TRANSCRIBER'S NOTE:
-Due to a large number of tables, it is strongly suggested to use a
monospaced font.
[Illustration: THE BUSY RETAIL STORE OF THE L. E. WATERMAN COMPANY At
the "Pen Corner," 173 Broadway, New York City]
Cyclopedia
_of_
Commerce, Accountancy,
Business Administration
VOLUME 4
_A General Reference Work on_
ACCOUNTING, AUDITING, BOOKKEEPING, COMMERCIAL LAW, BUSINESS
MANAGEMENT, ADMINISTRATIVE AND INDUSTRIAL ORGANIZATION,
BANKING, ADVERTISING, SELLING, OFFICE AND FACTORY
RECORDS, COST KEEPING, SYSTEMATIZING, ETC.
_Prepared by a Corps of_
AUDITORS, ACCOUNTANTS, ATTORNEYS, AND SPECIALISTS IN BUSINESS
METHODS AND MANAGEMENT
_Illustrated with Over Two Thousand Engravings_
TEN VOLUMES
CHICAGO
AMERICAN TECHNICAL SOCIETY
1910
COPYRIGHT, 1909
BY
AMERICAN SCHOOL OF CORRESPONDENCE
COPYRIGHT, 1909
BY
AMERICAN TECHNICAL SOCIETY
Entered at Stationers' Hall, London
All Rights Reserved
Authors and Collaborators
JAMES BRAY GRIFFITH, _Managing Editor_
Head, Dept. of Commerce, Accountancy, and Business Administration,
American School of Correspondence.
ROBERT H. MONTGOMERY
Of the Firm of Lybrand, Ross Bros. & Montgomery, Certified Public
Accountants.
Editor of the American Edition of Dicksee's _Auditing_.
Formerly Lecturer on Auditing at the Evening School of Accounts
and Finance of the University of Pennsylvania, and the School of
Commerce, Accounts, and Finance of the New York University.
ARTHUR LOWES DICKINSON, F. C. A., C. P. A.
Of the Firms of Jones, Caesar, Dickinson, Wilmot & Company, Certified
Public Accountants, and Price, Waterhouse & Company, Chartered
Accountants.
WILLIAM M. LYBRAND, C. P. A.
Of the Firm of Lybrand, Ross Bros. & Montgomery, Certified Public
Accountants.
F. H. MACPHERSON, C. A., C. P. A.
Of the Firm of F. H. Macpherson & Co., Certified Public Accountants.
CHAS. A. SWEETLAND
Consulting Public Accountant.
Author of "Loose-Leaf Bookkeeping," and "Anti-Confusion Business
Methods."
E. C. LANDIS
Of the System Department, Burroughs Adding Machine Company.
HARRIS C. TROW, S. B.
_Editor-in-Chief_, Textbook Department, American School of
Correspondence.
CECIL B. SMEETON, F. I. A.
Public Accountant and Auditor.
President, Incorporated Accountants' Society of Illinois.
Fellow, Institute of Accounts, New York.
JOHN A. CHAMBERLAIN, A. B., LL. B.
Of the Cleveland Bar.
Lecturer on Suretyship, Western Reserve Law School.
Author of "Principles of Business Law."
HUGH WRIGHT
Auditor, Westlake Construction Company.
GLENN M. HOBBS, Ph.D.
Secretary, American School of Correspondence.
JESSIE M. SHEPHERD, A. B.
Associate Editor, Textbook Department, American School of
Correspondence.
GEORGE C. RUSSELL
Systematizer.
Formerly Manager, System Department, Elliott-Fisher Company.
OSCAR E. PERRIGO, M. E.
Specialist in Industrial Organization.
Author of "Machine-Shop Economics and Systems," etc.
DARWIN S. HATCH, B. S.
Assistant Editor, Textbook Department, American School of
Correspondence.
CHAS. E. HATHAWAY
Cost Expert.
Chief Accountant, Fore River Shipbuilding Co.
CHAS. WILBUR LEIGH, B. S.
Associate Professor of Mathematics, Armour Institute of Technology.
L. W. LEWIS
Advertising Manager, The McCaskey Register Co.
MARTIN W. RUSSELL
Registrar and Treasurer, American School of Correspondence.
HALBERT P. GILLETTE, C. E.
Managing Editor, _Engineering-Contracting_.
Author of "Handbook of Cost Data for Contractors and Engineers."
R. T. MILLER, JR., A. M., LL. B.
President, American School of Correspondence.
WILLIAM SCHUTTE
Manager of Advertising, National Cash Register Co.
E. ST. ELMO LEWIS
Advertising Manager, Burroughs Adding Machine Company.
Author of "The Credit Man and His Work" and "Financial Advertising."
RICHARD T. DANA
Consulting Engineer.
Chief Engineer, Construction Service Co.
P. H. BOGARDUS
Publicity Manager, American School of Correspondence.
WILLIAM G. NICHOLS
General Manufacturing Agent for the China Mfg. Co., The Webster
Mfg. Co., and the Pembroke Mills. Author of "Cost Finding"
and "Cotton Mills."
C. H. HUNTER
Advertising Manager, Elliott-Fisher Co.
FRANK C. MORSE
Filing Expert.
Secretary, Browne-Morse Co.
H. E. K'BERG
Expert on Loose-Leaf Systems.
Formerly Manager, Business Systems Department, Burroughs
Adding Machine Co.
EDWARD B. WAITE
Head, Instruction Department, American School of Correspondence.
=Authorities Consulted=
The editors have freely consulted the standard technical and business
literature of America and Europe in the preparation of these volumes.
They desire to express their indebtedness, particularly, to the
following eminent authorities, whose well-known treatises should be in
the library of everyone interested in modern business methods.
Grateful acknowledgment is made also of the valuable service rendered
by the many manufacturers and specialists in office and factory
methods, whose coöperation has made it possible to include in these
volumes suitable illustrations of the latest equipment for office use;
as well as those financial, mercantile, and manufacturing concerns
who have supplied illustrations of offices, factories, shops, and
buildings, typical of the commercial and industrial life of America.
JOSEPH HARDCASTLE, C.P.A.
Formerly Professor of Principles and Practice of Accounts, School of
Commerce, Accounts, and Finance, New York University.
Author of "Accounts of Executors and Testamentary Trustees."
HORACE LUCIAN ARNOLD
Specialist in Factory Organization and Accounting.
Author of "The Complete Cost Keeper," and "Factory Manager and
Accountant."
JOHN F.J. MULHALL, P.A.
Specialist in Corporation Accounts.
Author of "Quasi Public Corporation Accounting and Management."
SHERWIN CODY
Advertising and Sales Specialist.
Author of "How to Do Business by Letter," and "Art of Writing and
Speaking the English Language."
FREDERICK TIPSON, C.P.A.
Author of "Theory of Accounts."
CHARLES BUXTON GOING
Managing Editor of _The Engineering Magazine_.
Associate in Mechanical Engineering, Columbia University.
Corresponding Member, Canadian Mining Institute.
F.E. WEBNER
Public Accountant.
Specialist in Factory Accounting.
Contributor to The Engineering Press.
AMOS K. FISKE
Associate Editor of the _New York Journal of Commerce_.
Author of "The Modern Bank."
JOSEPH FRENCH JOHNSON
Dean of the New York University School of Commerce, Accounts, and
Finance.
Editor, _The Journal of Accountancy_.
Author of "Money, Exchange, and Banking."
M. U. OVERLAND
Of the New York Bar.
Author of "Classified Corporation Laws of All the States."
THOMAS CONYNGTON
Of the New York Bar.
Author of "Corporate Management," "Corporate Organization," "The
Modern Corporation," and "Partnership Relations."
THEOPHILUS PARSONS, LL. D.
Author of "The Laws of Business."
E. ST. ELMO LEWIS
Advertising Manager, Burroughs Adding Machine Company.
Formerly Manager of Publicity, National Cash Register Co.
Author of "The Credit Man and His Work," and "Financial Advertising."
T. E. YOUNG, B. A., F. R. A. S.
Ex-President of the Institute of Actuaries.
Member of the Actuary Society of America.
Author of "Insurance."
LAWRENCE R. DICKSEE, F. C. A.
Professor of Accounting at the University of Birmingham.
Author of "Advanced Accounting," "Auditing," "Bookkeeping for Company
Secretary," etc.
FRANCIS W. PIXLEY
Author of "Auditors, Their Duties and Responsibilities," and
"Accountancy."
