account represents a trust liability as above.
At a closing time the memorandum accounts of incomplete transactions
should be adjusted to their present inventory values.
=Consignee’s Inventory.=—Just as the consignor must be careful to
include in his inventory all goods out on consignment, so the consignee
must be equally careful to exclude from his inventory all goods of his
principal’s still unsold and in his possession.
=Illustrative Entries on Consignor’s and Consignee’s Books.=—An
illustration of a simple consignment transaction from the viewpoint
of both consignor and consignee is given below. It is assumed that a
consignment transaction takes place between J. J. Querles and I. M.
Factor as follows:
PROBLEM. Querles sends to Factor to be sold on
his account goods amounting at cost to $1,250. He
pays cartage $15, and insurance $25; while Factor pays
freight, duty, and cartage amounting to $52.50. Factor
makes sales of $1,600 and renders an account sales
showing also allowances to customers of $27.30, a 5%
commission charge and 1% for guaranteeing collection of
all accounts, and the net proceeds credited.
1. Querles’ books at the time of sending the goods to
Factor:
Consignment, I. M. Factor, No. 1 1,250.00
Purchases 1,250.00
Consignment, I. M. Factor, No. 1 40.00
Cash 40.00
Cartage $15, insurance $25.
2. Factor’s books at the time of receipt of Querles’
goods:
Consignment 1,250.00
Consignments-In 1,250.00
To set up memo accounts of the
receipt of Querles’ goods.
J. J. Querles, Principal 52.50
Cash 52.50
Freight, duty, and cartage on
Querles’ goods.
3. Factor’s books during the course of consignment
transactions:
Customers 1,600.00
J. J. Querles, Principal 1,600.00
To credit Querles with the sales.
J. J. Querles, Principal 123.30
Customers 27.30
Commissions 80.00
Collections Guarantee 16.00
To charge Querles with all expenses.
Consignments-In 1,250.00
Consignment 1,250.00
To reverse.
4. Querles’ books upon receipt of the account sales:
Consignment, I. M. Factor, No. 1 175.80
I. M. Factor 1,424.20
Consignment, I. M. Factor, No. 1 1,600.00
To credit the consignment with its
sales and charge it with its expenses,
including commission and to charge
Factor with the balance due.
Consignment, I. M. Factor, No. 1 134.20
Consignments Profit and Loss 134.20
To transfer the profit on this
consignment.
5. When Factor finally remits the balance of $1,424.20,
his entry is:
J. J. Querles, Principal 1,424.20
Cash 1,424.20
thus canceling his liability to Querles.
6. Querles’ books will show:
Cash 1,424.20
I. M. Factor 1,424.20
canceling his claim against Factor.
If the second method (see page 455) of making the
consignor’s record is used, the entries under No. 1
will appear as follows:
Consignment, I. M. Factor, No. 1 1,250.00
Consignments-Out 1,250.00
Cartage 15.00
Insurance 25.00
Cash 40.00
and No. 4 would be:
Freight 52.50
Sales Allowances 27.30
Commissions 96.00
I. M. Factor 1,424.20
Sales 1,600.00
Consignments-Out 1,250.00
Consignment, I. M. Factor, No. 1 1,250.00
To reverse.
In these last entries made under the second method,
consignment sales are included in the regular Sales
account, and the profit or loss is merged with that
from regular sales.
Decision as to which of the two accounting methods should be used must
be made according to the information desired by the principal. Where
consignment transactions are a side line, the record is usually kept by
the first method which shows the profit or the loss on each transaction
and thus furnishes valuable information for executives. This is
sometimes called the occasional consignment theory or method. Where the
consignment transaction is the usual method of effecting sales, the
second method illustrated above is generally to be followed, because by
this method all consignment transactions are properly included in the
regular sales and expense records.
CHAPTER XLIX
ADVENTURE SALES
=Adventure Transactions.=—Before the day of easy transportation and
communication between markets, adventure or venture undertakings were
quite common. The inherent willingness of men to take a chance, and
the desire to speculate, often led to the fitting out of cargoes of
merchandise for sale in distant ports and the equipping of trading
expeditions into unknown regions. Many dangers had to be met, the
hazards and risks being great. Success attended many adventurers, and
many also met with failure. Even today this method of seeking a market
has its allurements.
=Single and Joint Ventures.=—Adventures are of two kinds, single and
joint. The single adventure is merely an outward consignment by a
single proprietor and is treated in accounting as such, i.e., it is
charged with all its costs and credited with its returns, the balance
being either a profit or a loss. The joint venture is accounted
for on the same principle, although the procedure may be much more
complicated. A joint venture account may be defined as the record of
“commercial transactions of a particular kind, usually of a temporary
nature, entered into jointly by several parties who combine together
for the purpose, contribute the capital and the services, as may
be arranged, and agree to share the losses or profits in certain
proportions.” Speculation in stocks, the chartering of a ship for
a particular purpose, a particular voyage, or a fixed period of
time—these are some lines of present-day joint venture endeavor.
=Relations between Parties.=—From the legal point of view, the
combination under a joint venture is a special partnership, i.e., one
entered into for the accomplishment of a special purpose, the several
parties to it having control, as in a partnership, and sharing profits
and losses either according to contract or, in its absence, equally.
Usually, in a joint venture one of the parties or an outside agent is
entrusted with the entire enterprise.
=Accounting for the Joint Venture.=—Accounting for the joint
transactions is comparatively easy. If the undertaking is simple, one
account for each such joint undertaking, viz., “Joint Venture,” will
suffice. This account will be carried on the records of the regular
business of each party to the venture. The account is debited with the
costs of the venture and credited with the returns from it.
If the enterprise is more complicated, it may be required to set up a
number of separate accounts, or even a separate set of records, but
the summary or clearing account for these will still exhibit costs set
over against returns. If the partners are all in the same city and have
access to the records, one set of accounts is all that is necessary.
Where the partners are in different places, each should keep a record
of all transactions as reported by the manager of the venture. Since
the manager reports all transactions to each of the parties, the “Joint
Venture” accounts as kept by the different partners will all be the
same.
The other accounts affected by the joint transactions will either be
the same or reciprocal. Upon the inception of the venture, some of
the partners having contributed cash, others merchandise, still other
facilities, services, etc., the Joint Venture account is charged with
all contributions and each partner is credited. If the venture is
managed by one of the partners, instead of a credit to his own personal
account, his cash or merchandise account will receive the credit for
his contribution. If the managing partner desires to separate his
investment in the joint venture from his investment in his regular
business, he will set up a Joint Venture Investment account to which
the amount of his contribution to the joint venture will be transferred
from his regular capital account. Expenses incurred are charged to the
joint account and credited to the partner paying them. All sales made
and collected are credited to the joint account and charged to the
partner retaining the money.
=Interest Allowances and Charges.=—Because some partners may have
made larger contributions than others, the agreement may provide that
interest be credited the partners on their contributions. On the
other hand it frequently happens that one or some of the partners
have the use of the moneys received from joint sales until date of
settlement of the venture, and the agreement may provide that interest
shall be charged to those retaining the collected funds. This can be
accomplished by charging the joint account and crediting the partners
with interest from the dates of their contributions to the date of
settlement, and by charging the partners retaining joint funds and
crediting the joint account from the date when the funds come into
their possession until the settlement date. A salary or a commission
may be allowed the managing partner or partners. This also is a charge
to the joint account and a credit to the partner.
=Distribution of Profits.=—After all transactions have been completed
and all charges and credits made, the joint account for each venture
will show by its balance the net profit or loss. This is distributed
among the partners in agreed ratio, or in equal ratio in the absence of
agreement. After this is done, only the partners’ accounts remain, some
with debit and others with credit balances. The managing partner should
collect the debit balances and remit to those with credit balances,
thus making a complete settlement of the joint undertaking.
Should the fiscal period of any of the partners close during the term
of the venture, conservatism would generally require that his own
accounts do not show a profit on the sales made to date, on the theory
that losses on the incomplete portion may wipe out any profits on the
completed portion. This is because the joint undertaking is considered
as a whole and inseparable transaction and not as composed of numerous
separate sales. The element of risk is always an important factor in
undertakings of this sort. However, there might be circumstances under
which the taking of at least a partial profit could be justified.
Assuming that no profit is taken, the joint account becomes a balance
sheet account at closing, asset or liability according as costs have
been more or less than the sales as on the date of closing.
=Joint Venture Accounts Illustrated.=—An illustration will bring out
the salient points in the above discussion:
PROBLEM. A, B, and C enter a joint venture to
Mexico, with C as manager. A and C contribute
merchandise valued at $5,000 and $8,000 respectively,
and B $11,000 cash for the purchase of additional
merchandise. C is to receive 3% commission on sales.
