CLASSES OF ACCOUNTS
=39.= In double entry bookkeeping, the accounts used may be divided
into the two general classes of _personal_ and _impersonal_. For the
purpose of more complete classification, the second class is further
subdivided into _real_, _representative_, and _nominal_ accounts.
=40. Personal Accounts.= A personal account is a record of transactions
with a particular person or persons.
_Examples_--
A record of transactions with persons who buy goods from us.
A record of transactions with persons from whom we buy goods.
[Illustration]
=41. Real Account.= A real account is a record of transactions with
respect to a particular property. Properties which we possess are
termed _resources_ or _assets_; therefore all real accounts are also
_asset accounts_.
[Illustration]
_Examples_--
Real estate (land and buildings), Machinery, Furniture, Merchandise,
etc.
=42. Representative Account.= A representative account is a summary of
all debit or credit transactions of a particular class with respect
to several personal accounts. The debit or credit to this account
completes the double entry, and illustrates the rule that in double
entry there must be a credit for every debit.
_Example_--
We sell goods to a number of customers, and the amounts of these sales
are debited to their several accounts. To complete the double entry,
we credit the total amount of these sales to an account called _sales
account_. The total credits to this account during any given period
_represent_ the sales to all customers for the same period, and the
sales account is a _representative_ account.
The total debits to all customers' accounts for goods purchased in
one month amount to $1,423.62. This amount is credited to the sales
account. Likewise the purchases for the same period amount to $947.20,
and the several amounts are credited to the personal accounts of those
from whom the purchases were made, while a like amount is debited to a
representative account known as a purchase account.
[Illustration]
=43. Nominal Account.= A nominal account is a record of transactions
having to do with profit and loss; a record of a particular class of
expenditures from which no direct returns are expected; any impersonal
account which does not come under the classification of real or
representative accounts.
_Example_--
We buy coal to be used in heating our building. The coal is not to
be resold, but its use is necessary; it is one of the expenses of
conducting the business, and we charge the amount to an _expense_
account. Expense is a _nominal_ account kept for the purpose of showing
the total expenses of the business.
[Illustration]
=44. Merchandise Account.= The merchandise account is a real account
formerly much used, but discarded by modern accountants. When used,
this account is debited with all purchases of merchandise and credited
with all sales. The account is also charged with all goods returned by
our customers, and credited with all goods which we return to those
from whom we have purchased them. Goods returned by our customers are
charged at the prices at which they were purchased by the customers;
consequently the debit side of the merchandise account does not
furnish a true exhibit of our purchases; neither is the credit side
a true exhibit of our sales. Since the merchandise account furnished
no valuable information, other accounts which exhibit more vital
statistics have been substituted.
=45.= _Purchase account_ is one of the accounts substituted for the
merchandise account. This account is charged with all purchases as
represented by the footings of the purchase book or purchase journal.
This completes the double entry, the separate purchases having been
credited to the personal accounts of those from whom the goods were
purchased. All returns or other similar deductions allowed on purchase
invoices are charged to those from whom the purchases were made and
credited to purchase account. The balance of the purchase account then
shows the total net purchases.
=46.= _Sales account_ takes the place of the credit side of the
merchandise account. All sales as shown by the footings of the sales
book are credited to the sales account, completing the double entry.
All returns and allowances are likewise charged to the sales account.
The balance of the sales account shows total net sales.
SAMPLE TRANSACTIONS
=47.= The following transactions, properly recorded in journal
sales book, purchase book, and ledger, demonstrate the uses of the
merchandise, purchase, and sales accounts explained in the preceding
paragraphs:
--Sept. 20--
Bought from American Furniture Co., Grand Rapids
2 #four-drawer V F cabinets $11.00 $22.00
4 #35 card sections 4.20 16.80
1 #35 top 1.75
1 #35 base 1.25 $41.80
------
--21--
Bought from Morgan Printing Co., Chicago
5,000 #1 plain ruled #35 cards .90 4.50
3,000 #1 ledger " #35 " 1.50 4.50
2,000 #1 " " #46 " 2.00 4.00 13.00
------
--22--
Sold to Ackers & Co., 224 Randolph St.
4 #35 sections 5.50 22.00
1 #35 top 2.25
1 #35 base 1.75 26.00
------
--23--
Sold to Thompson & Co., 94 Monroe St.
2,000 #1 plain ruled 35 cards 1.25 2.50
--24--
Received from Ackers & Co.
1 #35 section 5.50
(Damaged)
--25--
Shipped to American Furniture Co.
1 #35 section 4.20
(Received in bad order)
In the first demonstration, the footings of the sales and purchase
books, as well as the returns entered in the journal, are posted to
a merchandise account. It will be noted that the debit side of the
merchandise account does not represent the actual purchases, and the
credit side does not represent the sales.
In the second demonstration, the purchase and sales accounts are used.
Total sales are credited to sales account from purchase book, and
returns credited from the journal. The balances of these accounts show
actual net purchases and sales.
[Illustration]
[Illustration]
[Illustration]
CLASSES OF ASSETS
=48.= Asset accounts are accounts representing resources or assets of
the business. Assets are classified as _Fixed_; _Active_ or _Floating_;
_Passive_ or _Speculative_; _Fictitious_.
_Fixed assets_ are those permanent forms of property which are a
necessary part of the equipment used for conducting the business--such
as real estate, buildings, machinery, etc.
_Active_ or _floating assets_ are those forms of property of which the
quantity in our possession varies from day to day--as merchandise,
accounts, cash, etc.
_Passive_ or _speculative assets_ are those (_a_) whose values are
not readily determined, or (_b_) whose values are subject to market
fluctuations--as, for example, (_a_) franchises, copyrights, patents;
(_b_) stocks, bonds, or other speculative securities.
_Fictitious assets_ are those which are not represented by tangible
property, or which are of value to a going business but would have
no market value if the business were closed out or liquidated. These
assets are frequently represented by an expense account on the books.
The initial advertising expense necessary to launch the business
successfully is frequently carried on the books as an asset. The amount
of such advertising expense is spread over a stated period, a certain
proportion being charged into the regular expense accounts each year
until the entire amount is used.
=49. Examples of Fixed Assets.= The assets of an ordinary mercantile
business are of the first two classes only--fixed and floating. The
most common forms of fixed assets of such a business are:
_Real Estate_--generally understood to include land and buildings owned
and used in the business.
_Furniture and Fixtures_--represented by office and store furniture,
shelving, counters, stoves, furnaces or other heating appliances,
lighting fixtures.
_Horses and Wagons_ or _Trucks_--including all horses, wagons, trucks,
harness, or motor-cars used for hauling goods.
If the business is one in which these classes of property are dealt
in, they become active assets. Land, for example, would be one of the
_active_ assets of a business organized to buy and sell real estate.
=50. Examples of Floating Assets.= The active or floating assets of a
mercantile business are:
_Merchandise_--meaning the stock in trade or goods dealt in.
_Accounts_--the open accounts of customers who owe for goods purchased.
_Notes_ or _Bills Receivable_--all outstanding notes payable to the
firm.
_Cash_--the amount of cash on hand and in the bank.
=51. Examples of Passive Assets.= Passive or speculative assets are
more frequently found on the books of a manufacturing business, a
corporation, or a business a part or whole of which has been sold by
the original owners. Examples of these assets are:
_Patents_--A manufacturer owns a patent the value of which depends upon
future profits resulting from the manufacture and sale of the article
which it covers. It is customary to place a value on the patent, and to
consider it an asset of the business.
_Good-Will_--A man has established a business which has become
extremely profitable, and in selling the business he places a certain
value on the reputation or goodwill which he has built up.
_Speculative_--A firm having a surplus not required in the business
sometimes invests it outside of the business with the expectation of
realizing a profit by selling at an advanced price. They buy grain or
provisions, mining or railway stocks, etc. Or an investment may be made
in the stock of some manufacturing business to be established in the
town, because such an enterprise, if successful, will naturally result
in an increase in their own business.
=52. Examples of Fictitious Assets.= Fictitious assets are seldom found
on the books of other than corporations where a large initial promotion
expense is involved. A good example of a fictitious asset is:
_Advertising_--A business house may decide on an average annual
expenditure for advertising; but to be effective, the expenditures for
the first two or three years may necessarily exceed this amount. The
excess is considered as an investment since it is expected that as
the business becomes firmly established the annual expenditure can be
reduced to an amount even less than that estimated, gradually reducing
the amount carried on the books as an asset. To illustrate:
Annual advertising appropriation for ten years is $10,000.00.
Expended first year $18,000.00
Deduct appropriation 10,000.00
----------
To advertising inventory 8,000.00
Expended second year 15,000.00
Deduct appropriation 10,000.00
----------
To advertising inventory 5,000.00
Expended third year 10,000.00
Deduct appropriation 10,000.00
----------
To advertising inventory 000.00
Appropriation fourth year 10,000.00
Expended " " 8,000.00
----------
To credit advertising inventory 2,000.00
Appropriation fifth year 10,000.00
Expended " " 9,000.00
----------
To credit advertising inventory 1,000.00
Appropriation sixth year 10,000.00
Expended " " 10,000.00
----------
To advertising inventory 000.00
Appropriation seventh year 10,000.00
Expended " " 9,000.00
----------
To credit advertising inventory 1,000.00
Appropriation eighth year 10,000.00
Expended " " 8,000.00
----------
To credit advertising inventory 2,000.00
Appropriation ninth year 10,000.00
Expended " " 7,000.00
----------
To credit advertising inventory 3,000.00
Appropriation tenth year 10,000.00
Expended " " 6,000.00
----------
To credit advertising inventory 4,000.00
---------- ----------
$13,000.00 $13,000.00
REVENUE ACCOUNTS
=53.= The term _revenue_ (synonymous with _income_) is used to
designate those items which, when brought together in an account,
exhibit the profit or loss of the business.