CHARLES U. CARPENTER
General Manager, The Herring-Hall-Marvin Safe Co.
Formerly General Manager, National Cash Register Co.
Author of "Profit Making Management."
C. E. KNOEPPEL
Specialist in Cost Analysis and Factory Betterment.
Author of "Systematic Foundry Operation and Foundry Costing,"
"Maximum Production through Organization and Supervision," and other
papers.
HARRINGTON EMERSON, M. A.
Consulting Engineer.
Director of Organization and Betterment Work on the Santa Fe System.
Originator of the Emerson Efficiency System.
Author of "Efficiency as a Basis for Operation and Wages."
ELMER H. BEACH
Specialist in Accounting Methods.
Editor, _Beach's Magazine of Business_.
Founder of The Bookkeeper.
Editor of _The American Business and Accounting Encyclopedia_.
J. J. RAHILL, C. P. A.
Member, California Society of Public Accountants.
Author of "Corporation Accounting and Corporation Law."
FRANK BROOKER, C. P. A.
Ex-New York State Examiner of Certified Public Accountants.
Ex-President, American Association of Public Accountants.
Author of "American Accountants' Manual."
CLINTON E. WOODS, M. E.
Specialist in Industrial Organization.
Formerly Comptroller, Sears, Roebuck & Co.
Author of "Organizing a Factory," and "Woods' Reports."
CHARLES E. SPRAGUE, C. P. A.
President of the Union Dime Savings Bank, New York.
Author of "The Accountancy of Investment," "Extended Bond Tables,"
and "Problems and Studies in the Accountancy of Investment."
CHARLES WALDO HASKINS, C. P. A., L. H. M.
Author of "Business Education and Accountancy."
JOHN J. CRAWFORD
Author of "Bank Directors, Their Powers, Duties, and Liabilities."
DR. F. A. CLEVELAND
Of the Wharton School of Finance, University of Pennsylvania. Author
of "Funds and Their Uses."
[Illustration: CHICAGO SALES AND DISPLAY ROOMS OF THE NEW HAVEN CLOCK
COMPANY]
Foreword
With the unprecedented increase in our commercial activities has come
a demand for better business methods. Methods which were adequate for
the business of a less active commercial era, have given way to systems
and labor-saving ideas in keeping with the financial and industrial
progress of the world.
Out of this progress has risen a new literature--the literature of
business. But with the rapid advancement in the science of business,
its literature can scarcely be said to have kept pace, at least, not to
the same extent as in other sciences and professions. Much excellent
material dealing with special phases of business activity has been
prepared, but this is so scattered that the student desiring to acquire
a comprehensive business library has found himself confronted by
serious difficulties. He has been obliged, to a great extent, to make
his selections blindly, resulting in many duplications of material
without securing needed information on important phases of the subject.
In the belief that a demand exists for a library which shall embrace
the best practice in all branches of business--from buying to selling,
from simple bookkeeping to the administration of the financial affairs
of a great corporation--these volumes have been prepared. Prepared
primarily for use as instruction books for the American School of
Correspondence, the material from which the Cyclopedia has been
compiled embraces the latest ideas with explanations of the most
approved methods of modern business.
Editors and writers have been selected because of their familiarity
with, and experience in handling various subjects pertaining to
Commerce, Accountancy, and Business Administration. Writers with
practical business experience have received preference over those with
theoretical training; practicability has been considered of greater
importance than literary excellence.
In addition to covering the entire general field of business, this
Cyclopedia contains much specialized information not heretofore
published in any form. This specialization is particularly apparent in
those sections which treat of accounting and methods of management for
Department Stores, Contractors, Publishers and Printers, Insurance, and
Real Estate. The value of this information will be recognized by every
student of business.
The principal value which is claimed for this Cyclopedia is as a
reference work, but, comprising as it does the material used by the
School in its correspondence courses, it is offered with the confident
expectation that it will prove of great value to the trained man who
desires to become conversant with phases of business practice with
which he is unfamiliar, and to those holding advanced clerical and
managerial positions.
In conclusion, grateful acknowledgment is made to authors and
collaborators, to whose hearty cooperation the excellence of this work
is due.
Table of Contents
(For professional standing of authors, see list of Authors and
Collaborators at front of volume.)
VOLUME IV
THEORY OF ACCOUNTS _By James B. Griffith_ Page 11
Dictionary of Commercial Terms--Commercial Abbreviations--Objects
of Bookkeeping--Methods--Single Entry--Double Entry--Advantages
of Double Entry --Classes of Account Books--Recording
Transactions--Promissory Notes--Bank Deposits--Sample
Transactions--Classes of Accounts--Classes of Assets--Revenue
Accounts--Rules for Journalizing--Rules for Posting--Trial
Balance--Sample Ledger Accounts--Treatment of Cash Discounts
--Profit and Loss--Merchandise Inventory Accounts--Balance Sheet
--Journalizing Notes--Journalizing Drafts
SINGLE PROPRIETORSHIP AND PARTNERSHIP ACCOUNTS
_By James B. Griffith_ Page 119
Retail Business--Proprietors' Accounts--Inventory--Retail Coal
Books-- Uncollectible Accounts--Sales Tickets--Departmental
Records--Partnership Agreements--Kinds of Partners--Participation
in Profits--Interest on Investments--Capital and Personal
Accounts--Opening and Closing Partnership Books--Model Set of Books
CORPORATION AND MANUFACTURING ACCOUNTS
_By James B. Griffith_ Page 195
Classification of Corporations--Joint Stock
Company--Creation of Corporation --Stockholders--Stock
Certificates--Capitalization--Capital and Capital Stock --Stock
Subscriptions--Management of Corporations--Powers of Directors
and Officers--Dividends--Closing Transfer Books--Sale of Stock
Below Par--Corporation Bookkeeping--Books Required--Opening
Entries--Changing Books from Partnership to Corporation--Stock
Donated to Employes--Reserves--Computing Sinking Funds--Premium
and Interest on Bonds--Manufacturing and Cost Accounts--Factory
Assets--Factory Expenses--Balance Ledger
THE VOUCHER SYSTEM OF ACCOUNTING _By James B. Griffith_ Page 273
Use of Vouchers--Voucher Checks--Journal Vouchers--Voucher
Register--Operation of System--Auditing Invoices--Executing
Vouchers--Paying, Filing, and Indexing Vouchers--Voucher
File--Demonstration of System--Voucher Accounting--Unit System
--Combined Purchase Ledger and Invoice File--Private Ledger
--Private Journal--General Ledger--Manufacturing Accounts
--Charting Accounts--Chart of Trading Business--Chart of
Manufacturing Accounts--Examples of Charts--Explanation
of Charts
REVIEW QUESTIONS Page 325
INDEX Page 345
[Illustration: THE ACCOUNTING DEPARTMENT IN THE OFFICES OF THE GREEN
FUEL ECONOMIZER COMPANY, MATTEAWAN, N. Y.]
THEORY OF ACCOUNTS
PART I
Like every other special branch of study, the Theory and Practice
of Accounts has its own special vocabulary of technical terms. In
all literature of accounting and business methods in general, these
terms are frequently employed; and the student will find it not only
advantageous, but in fact absolutely necessary, to familiarize himself
thoroughly with their use.
The commercial terms and definitions in the following list are the
ones most commonly used in business. Great care has been exercised in
preparing a list that is practical and in making the definitions clear.
DICTIONARY OF COMMERCIAL TERMS
_Acceptance_--When a draft or bill of exchange is presented to the
payer, he writes across the face "Accepted" or "Accepted for payment at
..." and signs his name. It is then termed an acceptance.
_Accommodation Note_--A note given without consideration of value
received; usually done to enable the payee to raise money.
_Account_--
(_a_) A statement of debits and credits.
(_b_) A record of transactions with a particular person or persons, or
with respect to a particular object.
_Account Books_--Books in which records of business transactions or
accounts are kept.
_Account Current_--An account of transactions during the present month,
week, or other current period. An open account.
_Account Sales_--A statement in detail covering sales, expenses, and
net proceeds made by a commission merchant to one who has consigned
goods to him.
_Accrued; Accrued Interest_--
(_a_) Accumulated interest not payable until a specified date.
(_b_) Accumulated rent.
[Illustration: Specimen Account]
_Acknowledgment_--A certificate to the genuineness of a document signed
and sworn to before an authorized official, as a Notary Public.
_Administrator_--One appointed by the court to settle an estate.