C pays freight, duty, and insurance of $890 from his
own cash, and buys merchandise with B’s contribution.
He makes sales, according to reports sent by him to A
and B, aggregating $30,000, and holds the amount in his
possession one month till settlement. The investment
period is six months. Interest at 6% is to be credited
to partners on their original investments and is to
be charged to C on the $30,000 held by him for one
month.[7] A, B, and C share profits in the ratio of
their original contributions. Settlement is made by C
in cash.
[7] Whatever agreement is made by the partners for interest adjustments
governs. In practice the usual procedure in a case of this kind would
be to allow C interest on the $890 cash advanced by him for expenses
from date of advance to date of settlement, and to charge him with
interest on all moneys received by him from dates of the various sales
to date of settlement. To simplify calculations, it is assumed in the
illustration that C’s use of funds received from sales during the first
five months approximately compensates him for the $890 advanced by him.
The following entries show the record of the above
transactions on B’s and C’s books.
1. At the beginning of the venture the record will be:
On B’s books:
Joint Venture, A and C, to Mexico 24,000.00
A 5,000.00
Cash 11,000.00
C 8,000.00
To set up the venture transaction.
B, Capital 11,000.00
Joint Venture, A and C, Investment 11,000.00
To show capital invested in joint
venture.
Joint Venture, A and C, to Mexico 890.00
C 890.00
Freight, duty, etc., paid by C.
On C’s books:
Joint Venture, A and B, to Mexico 24,000.00
A 5,000.00
B 11,000.00
Purchases 8,000.00
(As above.)
C, Capital 8,000.00
Joint Venture, A and B, Investment 8,000.00
(As above.)
Joint Venture, A and B, to Mexico 890.00
Cash 890.00
(As above.)
C, Capital 890.00
Joint Venture, A and B, Investment 890.00
Freight, duty, etc., paid by C.
2. On B’s books at the time of settlement:
Joint Venture, A and C, to Mexico 1,620.00
A 150.00
Interest Income, Joint Venture, A and C 330.00
C 1,140.00
6% interest on original contributions
of each partner for six months;
3% commission to C on sales.
C 30,150.00
Joint Venture, A and C to Mexico 30,150.00
6% interest charged C on $30,000
for one month; C charged with his
collections from sales $30,000.
On C’s books:
Joint Venture, A and B, to Mexico 1,620.00
A 150.00
B 330.00
Interest Income, Joint Venture, 240.00
A and B
Commission Earned, Joint Venture, 900.00
A and B
Cash 30,000.00
Interest Cost 150.00
Joint Venture, A and B, to Mexico 30,150.00
3. On the records of all the partners the Joint Venture
account shows a credit balance, i.e., a profit of
$3,640, the distribution of which will be as follows:
On B’s books:
Joint Venture, A and C, to Mexico 3,640.00
A 758.33
Profit and Loss, on Joint Venture, 1,668.34
A and C
C 1,213.33
To distribute profits on the venture
in the agreed ratio 5:11:8.
On C’s books:
Joint Venture, A and B, to Mexico 3,640.00
A 758.33
B 1,668.34
Profit and Loss on Joint Venture, A and B 1,213.33
B’s accounts now show a balance due A of $5,908.33; a
claim against C for $18,906.67; his own share therefore
being the difference, or $12,998.34. That this is the
correct amount is seen by comparing it with the amount
of B’s Joint Venture, A and C, Investment account
showing $11,000, his Interest Income Joint Venture, A
and C, showing $330, and his Profit and Loss on Joint
Venture, A and C, showing $1,668.34.
4. C now makes settlement in cash with his copartners
for the respective amounts due them. The settlement
transactions will appear as follows:
On B’s books:
Cash 12,998.34
C 12,998.34
Cash from C in settlement of
Joint Venture.
A 5,908.33
C 5,908.33
C reports settlement with A.
On C’s books:
A 5,908.33
B 12,998.34
Cash 18,906.67
Settlement with A and B on Joint Venture.
After these entries have been made on B’s books, the
joint venture with A and C will be shown completed. His
books show a full net profit on the venture of
$1,998.54, reflected in the excess of cash received
from C over cash given him for investment. At the end
of B’s regular fiscal period, the profit on the venture
will ordinarily be shown separately on the statement
of profit and loss after the item, Net Profit from
Operations. It will be set up as follows:
Joint Venture, A and C, to Mexico $1,998.34
(Schedule B-5)
Gross Returns in cash from C, $12,998.34
Managing Partner
Original Investment 11,000.00
----------
Net Profit, as above $ 1,998.34
==========
Schedule B-5 should give a complete report of the venture,
somewhat as follows:
JOINT VENTURE, WITH A AND C, TO MEXICO
Gross Returns as reported by C, Managing Partner $30,000.00
Costs:
Merchandise Purchases $24,000.00
Expenses 890.00 24,890.00
---------- ----------
Gross Profit $ 5,110.00
Commission to C 900.00
----------
$ 4,210.00
_Add_:
Interest paid by C for use of funds after
completion of venture 150.00
----------
Net Profit to be distributed: $ 4,360.00
A, Interest on Capital $ 150.00
Profit and loss share,
⁵/₂₄ of $3,640 758.33 $ 908.33
---------
C, Interest on Capital $ 240.00
Profit and loss share,
⁸/₂₄ of $3,640 1,213.33 1,453.33
---------
B, Interest on Capital $ 330.00
Profit and loss share,
¹¹/₂₄ of $3,640 1,668.34 1,998.34 $ 4,360.00
--------- ---------- =========
At the close of the period the account, Joint Venture,
A and C, Investment, having served its purpose, is
transferred back to B’s regular capital account.
C’s accounts show a balance due A of $5,908.33;
due B, $12,998.34; the remainder of the joint income,
$11,243.33 {$30,150 - ($5,908.33 + $12,998.34) = $11,243.33},
being his own share.
After the same manner as B, C will make, at the close
of his regular fiscal period, a summary of the joint
venture, showing it in his statement of profit and loss
somewhat as follows:
Joint Venture, A and B, to Mexico:
Commission as Managing Partner $ 900.00
Share of Profit (see Schedule B-5) 1,453.33 $2,353.33
Gross Returns in cash $11,243.33
Original Investment 8,890.00
----------
Profit, as above, $ 2,353.33
==========
The student will note that the $150 interest paid by C
for the $30,000 joint funds used by him for one month
is not recorded as an interest cost of the venture, but
is charged to C’s regular Interest Cost account because
the funds must have been used for the conduct of his
regular business.
The accounts on each partner’s books with his copartners are not
ordinary asset and liability accounts but are more of the nature
of capital accounts and might be entitled “A, Contribution,” “B,
Contribution,” etc. The records of the joint venture comprise a group
of accounts which constitute a unit within themselves, showing the
partnership relation existing among the several parties from the
inception of the partnership to its liquidation.
CHAPTER L
ACCOUNTS CURRENT
=Definition.=—An account current in its broadest sense is an account
of current transactions. In a technical sense, it is an open personal
account, one with an outstanding balance. Frequently accounts are
allowed to run on between two persons, recording transaction after
transaction with partial or full settlement at times but with no
intention of closing the account. A principal may have constant
dealings with his agent or representative, making periodical payments
on account or making remittances to be used as needed by the agent.
The agent may make purchases for the account of his principal, paying
the bill out of his own funds. He may use in his own transactions
any surplus funds of the principal in his possession. An account
showing transactions of these various kinds is an account current.
The customers’ accounts in brokerage houses and the accounts between
banks—banks and their correspondents—are other examples of accounts
current.
=Interest on Balances.=—In handling accounts current between banks and
in brokerage houses, it is the practice to charge the account with
interest on the debit balances and to credit it with interest on the
credit balances. It was formerly the practice in some lines of trade to
charge interest on all overdue customers’ accounts. Frequently today
invoices carry a statement to that effect, although the policy is not
often enforced through fear of loss of patronage.
=Joint Venture Accounts.=—In the case of joint ventures discussed in
Chapter XLIX, a condition analogous to this was mentioned where the
joint account was charged and the contributing partners’ accounts were
credited with interest, while the managing partner was charged and the
joint account credited with interest on all joint funds retained in his
possession.
=Partners’ Accounts and the Account Current.=—Occasionally, also, in
partnership adjustments at the close of a fiscal period, the agreement
may require the business, i.e., the partnership, to allow each partner
credit for interest on his investments and charge him with interest
on his withdrawals. Each partner’s account is treated very much as an
account current of the business when such adjustments are prescribed.