_Revenue receipts_ are the receipts which originate exclusively from
the sale or exchange of the commodities or things of value for the
handling of which the business has been organized.
_Revenue expenditures_ are those expenditures connected with the
expense of operation or administration of a business, including such
items of expense as postage, printing, salaries, rent, etc.
_Revenue accounts_ is a term used to designate those accounts that
represent revenue receipts or revenue expenditures.
=54. Revenue Receipts.= The account representing revenue receipts in
all lines of business (though it may sometimes be known by another
name) is the _sales account_--a representative account showing net
sales. Net sales, less cost of goods sold, represent gross profits.
Gross profits, less cost of conducting the business (revenue
expenditures) represent net profits.
=55. Expense.= The broad term _expense account_ represents all revenue
expenditures; but in modern bookkeeping the amounts of the different
classes of expense are kept separate as far as possible.
Some of the most commonly used divisions of expense are: Rent;
Insurance; Taxes, Interest and Discount; Out Freight and Express; Heat
and Lights; Labor; Salaries, etc. It is customary to open one account
in the name of _General Expense_, to care for expenditures not included
in special accounts.
=56.= _Insurance_--A nominal account to which is charged all sums
paid to insurance companies (called _premiums_), in consideration of
which our property is insured against loss by fire, cyclones, or other
disaster.
=57.= _Rent_--A nominal account to which is charged all sums paid for
use of property which we rent or lease from others for the benefit of
our business--usually the buildings in which our business is transacted
or in which our goods are stored.
=58.= _Taxes_--A nominal account to which are charged all taxes and
license fees paid on account of property owned or business transacted.
=59.= _Interest_--This is a nominal account which should include only
interest charges paid or interest earned on account of capital. When we
borrow money or discount a note, we do it because we need cash capital,
and the interest paid is a capital expense or a direct source of loss.
Exchange charged for the collection of notes and drafts belongs in the
same class. All interest paid for the use of money, and exchange paid
for the collection of notes, drafts, and checks, should be debited to
interest account. When we save the discount by prepayment of bills,
the discount is earned by the use of capital. All such earnings are a
direct source of profit and should be credited to interest account.
Discount paid on notes is interest paid in advance, and should not be
confused with discounts allowed to customers for the prompt payment of
bills; the latter is a reduction in the price received for our goods,
and reduces trading profits. This question is discussed under the head
of _Cash Discounts_.
=60.= _Out Freight and Express_--A nominal account which is debited
with all transportation charges paid on goods that we ship, whether
sales are made at delivered prices or freight is paid as an
accommodation to the customer. When goods are sold at f. o. b. prices,
and the freight is paid by us as an accommodation to the customer, out
freight should be credited and the customer debited.
This should not be confused with _in freight_, or freight paid on goods
received, as such charges add to the cost of the goods and should be
charged to the account representing that particular class of goods.
=61.= _Heat and Light_--This account is debited with all sums paid for
fuel, heating bills, lighting bills, and lighting supplies.
=62.= _Labor_--A nominal account which is debited with all sums paid as
wages to mechanics or laborers employed by the business.
=63.= _Salaries_--A nominal account which is debited with all salaries
paid to managers, salesmen, clerks, and others employed in the
administration of the business.
RULES FOR JOURNALIZING
=64.= Journalizing is one of the most important operations in
bookkeeping, since journalizing a transaction involves the selection of
the proper accounts to be debited and credited completing the double
entry. With the use of separate sales and purchase records, the journal
itself is used principally for those entries involving a transfer of
values from one account to another. These are frequently referred to
as _cross entries_. The number of possible entries of this class is
practically unlimited, and they require careful study on the part of
the bookkeeper.
Rules for journalizing are frequently referred to in bookkeeping
textbooks; but, since the custom of journalizing every transaction is
now obsolete, the term is no longer sufficiently descriptive. A better
term to use would be _rules for debit and credit_, for it is the rules
of debit and credit that must be followed when a journal entry is to be
made.
[Illustration]
=65. Three-Column Journal.= A three-column journal suitable for a small
business is shown above. The third column is used for sales only, while
the first two columns are used for regular journal entries. The use of
the column for sales answers the same purpose as a sales book, and
total sales are posted to the credit of sales account at the end of the
month.
SAMPLE TRANSACTIONS
=66.= For the purpose of demonstrating the principles of debit and
credit as exemplified in the journal, the following transactions except
those involving cash are _journalized_ in a three-column journal. The
third column is used for sales, and it is to be understood that a cash
account is kept in a separate cash book.
--April 2--
Sold to Hiram Watson on account
10# gran. sugar 5½c. $.55
3 bars soap .25
2# starch 5 .10
2 cans corn .25 $1.15
----
--2--
Paid electric light bill--cash 4.75
--2--
Sold for cash sundry merchandise 8.60
--3--
Bought from Eureka Milling Co. on account
5 bbls. XXX flour 3.75 18.75
--4--
Sold to J. L. Jarvis on account
¼ bbl. flour 1.25
2# butter .32 .64
1# coffee .30
10# lard .11 1.10 3.29
----
--4--
Bought from J. L. Jarvis on account
Fire Insurance on stock and fixtures, $3,000.00 for
one year from date 18.00
--5--
Paid Eureka Milling Co. cash 18.75
--6--
Sold to J. L. Jarvis on account
1# cheese .16
1 doz. eggs .22
1# baking powder .50
3 bu. potatoes .65 1.95 2.83
----
--6--
Bought from Atlas Safe Co. on account
1 office safe 50.00
Paid cash for repairs to door lock .40
Sold for cash sundry merchandise 16.70
[Illustration]
[Illustration]
EXAMPLES FOR PRACTICE
1. After you become familiar with each entry and the nature of the
accounts to be debited or credited, journalize the transactions given
in Article 66, then compare with the model journal, and see if your
work is correct.
2. Journalize the following transactions:
--April 10--
Bought from David Cole & Son on account
100 bbls. flour at $4.60 $460.00
--10--
Sold to L. H. Stebbins on account
20 bbls. flour at 5.10 102.00
--10--
Sold to Henry Waterbury on account
30 bu. beans 2.00 60.00
20 " oats .37 7.40
--11--
Paid to David Cole & Son
Cash on account 160.00
Gave them my note for 30 days 300.00
--11--
Received note from L. H. Stebbins
for 30 days to balance account 102.00
--12--
Paid cash for harness oil .35
--12--
Henry Waterbury paid cash on account 40.00
RULES FOR POSTING
=67.= The act of transferring all items from the journal, sales book,
purchase book, cash book, or other books to the ledger is called
_posting_. All items relating to one account are posted to that account
in the ledger; thus all sales are posted to the sales account, and all
transactions with a person are posted to the account of that person.
Every debit must be posted to the debit side of the corresponding
account in the ledger.
=68. Routine.= The first operation in posting is to open an account in
the ledger by writing the name of the account on the line at the head
of the ledger page. The month and day are then written in the date
column; the page of the book from which the item is posted is written
in the folio column, and the amount is placed in the money column.
The final operation is to place the number of the ledger page in the
folio column of the book from which the item was transferred, directly
opposite the item posted.
=Posting from Journal.= In posting from the journal, all items in the
left or debit columns are posted to the debit side of the corresponding
ledger accounts, while all items in the credit column are posted to the
credit side of the ledger accounts.
The first item in the journal in the preceding section is a debit to
Hiram Watson, amount $1.15. It is necessary to open an account in the
ledger, which is done by writing Hiram Watson's name at the head of the
page, above the date column on the left side of the page; in the date
column we write the date, April 2; in the folio column we write the
journal page, 1: and in the money column we write the amount, $1.15.
The number of the ledger page is now written in the folio column in the
journal, directly opposite the name of Hiram Watson.
The second transaction recorded in the journal is a purchase which
makes it necessary to open a purchase account in the ledger, to which
is debited the amount of the purchase $18.75. The first transaction
recorded in the journal is a sale, therefore the credit is to the sales
account. Since we are placing all sales in a special column, the amount
will not be posted until the end of the month, when the total sales
will be posted to the credit of the sales account as one item. In the
second transaction, the credit is to a personal account, and we open
an account in the ledger with Eureka Milling Co., following the same
routine in posting as with debit items, except that the item is posted
to the credit side of the account.
=Posting from Cash Book.= When posting from the cash book, it must be
remembered that all items on the left-hand page (which debit cash) must
be posted to the credit of some other account; and that all items on
the right-hand page (which credit cash) must be posted to the debit of
an account in the ledger.
Why cash received is entered on the left-hand page of the cash book,
and cash paid out on the right-hand page, is a point not always clear
to the bookkeeper. To obtain a clear view of this point, it should be
remembered that the cash book is nothing more or less than a ledger
account with cash, and cash received is entered on the left-hand page
(or debit side) for the reason that any account is debited for what is
received or is added to it.
We sell merchandise, for example, and the person is debited because he
receives it. We buy real estate; the real estate account is debited
because our real estate possessions are added to. Broadly speaking, we
(the business) receive the real estate; but, instead of charging the
amount to ourselves (the person), we charge it to _Real Estate_, that
we may know the amount of our real estate investment.
A customer pays us cash; cash is debited because our cash possessions
are added to. We might charge the amount to our account; but we prefer
to charge it to a cash account that we may know how much cash we have
on hand. We pay out cash; cash is credited because cash has gone out of
our possession. The main point of difference is that we post to other
ledger accounts direct from the cash book, which is itself a ledger
account, instead of journalizing cash transactions.