_Ad Valorem_--According to value. A term used to indicate that duties
are payable on the value rather than on the weight or quantity of
articles.
_Adventure_--As used in business, this term signifies a venture or
speculation.
[Illustration: Account Sales]
_Advice_--Information with reference to a business transaction; notice
of shipment; notice of draft. Transmitted by letter or telegram.
_Affidavit_--A statement or declaration made under oath, before an
authorized official.
_Agent_--One authorized to act or transact business for another.
_Agreement_--A mutual contract entered into by two or more persons.
[Illustration: Acknowledgment]
_Allowance_--An abatement; a credit for inferior goods, error in
quantity, etc.
_Annual Statement_--A yearly summary of the transactions of a business.
_Annuity_--An amount payable to or received from another each year for
a term of years or for life.
_Antedate_--To date a document or paper ahead of the actual time of its
execution.
_Appraise_--To place a value on goods or property. An estimate made for
the purpose of assessing duties or taxes.
_Appreciation_--An increase in value. Real estate may increase in value
on account of the demand for property in the immediate vicinity.
_Approbation_ or _Approval Sales_. Goods delivered to customers with
the understanding that if not found satisfactory they are to be
returned within a definite period and without payment.
_Articles_--A collection of merchandise; parts of a written agreement,
as "Articles of Association."
_Arbitrate_--To determine or settle disputes between two or more
parties, as settlement of differences between employer and employees.
_Assets_--All of the property, goods, possessions of value of a person
or persons in business.
_Assign_--To transfer or convey to another for the benefit of creditors.
_Assignee_--The person to whom the property or business is transferred.
Usually acts as a trustee of the creditors.
_Assignment_--The debtor's transfer or conveyance of his property to a
trustee.
_Assignor_--The debtor who makes an assignment, or transfers property
for the benefit of creditors.
_Association_--A body organized for a common object.
_Attachment_--A legal seizure of goods to satisfy a debt or claim.
_Auxiliary_--Books of record other than books of original entry or
principal books of account. Books used for purposes of distribution or
the gathering of statistics are "auxiliary" books.
_Audit_--To verify the accuracy of accounts by examining or checking
records pertaining thereto.
_Average_--As applied to accounts, the mean time which bills of
different dates have to run, or an average due date for several
accounts. Determining the due date is sometimes referred to as
averaging accounts.
_Balance_--The difference between the debit and credit sides of an
account. To close an account by entering the amount on the lesser side
necessary to make the two sides balance.
_Balance Sheet_--A statement or summary in condensed form made for the
purpose of showing the standing or condition of a business.
_Balance of Trade_--The balance or difference in value between the
imports and exports of a country.
_Bale_--The form in which certain commodities are marketed. A bale of
cotton, bale of hay, etc.
_Bank Balance_--The net amount to the credit of a depositor at the bank.
_Bank Note_--A note issued by a bank, payable on demand, which passes
for money.
_Bank Draft_--An order drawn by one bank on another for the purpose of
paying money.
_Bank Pass-Book_--A small book furnished to a depositor by his bank, in
which are entered the amounts of deposits and sometimes the checks or
withdrawals.
_Bankrupt_--A person, firm, or corporation whose liabilities exceed
their assets; who are unable to meet their obligations.
_Bill_--A statement or record of goods bought or sold, or of services
rendered.
[Illustration: Bill]
_Bill of Exchange_--An order on a given person or bank to pay a
specified amount to the person and at the time named in the bill. The
term is more commonly used to apply to orders on another country, being
made in triplicate.
_Bill of Lading_--A receipt issued by the representative of a common
carrier, for goods accepted for transportation to a specified point and
at a given rate. It is a contract, and, when transferred to a third
party, becomes an absolute title to the goods.
[Illustration: Bill of Lading]
_Bill of Sale_--A written document executed by the seller, transferring
title to personal property.
_Bill Head_--The blank or form on which a bill is made. For
illustration, see Bill.
[Illustration: Bill of Exchange]
_Bills Payable_--Promissory notes and acceptances which we are to pay.
_Bills Receivable_--Promissory notes and acceptances which are to be
paid to us.
_Blanks_--Papers or books ruled or printed in suitable form for
business records.
_Blotter_--A book in which are entered memoranda of transactions which
are later copied into other books. Also known as a _day book_.
_Bond_--A written agreement binding a person to do or not to do certain
things specified therein. A negotiable instrument secured by mortgage
or other security, binding the maker to pay certain sums on specific
dates.
_Bonded Goods_--Goods stored in a government warehouse, or in bonded
cars, bonds having been given by the owner for the payment of import
duties or internal revenue taxes when removed.
_Bonus_--An amount paid in excess of the sum originally agreed upon.
A premium or gift--for example, a sum paid to a salesman as extra
compensation for making a certain number of sales.
_Book Account_--A charge or evidence of indebtedness on the books of
account not secured by note or other written promise.
_Brand_--A class of goods. A symbol or name used to designate a
specific article. A trade mark.
_Broker_--One who acts as agent or middleman between buyer and seller.
_Brokerage_--The commissions or fees paid the broker for his services.
Also a term used to designate his business.
_Bullion_--Uncoined gold or silver.
_Call Loans_--Loans made payable on demand or when called for.
_Cancel_--To render null and void; to annul.
_Capital_--Property or money invested in a business.
_Capital Stock_--A term used to indicate the subscriptions of all
stockholders to the capital of a corporation.
_Cartage_--The charges made for hauling goods by wagon, or otherwise
than by freight or express.
_Cash Sales_--Sales for which immediate payment is received in
contradistinction to sales of goods on credit.
[Illustration: Bill of Sale]
_Certificate of Stock_--A written statement or declaration of the
purchase of a specified number of shares of the capital stock of a
corporation. An evidence of ownership.
_Certified Check_--A check, the payment of which is guaranteed by the
bank on which it is drawn.
_Charges_--The expense involved in handling goods or in performing a
specific act--as, for example, charges for storage, freight charges,
etc. Also a synonym for _debits_.
_Chart_--A classified exhibit of the components of a business
organization, showing the authority and responsibilities of the
members. Grouping of the accounts of a business with respect to their
relation to one another.
_Charter_--To hire a car, ship, or other instrument of transportation.
A document defining the rights and duties of a corporation.
_Check_--An order on a bank to pay to a certain person, or to the order
of such person, a specified sum, which sum is to be charged to the
account of the drawer of the check.
_Clearing House_--An exchange established by banks in cities, for their
convenience in making daily settlements. The checks and drafts on the
different banks are exchanged without the formality of presenting them
personally at each bank. A balance is found, and this amount only is
paid in cash.
_Closing an Account_--Making an entry that will balance the account.
_Collateral_--Pledges of security--as stocks, bonds, etc.--to protect
an obligation or insure the payment of a loan.
_Commission_--A percentage or share of the proceeds allowed for the
sale of merchandise--as the pay of a commission merchant for selling a
car of flour.
_Commission Merchant_--One who sells goods on commission. Similar to a
broker.
_Commercial Paper_--Negotiable paper used in business.
_Common Law_--Law based upon the precedent of usage, though not
contained in the statutes.
_Company_--A corporation; also used to designate partners whose names
are not known.
_Compromise_--To settle an account for less than the amount claimed. To
agree upon a settlement.
[Illustration: Certificate of Stock]
_Consideration_--The price or money paid or to be paid which induces
the entering into a contract by two or more persons.
_Consignee_--The party to whom goods are shipped. A person to whom
goods are sent to be sold on commission is a consignee. The goods so
sent are known as a _consignment_, and the sender is the _consignor_.
_Consul_--An agent of the Government, residing in a foreign part, who
guards the interests of his own Government.
_Contra_--On the opposite side--as a contra account.
_Contract_--A written agreement between two or more persons to perform
or not to perform some specified act or acts.
_Contingent Assets and Liabilities_--Resources or liabilities whose
value depends upon certain conditions.
_Contingent Fund_--A sum put aside to provide for an anticipated
obligation; a reserve fund.
_Conveyance_--A term used to describe certain forms of legal documents
transferring from one person to another, title to property or
collateral.
_Copyright_--A right granted to an author or publisher to control
the publication of any writing, or the reproduction of a photograph,
painting, etc.
_Counterfeit_--A spurious coin, or bank or treasury note.
_Coupon_--A certificate detached from a bond, which entitles the holder
to the payment of interest.
_Coupon Bond_--Bonds to which are attached coupons calling for the
payment of interest. The coupons, when detached, become negotiable
paper.