=Illustration of Account Current.=—Thus, while the old account
current as formerly understood and applied to the ordinary customer
and creditor relationship is now very seldom encountered, the
principle of it is met with frequently enough to demand explanation
and illustration. No special form is necessary for the stating of an
account current; the interest calculations on the various balances can
be made outside the account and only the net result be embodied in the
account. A form of account is shown in Form 45, however, which exhibits
all necessary data on its face. Take the following account on which 5%
interest is to be charged and allowed:
B. I. PERKINS, CURRENT ACCOUNT
====================================================================
19— | 19—
July 4 Cash 1,250.00 | June 4 Balance 600.00
Aug. 11 Note 60 da., no int. 1,500.00 | July 4 Mdse. n/30 1,400.00
Nov. 11 Cash 1,000.00 | Aug. 3 Mdse. n/30 1,000.00
Dec. 7 Cash 400.00 | Oct. 2 Mdse. 2,100.00
10 Rtd. Goods of | Dec. 4 Mdse. 800.00
Dec. 4 50.00 |
[Illustration: Form 45. Form of Adjusted Account Current]
=Adjusting the Account Current.=—Adjustment of such accounts is usually
made periodically. Referring to the illustration shown in Form 45, the
interest calculation is made counting the exact number of days from
each “date of value” to and including December 31. Interest is figured,
for the sake of ease of calculation, on a 360-day basis. A 365-day
basis would be more accurate and this is often done on current accounts
between banks. The “date of value” is the date from which interest may
be equitably charged or allowed. For example, in the above account, the
credit for merchandise purchased on July 4, but with a credit allowance
of 30 days, may not equitably be allowed till 30 days thereafter, or
August 3. On the debit side, the note for $1,500 dated August 11, at 60
days with no interest, cannot be equitably counted until it comes due,
i.e., on October 10. Similarly, the “date of value” on December 10, for
the goods returned of the transaction of December 4, must be reckoned
as of the same date as the original transaction, for only a portion of
the full credit set up is allowed to remain.
In the above problem, the credit interest exceeds the debit by $35.80.
This amount is therefore brought as an additional credit into the
account. The account as now adjusted will be sent to B. I. Perkins
for his verification. When formally approved, or if no objection is
made to it after a reasonable length of time, the account is balanced
and it becomes now what is termed an adjusted account. This periodic
adjustment makes possible the localization of disagreements and their
settlement while the facts are still fresh in mind. Its effect,
however, is to produce a slight compounding of interest unless the
balance is immediately settled.
Another method of making the interest calculation is on the basis of
the balance of the account after each transaction and the length of
time it remains unchanged, i.e., until the next transaction changes the
balance. This method follows somewhat the method illustrated in Chapter
XXXIII for division of partners’ profits on the basis of the amount of
the investment and the length of time invested; but under this method
it is not possible to make so condensed and apparent a statement of
account as by the method illustrated in full above.
It sometimes happens that the “date of value” may fall beyond the
settlement date, as where the term of credit throws the time of
payment far enough ahead that payment cannot be demanded till after a
periodic settlement time. The effect of such a condition is to reverse
the interest charge for the period beyond the settlement date to an
interest credit, or vice versa. The method of averaging accounts
or equation of payments, as it is sometimes called, may be used to
advantage here. Explanation and illustration of this method are given
in Chapter LII.
=The Bank Account an Account Current.=—The bank’s account with a
depositor is a good example of the account current. Except by special
agreement, the allowance of interest is not customary. Periodically,
the depositor’s pass-book is balanced or a statement of his account
is rendered by the bank. When the balanced pass-book, with canceled
checks, is returned to the depositor, or when the statement of account
is rendered by the bank, the record kept by the depositor—as shown
by his check book stubs or by the bank column in his cash book—will
not usually show the same balance as that indicated by the bank’s
statement, and adjustment or reconciliation is necessary to check the
accuracy of the statement. In Chapter XLI, regarding the handling of
cash, the policy was recommended of depositing all receipts and paying
only by check. A cash book kept under that plan, making use of a net
cash column on both sides, does not need an additional column for
the bank record because everything shown in the net cash columns has
either been deposited in the bank or paid out by check. The cash book
balance, therefore, should be the same as the bank’s balance. If the
record of the bank account is kept only on the check book stubs or
interleaves, this balance should be the same as the bank’s. But however
kept, there will almost invariably be a few outstanding checks which
the depositor’s cash book or check book shows as having been issued,
but which have not been presented to the bank for payment at the time
the statement of account is rendered and which therefore are not
included in the statement. This brings about a difference which must be
reconciled.
=Reconciliation of Bank Balance.=—Two methods of reconciliation are
used. The one brings the bank’s balance into agreement with that of
the depositor; the other starts with the depositor’s balance and
brings it into agreement with that of the bank. The first step in
the reconciliation is to discover which of the checks issued by the
depositor have not been paid by the bank. This is done by arranging
the returned checks in numerical sequence and comparing these with the
depositor’s record of checks issued. Usually the total of these few
unpaid checks will be equal to the discrepancy between the two records,
and so will reconcile them.
The following problem is given to illustrate the above discussion:
PROBLEM. On March 20, at the close of the day,
the bank’s statement showed a balance of $1,525.14. The
depositor’s record on the same date showed $604.19. The
following checks were outstanding: No. 529B, $214.50;
542B, $379.60; 557B, $119.40; 581B, $75.20; and 992A,
$132.25.
Reconciliation statement, as on March 20, 19—:
Bank balance as per bank’s statement $1,525.14
Outstanding checks:
No. 992A $132.25
529B 214.50
542B 379.60
557B 119.40
581B 75.20 920.95
------- ---------
True balance as per cash (or check) book $ 604.19
---------
Other method:
True balance as per cash book $ 604.19
Outstanding checks:
No. 992A $132.25
529B 214.50
542B 379.60
557B 119.40
581B 75.20 920.95
------- ---------
Bank balance as per bank’s statement $1,525.14
---------
=Other Reconciliation Factors.=—Oftentimes other items than those
shown must be taken into consideration when reconciliation is made.
Where several bank accounts are kept and a check register—in addition
to the cash book—is used to keep record of the accounts with the
various banks, it may happen that checks drawn on one bank are wrongly
charged to another; that checks drawn, or deposits made one day, are
not credited until the next; that certain drafts deposited with the
bank for collection are not credited to the depositor’s account until
collection is made, whereas the depositor debited the bank at the
time of the deposit; again it may be that the item of bank’s charges
for collection has not yet been recorded; or that interest on deposit
balances has not been credited, etc. All such items must be considered
when reconciliation is made. Where there are many of these adjustment
items to be taken account of, it may be necessary to list them in
formal schedules under such heads as:
1. Bank charges, we do not credit.
2. Bank credits, we do not charge.
3. We charge, bank does not credit.
4. We credit, bank does not charge.
Examples of transactions bringing about the above debits and credits
are:
1. Protest fees charged against the depositor’s
account, of which he has not been notified.
2. Interest on bank balance credited by bank before
the depositor is notified.
3. Deposits made and charged to bank but not yet
credited by bank or credited in error to some
other depositor’s account.
4. Checks drawn but not yet presented to the bank
for payment.
When the first method of reconciliation is used, items (1) and (3)
must be added to the bank’s balance and items (2) and (4) must be
subtracted from it in order to arrive at the cash book balance. The
following problem will illustrate this:
PROBLEM. In the bank’s statement of July 1, 19—,
with a balance of $675, are included protest fees
in connection with the collection of checks amounting
to $7.50, and interest allowed on our average bank
balance of $16.67. Our deposits for June 30, 19—,
totaling $250 in the morning and $100 in the afternoon,
have not been credited by the bank. Outstanding checks
amount to $180. Our cash book balance on July 1, 19—
was $835.83.
Bank reconciliation statement as of July 1, 19—:
Bank balance as per bank’s statement $ 675.00
_Add_:
Deposit not included in above balance $350.00
Bank charge not included in our balance—protest
fees 7.50 357.50
------- ---------
$1,032.50
_Deduct_:
Outstanding checks $180.00
Bank interest, not included in our balance 16.67 196.67
------- ---------
Balance as per cash book $ 835.83
=========
It will be seen that neither the cash book balance nor the bank
balance is a correct statement of the cash available for checking. The
depositor, in order to find this amount, will have to take account of
the figures given by the bank for items he has not known about. His
checking balance in the above problem is ascertained as follows:
Cash book balance $835.83
_Less_—Bank charges 7.50
(expenses to the depositor) -------
$828.33
_Plus_—Bank credits 16.67
(income to the depositor) -------
True balance available for checking $845.00
=======
There is not usually so much difficulty in reconciling the bank
account; but where several bank accounts are maintained, it is easy to
misplace debits and credits and a formal statement of reconciliation
should always be made and kept as a part of the record. This
reconciliation should be made every time a statement is received from
the bank. The frequency of asking for a statement of account from
the bank depends somewhat upon the volume of transactions handled
through the bank, but it should be secured at least every month and
particularly whenever formal statements of profit and loss and balance
sheet of the depositor are made up.