If cash transactions were journalized--
Cash
To Person
Person
To Cash
the amounts would be posted to the debit or credits of the cash
account in the ledger; but for convenience we keep the cash accounts
in a separate book. Journalizing a few of the transactions given will
clearly demonstrate the point.
TRIAL BALANCE
=69.= A _trial balance_ is a list of the balances of all accounts
remaining open in the ledger, together with the balance shown by the
cash account. On journal paper, all open accounts are listed by name;
the debit balances are placed in the debit column, and credit balances
are placed in the credit column; the pages of the ledger are placed in
the folio column, opposite the names of the account. Both debit and
credit columns are footed, and the footings of the two columns should
agree.
A trial balance is taken for the purpose of testing the accuracy of the
postings to the ledger; to find out if the ledger is in balance. The
trial balance can be taken without considering the balances, by taking
the total debit and credit items posted to all open accounts.
While the trial balance shows that for every debit posted to the ledger
a corresponding credit has also been posted (double entry principle),
it does not absolutely prove the accuracy of the work. If a debit item
of $100.00 were posted to the debit of the wrong account, it would not
affect the balance of the ledger; but if the item were posted to the
credit instead of to the debit of the account, the ledger would be out
of balance and the amount that it was _out_would be shown by the trial
balance.
CLASSIFICATION OF ACCOUNTS
=70.= The arrangement of the accounts in the ledger is of considerable
importance. Since one of the objects of bookkeeping is to exhibit
the standing or condition of the business, the accounts should be
classified in a manner that will make easiest the assembling of
important statistics.
The accounts in the ledger represent either _Assets_ (resources),
_Liabilities_, _Profits_ (gains), or _Losses_. Every account having a
debit balance represents either (_a_) an asset or (_b_) a loss. (_a_) A
personal account having a debit balance represents an asset; (_b_) any
expense account having a debit balance represents a loss, as it reduces
the chance for profit.
Every account having a credit balance represents either (_c_) a
liability or (_d_) a profit. (_c_) A personal account having a credit
balance represents a liability--that is, something we owe; (_d_) a
sales account having a credit balance represents a profit because it
increases our chance of gain.
[Illustration: OFFICE OF THE REGISTRAR, AMERICAN SCHOOL OF
CORRESPONDENCE]
=71. Arrangement in Ledger.= The foregoing classifications should be
kept in mind in arranging the accounts in the ledger. First provide
space for the asset and liability accounts; then follow with the profit
and loss (or revenue) accounts. As far as possible, keep all asset
accounts together, following the same plan with liability and profit
and loss accounts.
The accounts are arranged in the trial balance in exactly the same
order as they appear in the ledger; and if correctly classified they
will show at a glance the assets (except inventories of merchandise)
and liabilities of the business. Likewise the profit and loss accounts
(also known as revenue accounts--see Article 53) will show total sales,
purchases, and expense of conducting the business.
SAMPLE LEDGER ACCOUNTS
=72.= The ledger accounts shown on pages 80-81, representing the
transactions given in the preceding set of sample transactions,
demonstrate the proper arrangement of accounts, manner of posting, and
the trial balance.
EXAMPLES FOR PRACTICE
1. From the copy of the journal (Article 66) which you have made, post
the transactions to the ledger.
2. Post the transactions from the journal you have made (Exercise 2,
preceding section) to the ledger.
3. Make a trial balance of the ledger accounts.
[Illustration]
[Illustration]
TREATMENT OF CASH DISCOUNTS
=73.= _Cash discounts_ are discounts allowed for prepayment of bills.
They are frequently confused with bank discounts (or interest collected
in advance when notes are discounted), but are of an entirely different
character.
When the price is made, the profits are calculated with the idea that
the customer may take advantage of the cash discount; that is, the
price after the discount is deducted includes a legitimate profit.
We cannot debit the customer with the amount of the bill less the
discount, for we do not know that he will take advantage of the
discount; and so, the charge to the customer and credit to sales
account is an amount which may never be received.
If the bill is paid less the discount, the amount deducted reduces our
profit on the sale. It is not an allowance for the use of capital, for
we can probably borrow money at 6 per cent, while the discount may be
5 per cent or more for anticipating payment 30 days or less. = 74.
Discounts Allowed.= Cash discounts allowed must eventually come out of
the profits arising from the sale of the commodities in which we are
trading. There are two methods of charging cash discounts, either of
which is considered correct:
(1) Open an account called _Discounts on Sales_, and charge to it all
discounts allowed for the prepayment of bills. When the books are
closed, the total will be charged against trading profits. This method
is coming into general use, and may be considered standard.
(2) Charge to _Sales Account_ directly all discounts allowed, treating
them as allowances. The balance of the sales account will then
represent net sales after returns, rebates, and cash discounts have
been deducted. One feature to recommend this plan is that sales account
does not show a fictitious volume of sales.
=75. Entering Cash Discounts in Cash Book.= When we receive payment
from a customer who has deducted the cash discount, the discount must
be taken account of in entering the payment, as the customer is to
receive credit for the full amount. We might enter the cash payment in
the cash book, and make a journal entry of the cash discount, but this
would necessitate two postings from separate books.
A better method, and one which has become standard, is to provide a
_cash discount column_ in the cash book. When a column has not been
provided for this purpose, a narrow column can be ruled in on the
cash received or debit side of the cash book. This is carried as a
memorandum until the end of the month, when the total is posted to the
debit of discount on sales. Two ways of making the entry are shown (p.
84).
In Example No. 1, the cash discount is entered in the discount column,
and the net cash received is entered in the cash column. When the
payment is posted, two entries are made in the ledger. One advantage in
this is that reference to the account of R. L. Brown & Co. shows at a
glance whether they are taking advantage of cash discounts.
In Example No. 2, the cash discount is entered in the proper column,
but the gross amount is entered in the cash column. The payment is then
posted in one item, and reference to the ledger account does not show
whether the payment of $100.00 is all cash or part discount. It is
necessary, also, to deduct the footing of the discount column from the
footing of the cash column to ascertain the amount of cash received.
For these reasons the method shown in Example No. 1 is recommended.
=76. Cash Discounts Earned.= When we take advantage of the discount
offered for the prepayment of bills, the discount earned can be
considered a legitimate source of profit. Our own selling prices for
goods purchased to be resold are based on the prices at which they are
billed to us, without considering a possible saving by discounting our
bills. Whether or not we discount our bills is largely a question of
capital, and such earnings are legitimate profits entirely outside of
regular trading profits. Discounts earned should be treated as interest
earned and credited to interest account, from which they will find
their way into profit and loss account.
[Illustration]
PROFIT AND LOSS
=77.= The _profit and loss account_ is a summary account made up of
the balances of all income and expenditure (revenue) accounts in the
ledger, the balance of this account representing the _net loss_ or _net
gain_ of the business.
It is advisable to show the net profits for each year; and to
accomplish this, it is customary to transfer the balance of profit and
loss account at the end of the year. In single proprietorships and
partnerships, the net gain is transferred to proprietor's or partner's
investment accounts, while in a corporation it is usually transferred
to a surplus account. A loss is transferred to a deficiency account.
=78. Trading Account.= This is a subdivision of profit and loss account
intended to exhibit the gross profit derived from the manufacture
or purchase and sale of goods in which the business is organized to
trade. These profits are known as _trading profits_. Just what items
of income and expenditure enter into trading profits or losses is an
important question in the science of accounts. A safe rule to follow
is to debit trading account with the cost of goods sold, including
cost of preparing them for sale. In a manufacturing business the cost
represents cost of raw materials and cost of manufacture. Credit the
account with net income from sales, arrived at by deducting from gross
sales all returns, allowances, rebates, and cash discounts.
All expenses incurred in selling the goods, and all expense of
administration of the business, should be charged to profit and loss
account proper. All profits arising from other transactions than
trading should be credited to profit and loss. These include interest
received on past due accounts, on notes, or for money loaned; discount
earned by the prepayment of bills; profits from the sale of real estate
or any property other than that in which the business is trading.
=Trading Account, How Constructed.= The trading account is made up by
charging total inventory at the beginning of the year and purchases
during the year; crediting net sales and inventory at the close of the
year, the balance representing the gross profit.
[Illustration]
=Turnover.= It is desirable to know the cost of goods sold. This is
known as the _turnover_, on which percentages of profit are based. The
turnover may be found by deducting the present inventory from the debit
side of the trading account.
[Illustration]
=79. Manufacturing Account.= In a manufacturing business it is very
desirable to know the cost to produce the goods; and for this purpose
a subdivision of profit and loss, called _manufacturing account_, is
used. The manufacturing account is debited with inventory of materials
at the beginning of the year; purchases of material; labor or wages
in factory, and all other expenses of manufacture; and credited with
inventory of materials at the close of the year. The balance represents
cost of manufactured goods to the trading division.
The principal value of these subdivisions of profit and loss lies in
the fact that they reveal not only the _amount_ but the _sources_
of profits and losses, which is one of the important functions of
accounting.
[Illustration]
The profit and loss account of a professional or other non-trading
concern need not be subdivided as explained for a trading concern. In
a non-trading business, all accounts representing revenue receipts or
revenue expenditures are transferred direct to profit and loss account.
=80. Transfer of Gross Profit.= The gross profit from trading is now
transferred to the credit of profit and loss account, and this account
is debited with the balances of all revenue expenditure accounts.
Continuing the illustration from Article 78, we have:
[Illustration]
=81. Transfer of Net Profit.= The net gain is transferred to the credit
of proprietor's account in a single proprietorship.