_Credentials_--Letters or testimonials conveying authority.
_Creditor_--One whom we owe; one who gives credit.
_Currency_--The coin or paper money constituting the circulating medium
of a country.
_Debenture_--A certified evidence of debt. See Bond.
_Debit_--To charge; to record an amount due.
_Deed_--A written document or contract transferring title to real
estate.
_Defalcation_--The appropriating to one's own use, of money intrusted
to him by another; embezzlement.
_Deferred Bonds_--Bonds which are to be paid when some condition is
fulfilled in the future.
_Delivery Receipt_--An acknowledgment of the delivery of goods. Largely
used by merchants in the delivery of goods to customers.
_Demand Note_--A promissory note or acceptance payable on presentation
or on demand.
[Illustration]
_Deposit_--The money placed in custody of the bank, subject to order.
_Depreciation_--A reduction in the value of property. In a
manufacturing plant, buildings and machinery depreciate in value
through wear and tear; a residence property may depreciate owing to the
nature of a nearby building.
[Illustration: Delivery Receipt]
_Discount_--An allowance or abatement made for the payment of a bill
within a specified period. The interest paid in advance on money
borrowed from a bank.
_Dishonor_--Refusal to accept a draft, or failure to pay a written
obligation when due.
[Illustration: Demand Note]
_Dividend_--The profits which are distributed among the stockholders of
a corporation.
_Draft_--A written order for the payment of money--usually made through
some bank.
_Drawer_--The person by whom the draft is made; the one who requested
the payment of money by the drawee.
_Drayage_--Synonymous with cartage.
_Due Bill_--A written acknowledgment of an amount due; of the same
effect as a demand note.
_Dunning_--Soliciting or urgently pressing the payment of a debt.
_Duplicate_--A copy of a paper or document; the act of making a copy.
_Duty_--The tax paid on imported goods.
_Doubtful_--Of questionable value. We refer to an account as "doubtful"
when we question the likelihood of its payment.
[Illustration: Draft]
_Earnest_--An advance payment, applying on the purchase price, made to
bind an oral bargain.
_Embezzlement_--See Defalcation.
_Exchange_--The charge made by a bank for the collection of drafts or
checks.
_Exports_--Commodities sent to another country.
_Extend_--To set a later date for payment; to add several items and
carry the totals to the proper column.
_Face Value_--The amount for which a commercial paper is drawn.
_Facsimile_--An exact duplicate or exact copy.
_Financial Statement_--A term used in the same sense as _balance sheet_
or _annual statement_.
_Fiscal_--A financial or business year, in contradistinction to a
calendar year. The fiscal year of a business may commence and end on
any date--usually on the date on which it was started.
_Fixed Assets_--Permanent assets acquired by a firm or corporation to
enable them to conduct a business. Includes real estate, building,
machinery, horses and wagons, etc.
_Fixed Charges_--Those charges in connection with the operation of a
business which occur at regular intervals, such as rent, taxes, etc.
_Fixtures_--A fixed asset represented by that part of the furniture not
readily removable, such as gas and electric light fixtures.
_Folio_--A column provided in account books, in which to enter the page
numbers of other books from or to which records are transferred.
_Footing_--The sum or amount of a column of figures.
_Foreign Exchange_--Drafts on foreign cities.
_Freight_--The charges paid for the transportation of goods.
_Gain_--The increase in value of assets or profit resulting from a
transaction or transactions.
_Gauging_--Measuring the liquid contents of casks or barrels.
_Going Business_--A term used to designate a business in actual
operation. Goodwill or the reputation of a business has a value so long
as the business is in operation, or keeps going. When a business is
discontinued, only the physical assets or actual properties owned by
the business are of value.
_Good Will_--The monetary value of the reputation of a business over
and above its visible assets; the value of a business name.
_Gross_--The entire amount in contradistinction to the net amount--as
gross weight or gross profit.
_Guarantee or Guaranty_--Surety for the maintenance of quality or the
performance of contracts.
_Honor_--To pay a promissory note when due; to accept or pay a draft.
_Hypothecate_--To deposit as collateral security for a loan.
_Import_--To bring goods into the country.
_Income_--The receipts of a business.
_Income Bonds_--Bonds on which the payment of interest is contingent on
profits earned. If the interest is passed on account of lack of funds,
the holder of the bond has no claim.
_Indemnity_--Security against a form of loss which has occurred or may
occur--as fire insurance, against loss by fire.
_Indorse_--To guarantee the payment of commercial paper by writing
one's name on the back.
_Indorsee_--The person to whom a paper is indorsed.
[Illustration: Lease]
_Indorser_--The person who guarantees payment; the one who indorses.
_Infringe; Infringement_--To trespass upon another's rights--as
infringement of a patent or copyright.
_Installment_--An account or note the payment of which is to be made in
several parts, at stated intervals.
_Insolvent_--Unable to pay one's obligations.
_Instant_--Principally used in correspondence to indicate the present
month.
_Insurance Policy_--A contract between an insurance company and the
insured.
_Interest_--The sum or premium paid for the use of money; one's share
in a business or a particular property.
_Inventory_--An itemized schedule of the property or goods belonging to
a business.
_Investment_--Money paid for goods or property to be held; not for
speculation.
_Invoice_--A list of goods bought or sold. See Bill.
_Jobber_--One who buys from manufacturers and sells to retailers; a
middleman.
_Job Lot_--An incomplete assortment of goods to be disposed of in a
lump. Usually indicates small portions or remnants of a stock, the bulk
of which has been sold.
_Joint Stock_--Property owned in common by several individuals known as
stockholders.
_Leakage_--An allowance for waste of liquids in transit; refers
particularly to liquids shipped in casks.
_Lease_--A written agreement covering the use of property during a
specified period, at a stated rental.
_Legal Tender_--The lawful amount to be offered in payment of an
obligation. Bank notes or other currency which passes for money.
_Lessee_--One who receives a lease. The _lessor_ makes it.
_Letter of Advice_--A letter giving notice of some act in which the one
receiving the advice has an interest--as making a shipment, notice of
draft, etc.
_Letter of Credit_--A letter which authorizes the receiving, by the
holder, of credit to a stated amount. Principally used by travelers to
secure credit from foreign bankers.
_Liabilities_--The obligations or debts of a firm, corporation, or
individual.
_License_--Permission, usually granted by a municipality, to conduct a
specified business.
_Liquidation_--The closing-out of a business or an estate.
_Loss and Gain_--The amount of profits or losses of a business.
_Maker_--One who signs a note.
_Manifest_--A list or schedule of the articles in a ship's cargo, or of
the goods comprising a shipment.
[Illustration: Order]
_Maturity_--The time when an obligation or an account is due.
_Mercantile Agency_--A company which obtains and keeps for the use of
its customers information showing the standing of business firms.
_Merchandise_--The stock in trade, or goods bought to be sold again.
_Money Order_--An order instructing a third party to pay money to the
person named. A form in which money is transmitted.
_Monopoly_--The exclusive control of the manufacture or sale of an
article.
_Mortgage_--A temporary transfer of title to land, goods, or chattels
to secure payment of a debt.
_Mortgagor_--One who gives a mortgage. The one to whom the mortgage is
given is the _mortgagee_.
_Negotiable_--An agreement or any commercial paper which can be
transferred by delivery or endorsement--as a bank note or promissory
note.
_Net_--Less all charges or deductions. _Gross_ assets less liabilities
leaves _net_ capital; _gross_ income less all expenses leaves _net_
profit; etc.
_Nominal_--Having no actual existence; exists in name only.
_Obligation_--Indebtedness.
_Open Account_--An account which has not been paid.
_Opening Entries_--The entries made in the books when it is desired to
open the accounts of a business.
_Option_--The right to be the first purchaser; a privilege.
_Orders_--Requests for the shipment of goods.
_Original Entry_--The first record made of a charge or credit which
becomes the basis of proof of the account.
_Overdraw_--To draw a check for a greater amount than the drawer has on
deposit in a bank.
_Par_--Face value.
_Partnership_--A firm; a union of two or more persons for the
transaction of business or the ownership of property.
_Payee_--The one to whom money is to be paid. The one who pays the
money is the _payer_.
_Per Annum_--By the year.
_Per Cent_ or _Per Centum_--By the hundred.
_Per Diem_--By the day.
_Personal Account_--Any account with an individual, firm, or
corporation.
_Personal Property_--All property other than real estate.