=Reconciliation Statement a Permanent Record.=—The reconciliation
statement should be made as a permanent record. A customary place of
record is on the check stub of the same date. Where a check register
is used, it should be made a part of the record there. Occasionally it
is incorporated in the cash book. Wherever made it should be easily
available for proof at a subsequent period. When reconciliation is to
be made as of a past date, i.e., at a time subsequent to the date on
which reconciliation is desired, the bank’s cancellation date on the
returned checks must be used to determine what checks were outstanding
on that date.
=Reconciling Other Accounts.=—Occasionally the dealings between two
firms located at a distance from each other may be such that items are
in transit one or both ways at the time when statement of account is
rendered. If this is the case, the methods of reconciliation applied
above to the bank account may have to be used before agreement or
comparison of the two records can be effected.
CHAPTER LI
BALANCING METHODS
=The “Fool-Proof” Trial Balance.=—Double-entry bookkeeping is never
satisfied with anything short of absolute proof of the mathematical
accuracy of the work. Often such proof is very difficult to secure.
There has not yet been devised—and in the nature of things, never will
be—any so-called royal road to the trial balance. Yet one often sees
claims put forth that there is no longer any need for trial balance
troubles. The use of certain methods, which are disclosed only upon
payment of fees in proportion to the advantages claimed for them, makes
it possible, according to their devisers, to take a trial balance
within an incredibly short time or to do away with trial balances
altogether. As a matter of fact, satisfactory results can be obtained
only by habits of accuracy and by proving the work done wherever
possible. Some methods found useful in searching stubborn errors will
be explained in this chapter.
=Ledger Analysis.=—By ledger analysis is meant an analysis of postings
classified according to the books of original entry, i.e., on the basis
of all journals whose record is transferred to the ledger. The process
of making such an analysis is somewhat as follows: The ledger must be
gone through carefully and for each account the last debit and credit
figures which entered into the last _correct_ trial balance must be
marked distinctly so as not to be included in the analysis. If the
analysis is for an interim period, the first debit and credit items
belonging to the next period should be marked in a similar way, as
shown in the illustration (Form 46). This must be done very carefully
as the “date” is not always a safe guide. The use of subsidiary
journals with one summary posting to offset many detailed contra
postings and inaccurate dating of the summary posting, often make the
“date” an uncertain guide. Care should therefore be exercised so that
the points marked include a complete, i.e., a debit and credit, posting
of every journal.
[Illustration: Form 46. Account Marked for Analysis]
=Procedure of Analysis.=—The content of each account between the
marked points is now analyzed according to the journals from which the
postings have been made. Analysis paper, with debit and credit columns
headed for each journal, may be used for this purpose. All debits in
the account posted from the journal are entered in the debit journal
column of the analysis sheet, all cash debits in the debit cash column,
all sales journal debits in the debit sales journal column, etc.
Similarly, the credit postings in the account are entered in the proper
credit columns of the analysis sheet. Each item in the account should
be checked or otherwise marked when transferred to the analysis sheet.
Illustration of the analysis sheet is given in Form 47.
When the various accounts have thus been analyzed, there should remain
no unchecked items in the period analyzed, unless there have been
transfers between accounts made directly on the face of the ledger. If
this has been the practice, an additional heading with debit and credit
columns, entitled “Ledger Transfers,” should be set up on the analysis
sheet. _Every_ account in the ledger is analyzed in the same way.
=The Analysis Sheet.=—It will be noticed in Form 46 that only the
period between the two diagonal marks \ and / is under analysis.
Accounts which have been closed but are within the period under
analysis must, of course, be included. When all accounts have been
analyzed, the columns of the analysis sheet are footed. For each
journal the footings of the debit and credit columns should be equal.
A difference will indicate that there is an error in the postings from
that particular journal. In this way the error is localized and only
these postings need to be checked individually.
The cash book columns in the analysis sheet (Form 47) may need some
explanation. If no Cash account is kept on the ledger, the balance of
the cash book for the period will have to be entered on the analysis
sheet before equality of the cash columns will be shown. With the
exception of the items transferred to the analysis sheet from the Cash
account—where a Cash account is carried in the ledger—all items in the
cash debit column of the analysis sheet represent, in the cash book,
credits to certain accounts, and those in its credit column represent
debits to certain accounts. The entries to the cash analysis column
from the ledger Cash account, showing on its debit cash receipts and
on its credit cash disbursements, must bring about the equilibrium.
The column total, however, will not represent cash receipts and cash
disbursements respectively, but the total of each column will be the
sum of both receipts and disbursements; whereas the totals of the other
columns are equal to the totals of the corresponding journals for the
period. This is brought about by the fact that the two cash columns on
the analysis sheet really cover two independent journals, viz., the
cash receipts and the cash disbursements journals.
[Illustration: Form 47. Ledger Analysis Sheet]
Agreement between the debit and credit totals of corresponding columns
is proof of equilibrium in the postings from that book; but unless
these column totals also equal the total of the corresponding journal,
there is evidence of the omission from the ledger, both on the debit
and on the credit side, of items recorded in the journal. Thus the
ledger analysis serves also as a check against omissions; but when used
for that purpose, account must be taken of duplicate entries in the
various journals, such as cash sales entered both in the cash and sales
journals but posted only from one of them.
=Use of Ledger Analysis.=—All that is claimed for the ledger analysis
is that it localizes the error, if it is an error in posting, and
so makes the work of searching for it less haphazard and renders
unnecessary a checking of all postings in the ledger. All the means
previously explained should be exhausted before this method is used.
If the previous trial balance, i.e., the one at the beginning of the
analysis period, is correct and the ledger analysis shows no errors in
posting, then certainly the trial balance for the end of the analysis
period must balance. If not, the error is an error on the face of the
ledger and its computations must be proved.
=The Slip or Reverse Posting System.=—As indicated before, it is
better to post carefully and accurately in the first place than to hunt
for errors afterwards. A method of proving daily postings known as the
slip or reverse posting system is used with success in many places.
Formal slips of any convenient width and length are provided, one for
the debit and one for the credit of each book from which postings are
made. The debit slips may be easily distinguished from the credit slips
by the use of different colors. The debit slips are ruled only with
money columns and each slip bears the title of its journal. Reverse
posting is made on the slip from the items posted to the ledger. Thus,
when posting the debits from the general journal, the general journal
debit slip is carried conveniently on the right of the ledger and
entry of each debit posting to the ledger is made _from the ledger_ to
the slip. When all journal debit postings have been made, the reverse
posting slip is totaled and must agree with the total of the journal
debit column for the items posted. Similarly, the journal credits are
posted, reverse posted, and proved. The debit postings must equal the
credit postings and thus proof is secured of the equilibrium of the
ledger. Each journal is posted, reverse posted, and proved in a similar
way. The bookkeeper is, in this way, sure of the correctness of his
work day by day. Oftentimes monthly recapitulation of these reverse
posting slips are made and preserved as part of the business records.
It will be seen that this method is identical with the ledger analysis
method explained above but applied at the time of making the posting
instead of at the close of the period.
=Check Figures in Posting.=—The use of the check figures 9 and 11 in
the verification of the arithmetic processes of addition, subtraction,
multiplication, and division was referred to earlier. Other odd
numbers, such as 13, 17, and 19, are less frequently employed. The
number 11 gives perhaps the most satisfactory results from the
standpoints of ease of application and accuracy of results. Its use in
the verification of postings is somewhat as follows:
An additional column similar to the folio column should be provided
in all the books for the check numbers. As an amount is posted to the
ledger the bookkeeper should determine the check number from the item
as it is written in the ledger—not from the journal item—and enter it
in the check column in both ledger and journal. When postings from the
journal are complete, the journal is totaled and the check figure for
its sum found. If this agrees with the sum of the check figure column
in the journal, posting is presumably correct. If the two items do not
agree, the check number for each amount in the journal debit column
should be proved. Inasmuch as the check number used was obtained from
the ledger amount, a wrong check number for the journal amount would
indicate a wrong posting which should now be turned to and corrected.