[Illustration]
MERCHANDISE INVENTORY ACCOUNT
=82.= The accounts now open in the ledger, other than proprietor's
account, exhibit all assets and liabilities of the business with the
exception of the present inventory, which is included in the trading
account. The amount of the inventory is transferred to the debit of a
merchandise inventory account.
[Illustration]
The books are now said to be _closed_, there being no open accounts
except those representing assets or liabilities of the business.
BALANCE SHEET
=83.= A statement of the assets and liabilities of a business is called
a _balance sheet_. If the assets exceed the liabilities, the difference
is the _present worth_. If the liabilities exceed the assets, the
business is _insolvent_, and the difference or balance shows the amount
of insolvency.
The balance sheet is prepared from the ledger balances after the books
have been closed. In arranging the accounts on a balance sheet, the
assets should be listed first, followed by the liabilities. The balance
will agree with the balance shown in the proprietor's or investment
account.
For the business of a single proprietor, it is customary to list the
accounts in the following general order:
_First_--Cash in bank and office.
_Second_--Open accounts and bills receivable.
_Third_--Merchandise per inventory, store fixtures, etc.
_Fourth_--Real estate.
The first two classes are termed _active_ or _quick_ assets, as they
can be most readily converted into cash.
The liabilities represented by credit balances, are listed in the order
of their urgency:
_First_--Open accounts due others.
_Second_--Bills payable.
_Third_--Mortgages or bonds payable.
The third class represents secured liabilities, while the first two
represent unsecured liabilities.
Continuing the previous illustration, we find the balance sheet of our
imaginary ledger to be as follows:
[Illustration]
SAMPLE TRANSACTIONS
=84.= At the end of the first year, the trial balance of a single
proprietorship was as follows:
DEBIT BALANCES
Bank Account $ 764.20
Sundry Open Accounts Receivable 1,127.30
Bills Receivable 475.00
Furniture and Fixtures 325.00
Cash in Office 68.50
Purchases 9,571.40
Expense 675.00
Discount on Sales 96.75
Interest 72.10
--------
13,175.25
CREDIT BALANCES
Proprietor (Investment) 2,500.00
Bills Payable 2,000.00
Sundry Accounts Payable 1,761.60
Sales 6,913.65
--------
$13,175.25
The inventory at the end of the year was $4,962.30; at the beginning of
the year, there was no merchandise in stock. The books are to be closed
into trading and profit and loss, and a balance sheet prepared.
When closing the books, all entries necessary to adjust the balances
of ledger accounts should be made through the journal. When an audit
is made, it is difficult to trace the entries unless they are plainly
stated in one group, which is provided when they are made in the
journal. The making of entries in the ledger directly, also increases
the opportunity for fraudulent entries. _Never make original entries in
the ledger._
EXAMPLE FOR PRACTICE
From the following trial balance prepare trading account; profit and
loss account; and balance sheet.
TRIAL BALANCE
Proprietor (Investment) $7,600.00
Bills Payable 4,000.00
Accounts Payable 1,470.00
Bank $1,262.84
Accounts Receivable 2,693.11
Bills Receivable 4,360.00
Merchandise Inventory 6,277.76
Furniture and Fixtures 750.00
Purchases 7,105.78
Expense 1,416.30
Discount on Sales 112.65
Interest 44.20
Sales 10,985.70
Cash 121.46
---------- ----------
$24,099.90 $24,099.90
Inventory at end of year $6,493.06.
[Illustration]
[Illustration]
[Illustration]
[Illustration]
[Illustration: CASHIER TERMINAL, LAMSON MOTOR-DRIVEN CABLE CASH
CARRYING SYSTEM FOR DRY GOODS, GENERAL, OR DEPARTMENT STORES
Lamson Consolidated Store Service Co.]
JOURNALIZING NOTES
=85.= When a note is received by us or we give our note to another,
it is necessary to make a journal entry in order that there may be
a proper record of the transaction on our books. Careful study is
sometimes necessary to determine just how the entry should be made, and
the following illustrations will serve as a guide.
=86. When Received.= When we receive a note, we debit bills receivable
and credit the maker--that is, the person who gives us the note.
We receive a note from Samuel Smart for $100.00 payable in 30 days. The
journal entry is:
Bills Receivable $100.00
Samuel Smart $100.00
30-day note dated Sept. 10
=87. When Paid.= When this note is paid, we debit cash and credit bills
receivable. The entry is made in the cash book on the debit side which
debits cash and credits bills receivable.
Bills Receivable Samuel Smart's note $100.00
due Oct. 10th
=88. When Collected by Bank.= Perhaps the note was collected through
our bank; in that case, the bank, instead of sending us the cash, will
credit the amount to our account. The bank may, also, charge a small
fee for collecting the money; consequently the amount placed to our
credit will be the sum collected, less their fee. The entry in the
journal would then be:
Bank $99.85
Interest and Discount .15
Bills Receivable $100.00
Smart's note due Oct. 10th
Collected by bank.
=89. When Discounted.= At the time we received Samuel Smart's note, we
may have needed the money for immediate use in our business. We would
then take the note to the bank, endorse it payable to the bank, when
they would discount it, giving us credit for the net proceeds. Since
the money is advanced to us, the bank would charge us interest for its
use, which amount would be deducted from the whole amount, leaving
the net proceeds. This amount would then be available for immediate
use. The note is then the property of the bank; it has gone out of our
possession and we have received the cash. The note is not paid, and in
discounting it we have created a liability to the bank. Remembering
that one of the functions of bookkeeping is to exhibit the true nature
of our assets and liabilities, we open a _Bills Discounted_ account in
the ledger. The entry is:
Bank $99.50
Interest .50
Bills Discounted $100.00
Discounted Smart's note due Oct. 10th.
=90. When a Note Drawing Interest is Discounted.= The above transaction
presupposes that the note is given _without_ interest; but if it were
given _with_ interest, the bank would simply add the interest to the
principal and deduct the discount from the total. In the case the sum
of the principal and interest ($100.00 + .50 = $100.50) is $100.50, and
the discount $.50, which would leave $100.00 as the net proceeds. If
the amount of the note were larger or the interest was figured for a
longer time, it would make a difference. Suppose the amount of the note
to be $2,000.00, time 30 days, interest 6% per annum.
Principal $2,000.00
Interest 30 days 10.00
Total $2,010.00
Less interest on
$2,010.00 for 30 days 10.05
----------
$1,999.95
Since the net amount realized is less than the face of the note, we
need not consider the interest earned, but the entry would be:
Bank $1,999.95
Interest and Discount .05
Bills Discounted $2,000.00
=91. When a Note Drawing Interest is Paid.= But suppose Samuel Smart's
note is $100.00 for 30 days, with 6% interest, and that the note is
kept by us and the money is paid directly to us when due. We shall
then receive the interest, in addition to the face of the note, making
a total of $100.50. The entry would then be made in the cash book on
the debit side, and would be:
Bills Receivable $100.00
Interest and Discount .50
Samuel Smart's note due Oct. 10, paid to-day.
=92. When a Discounted Note is Not Paid.= When we discounted Samuel
Smart's note of $100.00 for 30 days without interest at the bank, we
were obliged to endorse it, which had the effect of a guarantee of
payment. If not paid when due, the amount would be charged to our
account at the bank. The note would again come into our possession, and
the amount must be debited to some account, the credit being to the
bank.
We have previously credited the amount to bills discounted, and our
entry is:
Bills Discounted $100.00
Bank $100.00
Samuel Smart's note not paid at maturity.
But suppose the transaction to have been the one described in Article
90. The note returned to us is $2,010.00, that being the amount of
principal and interest. Our bills receivable and bills discounted
accounts show the item as $2,000.00 only. Therefore we must include the
$10.00 in our adjusting entries which will be:
Bills Receivable $10.00
Interest added to Smart's note not paid when due
Bills Discounted $2,000.00
Bank $2,010.00
Smart's note not paid at maturity.
=93. When a Note is Past Due.= The above entries leave this unpaid
item in the bills receivable account. If the business is one in which
a large number of bills are discounted, it will be advantageous to
show past due bills receivable by themselves, leaving bills receivable
account to represent only paper not due. The entry for a bill unpaid at
maturity would be:
Bills Receivable Past Due $2,010.00
Bills Receivable $2,010.00
Smart's note past due.
=94. When a Note is Renewed.= We shall now suppose that Samuel Smart
finds that he will be unable to pay his note when due. He comes to us
and offers a new note for 30 days, which we accept. He prefers to add
the interest due on the original note to the principal, and makes his
note for $100.50. We then return the original note and the entry is:
Bills Receivable $100.50
Interest and Discount .50
Bills Receivable $100.00
New note given by Samuel Smart to cover note due
Oct. 10, with interest.
The effect of this transaction is that we have received a new note for
$100.50, and we debit bills receivable. This new note pays an older one
which goes out of our possession, so we credit bills receivable. The
amount of the new note includes the interest on the old, and we credit
interest.
We might have gone about this in a roundabout way by making these
entries:
_To cancel the old note:_
Samuel Smart $100.50
Bills Receivable $100.00
Interest, and Discount .50
Note due Oct. 10th.
_To enter the new note:_
Bills Receivable $100.50
Samuel Smart $100.50
New note 30 days to take up note due Oct. 10th.
These entries would leave the accounts in exactly the same condition as
our first entry, and would serve no useful purpose. This is given as an
illustration of how several entries may be made when the transaction
could be as clearly explained in one.