_Petty Cash_--A term used to signify small expenditures in actual cash.
_Postdate_--To date ahead; after the real date.
_Post_--To transfer amounts from books of entry to the ledger, which is
the book of final record.
_Power of Attorney_--Authority to act for and in the name of another in
business transactions.
_Preferred Stock_--Stock which participates in the profits before any
dividend can be paid on the common or ordinary stock.
_Premium_--The amount paid above par value; the amount paid to an
insurance company for insurance against loss.
_Present Worth_--The net capital of an individual.
_Proceeds_--The amount realized from a sale of property.
_Profit and Loss_--Synonymous with loss and gain.
_Promissory Note_--A promise, signed by the maker or makers, to pay a
stated sum at a specified time and place.
[Illustration: Promissory Note]
_Pro Rata_--A distribution of money or goods in proportionate parts.
_Protest_--A formal notice acknowledged before a notary that a note
or draft was not paid at maturity, and that the maker will be held
responsible for the payment.
_Quotation_--A price named for a given article or for services.
_Ratify_--To approve; to sanction the acts of an agent.
_Raw Material_--Material to be manufactured into other products--as
iron ore, pig iron, lumber, etc.
_Real Estate_--Primarily refers to land, although buildings are
frequently included.
_Rebate_--An allowance or deduction. See Allowance.
_Receipt_--An acknowledgment that money or something of value has been
received.
_Receiver_--One appointed to take charge of the affairs of a
corporation, either solvent or insolvent, and administer its affairs
under orders of the court.
_Remittance_--Money or funds of any character transmitted from one
place to another.
[Illustration: Power of Attorney]
_Renewal Note_--A new note given to take the place of a note that is
due.
_Rent_--A payment for the use of property owned by another.
_Resources_--Synonymous with assets.
_Revenue_--Income of a business.
_Revoke_--To recall authority of another to act as agent.
_Royalty_--A stipulated amount paid to the owner of a mine, patent,
copyright, etc., usually based on sales. The owner of a copyright
receives a royalty based on the number of books sold.
[Illustration: Receipt]
_Schedule_--Inventory of goods or statement of prices.
_Sight Draft_--A draft payable on presentation or at sight.
_Solvent_--Able to pay one's debts.
_Statement_--Commonly used to designate a list of bills to customers
during a stated period. Also used to designate a financial summary
showing profits and losses of a business.
_Stockholder_--An owner of stock in a corporation or joint stock
company.
_Storage_--The charge for keeping goods in a store or warehouse.
_Surety_--One who has guaranteed or made himself responsible for the
acts of another.
_Syndicate_--A combination of capitalists, usually temporary, for the
conduct of some financial enterprise.
_Tare_--The amount deducted from gross weights to cover weight of
packages--as crates, boxes, barrels, etc.
_Tariff_--A schedule of prices, as freight tariff. The duties imposed
on imports or exports.
_Terms_--The conditions governing a given sale. "Terms cash" means that
payment is to be made as soon as goods are delivered.
_Tickler_--Memoranda of matters requiring attention in the future,
arranged according to dates.
_Time Draft_--A draft which matures at some future date.
_Trade Discount_--The discount allowed by a manufacturer to a jobber or
by a jobber to a retailer.
[Illustration: Statement]
_Trade Mark_--See Brand.
_Ultimo_--Principally used in correspondence to designate last month.
_Valid_--Legal or binding; usually applied to a properly executed
contract.
_Value Received_--Used in notes to indicate that value has been given.
_Void_--Without legal force; not binding.
_Voucher_--A receipt; a document which proves the accuracy of an
account or the authority for an expenditure.
[Illustration: Voucher]
_Warehouse_--A building used for storage purposes.
_Warehouse Receipt_--A document acknowledging the receipt of goods for
storage in a warehouse.
_Warranty_--An agreement to assume responsibility if certain facts do
not prove as represented.
_Way Bill_--A document containing a list of goods shipped by a railroad.
_Wholesale_--A business which sells goods in large quantities, usually
in original packages and to the trade only.
_Working Capital_--The capital actually used in the active operations
of a business.
COMMERCIAL ABBREVIATIONS
The commercial abbreviations in the following list are in constant use
in the various lines of trade, and should be thoroughly understood by
the student of accounting.
A 1 First-class
acct. Account
ad Advertisement
Agt. Agent
amt. Amount
Ans. Answer
Art. Article
asstd. Assorted
Ass't. Assistant
Atty. Attorney
bal. Balance
bbl. Barrel
B. B. Bill Book
bds. Boards
bdls. Bundles
bgs. Bags
bk. Book
bkt. Basket
B. L. or B/L Bill of Lading
bls. Bales
bot. Bought
B. P. or B/P Bills Payable
bro't. Brought
B. R. or B/R Bills Receivable
B. Ren'd. Bill Rendered
bu. Bushel
bx. Box
C. B. Cash Book
¢ or cts. Cents
chgd. Charged
c. i. f. Cost, Insurance, and Freight
ck. Check
cks. Casks, Checks
Co. Company
C. O. D. Collect on delivery
Coll. Collect or Collector
Com. Commission
Com'l. Commercial
Cons'd. Consigned
Const. Consignment
Cr. Credit or Creditor
ctg. Cartage
cwt. Hundredweight
D. B. Day Book
Dept. Department
dft. Draft
dis. or Disc't. Discount
div. Dividend
do. or ditto The Same
doz. Dozen
Dr. Debit or Debtor
ds. Days
ea. Each
E. E. Error excepted
E. and O. E. Errors and omissions excepted
e. g. For example
Ent. Entry or Enter
Ent'd. Entered
etc. or &c. And others; And so forth
Exch. Exchange
ex. Express
exp. Expense
Exr. Executor
f. o. b. Free on board
fol. Folio; Page of a book
f'd, ford. Forward
frt. Freight
ft. Foot, Feet
gal. Gallon
gr. Grain
gro. or gr. Gross
guar. Guaranteed
hdkf. Handkerchief
hhd. Hogshead
hund. Hundred
I. B. Invoice Book
in. Inches
Ins. Insurance
Inst. Instant (this month)
int. Interest
inv. Invoice
invt. Inventory
I. O. U. I owe you; A due bill
J. Journal
lb. Pound
lbr. Lumber
lab. Labor
Manf. Manufacture
Mdse. Merchandise
Mem. Memorandum
Mfd. Manufactured
Mfst. Manifest
Mfr. Manufacturer
Mo. or mo. Month
Mtg. Mortgage
Ms. Manuscript
Mut. Mutual
Nat. or Nat'l. National
N. B. Take notice
No. Number
N. P. Notary Public, Net Proceeds
O. B. Order Book
O. K. All Correct; Approved
oz. Ounce
p. Page
pp. Pages
pay't or pm't. Payment
pc. Piece
pcs. Pieces
P. B. Pass Book
P. C. B. Petty Cash Book
pd. Paid
per. By; By the
per an. By the year
pk. Peck
pkg. Package
pop. Population
pref. Preferred
Prem. Premium
Pro. Proceeds
prop'r. Proprietor
prox. Next Month
P. S. Postscript
pub. Publisher
Qr. or qr. Quarter, Quire
Qt. or qt. Quart
rec'd. Received
ret'd. Returned
R. R. Railroad
Ry. Railway
S. B. Sales Book
S. E. Single Entry
Sec. Secretary
Shipt. Shipment
Shs. Shares
Sig. Signature
S. S. Steamship
s. s. To wit; Namely
St. dft. Sight Draft
Sund. Sundry
Supt. Superintendent
sq. Square
T. B. Trial Balance; Time Book
ult. Ultimo; Last month
via. By way of
viz. Namely
Vol. Volume
vs. Against
W. B. Way Bill
Wk. Week
Wt. or wt. Weight
yr. Year
yd. or yds. Yard or Yards
COMMERCIAL SIGNS AND CHARACTERS
The signs and characters most commonly used in business are
the following:
@ To or At
a/c Account
B/L Bill of Lading
B/R Bills Receivable or Bill Rendered
B/P Bills Payable
B/S Bill of Sale
¢ Cents
c/o Care of
D/D Days after date
D/S Days after sight
F/B Free on board
J/A Joint Account
L/C Letter of Credit
L/M Letters of Marque
£ Pounds Sterling
o/c On account
o/c Out of courtesy
% Per cent
p Per
$ Dollars
# Number, if written before a figure, as #25; Pounds,
if written after, as 25#
[check mark] Check Mark
" Ditto
° Degrees
' Prime; Minute; Feet
" Seconds; Inches; also used as Ditto marks
1¹ One and one-fourth
1² One and one-half
1³ One and three-fourths
+ Plus
- Minus
× By or times
÷ Divided by
= Equals
DEFINITION AND OBJECTS OF BOOKKEEPING
1. Bookkeeping is the art of recording the transactions of a business
in a manner that makes it possible to determine the accuracy of the
records.