The check numbers in the ledger accounts are used only for verifying
account totals and balances and may even be carried into the trial
balance for proving it. Practice in the use of any check number soon
develops accuracy and speed and makes the method easy of application
and commendable wherever the work must be proved day by day as
completed.
=Errors in Columnar Books and Controlling Accounts.=—These are frequent
sources of trouble unless handled with care. In the chapter on columnar
books, it was laid down as a basic principle that _all_ items appearing
in the general amount column should be entered in some analysis column,
i.e., analysis columns should be provided for distribution of _all_
items. This makes proof of distribution possible and establishes formal
equilibrium of the book so that errors in posting are not so likely to
occur.
Care must be exercised in posting the discount columns of the cash book
to the proper sides of the respective accounts.
In the use of controlling accounts, where a special column is not
provided, as for Accounts Receivable on the credit side of the cash
book, posting of the item should be made both to the individual account
and also to the controlling account.
=Trial Balance Adjustment Account.=—Where error creeps into the
ledger and seems impossible of detection at a monthly trial balance
period, the device of forcing a balance is sometimes used by setting up
an account called “Trial Balance Adjustment,” “Error in Trial Balance,”
or some other similar title. To this is charged or credited the amount
of the difference in the trial balance. It is a temporary makeshift,
a method of holding the item in suspense until the error is located.
Needless to say, the inclusion of such an account does not improve the
appearance of a trial balance, but may be countenanced as a temporary
expedient.
CHAPTER LII
SOME APPLICATIONS OF INTEREST AND PROPORTION
=The Nature of Interest.=—Interest may be defined as the charge made
for the use of money. Sprague defines it as the increase in principal
due to the lapse of time. The ethics of the practice of charging
interest was questioned by the ancient world and not fully conceded
as right until modern times. Various economic theories have been
evolved to explain the true character of interest. Whatever they may
be, interest as a commercial phenomenon is thoroughly established and
countenanced by the law, although in many states an exorbitant interest
charge is declared to be usury.
=Commercial Interest.=—Commercial interest, so-called, usually contains
an element in addition to the time-charge for the use of money. That
element may be: (1) in the nature of a premium for insurance against
the risk of losing the money loaned; or (2) where capital in some fixed
form is loaned, in the nature of an allowance or additional charge to
cover the shrinkage in the asset loaned due to wear and tear.
=Simple and Compound Interest.=—As to its method of calculation,
interest may be simple or compound. Simple or single interest is
figured on the single base known as the principal, the only other
element being the length of time. Compound interest periodically adds
the unpaid interest to the previous principal, and so secures interest
not only on the original principal but on all unpaid interest as well.
In accounting both kinds of interest are recorded under the common
title Interest. Some applications of the interest principle to certain
special accounts will be discussed.
=Equation of Payments.=—The practice of averaging accounts is
occasionally met with at the present time in American business. In
proceedings in bankruptcy, all claims against the bankrupt on open or
running account comprising several items, when filed with the trustee,
must show the average due date of the items if interest is to be
secured on the overdue amounts.
The problem involved may best be shown by an example. The following
account appears on A’s books, showing charges against B:
B
=============================================================
Jan. 5 Mdse. 2/10, n/30. 100.00 |
Feb. 1 Mdse. 2/10, n/60. 350.00 |
Apr. 10 Mdse. net 200.00 |
June 2 Mdse. 2/10, n/60. 2,000.00 |
If B does not settle the various amounts as they come due, A is
deprived of the use of his money longer than contemplated in the sale
contract. In justice to him, interest on the overdue amounts ought to
be allowed. If B should pay any of the amounts earlier than the terms
of sale require, he should be allowed a discount, i.e., a rebate equal
to the interest for the time of prepayment. Further, shortly after the
last purchase on June 2 at 60 days, amounting to $2,000, B may desire
to settle his entire account, taking his discount for prepayment on the
$2,000 and allowing A interest on the overdue amounts. If the date of
settlement is fixed, the amount necessary for an equitable settlement
may be determined by the method used for the account current in the
previous chapter.
=Average Due Date.=—But B may want to know the date on which he can
settle equitably by paying the exact amount of the account without
either paying interest on the overdue items or taking discount on the
$2,000. The problem involved is that of averaging or equating accounts.
The equated date, due date, or average date of payment are the terms
variously applied to the date of equitable settlement. If the account
has only debits or only credits, the equation is called a simple or
single equation or average; if it has both debits and credits, the
equation is called a compound or double equation.
In order to determine the equated date, an arbitrary one, called the
focal date, is taken for the purpose of computing the interest charges
and credits, and from that date the days of interest are counted
backwards or forwards according to the result arrived at through use
of the arbitrary date. Interest is calculated at an arbitrary rate,
usually 6% (100% per day is used by another method of calculation), and
in the case of compound equation the same rate must be used on both
debits and credits.
To illustrate the method of calculation for the simple equation and the
interest principle involved, the account above cited will be equated.
In order that the expired time between the focal date and each date
of value may be easily computed, the last day of the previous year is
taken as the focal date. Interest is at 6%.
Int. on Total Int. on Each
Date of Date of Expired Amount for Amount for
Entry Value Time Amount 1 Day Expired Time
1/5 2/4 35 da. $ 100 $ .58
2/1 4/2 92 ” 350 5.37
4/10 4/10 100 ” 200 3.33
6/2 8/1 213 ” 2,000 71.00
------ -------
$2,650 .44⅙ )$80.28
====== ------
182 da.
This calculation shows that theoretically, had the various
transactions been under contemplation on December 31, the focal date,
payment of the total $2,650 could equitably have been made with a
discount of $80.28. The interest (or discount) on $2,650 for 1 day is
44⅙ cents. A discount amounting to $80.28 can therefore be demanded on
$2,650 only as the result of an offer to prepay 182 days (80.28 ÷ .44⅙
= 182) before the payments are equitably due. Hence, payment of $2,650
without discount would settle the account equitably 182 days after
the focal date, or on July 1. That this is true can easily be proved
by using July 1 as the settlement date and figuring as for a current
account. It will be found that interest on the overdue items on that
date amounts to $10.42, while the discount on the item not yet due
amounts to $10.33; the difference .09 not being a large enough fraction
(9 ÷ 44⅙) to justify payment one full day earlier.
=The 100% Method.=—A short method of calculation may be used, employing
the 100% per day method. Any date may be taken as a focal date, and
very frequently the date of the first or last transaction is used. In
the illustration below, November 30 of the previous year is taken as
the focal date so that the expired time on each item is immediately
indicated by the _number_ of the month and the day in the “date of
value” column. The use of the 100% per day method makes the calculation
of interest on each item a simple matter of multiplication by time and
amount, i.e., it reduces each amount to a “day-dollars” figure, and on
that basis one day’s interest on the account total is equal to that
total, and therefore the divisor in the division made to determine the
focal date is the amount of the account. This greatly simplifies all
the operations. Sometimes the expired time is calculated by calendar
months and days, converting fractions of a month on a 30-day basis. The
method is used in the illustration below, where the problem shown above
by the accurate interest method is solved by the 100% method.
The “month-dollars” column divided by the “amount” column gives 6,
shown in the “equated date, months” column, with a remainder of 2,500.
This is reduced, by multiplication by 30, to day-dollars and carried
to that column, whose total, 80,100, is divided by 2,650, giving 30 as
shown in the “equated date, days” column. The equated date is therefore
June 30 (6/30). The one day’s difference between this and the other
method is accounted for because each calendar month is counted as 30
days.