=95. When Renewed Note Has Been Discounted.= If the note which Samuel
Smart has renewed has been discounted at the bank, we must reimburse
the bank in some manner before we can obtain possession of the original
note. The most simple way to handle this transaction will be to give
the bank our check to pay the note. The entry is:
Bills Discounted $100.00
Interest and Discount .50
To Bank $100.50
Gave check to take up Samuel Smart's note.
We shall then treat the new note as previously explained. If, after
getting it recorded on the books, we wish to discount this note, the
entries will be exactly the same as when we discounted the original
note.
=96. When We Give or Pay a Note.= When we give our note, the effect of
the transaction is just the opposite of the receipt of a note. Instead
of adding to one class of our resources we are increasing one class of
our liabilities, in return for which we either receive something of
value or reduce our liabilities of another class. When we give our note
in payment of a loan, we receive cash; if we buy goods and give a note
in payment, we receive merchandise; if we give a note in payment of an
account, we simply reduce our liabilities of one class and add to those
of another.
The entries necessary to properly record transactions involving
notes given or bills payable, are not so complex as is the case with
transactions involving bills receivable. The following illustrations
cover transactions likely to arise in the average business:
We give our note for $100.00 payable in 30 days, without interest, to
Western Grocer Co. in settlement of an account. The entry is:
Western Grocer Co. $100.00
Bills Payable $100.00
Note 30 days without interest
When we pay the note the entry is:
Bills Payable $100.00
Bank $100.00
Check to Western Grocer Co. to pay note due Oct. 10.
=97. When Our Note Has Been Discounted.= The Western Grocer Co. has
either discounted the note or placed it in the bank for collection, and
it is presented for payment by the Merchants Bank. We give them a check
in payment, and the entry is:
Bills Payable $100.00
Bank $100.00
Check to Merchants Bank to pay our note to Western Grocer Co., due Oct.
10.
The entry in this case is the same as in the previous illustration,
with the exception of the explanation.
=98. When We Pay Our Note With Interest.= We give our note to Western
Grocer Co. for $100.00 payable in 30 days, with interest at 6%. We pay
the note by check, and the entry is:
Bills Payable $100.00
Interest and Discount .50
Bank $100.50
Paid Western Grocer Co. note due Oct. 10, by check No. 10.
=99. When We Discount Our Note.= We wish to borrow $100.00 from the
bank, and give our note for the amount, payable in 30 days. The bank
discounts the note, placing the proceeds to our credit. The rate of
interest charged is 6%. Our entry is:
Bank $99.50
Interest and Discount .50
Bills Payable $100.00
Note for $100.00, 30 days discounted at bank.
=100. When We Pay for Goods With Our Note.= We buy goods from Michigan
Milling Co. to the amount of $100.00, and tender our note at 30 days
with interest, in payment. This makes it unnecessary for us to open an
account with Michigan Milling Co. and the entry is:
Purchases $100.00
Bills Payable $100.00
Invoice #16 from Michigan Milling Co.
Gave note for 30 days with interest at 6%.
=101. When We Renew a Note.= When this note is due, we find it
inconvenient to pay, and give a new note for 30 days, adding the
interest now due to the face of the original note. The amount of the
new note is $100.50, and the entry is:
Interest and Discount $ .50
Bills Payable 100.00
Bills Payable $100.50
New note given Michigan Grocer Co. to renew note due Oct. 10, $100.00,
interest $.50, 30 days, with interest.
=102. When We Renew Our Discounted Note.= When our note given to the
bank is due, we find it inconvenient to pay the entire amount. We give
the bank a check for $50.00, and a new note at 30 days for the balance.
The bank always collects interest in advance, so we shall be obliged to
give them our note for $50.00 plus the interest, or $50.25. In effect,
the bank discounts our note for $50.25, the proceeds, $50.00, paying
the balance of our note now due. The entry is:
Bills Payable $100.00
Interest and Discount .25
Bank $50.00
Bills Payable 50.25
Gave check for $50.00 to apply on note
due at bank to day.
Discounted new note for $50.25, payable in 30 days.
JOURNALIZING DRAFTS
=103.= When a draft has been accepted, it should be treated the same as
any other form of bill receivable or bill payable. If we make a draft
on a customer, which he accepts, it becomes a bill receivable. If we
accept a draft drawn on us, it becomes a bill payable.
Sight drafts are frequently made use of as a convenient means
of collecting an account. Such drafts are taken to our bank for
collection, but they do not give us credit for the amount until the
draft is paid. Drafts of this kind, which are placed with the bank for
collection only, are not treated as bills receivable, as we do not
credit the account of the one on whom it is drawn until payment is
received.
=104. When Our Sight Draft is Paid.= We draw on Samuel Smart at sight
for $50.00 through our bank. When paid, we receive credit at the bank
for the amount, less collection charges. The entry in our journal is:
Bank $49.90
Interest and Discount .10
Samuel Smart $50.00
Paid sight draft
=105. When Discounting Time Draft.= Samuel Smart owes us $100.00, and
while the amount is not due for 30 days, we have reason to believe that
he will accept a draft payable in 30 days. We accordingly draw on him
through our bank. Our reason for doing this is that his acceptance will
be a promise to pay, and our bank will then discount the draft. The
draft is accepted, and our bank notifies us that the proceeds have been
placed to our credit, the draft being discounted at 6%. The entries are:
Bills Receivable $100.00
Samuel Smart $100.00
Samuel Smart accepted our 30-day draft
Bank 99.50
Interest and Discount .50
Bills Discounted $100.00
Discounted Samuel Smart's 30-day acceptance.
=106. When We Accept.= When we accept a draft payable at a future date,
it immediately becomes a bill payable and should be so treated.
We accept the 30-day draft of the Western Grocer Co. for $200.00. Our
journal entry is:
Western Grocer Co. $200.00
Bills Payable $200.00
Accepted 30-day draft.
=107. When We Pay an Acceptance.= When this draft is due, we pay it,
giving our check to the bank. The entry is:
Bills Payable $200.00
Bank $200.00
Gave check to pay draft of Western Grocer Co.
=108. When We Pay a Sight Draft.= Instead of accepting a time draft, we
pay a sight draft of Western Grocer Co. for $200.00. In this case it
has not become a bill payable, and our entry is:
Western Grocer Co. $200.00
Bank $200.00
Check to Merchants Bank to pay sight draft.
=EXAMPLES FOR PRACTICE=
The following examples are to be journalized by the student after
he has become thoroughly familiar with the transactions previously
explained:
--Nov. 6--
Received from Jackson & Co. their note for $214.00 without interest,
payable in 30 days, in full settlement of account.
--Nov. 6--
Received from David Newman his note for $650.00 with interest at 6%,
payable in 30 days, in settlement of account. We discounted this note
at First National Bank.
--Nov. 7--
Paid our note given Oct. 6, to National Spice Co., amount $150.00 with
interest at 6%. This note was paid by check #11 to Mechanics Bank.
--Nov. 8--
Bought from Valley Mills on our note for 30 days with interest at 6%,
100 bbls. flour at $5.25 per bbl.
--Nov. 9--
Discounted our note for $1,000.00, 30 days, at First National Bank.
--Dec. 6--
Jackson & Co., paid their note due to-day, $214.00.
--Dec. 6--
David Newman paid $300.00 on his note due to-day. Gave new note for
balance due, payable in 30 days with interest at 6%.
--Dec. 8--
Paid our note to Valley Mills by check #11.
--Dec. 9--
Paid $500.00 on our note to First National Bank by check #12. Gave new
note for $500 payable in 30 days, interest at 6%.
--Dec. 9--
Andrew White paid sight draft, $42.60, through First National Bank,
exchange $.10.
--Dec. 9--
J. D. Jenks accepted our 30-day draft for $140.00, which we discounted
at First National Bank at 6%.
--Dec. 10--
Accepted a 30-day draft for $75.00 drawn by Eastern Woodenware Co.
--Dec. 11--
Gave First National Bank our check for $90.00 to pay 60-day draft of
Farwell & Graves accepted by us Oct. 11.
--Dec. 12--
Gave First National Bank our check for $41.00 to pay sight draft of Dun
& Co.
[Illustration: ACCOUNTING DEPARTMENT, SWIFT & COMPANY, CHICAGO]
SINGLE PROPRIETOR'S AND PARTNER'S ACCOUNTS
RETAIL BUSINESS
=1.= In this section we demonstrate complete sets of books for a retail
business, showing every necessary step in bookkeeping from the opening
of the business. The first set represents a small business in which
the simplest methods are adequate. The business is owned by a single
proprietor who opens a retail grocery store.
=2. Opening the Books.= Remembering that bookkeeping is the art of
recording the transactions of a business, the first thing to be done
is to make the proper opening entry of the books. Being the opening
entry, it should record the first fact of importance, which is that the
business has been opened. Since bookkeeping should exhibit the exact
financial standing of the business, the next step will be a complete
statement of assets and liabilities.
It is customary to make this opening entry on the first page of the
journal. The entry should be a plain statement of facts which can be
readily understood by anyone.
=3. Books Used.= In this set, the books used are Journal, Cash Book,
and Ledger. In addition a _counter book_ or _blotter_, corresponding
to a day book, is used. This is a rough book in which are recorded
sales on account, cash purchases, and sometimes payments on account.
The entries are merely memoranda of transactions, made when they
occur, to be later entered in the regular books. No bookkeeper being
employed, it would be inconvenient for the proprietor or his clerk to
go to the desk and make a detailed entry every time a sale is made, and
so the transaction is entered in pencil in the blotter. Bookkeeping
records must be permanent, and should always be made in ink; and it is
advisable, when possible, to have all entries made in one handwriting.