The objects of bookkeeping are:
(_a_) To exhibit a record of the separate transactions of a business.
(_b_) To furnish statistical information in respect to any particular
class of transactions.
(_c_) To exhibit the financial standing or condition of a business.
When properly assembled the bookkeeping records become _accounts_ (for
definition, see Dictionary of Commercial Terms).
If correct methods are used, the bookkeeping records will be assembled
or grouped in a manner to show their exact nature and their bearing on
the status of the business, or the standing of the account.
=2. Debit.= The term _debit_ designates those items in an account
representing values with which we have parted, or transferred to
another person or account. Debits are always placed on the left side
(or in the left-hand column) of an account. Debits to persons are of
the following classes:
(_a_) The transfer of merchandise.
(_b_) The rendering of services.
(_c_) The use of something of value.
_Examples_--
(_a_) We sell to John Doe two tons of coal at $7.50 per ton. We _debit_
his account with the amount.
(_b_) We render services to Thos. Ryan for which he is to pay us a
stated fee. We _debit_ his account with the amount of the fee.
(_c_) We are to pay rent for the use of our offices. Our landlord
_debits_ us with the amount.
=3. Credit.= The term _credit_ designates those items in an account
representing value which we have received or which has been transferred
to us. Credits are always placed on the right side (or in the
right-hand column) of an account. Credits to persons are of the
following classes:
(_a_) The receipt of merchandise or money.
(_b_) The rendering of services.
(_c_) The use of something of value.
_Examples_--
(_a_) John Doe pays us $10.00 on account. We _credit_ his account with
the amount.
(_b_) Our attorney makes a charge for legal services. We _credit_ his
account with the amount.
(_c_) We rent or lease property to another; and when payment is made,
we _credit_ his account.
=4. Rules for Debit and Credit.= Debit and credit are the fundamental
principles of bookkeeping. The general rules to be followed in debits
and credits are:
Debit cash when you receive it.
Debit a person when you trust him.
Debit a person when you pay him.
Credit cash when you pay it out.
Credit a person when he trusts you.
Credit a person when he pays you.
=5. Balance.= When the two sides of an account differ in amount, it is
said to show a balance. If the debit side of the account is the larger,
the difference is a _debit balance_. If the credit side of the account
is the larger, the difference is a _credit balance_.
_Example_--If we debit John Doe's account for two tons of coal at $7.50
a ton, or $15.00 (see Example (_a_), Article 2), and credit his account
with $10.00 paid (see Example (_a_), Article 3), the debit side of the
account is $5.00 greater than the credit side. Therefore it shows a
debit balance.
METHODS OF BOOKKEEPING
6. There are but two methods or systems of bookkeeping, and they are
known as _single entry_ and _double entry_. No matter in what form
bookkeeping records are kept, the method must be either single or
double entry.
Single entry is used only in very small businesses or by those who do
not understand the advantages of double entry.
SINGLE ENTRY
7. As the name indicates, single entry is a single record of the
transaction--that is, a record of one phase of the transaction only.
_Example_--John Doe's account would show that he received two tons of
coal, but there would be no corresponding account to show that our
supply of coal had been diminished.
Single entry fails to fulfil the object of bookkeeping, as it does not
exhibit the true financial condition of the business, and is incapable
of proof of accuracy.
DOUBLE ENTRY
8. Double entry is a system of making two entries (or a double record)
of every transaction. In every business transaction, two distinct
factors are involved--namely, that which is received, and that which is
parted with. If we sell a given quantity of a commodity, we part with
it, and the sale takes from or decreases the value of that particular
commodity in our possession. If we sell for cash, the transaction adds
to our cash possessions; while if the value of the commodity is debited
or charged to the account of a customer, it adds to the amount we are
to receive from that customer.
=9. Principle of Double Entry.= Double entry is a system of debits and
credits. One writer expresses it as a system of opposing contra things.
_The fundamental principle of double entry is that there must be a
corresponding credit for every debit._
_Example_--When we sell John Doe two tons of coal, we debit his
account; but we have decreased the value of our stock of coal, and to
complete the double entry, we credit coal account (or _Merchandise_, as
the account representing our stock in trade is sometimes known). When
he pays us money, we credit his account, and debit cash.
=10. Advantages of Double Entry.= The principal advantages of double
entry bookkeeping are that the system permits of making an accurate
exhibit of the standing of the business; it exhibits the profits and
losses; it shows the sources of profits and the causes of losses; it
permits of proof of the accuracy of the records.
[Illustration]
11. _Account books_ are ruled with special forms which adapt them
to bookkeeping records. The forms of ruling are many and varied to
suit the requirements of different classes of business. Rulings for
double entry bookkeeping do not differ materially from those used in
single entry. For double entry, at least two amount columns must be
provided--one for debits, and one for credits.
The most common form of ruling is known as _journal ruling_. A book
with this ruling is also known as a _journal ledger_.
The words in parentheses explain the purpose of the different columns.
The abbreviations _Dr._ (debit) and _Cr._ (credit) are sometimes
written at the head of the amount column; but most bookkeepers omit
them, as the position of the columns indicates their purpose.
DEMONSTRATION
To illustrate the manner of entering transactions in accounts, we show
in the accompanying diagrams how the transactions used in the foregoing
examples would appear in the proper accounts.
[Illustration]
EXAMPLES FOR PRACTICE
1. On journal ruled paper, which can be procured at any stationer's,
write up the account of John Doe as per example given in Articles 2 and
3.
2. Write up the account of John Doe, showing also the accounts
necessary to complete the double entry, as per example in Article 11.
3. Write up the accounts covering the following transactions, by the
single entry method:
Nov. 16. Sold to James Stevenson 4 cords of wood, at $4.75 per cord.
Sold to Andrew White 2½ tons of coal, at $6.00 a ton.
Nov. 17. Sold to Wm. Johnson 1 ton of coal, at $7.00 a ton.
Nov. 19. Received from James Stevenson $12.00 cash, to apply on account.
Nov. 20. Received from Wm. Johnson $7.00 in payment of account.
4. Write up the same accounts by the double entry method, using a
merchandise account to represent all classes of merchandise sold.
CLASSES OF ACCOUNT BOOKS
12. Account books are of two classes: (_a_) those in which complete
records of transactions, or complete accounts, are kept; (_b_) those
which contain particulars of individual transactions which must
afterward be transferred to books of the (_a_) class.
Books of the (_a_) class are known as _principal books_ or _books of
record_; that is, they contain the final or permanent record of an
account.
Books of the (_b_) class are of two kinds: (_ba_) books of _original
entry_; (_bb_) _auxiliary books_.
Any book which contains the first (or original) record of a transaction
is a book of original entry (_ba_).
[Illustration]
[Illustration: A CORNER IN THE OFFICES OF THE PLATT IRON WORKS, DAYTON,
OHIO]
Any book in which records contained in books of original entry (_ba_)
are assembled, to be transferred later to principal books (_a_), is an
auxiliary book.
Any book used for the purpose of assembling statistical information is
an auxiliary book.
The books most commonly used in double entry bookkeeping are: _Order
Book_, _Day Book_, _Cash Book_, _Journal_, _Sales Book_, _Purchase
Book_, _Ledger_.
=13. Order Book.= An Order Book is a book of original entry in which is
entered a record of each order or request for the shipment or delivery
of merchandise. The record shows the name and address of the customer,
the kinds and quantities of goods wanted, and the prices at which they
are to be sold.
The ruling of the order book varies according to the nature of the
business. A simple form of ruling is shown.
=14. Day Book.= A Day Book is a book of original entry in which are
entered full particulars of each completed transaction. These records
are afterwards assembled in auxiliary books, from which they are
transferred to the principal books.
[Illustration]
The use of the day book was formerly universal, but it has been
discarded by modern bookkeepers as its use involves unnecessary labor.
The records formerly kept in the day book are now made directly in
certain books then known as auxiliary, which makes of them books of
original entry. The ruling of the day book is shown.