Time Month- Day- Equated Date
Months Days Amount Dollars Dollars Months Days
2 4 $ 100 $ 200 $ 400
4 2 350 1,400 700
4 10 200 800 2,000
8 1 2,000 16,000 2,000
----- -------- -------
$2,650 )$18,400 $ 5,100 6 30
------ 15,900
--------
$ 2,500
30 75,000 6 30
------- -------
$80,100
79,500
-------
$ 600
=Compound Equation.=—Where the account has both debits and credits, the
estimate is made similarly. Calculation of the month- and day-dollars
is made for each side separately. At this point the totals on both
sides are combined to find the balance of the account and the balance
of the discounts, and these two balances are used to find the equated
date. If the balance of the account is on the same side as the balance
of the discount, the equated date is forward from the focal date
because, if settlement were made on that date, the man who owes the
balance is entitled to the theoretical discount also. If the balance
of the account and the balance of interest are on different sides,
the count is backward from the focal date. The following account and
solution will illustrate:
S. L. DAVIS
==================================================================
19— | 19—
Mar. 8 Mdse. net 1,000.00 | Apr. 30 Note, 30 da., 6% 500.00
June 20 ” n/30 1,500.00 | Aug. 30 Cash 1,500.00
Sept. 5 ” n/60 2,000.00 | Sept. 10 Note, 60 da., no
| interest 2,000.00
_Debits_:
Expired Time Interest
Months Days Amount Month-Dollars Day-Dollars
3 8 $1,000 $ 3,000 $ 8,000
7 20 1,500 10,500 30,000
11 4 2,000 22,000 8,000
------ ------- -------
Totals $4,500 $35,500 $46,000
_Credits_:
4 30 $ 500 $ 2,000 $15,000
8 30 1,500 12,000 45,000
11 9 2,000 22,000 18,000
------- ------- -------
Totals $4,000 $36,000 $78,000
------ ------- -------
_Balances_:
Amount Dr. $500
Interest Cr. $500 Cr. $32,000
Dividing we get 1 month, 64 days, i.e., 3 months, 4 days. The balances
being on opposite sides, the equated date is 3 months, 4 days, backward
from November 30 (11/30), i.e., 11/30-3/4 = 8/26 or August 26.
Equitable settlement could therefore be made by interest-bearing note
for $500, dated August 26, or by cash payment of $500 plus interest on
$500 from August 26 until date of actual settlement, as would be the
case had the account been handled as an account current with adjustment
as of August 26.
=The Cash Balance.=—When an account has been equated, to determine
the cash sum which will be required for equitable settlement on a
given date subsequent to the equated date, the balance of the account
plus interest on that balance from the equated date to the date of
settlement will be the correct amount. This amount is technically
called the cash balance of the account. It is exactly the same as the
adjusted balance of an account current, and may be determined by such
adjustment of the account instead of by the method of equation of
payments just described.
=Interest on Partial Payments.=—Under the heads of accounts current
and equation of payments, the question of partial payments on open
account has been treated. There remains to be discussed a statement
of the practices governing partial payments on notes. Two methods
of calculating are in use, the legal or United States method and
the so-called merchants’ method. The merchants’ method is used for
short-time notes and on any other kind by agreement. The method is
exactly similar to that of adjustment of current accounts. Interest is
charged on the face of the note from its date of issue till its due
date, and allowed on each partial payment from its date of payment till
the due date of the note. The difference between the sum of the face of
the note plus its interest and the partial payments plus their interest
accruals is, of course, the balance due.
=United States Rule.=—The United States Supreme Court has ordered
the application of the partial payments somewhat differently. The
first partial payment must first be applied to the payment of the
accrued interest on the principal up to the date of the first payment.
Any excess shall be applied to a reduction of the principal. Each
succeeding payment is similarly applied first to cancellation of
accrued interest on each new principal and then to a reduction of the
principal. In case any payment is insufficient to meet the accrued
interest, the payment is held in reserve, the principal remaining
unchanged until a payment or payments are made which added to the
previously reserved payment or payments are sufficient to cancel
all interest accrued to that date. Any excess is used to retire the
principal.
=Interest on Daily and Savings Bank Balances.=—In the handling of
balances between banks, interest on daily balances is usually figured
in the settlement. Calculation is on a 365-day basis in the larger
banks. Banks frequently allow large depositors a low rate of interest
on daily balances maintained above a certain fixed minimum. Take the
following account:
X. Z. & CO.
====================================================
Date Dr. Cr. Balance Interest Base Interest
Jan. 2 1,500 500
3 300 500 1,700 700
4 800 100 1,000
5 400 600 1,200 200
6 500 400 1,100 100
7 700 1,100 1,500 500 .11
-----
2,000
In the above account interest is allowed on all amounts above $1,000 at
the rate of 2%. If settlement is periodical, interest may be calculated
on the total of the “interest base” column for one day. Usually,
however, if a monthly settlement basis is used, the total minimum
balance for the month is subtracted from the total of the “balance”
column, and the remainder is the interest base. In savings banks no
interest is allowed on amounts which have been withdrawn during the
interest period, regardless of how long the sum may have been on
deposit previous to date of withdrawal. There is no uniform practice
as to when deposits shall begin to draw interest, in some banks at the
beginning of the month after deposit, unless deposit is made on the
first day of the current month; in others, not until the beginning of
the next interest period. Great care must be exercised, therefore, in
handling deposit and withdrawal dates.
=Bank and True Discount.=—Bank discount has been defined as the prepaid
or collected interest on a discounted note, calculation being on the
basis of the amount to be collected on the note at its maturity.
True discount is the difference between the face of a debt and its
present worth, meaning by present worth that sum of money which placed
at interest now will equal or be worth the face of the debt at maturity.
=Proportion, Simple and Weighted.=—Proportion is defined as an
equality of ratios. Thus, if the ratio of _a_ to _b_ is the same as the
ratio of _c_ to _d_, this relation may be expressed as follows:
_a_ _c_
——— = ——— or _a_ : _b_ = _c_ : _d_
_b_ _d_
the fractional form being preferred. In accounting it is often
required to divide amounts in certain ratios, as when profits must be
apportioned among partners, when insurance, taxes, and other expense
charges must be distributed over departments, etc. This is usually
entitled “apportioning.” It is not necessary to illustrate simple
proportion, but a problem in “weighted proportion” will be given here.
Apportion an insurance charge of $1,000 over departments A, B, and C
according to the property values in those departments, taking account
of the fact that the rate on A is double that on B and C. The property
values are: A $10,000; B $15,000; C $35,000.
The proper basis for distribution cannot be found, as in simple
proportion, by an addition of the values in the departments. Before
addition, the value in A must be weighted by 2, i.e., doubled. This
gives a basis of $70,000 ($20,000 for A + $15,000 for B + $35,000 for
C = $70,000). Of the $1,000 insurance cost, department A will have to
bear ²⁰/₇₀; B ¹⁵/₇₀; and C ³⁵/₇₀. The charges will be therefore:
A, ²⁰/₇₀ of $1,000 or $ 285.71
B, ¹⁵/₇₀ ” 1,000 ” 214.29
C, ³⁵/₇₀ ” 1,000 ” 500.00
---------
$1,000.00
=Apportioning Freight Charges.=—In-freight and cartage are treated as
additions to the cost of goods bought; consequently, at inventory time
it is necessary to add the correct amount of in-freight to the cost
of goods on hand. However, it is seldom possible to apply the freight
costs directly to each unit of product on hand and yet theoretically
this should be done. Usually the ratio of freight costs to the total
amount of purchases during a given period is taken as the basis for
adding freight to the inventory. Thus, if that ratio has been 5% for
the period, a commodity costing $100 would be valued at $105 for the
inventory. Thus the freight expense is deferred.
This usually is deemed sufficiently accurate for most purposes. Where
departmental records are kept, or where accurate factory costs are
required, a closer apportioning is sometimes necessary. The freight
classifications are such that the rates are not proportionate to the
_values_ of the goods; but other factors such as weight, kind of goods,
method of crating, etc., all enter into the freight rate. Of these, the
only factor which is easily obtainable is the weight. A distribution
of freight on the basis of _value_ and _weight_ has been suggested—a
weighted proportion method of apportionment. This, of course, requires
an involved calculation which is usually “shied” at by bookkeepers and
is not necessary except where very accurate and detailed costs are
required.
CHAPTER LIII
SINGLE OR SIMPLE ENTRY
=Different Systems of Bookkeeping.=—Except in small enterprises, the
only satisfactory system of bookkeeping is double entry. The system—or
rather lack of system—known as single entry antedates double entry and
is met today occasionally, particularly in small retail stores. It
seems necessary, therefore, to give the student an explanation of its
main features.
An early writer defines bookkeeping as “the art of recording
mercantile transactions in a regular and systematic manner.“ In
further elucidation he says: “A merchant’s books should contain every
particular which relates to the affairs of the owner. They should
exhibit the state of all the branches of his business; the connection
of the various parts; the amount and success of the whole. They should
be so full and so well arranged as to afford a ready information
in every point for which they may be consulted.“ Single entry
hardly measures up to these requirements, but there are places and
circumstances where it gives results satisfactory enough. Bookkeeping
has had a development contemporaneous with industrial life. Only simple
records are needed so long as industries are simple, but with the
increasing complexity of industrial enterprise, previous methods become
inadequate.
=Single Entry.=—Single entry may be defined as that method of keeping
records which sorts out and classifies debits and credits only as they
apply to persons, the proprietor included, and usually also to cash.