A sample page of the blotter, which illustrates its use, is shown (p.
3). The marks // indicate that the item has been transferred to journal
or cash book.
=4.= The ledger used is one with journal ruling. In posting, each item
is entered in the ledger. This is a very satisfactory plan for a small
business, as the items of which each charge is composed can be seen
at a glance. More space is required for an account, but the saving in
time in making statements is a distinct advantage, especially when the
proprietor is his own bookkeeper. With the ordinary style of ledger, it
is necessary to refer to books of original entry to find the items.
[Illustration: Ledger with Journal Ruling]
=5. Statements.= Customers frequently request detailed statements of
account which will give full particulars of each transaction, including
each item. At other times the proprietor sends statements to his
customers, with a request for payment. When this is done, it is not
necessary to enter each item, a statement of the balance due being
sufficient unless an itemized statement is requested by the customer.
=6.= The business is opened by William Webster on the 21st day of
November, 190-. He is to conduct a retail grocery business, and has
rented a store from Wm. Bristol at a monthly rental of $30.00. His
resources consist of cash $600.00; merchandise, consisting of a
miscellaneous stock of groceries, $964.50; personal accounts due him as
follows: Henry Norton, $25.00; L. B. Jenkins, $22.70. His liabilities
consist of two accounts due for goods purchased, as follows: Brewster &
Co., Rochester, N. Y., $115.20; Warsaw Milling Co., $64.00. The opening
entry, which furnishes a permanent record of these facts, is shown (p.
4).
=7. Proprietor's Account.= The proprietor's account is an account
representing capital when the business is owned by a single proprietor.
When the business is started, this account is opened in the name of the
proprietor (Wm. Webster, Proprietor), and to it is credited his net
investment. From time to time the books are closed and the proprietor's
account then receives credit for the net profits or is debited with the
net losses of the business.
[Illustration: Day Book]
[Illustration: Opening Entry in Journal]
[Illustration: AIR-LINE MEAT-CARRYING SYSTEM FOR A LARGE RETAIL MARKET
Lamson Consolidated Store Service Co.]
When the proprietor withdraws money or goods from the business
for his personal use, the amount may be charged to his investment
or proprietorship account, or to a personal account (Wm. Webster,
Personal) opened in his name. The latter method is recommended by some
writers for the reason that the proprietor's personal expenses, or
those of his family, are then separated from the expenses or capital
expenditures of the business. As a customer of the business, he is
placed on the same basis as any other individual. But the personal
account must be closed some time; he must pay it in cash, or close it
into profit and loss so that it finally operates to reduce his net
investment.
It appears, therefore, that the question whether withdrawals are
charged to the investment or a personal account is largely a matter of
personal preference.
=8.= The opening entries having been made, the books are now ready
for the recording of the regular transactions of the business. The
following transactions are shown in the model set, but the blotter is
omitted, all transactions being entered in the journal and cash book.
The sample page of the blotter described in Article 3 is sufficient to
illustrate its use.
SAMPLE TRANSACTIONS
=9.= --Nov. 21--
Sold to Henry Norton on account,
10# sugar .05½ $.55
2 cans corn .25
1 can peas .15
3# rice .30
------
1.25
--Nov. 21--
Sold to John Smallwood on account,
5# butter 1.00
4# lard .50
1 doz. eggs .25
------
1.75
--Nov. 21--
Cash sales 14.10
--Nov. 22--
Sold to Harry Webster on account,
7 bars Lenox soap .25
1 pkg. gold dust .20
matches .15
¼ bbl. flour 1.35
------
1.95
--Nov. 22--
Bought for cash
10 doz. eggs .21 2.10
--Nov. 22--
Cash sales 11.27
--Nov. 23--
Bought from H. Klink & Co., Buffalo, N.Y., on account,
278# hams .11 30.58
200# lard .07½ 15.00
------
45.58
--Nov. 23--
Sold to F. W. Bradley on account,
2 bu. potatoes 1.60
--Nov. 23--
Sold to C. D. Glover on account,
1 bbl. apples 3.25
5 gal. vinegar 1.25
------
4.50
--Nov. 23--
Cash sales 13.20
--Nov. 24--
Bought from John Smallwood on account,
100 bu. potatoes .60 60.00
Paid him cash 25.00
--Nov. 24--
Sold John Smallwood on account,
2# cheese .32
1 bottle vanilla ext. .35
1# coffee .35
1# tea .60
------
1.62
--Nov. 24--
Sold to A. C. Maybury on account,
1# royal baking powder .50
1# corn starch .10
1# soda .10
2 pkgs. jello .20
------
.90
--Nov. 24--
Cash sales 15.10
--Nov. 25--
Paid Brewster & Co.
Cash 115.20
--Nov. 25--
Sold to L. B. Jenkins on account,
½# pepper .20
½# cloves .20
¼ bbl. flour 1.35
------
1.75
Sold to D. E. Johnson on account,
12# ham .14 1.68
--Nov. 25--
Received from Henry Norton
Cash 26.25
--Nov. 25--
Cash sales 13.00
--Nov. 26--
Sold to Wm. Bristol on account,
11# ham .14 1.54
1 qt. bottle olives .50
2# coffee .70
20# sugar .05½ 1.10
------
3.84
--Nov. 26--
Credit Wm. Bristol
1 month's rent 30.00
--Nov. 26--
Sold to C. D. Glover on account,
¼ bbl. flour 1.35
1# baking powder .50
7 cakes borax soap .25
------
2.10
--Nov. 26--
Paid clerk hire 8.00
--Nov. 26--
Cash sales 18.70
--Nov. 28--
Sold to H. N. Shaw on account,
1 bu. potatoes .80
1 doz. cans corn 1.50
------
2.30
--Nov. 28--
Sold to Watkins Hotel Co., on account,
10 bu. potatoes .75 7.50
50# lard .10 5.00
20# ham .13½ 2.70
------
15.20
--Nov. 28--
Cash sales 9.45
--Nov. 29--
Bought from Lowell & Sons
500# sugar .04¾ 23.75
50 gal. molasses .30 15.00
------
38.75
--Nov. 29--
Bought from Star Salt Co.
10 bbls. salt .80 8.00
--Nov. 29--
Sold to R. H. Sherman on account,
1# coffee .25
1# chocolate .45
1 qt. olive oil 1.35
¼# ginger .15
¼# pepper .15
1 pkg. mince meat .10
2# lard .25
------
2.70
--Nov. 29--
Cash sales 14.35
--Nov. 30--
Received from F. W. Bradley
Cash 1.60
--Nov. 30--
Paid Warsaw Milling Co.
Cash 64.00
--Nov. 30--
Sold to John Smallwood on account,
1 bbl. salt 1.10
--Nov. 30--
Sold to D. E. Johnson on account,
10# lard .10 1.00
1# baking powder .50
1 pk. apples .35
------
1.85
--Nov. 30--
Bought for cash
5 bu. apples 1.00 5.00
--Nov. 30--
Cash sales 17.90
[Illustration: Journal Entrees Recording all Transactions]
[Illustration: Journal Entries Recording all Transactions]
[Illustration: Journal Entries Recording all Transactions]
[Illustration: Cash Book]
[Illustration: Journal Ruled Retail Ledger]
[Illustration: Journal Ruled Retail Journal]
[Illustration: Journal Ruled Retail Ledger]
[Illustration: Journal Ruled Retail Ledger]
[Illustration: Journal Ruled Retail Ledger]
[Illustration: Journal Ruled Retail Ledger]
At the close of business, Nov. 30, a trial balance of the ledger
accounts is taken. No attention is paid to the accounts which are
closed, the open accounts being only included in the trial balance.
The proprietor wishes to know whether the business has made or lost
money, and what the gross and net profits (or the losses) have been. To
obtain this information the books are to be closed. Before this process
can be completed, it is necessary to know the value of goods now in
stock--that is, to _take an inventory_.
INVENTORY
=10.= An inventory is taken by counting, measuring, or weighing all
goods in stock. The stock is listed on journal paper or in a day book,
listing first the quantity; second, the name of the article; third, the
price; fourth, the value of each item.
[Illustration: Inventory Sheet]
[Illustration: Trial Balance]
=11. Pricing.= In taking an inventory, _all goods must be priced at
cost--never at the selling price_. If selling prices are used, credit
is being taken for profits which cannot be earned until the goods are
sold. It may even be found advisable at times to list goods at less
than cost. Some classes of goods deteriorate; at other times the stock
may contain merchandise that was purchased on a high market, on which
prices have been materially lowered. To price such goods at actual cost
prices is creating fictitious values. Conservatism is necessary in
pricing an inventory, for the taking of credit for unearned profits is
wrong in principle.
This inventory shows the cost of goods in stock to be $1,042.77.
=12. Closing the Books.= This is the process of balancing all revenue
accounts, and transferring the balances to the profit and loss account,
the balance of the account being finally transferred or closed into the
capital, surplus, or deficiency account, as the case may be. We have
learned that in a single proprietorship, profit and loss is finally
closed into capital or investment account.
[Illustration: ERECTING SHOP IN THE WORKS OF THE BALDWIN LOCOMOTIVE
WORKS, PHILADELPHIA, PENNA.]
This being a trading business, the first step is to open a _trading
account_ for the purpose of finding the gross profit. The accounts now
in the ledger to be closed into trading account are _merchandise_,
_inventory_, and _purchases_, which are entered on the debit side;
and _sales account_, which is entered on the credit side. The present
inventory is now entered on the credit side; the two sides of the
account are footed; and the difference or balance represents the gross
gain or loss.
