----+-------------------------+---------------+--------------
| | _Dr._ | _Cr._
1 | Capital account | | L15,010 1 7
5 | Drawings | 1,500 0 0 |
20 | Trade creditors | | 4,961 10 0
24 | Fixtures, furniture, &c.| 1,269 4 3 |
27 | Bills payable | | 2,620 18 4
40 | Bad debts | 71 4 2 |
44 | Stock 1st Jan. 1906 | 4,078 16 4 |
50 | Discounts allowed | 975 3 3 |
53 | Trade debtors | 3,842 7 9 |
60 | Discounts received | | 1,117 17 8
65 | Wages and salaries | 1,865 12 0 |
75 | Depreciation | 141 0 5 |
78 | Rent, rates and taxes | 1,242 13 8 |
82 | General expenses | 1,087 8 0 |
90 | Bills receivable | 7,468 14 3 |
97 | Purchases | 44,731 2 10 |
100 | Sales | | 48,732 4 9
C56 | Cash at bank | 4,169 5 5 |
| +---------------+--------------
| | L72,442 12 4 | L72,442 12 4
----+-------------------------+---------------+--------------
Balance sheet.
It will be observed, therefore, that in order to complete the record of
the transactions by double-entry, it has become necessary to introduce
into the ledger a third class of accounts, known as _impersonal_ or
_nominal accounts_. These accounts record the transferences of money, or
of money's worth, which, so far from representing a mere reshuffling of
assets and liabilities, involve an increase in or a reduction of the
amount invested in the business, i.e. a profit or a loss. Transactions
representing profits are recorded upon the _Cr._ side of nominal
accounts, and those representing losses (including expenses) upon the
_Dr._ side. This is consistent with the rules already laid down in
connexion with real and nominal accounts, inasmuch as expenditure which
does not result in the acquisition of an asset is a loss, whereas
receipts which do not involve the creation of liabilities represent
profits. All debit balances therefore that are not assets are losses,
and _per contra_ all credit balances that are not liabilities are
profits. So that, inasmuch as double-entry provides _inter alia_ a
complete statement under suitable headings of all profits and all
losses, it is possible by aggregating these results to deduce therefrom
the net profit or loss of carrying on the business--and that by a method
entirely distinct from that previously described in connexion with
single-entry, thus constituting a valuable additional check. Taking the
trial balance shown above, the following represent the _trading
account_, _profit and loss account_, and _balance sheet_ compiled
therefrom. The trading account may be variously regarded as the account
recording the movements of goods which represent the stock-in-trade, and
as a preliminary to (or a subdivision of) the profit and loss account.
The balance sheet is a statement of the assets and liabilities;
but--inasmuch as, by transferring the balance of the profit and loss
account to the capital account, it is possible to bring the latter
account up to date and to show the credit balance representing the
surplus of assets over liabilities to date--the balance sheet, instead
of showing a difference, or a "balance," representing what is _assumed
to be_ the amount of the capital to date, shows an absolute agreement of
assets upon the one hand and of liabilities _plus_ capital upon the
other. The two sides of the account thus balance--hence the name.