=15. Cash Book.= A Cash Book is a book of original entry containing
records of all transactions which involve either the receipt or
payment of cash. The records in the cash book are in fact a complete
account with cash. We debit cash for all money received, and credit
cash with all money paid out; therefore, the difference between the
total footings of the debit and credit sides of the cash book shows
the amount of cash which we should have on hand. Since we cannot pay
out more than we receive, the debit side should be the larger, unless
both sides are equal, which shows that we have paid out all the cash
received.
The amounts entered on the debit side of the cash book are transferred
(or _posted_) to the credit side of the account of the one from whom
the cash is received.
The amounts entered on the credit side of the cash book are posted to
the debit side of the account of the one to whom the cash is paid.
[Illustration]
There are many special forms of ruling for cash books, with separate
columns for entering certain classes of receipts and payments of a
special nature. The ruling of the cash book should be made to meet the
requirements of the business in which it is to be used. A simple form
of ruling is shown.
It will be noted that the left-hand page is used for the debit side,
while the right-hand page is used for credits. This is the only account
kept with cash.
=16. Journal.= A Journal is a book in which separate transactions
are entered in a manner to preserve the balance necessary in double
entry--that is, showing the proper debit and credit for each
transaction. The journal is used for making adjusting entries, and it
was formerly the custom to copy into this book from the day book the
particulars of every transaction. Records are now made in the journal
directly, which makes it a book of original entry.
The records in the journal are transferred or posted to the debit and
credit sides of the accounts which they represent.
The journal is frequently combined with the cash book, and is then
called a _cash journal_. An ordinary form of journal ruling is shown in
Article 11.
=17. Sales Book.= A Sales Book is an auxiliary book in which is kept a
record of all goods sold, showing name of purchaser, quantity and kind
of articles, prices, and amounts.
A sales book is a journal of sales. The amounts of individual sales
are posted (transferred) to the debit side of the accounts of the
purchasers. The footings of the sales book are carried forward until
the end of the month, when the total amount is posted as one item to
the credit side of the _merchandise_ account, completing the double
entry.
The merchandise account has been universally used in the past, all
purchases being debited and all sales credited to this account. Certain
other accounts (which will be explained later) are now recommended by
leading accountants, to take the place of the merchandise account.
Sales books are usually ruled to meet the special needs of each
business, separate columns being provided for a record of special
classes of sales, or sales of special kinds of goods.
=18. Purchase Book.= A Purchase or Invoice Book is the opposite of the
sales book, being used for a record of all purchases made. Like the
sales book, the totals are carried forward to the end of the month, and
posted as one item to the debit side of the _merchandise_ account. The
amounts of the separate transactions are posted daily to the credit of
the persons from whom the goods are purchased.
[Illustration]
The purchase book is a purchase journal, and the ruling is the same as
that of other journals.
=19. Ledger.= The Ledger is the principal book, in which particulars
of every transaction of every nature are summarized. It is, in fact, a
transcript of all other books of the business except those used solely
for statistical purposes.
The ledger is the book which contains the final or complete records of
all dealings, either with an individual or with respect to a specific
class of transactions--as expenditures for a certain purpose, or
receipts of a given character, or sales of a given kind of goods.
A transcript of the ledger accounts exhibits the progress and standing
of the business.
Like other books, ledgers are now made with special forms of ruling,
depending on the purpose for which they are to be used. The old style
or common form of ledger ruling is shown (p. 35).
=20. Invoice or Bill.= An Invoice or Bill is an itemized statement or
record of goods sold by one person to another. The invoice or bill is
used in every line of business. A conventional form of invoice is shown
(p. 5).
RECORDING TRANSACTIONS
=21.= The records of transactions in the journal which show what
accounts are debited and what accounts are credited are called _journal
entries_. The act of making these entries is known as _journalizing_.
It was formerly the custom to journalize each individual transaction
from the day book, but in modern bookkeeping the journal is used only
for adjusting and special entries.
=22. Posting.= When the record of a transaction is transferred to the
ledger from a book of Class (_b_), it is said to be _posted_. The act
of making the transfer is called _posting_.
The original method was to itemize all transactions in the ledger, but
the present custom is to post the totals only.
=23.= When a record is transferred from one book of Class (_b_) to
another, or posted to the ledger, the page number of the book to or
from which it is transferred or posted is entered in the column known
as the _folio column_. This is done that the transaction may be traced
from one book to another. The presence of the page number also serves
as a check to show that the item has been posted.
_Example_--An item is to be posted from page 1 of the sales book to
page 10 of the ledger. In the folio column of the ledger will be
entered "S 1" indicating that the item will be found on page 1 of the
sales book. In the folio column of the sales book will be entered "10"
indicating that the item has been posted to page 10 of the ledger.
=24. Ledger Index.= An index to the ledger is necessary to enable us to
find the accounts. In small ledgers the index is placed in the front of
the book itself, while for large ledgers a separate index book is used.
There is a distinct advantage in this, as the index book can be kept
open on the desk while posting is being done, and the names found much
quicker than when it is necessary to turn the leaves of the ledger to
find the index.
When an account is opened in the ledger, the name should be written
in the index, followed by the page number. The names in the index are
arranged in alphabetical order, each name being written under the
letter of the alphabet corresponding to the first letter in the name.
For example:
=A= =B= =C=
Adams, J. C. 11 Bacon, I. H. 2 Crandall, Jas. 7
Andrews, Henry 14 Brown, Henry 9 Campbell, Don. 12
In a large index, one or more pages are used for a letter; while in a
small index, several letters may be placed on the same page.
SAMPLE TRANSACTIONS
=25.= The following sample transactions are carried through the books
described in this section, showing the proper entries and postings
(see pp. 40-43). The day book has been omitted, as it is practically
obsolete, not being used by progressive bookkeepers.
Muskegon, Mich., Nov. 1, 1907.
I, ROBERT B. ROBINSON, have this day commenced business as a wholesale
dealer in groceries and provisions. I have rented the store located
at 68 Pine St., from Geo. Baker, at $40.00 a month. My resources and
liabilities are as follows:
RESOURCES
Cash on hand $2,462.50
Merchandise per inventory 1,147.20
Due me from Roger Bros. 219.40
LIABILITIES
C. B. Whitney, Grand Rapids $ 126.90
My net investment 3,702.20
--Nov. 1--
Bought from Grand Rapids Gro. Co., Grand Rapids, Mich.
On account
10 cwt. sugar $4.85 $ 48.50
10 bbls. flour 5.25 52.50
150 " salt 1.10 165.00
2 " molasses 48
50,98 gals. .30 29.40 $295.40
--1--
Paid Geo. Baker
For 1 month's rent Cash 40.00
--2--
Sold to Geo. Wiggins, 110 Ottawa St.
On account
1 box B. B. soap 3.75
1 case X. X. corn 1.60
100# soda biscuit 4.25 9.60
--3--
Sold to Smith & Nixon, 262 Western Av.
On account
2 bbl. flour 6.15 12.30
2 cwt. sugar 5.15 10.30
1 bbl. molasses, 48 gal. .35 16.80 39.40
--5--
Bought from William Bratton, 48 Jefferson Av., Detroit
On account
10 sacks Java coffee,
1,000# .25 250.00
--6--
Sent to C. B. Whitney, Grand Rapids
Draft to balance account 126.90
--7--
Sold to H. A. Brainerd, 961 Lake Av.
On account
2 bbls. salt 1.35 2.70
10# baking powder .42 4.20 6.90
--8--
Charge Grand Rapids Gro. Co.
1 bbl. flour received in bad order 5.25
--9--
Sold to Bryan Bros., Lakeside
On account
2 bbls. salt 1.35 2.70
20# raisins .08 1.60 4.30
--10--
Bought from H. A. Edwin, Chicago
On account
20 bbls. pork 10.30 206.00
--12--
Sold for cash
3 bbl. pork 11.35 34.05
--13--
Sold to R. C. Ellison, 10 Jefferson Av.
On account
2 bbl. pork 11.40 22.80
5 bu. beans 2.10 10.50 33.30
--14--
Received from Geo. Wiggins
Cash to balance 9.60
--15--
Sent to Grand Rapids Gro. Co.