To justify the strict application of the term, a _system_ must needs
keep record of _all_ transactions. Methods—not systems—of single-entry
account-keeping are sometimes met with which do not make full record.
The point of view of single entry is personal. All features of the
business not connected with persons are looked upon as being under the
direct hand of the owner and subject to his control. But uncompleted
transactions with persons, whether customers or creditors, are not
capable of such oversight without the aid of individual, classified
records. The necessity of safeguarding the cash and keeping its flow
under review makes the classified cash record an almost universal
feature of single entry. As a usual thing, therefore, single entry
is characterized by: (1) a record of all transactions; (2) a debit
and credit analysis applied only to persons and to cash; and (3) a
classified and grouped record, i.e., ledger record, only as to persons
and cash. It does not analyze every transaction in its relation to the
business as a whole. It has a single point of view, i.e., it considers
only persons and cash and makes entries accordingly. Hence, its name.
=Books Required and Methods of Record—The Journal.=—In a single-entry
system three books of account are necessary—the journal, the cash book,
and the ledger. The cash book records all cash transactions, receipts
and payments, classified as to persons but otherwise in narrative form.
The journal records all other transactions following the same method.
The ledger makes secondary record only under the heads of customers,
creditors, and proprietor. The journal is the standard two-column
journal, the first column being used as an “items“ column, and the
second for totals. A three-column journal is advantageous, the first
column being used for items and for all unposted amounts, the second
for debit postings, and the third for credit postings. This aids in
proving the ledger postings, as will later be seen. Transactions
affecting persons are recorded under those persons’ names followed by
“Dr.” or “Cr.,” according to the analysis of the transaction. This
is necessary since position does not show it, the method of left and
right position for debit and credit not being used in the single-entry
journal. All other transactions are recorded in narrative form, merely
a memorandum being made of them.
=Cash Book.=—The cash book is the same as for double entry, receipts on
the left and disbursements on the right-hand page or column, according
as a double- or single-page cash book is used. Where the double page is
used, one of the two columns on either side is sometimes used for the
exclusive extension of the amounts to be posted to personal accounts.
This facilitates posting, since these are the only amounts which are to
be transferred to the ledger.
=Ledger.=—The single-entry ledger is the same as the double-entry and
uses the debit and credit principle of double entry. As stated above,
accounts are kept only with persons, including the proprietor. It
is seen, therefore, that single-entry books make a record of _all_
transactions but fail to analyze all those transactions in their
relations to one another and in their effects upon the business.
=Single Entry as Adapted to Modern Needs.=—Recognizing the value
of the analysis secured by double entry but overestimating the work
required to make the record, some concerns have developed single-entry
systems through use of subsidiary records and columnar books, from
which they derive very full information for management purposes. A
sales journal gives volume of sales, a purchase journal shows the
amount of goods purchased, and analytic columns in the cash book show
the main sources of receipts and their amounts, and the main classes
of expenditures and their amounts. A bill book is used for recording
notes receivable and payable, and inventory books for scheduling all
kinds of property, assets and liabilities. All of these make a system
approaching the double entry in completeness of detailed information,
but one which lacks the fundamental principle on which the double
entry rests, viz., an equality of debits and credits brought about by
a classified analysis of every transaction into its debit and credit
elements at the time of first entry on the books. It does not tie
together the whole into a mathematically provable system.
Since the advent of double entry there have always been strong
adherents to the single-entry method. An early writer, William Perry,
presented in 1777 a treatise on bookkeeping by either method. Most
small enterprises, even if they keep their records by the single-entry
method in the beginning, usually adopt the double-entry system as
their business increases, realizing that the latter furnishes better
accounting control than is obtainable under simple entry.
=Debits and Credits.=—To one who knows the double-entry method,
single-entry bookkeeping presents few difficulties. Debit and credit
as applied to personal accounts are usually of easy determination and
are exactly the same as in double entry. The debits and credits for
cash are based on the same principles in both systems. The method of
writing them in the books of original entry was sufficiently indicated
where those books were explained. Posting is done just as in double
entry. With regard to all work upon single-entry books, there is always
a temptation to do slovenly, inaccurate work because the system does
not provide internal proof as the double-entry system does. Thus, where
rebates have been allowed, only the net amount received may be shown in
the cash book with explanation that the payment is in full of account.
After this amount is posted to the customer’s account, the item does
not fully offset the original debit and it is necessary to make a note
in the ledger to the effect that the item is fully settled. The same
thing holds true for creditors’ accounts. Of course, this is not good
bookkeeping whether practiced in single or double entry.
=The Proprietor’s Account.=—The handling of the proprietor’s account
under single entry is very similar to that under double entry. The
proprietor’s capital account shows the original investment on the
credit side; his personal account, if kept separately, is debited
with his withdrawals, whether in merchandise or cash. Inasmuch as the
single-entry ledger does not show the profit or loss, the manner of
handling the proprietor’s account at closing is somewhat different.
The profit, as determined by the method shown a little later, may be
brought directly and without journal entry from the statement of profit
and loss into the proprietor’s capital account so that this account
will show the true net worth of the business as at that time. The
personal account is simply ruled off after its figures have been used
in determining profit.
=Proof of Posting.=—The only proof of work possible under single entry
is a checking of the secondary record against the original. A trial
balance of the ledger cannot be taken. A schedule or list of account
balances may be prepared and debit and credit totals of the list made.
This compared with a similar list prepared at the close of the last
period will show the changes that have taken place during the current
period. A list of the debits and credits to personal accounts in books
of original entry for this period must check against the net change
shown by the above comparison. Virtually this amounts to a second
posting of the items, and if the two postings agree, the presumption is
that the ledger is correct. The use of the “personal” posting column
for the cash book as explained above, and of similar columns in sales
and purchase journals, makes possible a much easier debit and credit
summary of the books of original entry if some proof of posting is
desired.
=Profit and Loss.=—Inasmuch as many of the factors affecting the net
worth have not been analyzed in making the original entry, no detailed
showing of profit and loss, as understood under double entry, can be
made. It is, of course, possible to go back over the books and make
such an analysis, but this would result practically in rewriting the
books on a double-entry basis. Single entry, therefore, has recourse to
another method which is characterized by a complete inventory-taking
and appraisal. It is sometimes called the “asset and liability method”
as explained in the following sections.
=Inventory and Appraisal.=—A physical inventory or count of all assets,
fixed, current, and deferred, is made. The books furnish only the
accounts receivable and the cash. All other assets are usually made
up by physical count and reappraisal. It is consequently very easy to
lose sight of some assets, particularly in the case of additions and
betterments to existing assets. For the deferred items, the inventory
of supplies on hand supplemented by the proprietor’s memory is the
customary source.
=Liabilities.=—Liabilities are more difficult of correct determination.
The accounts payable are shown on the ledger, the notes payable should
be shown in the bill book or by stubs in the bound blank book of notes.
Any unpaid bills may be found in the current file of unpaid invoices
if one is maintained. For all other liabilities, including deferred
income, the memory must serve. The haphazard manner in which this
statement must be made up is therefore apparent.
=Accrued and Deferred Items.=—There is usually little or no notice
taken of accruals and deferred items on account of the difficulty in
securing trustworthy and full information. The theory of averages,
viz., that these items at one period will offset, in the long run,
those at another, is the theory by which the failure to include
accruals and deferred data is excused. A comparison of this method with
the double-entry method for handling similar items throws into strong
relief the inaccuracies of the single-entry method.
=The Balance Sheet and the Determination of Profit.=—The balance
sheet, listing all assets and all liabilities, makes a determination
of proprietorship or net worth possible. Under the inventory and
appraisal method it must be taken periodically. A comparison of the
net worths as shown by successive statements develops the gain or loss
for the period, provided no other elements affecting net worth have
become involved. The additional element to be taken into consideration
is the relation of the proprietor to the funds of the business. He
may have withdrawn some of the assets or he may have made additional
investments, so that the condition of the assets as shown at the end
of the period is not entirely the result of business activities and
transactions.
Profits determination by this method, therefore, must take cognizance
of the two factors: (1) comparative net worths, and (2) proprietor’s
interim drawings and investments. A withdrawal of cash during the
period equal in amount to the profits for that period would result
in the same net worth at the close as at the opening of the period.
Drawings in excess of profits would cause a net worth less at the end
than at the beginning; and withdrawals less than profits would cause an
increased net worth. But under none of the three cases stated would a
comparison of the two net worths show the actual profits.