_Dr._ TRADING ACCOUNT for the Year ended 31st December 1906 _Cr._
------+-------------------------------------+-------------++-------+-----------------------------+-------------
| To Stock on hand, 1st Jan. 1906 | L4,078 16 4|| | By Sales |L48,732 4 9
| " Purchases | 44,731 2 10|| | " Stock on hand 31st Dec. |
| " Gross Profit, transferred | || | 1906 | 5,751 3 10
| to Profit and Loss account | 5,673 9 5|| | |
| |-------------++ | +-------------
| |L54,483 8 7|| | |L54,483 8 7
------+-------------------------------------+-------------++-------+-----------------------------+-------------
_Dr._ PROFIT AND LOSS ACCOUNT for the Year ended 31st December 1906 _Cr._
------+-------------------------------------+-------------++-------+-----------------------------+-------------
| To Rent, rates and taxes L1,242 13 8| || | By Gross Profit as per |
| " Salaries and wages 1,865 12 0| || | Trading Account | L5,673 9 5
| " General expenses 1,087 8 0| || | " Discount received | 1,117 17 8
| ----------+ L4,195 13 8|| | |
| " Discounts allowed | 975 3 3|| | |
| " Bad debts | 71 4 2|| | |
| " Deprecation | 141 0 5|| | |
| " Net Profit for the year trans- | || | |
| ferred to Capital account | 1,408 5 7|| | |
| +-------------++ | +-------------
| | L6,791 7 1|| | | L6,791 7 1
------+-------------------------------------+-------------++-------+-----------------------------+-------------
_Dr._ BALANCE SHEET as at 31st December 1906 _Cr._
------+-------------------------------------+-------------++-------+-----------------------------+-------------
| To A.B., Capital account |L14,918 7 2|| | By Fixtures, furniture, &c. | L1,269 4 3
| " Trade creditors | 4,961 10 0|| | " Stock on hand | 5,751 3 10
| " Bills payable | 2,620 18 4|| | " Trade debtors | 3,842 7 9
| | || | " Bills receivable | 7,468 14 3
| | || | " Cash at bank | 4,169 5 5
| +-------------++ | +-------------
| |L22,500 15 6|| | |L22,500 15 6
------+-------------------------------------+-------------++-------+-----------------------------+-------------
_Dr._ A.B., CAPITAL ACCOUNT _Cr._
------+-------------------------------------+-------------++-------+-----------------------------+-------------
| || 1906. | |
1906. | To Drawings account | L1,500 0 0||Jan. 1 | By balance from last account|L15,010 1 7
Dec 31| " Balance carried down | 14,918 7 2||Dec. 31| " Profit and Loss account, |
| | || | being net profit for the |
| || | year ended this date | 1,408 5 7
| +-------------++ | +-------------
| |L16,418 7 2|| | |L16,418 7 2
| +-------------++ | +-------------
| | || 1907. | |
| | ||Jan. 1 | By Balance brought down |L14,918 7 2
------+-------------------------------------+-------------++-------+-----------------------------+-------------
In the foregoing example the customary method has been followed of
deducting withdrawals of capital from the capital account and of adding
profits thereto. Sometimes, however, the balance of the capital account
remains constant, and the drawings and net profits are transferred to a
separate account called _current account_. This plan is but rarely
observed in the case of undertakings owned by individuals, or private
firms, but is invariably adopted in connexion with joint-stock
companies, although in such cases the name _appropriation of profit
account_ is generally employed.
Journal.
Although it is now usual to employ several books of first-entry, in the
case of comparatively small businesses one such book is sufficient for
all purposes, in that it is practicable for one person to record all the
transactions that take place as and when they occur. A book of this
description is called the _journal_, and for many years represented the
only book of first-entry employed in book-keeping. An example of the
journal is given below. The entries appearing therein are such as would
be necessary to prepare the trading and profit and loss accounts from
the trial balance shown above, and to bring the capital account up to
date.
In modern times, however, with the growth of business, it was soon found
impracticable to keep one book of first-entry for all transactions, and
accordingly it became necessary either to treat the journal as an
intermediate book, in which the transactions might be brought together
and focused as a preliminary to being recorded in the ledger, or else to
split up the journal into numerous books of first-entry, each of which
might in that case be employed for the record of a particular class of
transaction. The first method has been generally adopted in the
continental countries of Europe, as will be shown later on, whereas in
Great Britain and in North America the latter method more generally
obtains; that is, instead of having one journal in which all classes of
transactions are recorded in the first instance, it is usual to employ
several journals, as follows:--a _sales journal, sales book_ or _day
book_, to record particulars of goods sold; a _bought journal, invoice
book_ or _purchases book_, to record particulars of goods purchased; a
_returns inwards book_, to record particulars of goods sold but
subsequently returned by customers; a _returns outwards book_, to record
the like particulars with regard to goods purchased and subsequently
returned; a _bills receivable book_, to record particulars of bills of
exchange received from debtors; and a _bills payable book_, to record
particulars of bills of exchange given to creditors.