Draft to balance 290.15
--16--
Sold for cash
1 box soap 3.75
--17--
Received from Smith & Nixon
Cash on account 25.00
[Illustration]
[Illustration]
[Illustration]
[Illustration]
PROMISSORY NOTES
=26.= A promissory note is a form of commercial paper much used in
business. Goods are sold on specific terms--that is, to be paid for
in a certain time after date. Profits are based on the supposition
that the bills will be paid when due. When not so paid, the debtor is
virtually borrowing money from the creditor, and should pay interest
for the use of that money just as he would if he had borrowed it from a
bank. To settle the account when it is not convenient to pay cash, it
is customary to give a promissory note for the amount, plus interest,
payable on a certain date. The promissory note is more convenient for
the creditor; for when it bears his endorsement, his bankers will
discount it, thus giving him the money for use in his business. Even
though he may not discount it, the promissory note is better for the
creditor, as it gives him a definite promise to pay, which he does not
have when the debt is represented by an open account.
=27. Bills Receivable and Bills Payable.= The commercial term for
promissory notes accepted by us is _Bills Receivable_. The commercial
term for promissory notes given by us is _Bills Payable_. The term
"bill" is used in this connection for the reason that a promissory note
is a negotiable instrument, and when indorsed it becomes practically
a bill of exchange. The accounts in the ledger which represent notes
receivable and notes payable are called _Bills Receivable Account_ and
_Bills Payable Account_.
The bills receivable account is debited when a note is received, and
credited when a note is paid. The balance of bills receivable account
shows the amount of unpaid notes payable to us.
The bills payable account is credited when we give a note and debited
when we pay a note. The balance of bills payable account shows the
amount of the notes that we owe.
=28. Bill Book.= For the purpose of keeping a record of bills
receivable and bills payable, a book known as a _bill book_ is used.
Any draft, note, due bill, or other written promise to pay a specified
sum at a stated time, should be treated as a note or bill--receivable
or payable, as the case may be. The bill book is an auxiliary book, and
the record kept is usually treated as a memorandum only, records of
each transaction being made in the journal. The form shown (p. 45) is
one in common use.
[Illustration]
=29. Acceptances.= A draft when accepted--that is, when it becomes
an _acceptance_--has the same value as a promissory note, for it is
a definite promise to pay on a specified date. Drafts are used for
the collection of accounts in other cities than the one in which the
creditor's place of business is located. A draft may call for payment a
certain number of days after date, or it may call for payment at sight.
The former is known as a _time draft_, while the latter is a _sight
draft_.
=30. Discount and Exchange.= When a promissory note is taken to the
bank for the purpose of raising money, it is customary for the banks to
calculate the interest for the time the note is to run, and to deduct
this from the principal, giving the borrower the net amount only. In
other words, the interest is paid in advance, and such advance payment
of interest is called _discount_.
When a draft is collected through a bank, a small fee is charged,
and this fee is called _exchange_. Exchange is also charged for the
collection of out-of-town checks, especially if they are drawn on banks
in small towns and cities.
BANK DEPOSITS
=31.= When money is deposited in a bank, a list of the items in the
deposit is made on a blank known as a _deposit ticket_ or _deposit
slip_. These deposit tickets are furnished by the bank for the
convenience of its customers.
=32. Signature Card.= Money deposited in a bank can be withdrawn only
by presenting a written order or _check_, signed by the one in whose
name the money is deposited. That the bank may know that money is not
paid on checks that do not bear the correct signature, each depositor
is required to leave at the bank the signature or signatures which
are to be honored. These signatures are written on a card, known as a
_signature card_, which the bank keeps for reference.
=33. Check Books.= Blank checks are usually bound in book form, the
checks themselves being perforated so that they can be easily removed.
These _check books_ are in most cases furnished by the bank. The number
of checks on a page varies, but is seldom more than four. When a check
is written, the number, date, name, and amount should be written on the
face of the stub. To keep a convenient record of the balance in the
bank, it is well to enter a list of all checks and deposits on the back
of the check stubs.
[Illustration: Signature Card]
=34. Pass Book.= The bank _pass-book_ should be taken to the bank
whenever a deposit is made, as it contains the bank's receipt for all
money deposited.
=35. Indorsement of Checks.= Before a check can be deposited in the
bank, it must be indorsed by writing the name of the payee across the
back. The indorsement should be on the back of the left end of the
check--never on the right end. Several forms of indorsement are shown
(p. 48). When the name only is written, it makes the check payable to
the bearer, and is known as a _blank indorsement_. When the words "Pay
to" are used, the check becomes payable to the one whose, name appears
immediately under the words. It can only be paid to him in person or
credited to his account at any bank at which he may deposit the check.
A check indorsed with the words "Pay to the order of" permits of a
further transfer, and provides a receipt from the one to whom it is so
indorsed. When a check is to be deposited, the proper indorsement is
"For deposit only." This is of special importance when deposits are
sent by messenger. Such indorsements usually include the name of the
bank, and are made with a rubber stamp.
=36. Depositing Cash.= It is a good plan to deposit all cash received
and to pay all bills by check, except such small items as are paid from
petty cash. By doing this, all transactions pass through the bank,
providing a receipt in every case in the form of a canceled check
bearing the indorsement of the payee.
[Illustration: Endorsement]
=37. Treatment of Petty Cash.= It is customary in business
establishments to keep on hand a certain sum of cash out of which to
pay items of expense such as office supplies, etc., when the amount is
too small or it is not convenient to write a check.
The best way to handle this is to draw a check for a certain amount,
and keep this money separate from the cash received from day to day.
At the end of the month, or sooner if the fund is low, draw a check
payable to cash for the amount paid out and charge it to expense. This
will leave the fund intact.
_Example_--We shall suppose the amount of petty cash to be kept on hand
to be $25.00; and the amount paid out, $15.60, leaving $9.40 on hand.
A check will be made for $15.60, to be charged to expense through the
regular cash book. The cash will be drawn from the bank, and the amount
added to the $9.40, making a total of $25.00.
A record of petty cash is usually kept in a small book called a _petty
cash book_. This book has the regular two-column journal ruling. In
handling petty cash, great care should be taken to secure a receipt in
some form for every payment.
[Illustration: A BIRD'S-EYE VIEW OF THE BELOIT, WIS., FACTORY OF THE
FAIRBANKS-MORSE CO.]
SAMPLE TRANSACTIONS
=38.= The following sample transactions taken from the books of W.
B. Clark, Ames, Ia., illustrate the use of the papers and accounts
explained in this section, and show how the transactions would appear
on the books.
Mr. Clark is a shipper of produce, and a retail dealer in coal. His
assets and liabilities are as follows:
ASSETS
Cash in bank $1,262.78
Inventory, Produce 685.00
" Coal 747.50
Geo. White--Open account 21.00
F. H. Russel " " 7.00
Henry Brown " " 8.00
O. L. Duncan--Note due Dec. 1 27.00 $2,758.28
--------
LIABILITIES
Iowa Coal Co., Des Moines,
Open acct. $120.00
Lehigh Coal Co., Chicago, Ill.,
Open acct. 325.00
George Hardy, Open account 60.00 505.00
--------
As he wishes to know how much business he is doing in each department
of his business, he keeps accounts in the ledger with both produce and
coal instead of one merchandise account. In the sales book, one column
is used for coal sales, and one for produce sales. No purchase book is
kept, all purchases being posted from the journal or cash book.
--Oct. 22--
Bought from David Andrews, for cash
200 bu. potatoes @ .42c $84.00
Paid by check No. 11.
--22--
Sold to Albert Long on account
2 tons run of mine coal $3.25 6.50
--23--
Received from Geo. White on account
Cash 10.00
--24--
Sold to Taft Produce Co., Des Moines, on account
148 bu. beans 3.10 458.80
--24--
Drew from bank for petty cash 10.00
Check No. 12.
--25--
Sold to Geo. Hardy on account
1½ tons nut coal 9.00 13.50
Gave him check No. 13. 46.50
--27--
Gave to Lehigh Coal Co., Chicago.
60-day note 200.00
Check No. 14. 125.00
--28--
Taft Produce Co. paid sight draft through Iowa
National Bank 458.80
--29--
Accepted 30-day draft made by Iowa Coal Co. 120.00
Payable at Ames State Bank
--30--
Deposited in Ames State Bank
Draft Iowa National Bank 458.80
Cash 10.00
--30--
Paid for repairs to stove, cash 1.20
--31--
Sold for cash, ½ ton egg coal 4.50
[Illustration]
[Illustration]
[Illustration]
[Illustration]
[Illustration]
[Illustration]
[Illustration: ACCOUNTING DEPARTMENT IN THE NEW YORK OFFICE OF J.
WALTER THOMPSON COMPANY]
THEORY OF ACCOUNTS