Similarly, additional investments have an opposite effect, bringing
about an increase in closing net worth in the exact amount of the
additional investment and so obscuring the true amount of profit or
loss for the period. Accordingly, the increase or decrease of net
worth as shown by the comparative statements of financial condition
must be adjusted in accordance with the proprietor’s withdrawals
and additional investments to make a correct determination of
profits. To determine the profits for the year, to the change in net
worth—treated algebraically, i.e., positive if an increase and negative
if a decrease—must be added the withdrawals, and from this sum the
additional investments must be subtracted.
=Single and Double Entry Compared.=—From the foregoing discussion and
from the illustrations in the next chapter it will be seen that single
entry can be worked through to a conclusion as to profit and loss. It
tells nothing, however, of the sources of that profit or loss, nor
does it give any control over expenses. It is true that a comparative
statement of assets and liabilities as shown in Chapter IV, presenting
increases and decreases of the various assets and liabilities, will
give additional information, but even that does not show the reasons
for the change and so affords no basis for control. For such purposes
the statistical totals of the sales and purchase records, and of
the cash book, where analytical columns are used, furnish the only
information available under single entry. Its only advantage, then,
is brevity, the saving of labor in making the record. No difficult
analysis is met with in the original record and posting is a less heavy
task than in double entry. But brevity and labor-saving are secured at
the expense of the very information which the business man needs.
The advantages of double entry may be summarized as follows:
1. The ledger shows a classified record of every
transaction.
2. Expenditures for capital purposes, i.e., for new
assets or additions and betterments to existing
assets, are recorded as such, so that there is
no danger of losing sight of them.
3. A gross profit figure is obtainable and percentages
of profits and expenses, making possible an
_estimate_ of merchandise inventory at any time.
This is particularly valuable in case of fire loss.
4. The double-entry method provides a proof of the
mathematical accuracy of the ledger.
5. A full statement of sources of profits and causes
of expenses can be obtained in double entry.
Where the above advantages and information are not desired nor
necessary, as in a very simple business under the immediate supervision
of the proprietor, or in simple executorship transactions, etc., single
entry may suffice.
=Change from Single to Double Entry.=—If it is desired to change
from single to double entry, all that is necessary is a complete
inventory and appraisal, to be used as the basis for an opening journal
entry, debit and credit, as for any opening entry. If the former
single-entry ledger is to be used, only the items not already posted,
i.e., the impersonal items, will be posted from this opening entry. The
proprietor’s account should first be adjusted to its correct figure
by a determination of profits by the single-entry method. If this is
done, no posting to his account is needed from the opening entry for
the double-entry books. This opening entry posted will bring the ledger
into equilibrium, which will be maintained under the double-entry
method. If a new ledger is to be used, the opening entry above referred
to will be posted completely—personal and impersonal items—which
will of course bring about the equilibrium desired. Thereafter all
transactions will be analyzed and entered according to the double-entry
system.
CHAPTER LIV
ILLUSTRATION OF SINGLE ENTRY
=Opening Entries.=—In opening a set of single-entry books, as complete
a record should be made as under double entry. If the proprietor begins
business with an investment of cash only and without any obligations,
an entry in the cash book of the amount invested as a credit to
the proprietor’s capital account is all that is necessary. If the
investment consists of a variety of properties and liabilities to
creditors, and obligations on leases, salaries, etc., are assumed, a
very careful and complete record should be made in the journal, showing
the kinds and values of the properties invested, and the kinds and
amounts of the liabilities assumed. This is best arranged in schedule
or statement form, with extension into the posting money columns only
of those personal items for which accounts are to be opened in the
ledger. Illustration will be given of a simple set of single-entry
books, the journal, cash book, sales and purchase records, and the
ledger. In order that the entries may be traced, a separate statement
or diary of the transactions will be given, covering in summarized form
a six months’ period.
PROBLEM. June 30, 19—, A. B. Cornell purchased
a store and business, paying $7,750.
He took over the following assets and liabilities
at the values shown:
Store building and lot $3,000.
Furniture and fixtures $500.
Horse and wagon $250.
Accounts receivable: B. C. Davis $50; C. D. Elliot $75;
D. E. Foley $100; E. F. Gaynor $25; F. G. Harvey $125.
Stock of merchandise $5,250.
Mortgage on real estate $500.
Accounts payable: G. H. Jackson & Co. $250; H. J.
Kelsey $375; J. K. Landon Co. $500.
He deposited $500 as an additional investment.
During the six months the following transactions took
place:
Cash sales $10,000.
Sales on account: Davis $300; Elliot $400; Foley $500;
Gaynor $600; Harvey $700.
Purchases were: Cash $3,500; Jackson & Co. $500; Kelsey
$450; Landon $750; Morey & Co. $1,000.
Cornell returned goods to Morey & Co. $50, and received
an allowance from Kelsey $20.
He made Harvey a rebate of $25.
He received cash on account from Davis $250; Elliot
$300; Foley $400; and notes from Gaynor $250 and
Harvey $500.
He paid on account cash to Morey & Co. $500; Jackson & Co.
$600; Kelsey $675.
He gave his note for $1,000 to Landon.
He paid off the mortgage with interest $530.
Expenses paid were: Clerks $750; cashier, stenographer, etc.,
$250; N. Y. C. Ry. for freight $250; horse feed and expense
of driver $125; newspaper and street-car advertising $300.
Cornell drew $2,000, and made an additional investment
of a safe valued at $250.
At the close of the year inventories and appraisals of data not on the
ledger were as follows:
Store building and lot $2,970.
Furniture and fixtures $725.
Horse and wagon $235.
Merchandise $3,000.
Notes receivable $750, with accrued interest $2.50.
Notes payable $1,000, with accrued interest $15.
Accrued salaries and expenses $25.
It was decided to value the accounts receivable at face
value less 2%.
JOURNAL
=============================================================
19— June 30
A. B. Cornell commenced business, purchasing the
store and stock of the ........ Company, taking over
all its assets and assuming all its liabilities and
obligations. He deposited $500 as a working fund for
the business. The following shows his investment assets
and obligations:
_Assets_ L.F. Items Dr. Cr.
Store Bldg. and Lot 3,000.00
Furniture and Fixtures 500.00
Horse and Wagon 250.00
Merchandise 5,250.00
Accounts Receivable:
B.C. Davis Dr. 50.00 5 50.00
C.D. Elliot Dr. 75.00 5 75.00
D.E. Foley Dr. 100.00 5 100.00
E.F. Gaynor Dr. 25.00 5 25.00
F.G. Harvey Dr. 125.00 375.00 5 125.00
------
Cash 500.00
------
Total Assets 9,875.00
_Liabilities_
Mortgage on Real Estate 500.00
Accounts Payable:
G. H. Jackson
& Co. Cr. 250.00 5 250.00
H. J. Kelsey Cr. 375.00 5 375.00
J. K. Landon
Co. Cr. 500.00 1,125.00 5 500.00
------ --------
Total Liabilities 1,625.00
--------
A. B. Cornell, Capital Cr. 6 8,250.00 8,250.00
Dec. 31 Morey & Co. Dr. 5 50.00
Returned goods as
unsatisfactory.
H. J. Kelsey Dr. 5 20.00
Allowance a/c inferior
goods.
F. G. Harvey Cr. 5 25.00
Rebate a/c dissatisfaction.
E. F. Gaynor Cr. 5 250.00
Note at 3 mo. 6% on a/c.
F. G. Harvey Cr. 5 500.00
Note at 60 da.,
no interest on a/c.
J. K. Landon Co. Dr. 5 1,000.00
Note at 6 mo. 6% on a/c.
A. B. Cornell, Capital Cr. 6 250.00
Made additional investment
of office safe.
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1,445.00 10,400.00
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JOURNAL
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19— L.F. Items Dr. Cr.
Dec. 31 FINANCIAL STATEMENT
_Assets_
Store Bldg. and Lot 2,970.00
Furniture and Fixtures 725.00
Horse and Wagon 235.00
Merchandise 3,000.00
Accounts Receivable:
B.C. Davis 100.00
C.D. Elliot 175.00
D.E. Foley 200.00
E.F. Gaynor 375.00
F.G. Harvey 300.00
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1,150.00
_Less_—
Bad Debts est. 23.00 1,127.00
Notes Receivable 750.00
Accrued Interest on above 2.50
Cash 1,970.00
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Total Assets 10,779.50
_Liabilities_
Notes Payable 1,000.00
Accrued Interest on above 15.00
Accounts Payable:
G. H. Jackson & Co. 150.00
H. J. Kelsey 130.00
J. K. Landon Co. 250.00
Morey & Co. 450.00
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980.00
Accrued Salaries and Expenses 25.00
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Total Liabilities 2,020.00
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Net Worth 8,759.50