=13.= The trading account shows a credit balance or gross profit of
$92.00. This balance is now closed into profit and loss, being entered
on the credit side. The only revenue account now open is expense,
which shows a debit balance of $38.00. This is a revenue expenditure,
representing a loss, and is therefore transferred to the debit or loss
side of profit and loss account.
Profit and loss shows a credit balance or net profit of $54.00. The
balance closes into the account of the proprietor, where it is entered
on the credit side increasing his net investment to $1,487.00.
NOTE--Complete postings from page 4 of the journal.
=14.= _A balance sheet_ should now be prepared; and if our work is
correct in every particular, the present worth will correspond in
amount with the net investment shown by the proprietor's account.
BALANCE SHEET, Nov. 30
_Assets_
Cash $535.62
Accounts Receivable 57.63
--------
$593.25
Merchandise Inventory 1,042.77 1,042.77 1,636.02
--------
_Liabilities_
Sundry Accounts Payable 149.02 149.02
--------
Present Worth $1,487.00
[Illustration: Closing Entries, Trading and Profit and Loss Accounts]
EXERCISE
=15.= On a certain date the assets and liabilities of John Noble are as
follows:
ASSETS: cash, $450.00; inventory, $762.50; due from sundry
debtors--John Lane $30.00, Henry Watson $17.60, D. B Olin $27.60.
LIABILITIES: due sundry creditors--Perkins & Co. $90.00, F. C. Watkins
$54.00.
The following transactions take place:
April 1: Sold to Wm. Aultman on account, 1 bbl. apples $4.50; 10 bu.
corn @ 48c. Bought from Mills & Sweet, 114# cheese at 11c.
April 2. Sold to Henry Watson on account, 10 bu. potatoes @ 75c; D. B.
Olin paid his account in cash; sold for cash, miscellaneous merchandise
$17.20.
April 3. Sold to Andrew Nevin on account, 20# lard at 11c, 14-1/2#
ham at 15c; sold to Homer Miller on account, 1/4 bbl. flour, $1.55,
3 doz. eggs @ 26c, 20# sugar @ 5-1/4c; sold for cash, miscellaneous
merchandise $18.60.
April 4. Paid Perkins & Co., cash 90.00; sold Marvin Stetson 1 bbl.
apples $4.50, 2# coffee @ 40c, 1# tea @ 60c; Wm. Aultman paid his
account in full; sold for cash, miscellaneous merchandise $16.30.
April 5. Bought from Geneva Milling Co. 100 bbls. flour @ $3.25; sold
to D. Wiseman 2 bbls. salt @ $1.10, 10# sugar @ 5-1/2c; sold for cash,
miscellaneous merchandise $14.90.
April 6. Sold F. C. Watkins 20 bu. corn @ 35c, 10# butter @ 30c, 1
vinegar cask $1.50; paid F. C. Watkins cash $42.50; Henry Watson paid
his account in full; paid 1 month's rent $35.00; paid clerk hire $7.00;
sold for cash, merchandise $27.90.
At the close of business, the merchandise inventory was $987.75.
Using journal, cash book, and ledger, open the books, enter and post
these transactions Make a trial balance and a balance sheet, showing
present worth. Does the business show a profit or a loss, and how much?
How is the amount determined from the balance sheet?
Close the books into the proper accounts, showing gross and net profit
and loss. To what account is the profit or loss transferred?
RETAIL COAL BOOKS
=16.= The proprietor wishes to retire from the grocery business, and,
having an opportunity to sell the stock at inventory value, does so,
receiving $1,042.77 in cash. He immediately pays sundry accounts
payable, $149.02. He collects all accounts receivable except the amount
due from L. B. Jenkins, $24.45. This leaves him with assets consisting
of cash $1,462.55; due from L. B. Jenkins, $24.45; and no liabilities.
He next engages in the retail coal business, investing his entire
assets. He rents an office and yards at $40.00 per month, and engages a
teamster who owns a team and wagon, paying him $24.00 per week.
=17.= In this business there are introduced a sales book, with which
the student is familiar, and a form of ledger known as _center ruled_
(p. 25). This form at first appears slightly confusing; but there is
considerable advantage in having the debit and credit columns side by
side, as balances can be calculated more readily.
=18.= The cash book used is one having three columns. On the debit side
the third column is used for cash sales. The footing is carried forward
until the end of the month, or any other time when a trial balance is
desired, when the amount is posted in one item. All bills are paid by
check, the money received being deposited in the bank.
=19.= An auxiliary book used in this business is a _scale book_, in
which are recorded the weight of wagon, gross and net weights. Weighing
the delivery wagons used by the business each morning is sufficient;
this weight can be used on each load hauled for the day. And on
deliveries made by the regular wagons, it is not necessary to record
the weight of each load in the scale book; knowing the tare, the net
weight can be recorded in the sales book.
The principal use of the scale book is to record the weights of coal
sold at the yards and hauled by the purchaser. When a wagon comes to
the yard for a load of coal, it is of course necessary to obtain first
the weight of the empty wagon; and it is important that both this and
the gross weight be permanently recorded to prevent later disputes. The
scale or weight book is usually made with sheets of from four to six
weight tickets, perforated, having stubs which are exact duplicates
of the tickets. The perforated ticket is given to the customer and the
stub remains in the book as a permanent record.
Since it is necessary to enter the weights in two places, and because
this duplication of work is liable to result in errors, a better plan
would be to omit the stub and make the book with carbon duplicate
tickets. Even with the old style of book a sheet of carbon paper can
be placed between two sheets and two copies of the ticket made at one
writing; the record sheet to remain in the book. See illustration, p.
26.
[Illustration: CENTER RULED LEDGER]
=20. Uncollectable Accounts.= In the closing entries of the last model
set, we have shown that the gross trading profits are represented
by the balance of trading account. All profits from other sources
are credited directly to profit and loss account; likewise all other
losses are charged directly to profit and loss. One such source of
loss is _uncollectable accounts_. To charge the loss resulting from
an uncollectable account against trading profits would create a false
showing in respect to the trading profits during the current period,
for the reason that the account may represent sales made during a
former period.
[Illustration: Scale Book]
SAMPLE TRANSACTION
=21.= The transactions which follow represent the business for the
period covered:
--Dec. 10--
Commenced business with the following assets:
Cash $1,415.55
Due from L. B. Jenkins 24.45
--Dec. 10--
Bought from Lehigh Coal Co., on account,
25 tons nut coal $4.25 106.25
--Dec. 10--
Bought from Reading Coal Co., on account,
25 tons egg coal 4.25 106.25
15 tons pea coal 3.75 56.25
--------
162.50
--Dec. 10--
Deposited cash 1,400.00
--Dec. 11--
Sold to Henry Newton
2,000# nut 5.25 5.25
--Dec. 11--
Sold to D. H. Kennedy
6,000# egg 5.75 17.25
4,000# nut 5.75 11.50
--------
28.75
--Dec. 11--
Sold for cash
1,000# nut 5.25 2.63
--Dec. 12--
Sold to Andrew White
4,000# egg 5.75 11.50
1,000# pea 5.25 2.63
--------
14.13
--Dec. 12--
Sold to F. W. Francis
6,000# nut 5.75 17.25
1,500# pea 5.25 3.94
--------
21.19
--Dec. 12--
Sold for cash
4,000# nut 5.75 11.50
--Dec. 13--
Bought from Lackawanna Coal Co.
50 tons run of mine 3.25 162.50
--Dec. 13--
Sold to Eastern Foundry Co.
25 tons run of mine 3.75 93.75
--Dec. 13--
Sold to Geo. Miller
8,000# egg 5.75 23.00
--Dec. 13--
Sold for cash
2,000# nut 5.75 5.75
4,000# nut 5.25 10.50
2,000# pea 4.75 4.75
--------
21.00
--Dec. 13--
Deposited all cash on hand
--Dec. 14--
Bought from Lehigh Coal Co.
30 tons nut 4.25 127.50
--Dec. 14--
Sold to Lotus Club
10 tons nut 5.75 57.50
--Dec. 14--
Sold to David Meyer
4,000# pea 5.25 10.50
--Dec. 14--
Sold to City Wagon Co.
10,000# run of mine 4.50 22.50
--Dec. 14--
Sold for cash
6,000# egg 5.25 15.75
--Dec. 15--
Paid Lehigh Coal Co.
Check# 1 106.25
--Dec. 15--
Received from D. H. Kennedy
Cash in full payment of his account.
--Dec. 15--
Sold to Samuel Hartley
1,000# pea 4.75 2.38
2,000# nut 5.25 5.25
--------
7.63
--Dec. 15--
Sold for cash
2,000# pea 5.25 5.25
5,000# nut 5.25 13.13
4,000# egg 5.25 10.50
2,500# run of mine 4.25 6.38
--------
35.26
--Dec. 15--
Paid Henry Wiggins, teamster
Check #2 24.00
--Dec. 15--
Paid D. H. Tuttle
1 month's rent, check #3 40.00
--Dec. 15--
Deposited all cash on hand
--Dec. 15--
Charged L. B. Jenkins account to profit and loss
EXERCISE
=22.= Open the books, using cash book, sales book, journal, and ledger.
Enter each transaction, and make all postings to ledger. Take off a
trial balance of the ledger accounts.
At the close of business, Dec. 15, the inventory is taken, and shows
the following quantities on hand:
38 tons nut @ 4.25
14 " egg @ 4.25
9 " pea @ 3.75
18½ " run of mine @ 3.25
Close all accounts representing trading transactions into a trading
account, and find the gross trading profit or loss.
Close trading and revenue expenditure accounts into profit and loss
account.
Close net profits into proprietor's account.
Bring down the balances in the ledger and take a new trial balance.
SALES TICKETS
=23.= In a retail business it is necessary for the sales person to
record purchases at the time the goods are selected by the customer.
When but one or two clerks are employed, it is possible to record
these sales in a counter book or blotter; but in a larger business
employing several clerks, this method would be extremely inconvenient.
The bookkeeper would be obliged to wait for the books; and even if two
sets of counter books were provided for use on alternate days, the work
would always be at least one day behind.
The increase in the volume of business transacted, and the multiplicity
of transactions in a retail store, have been responsible for the
introduction of many labor-saving methods and devices. One of these now
used in all large stores and in many small ones, is the _sales ticket_.
The sales ticket is to all intents and purposes a small invoice blank.
Sales tickets are put up in pads or in book form, and are numbered
in duplicate. The number is prefixed by a letter--as _H 10_--which
is intended to indicate either the department or the sales person.
When a sale is made, the ticket or bill is made in duplicate by means
of carbon paper; one copy is given to the customer, and the other
retained. If it is a cash sale, the copy retained goes to the cashier
with the money; if a sale on account, to the bookkeeper to be charged.
These sales tickets are also used for taking orders for future
delivery, both copies being retained until the order is filled. When
delivery is made, one copy goes to the customer as a bill. Aside from
the time saved, the sales ticket is a great convenience, as its use
gives the customer a bill for every purchase.
DEPARTMENTAL RECORDS
=24.= When the goods sold are divided into departments, it is here
customary to record carefully the purchases and sales for each
department. These records are provided for by the use of purchase
and sales books having as many columns as there are departments.
Let us suppose that the business under consideration is a single
proprietorship, and that the goods sold are clothing, shoes, and
furnishings. Each class of goods is kept in a separate department,
sales and purchases being recorded by departments.
=25.= Purchase and sales books of a special design are used, each
having three special columns. It will be noted that neither purchases
nor sales are recorded in detail, but that both purchase invoices and
sales tickets are recorded by number, and only the totals extended
in the proper column. The charges and credits are posted to personal
accounts from the purchase and sales books. All purchase invoices are
filed in numerical order. The sales tickets are kept in bundles, each
day's tickets by themselves. The tickets of each department and each
sales person are also kept by themselves. If it becomes necessary at
any time to know the items of an invoice or sales ticket, it is an easy
matter to refer to the files under the proper date and number for the
desired information.
The combined totals of the three department columns must equal the
footing of the total column. All footings are carried forward until the
end of the month, when the totals are posted directly to purchase and
sales accounts, completing the double entry. In the ledger, purchase
and sales accounts are kept with each department; but when the books
are closed, the results from all departments are combined in the
trading account. Instead of recording cash sales in a special column
in the cash book, all receipts of this kind are entered in the regular
_cash received_ column. These sales are not posted from the cash book,
but are entered in the sales book daily. Thus they are carried forward
in the footings, and at the end of the month the totals of the sales
book represent all sales, both on account and for cash.
=26.= The cash book in this set presents some new features. Instead
of using both pages of the book, one page is used for both debit and
credit. The bank account is also kept in the cash book, debit and
credit columns being provided for this purpose. Deposits are entered in
the bank debit column and in the cash credit column. Checks are entered
in the bank credit column and posted to individual accounts.
The other books used are the journal and ledger. The journal is used
only for adjusting entries which cannot be made through the other books.
SAMPLE TRANSACTIONS
=27.= The business is opened by C. D. Walker, who invests $3,500.00
cash, which he deposits in the bank. The following transactions are
recorded:
--Jan. 12--
Bought from Hart, Schaffner & Marx, Chicago
50 suits $13.50 $675.00
15 " 16.50 247.50
--------
$912.50
Net; 2% 10.
Invoice #1.
--Jan. 12--
Bought from Hamilton Brown Shoe Co., St. Louis
30 pr. shoes 2.25 67.50
30 " " 4.25 127.50
10 " " 1.50 15.00
--------
210.00
Net 60; 2% 10.
Invoice #2.
--Jan. 14--
Bought from Farwell & Co., Chicago
1 doz. shirts 13.50 13.50
2 " " 9.00 18.00
4 " " 6.25 25.00
2 " sox 1.50 3.00
1 " " 2.00 2.00
10 " underwear 6.50 65.00
5 " hdkfs. 1.10 5.50
--------
132.00
Net 60; 2% 10.
Invoice #3.
--Jan. 14--
Bought from Barr Dry Goods Co., St. Louis
12 doz. collars .75 9.00
12 " " 1.10 13.20
--------
22.20
Net 30.
Invoice #3.
--Jan. 15--
Sold to S. W. Martin, 842 3d Av., on account
Sales ticket A4. 25.00
S.T. B6 4.50
S.T. C18 6.00
--------
35.50
--Jan. 15--
Sold for cash
Clothing 148.70
Furnishings 26.50
Shoes 54.00
--------
229.20
--Jan. 15--
Paid Hart, Schaffner & Marx account
Check #1 894.25
Discount 18.25
--------
912.50
--Jan. 16--
Sold to A. R. Crane, 1162 Baker St., on account
S.T. B7 3.00
--Jan. 17--
Sold to D. H. Whipple, 476 Lake St., on account
S.T. A12 27.50
Paid cash on account 10.00
--Jan. 17--
Received from S. W. Martin
1 shirt, for exchange 1.50
Sold him on account
1 shirt 2.00
S.T. B9
--Jan. 17--
Sold for cash
Department A 200.00
" B 64.00
" C 87.50
--------
351.50
--Jan. 19--
Sold to C. D. Lewis, 64 Ferry Av., on account
S.T. B11 6.50
S.T. C23 3.50
--------
10.00
--Jan. 19--
Paid Hamilton Brown Shoe Co., on account
Check #2 205.80
Discount 4.20
--------
210.00
--Jan. 19--
Paid clerk hire, cash 12.00
--Jan. 19--
Paid store rent to D. C. Watson
Check #3 50.00
--Jan. 19--
Sold for cash
Department B 37.50
" C 35.00
--------
72.50
--Jan. 19--
Deposited in bank 550.00
--Jan. 20--
Sold to B. E Johnson, 92 King St., on account
S.T. A15 20.00
--Jan. 20--
Sold for cash
Department A 75.00
" B 21.25
--------
96.25
--Jan. 20--
Deposited in bank 100.00
--Jan. 20--
Paid freight bills
Department A 8.75
" B 3.42
" C 4.20
--------
Check #4 to C. D. Jenks, Agt. 16.37
The inventory on Jan. 20 is:
Clothing $487.00
Furnishings 30.50
Shoes 64.50
BALANCE SHEET, JAN. 20
_Assets_
Cash
Bank $2,983.58
Office 97.45
-------- $3,081.03
Accounts Receivable
Martin 36.00
Crane 3.00
Whipple 17.50
Lewis 10.00
Johnson 20.00
--------
86.50
Merchandise (Inventory) 582.00
-------- $3,749.53
_Liabilities_
Accounts Payable
Farwell 132.00
Barr 22.20 154.20 154.20
-------- -------- --------
Present Worth $3,595.33
[Illustration: Adjustment Journal and Department Purchase Book]
[Illustration: Departmental Sales Book]
[Illustration: Cash Book Including Bank Account]
[Illustration: Center Ruled Ledger]
[Illustration: Center Ruled Ledger]
[Illustration: Center Ruled Ledger]
[Illustration: Center Ruled Ledger]
[Illustration: Center Ruled Ledger]
[Illustration: Trial Balance]
EXERCISE
=28.= Take a trial balance of the ledger accounts as they appear after
the books are closed Jan. 20.
At the close of business, Feb. 28, we find that the following
transactions have been recorded:
Purchased clothing from Hart, Schaffner & Marx, $1,500.00; from Brokau
Bros., $720.00.
Purchased furnishings from Barr Dry Goods Co., $60.00, from Rosenthal &
Co., $437.50.
Purchased shoes from Brown Shoe Co., $460.00.
Sold on account, clothing, $600.00; furnishings, $224.40; shoes,
$112.00.
Sold for cash, clothing, $789.50; furnishings, $302.90; shoes, $447.25.
Received cash on account, $672.20.
Received returned goods: clothing, $15.00; shoes, $7.00.
Deposited cash in bank, $2,230.00.
Paid cash for expenses, $10.00.
Gave checks as follows: Hart, Schaffner & Marx, $1,176.00; Brokau
Bros., $705.60; Brown Shoe Co., $294.00; Farwell & Co., $132.00;
Barr Dry Goods Co., $22.20; Rosenthal & Co., $428.75; rent, $50.00;
expenses, $100.00.
Cash discounts earned on accounts paid as follows: Hart, Schaffner &
Marx, $24.00; Brokau Bros., $14.40; Brown Shoe Co., $6.00; Rosenthal &
Co., $8.75.
Take a new trial balance as the ledger accounts appear after posting
these transactions.
The inventory, Feb. 28, is:
Clothing $1,790.50
Furnishings 176.40
Shoes 136.25
--------
$2,103.15
Close the books, make statement of trading and profit and loss account.
Make a balance sheet.
What were the gross profits for this period?
What were the net profits?
What is the proprietor's present worth?
PARTNERSHIP
=29.= Legal authorities define a partnership as a combination by two
or more persons, of capital, labor, or skill, for the transaction of
business for their common profit.
Partnerships may be formed for the purpose of conducting any legitimate
business or undertaking, and are created by contract, expressed or
implied, between the parties. Partnership agreements need not be in
writing, but may be made by oral assent of the parties. Even though
they are legal if made orally, partnership agreements should always be
made in writing.