Part 39
The centre of all book-keeping systems is the _ledger_, and it may be said that all other books are only kept as a matter of practical convenience--hence the name "subsidiary books" that is frequently applied thereto. Inasmuch, however, as the transactions are first recorded in these subsidiary books, and afterwards classified therefrom into the ledger, the names _books of entry_ or _books of first entry_ are often employed. Subsidiary books which do not form the basis of subsequent entries into the ledger, but are merely used for statistical purposes, are known as _statistical_ or _auxiliary books_. In the early days of book-keeping the ledger comprised merely those accounts which it was thought desirable to keep accessible, and was not a complete record of all transactions. Thus in many instances records were only kept of transactions with other business houses, known as _personal accounts_. In the earliest examples transactions tending to reduce indebtedness were recorded in order of date, as they occurred underneath transactions recording the creation of the indebtedness; and the amount of the reduction was subtracted from the sum of the indebtedness up to that date. This method was found to be inconvenient, and the next step was to keep one account of the transactions recording the creation of indebtedness and another account (called the _contra account_) of those transactions reducing or extinguishing it. For convenience these two accounts were kept on opposite sides of the ledger, and thus was evolved the _Dr._ and _Cr._ account as at present in general use:--
_Dr._ A.B. Contra. _Cr._ -------+-------------+---------++-------+------------+--------- Date. | Narrative. | Amount. || Date. | Narrative. | Amount. -------+-------------+---------++-------+------------+--------- | | L s. d. || | | L s. d. | | || | | | | || | | | | || | |
In this form of account all transactions creating indebtedness due from the person named therein to the business--that is to say, all benefits received by that person from the buisness--are recorded upon the left-hand, or _Dr._ side, and _per contra_ all transactions representing benefits imparted by him, giving rise to a liability on the part of the business, are recorded upon the _Cr._ side. The account may run on indefinitely, but as a matter of convenience is usually ruled off each time all indebtedness is extinguished, and also at certain periodical intervals, so that the state of the account may then be readily apparent.
Single-entry accounts.
A mere collection of _personal accounts_ is, however, obviously a very incomplete record of the transactions of any business, and does not suffice to enable a statement of its financial position to be prepared. So at an early date other accounts were added to the ledger, recording the acquisition of and disposal of different classes of property, such accounts being generally known as _real accounts_. These accounts are kept upon the same principle as personal accounts, in that all expenditure upon the part of the business is recorded upon the _Dr._ side, and all receipts upon the _Cr._ side; the excess of the debit entries over the credit entries thus showing the value placed upon those assets that still remain the property of the business. With the aid of personal and real accounts properly written up to date, it is possible at any time to prepare a statement of assets and liabilities showing the financial position of a business, and the following is an example of such a statement, which shows also how the profit made by the business may be thus ascertained, assuming that the financial position at the commencement of the current financial period, and the movements of capital into and out of the business during the period, are capable of being ascertained.
STATE OF AFFAIRS AS AT 31ST DECEMBER 1906
+----+--------------------+----------------++------------------+--------------- | | _Liabilities._ | || _Assets._ | | | | || | | | Trade Creditors | L4,961 10 0 || Fixtures, Furni- | | | Bills Payable | 2,620 18 4 || ture, &c. | L1,269 4 3 | | Balance, being ex- | || Stock on hand | 5,751 3 10 | | cess of assets | || Trade Debtors | 3,842 7 9 | | over liabilities | || Bills Recievable | 7,468 14 3 | | (or "Capital") | || Cash at Bank | 4,169 5 5 | | at this date | || | | | carried down | 14,918 7 4 || | | | +----------------++ +--------------- | | |L22,500 15 6 || |L22,500 15 6 | | +----------------++ +--------------- | | Amount of Capi- | || Balance brought | | | tal on 1st Jan. | || down |L14,918 7 2 | | 1906 |L15,010 1 7 || | | | Balance, being net | || Amount drawn | | | profit for the | || out of business| | | year ended this | || during year | | | date | 1,408 5 7 || ended this date| 1,500 0 0 | | +----------------++ +--------------- | | |L16,418 7 2 || |L16,418 7 2 +----+--------------------+----------------++------------------+---------------
The method of accounting hitherto described represents _single-entry_, which--albeit manifestly incomplete--is still very generally used by small business houses, and particularly by retail traders. Its essential weakness is that it provides no automatic check upon the clerical accuracy of the record, and, should any mistake be made in the keeping of the books, or in the extraction therefrom of the lists of assets and liabilities, the statement of assets and liabilities and the profit or loss of the current financial period, will be incorrect to an equal extent. It was to avoid this obvious weakness of single-entry that the system of double-entry was evolved.
Double-entry.
The essential principle of double-entry is that it constitutes a complete record of _every_ business transaction, and as these transactions are invariably cross-dealings--involving simultaneously the receipt of a benefit by some one and the imparting of a benefit by some one--a complete record of transactions from both points of view necessitates an entry of equal amount upon debit and credit sides of the ledger. Hence it follows that, if the clerical work be correctly performed, the aggregate amount entered up upon the debit side of the ledger must at all times equal the aggregate amount entered up upon the credit side; and thus a complete list of all ledger balances will show an agreement of the total debit balances with the total credit balances. Such a list is called a _trial balance_, an example of which is given below. It should be observed, however, that the test supplied by the _trial balance_ is a purely mechanical one, and does not prove the absolute accuracy of the ledger as a record of transactions. Thus transactions which have actually taken place may have been omitted from the books altogether, or they may have been recorded to the wrong accounts, or the money values attached to them may be incorrect; or, yet again, fictitious records may be entered in the ledger of transactions which have never taken place. A _trial balance_ is thus no very adequate safeguard against fraud, nor does it bring to light mistakes in the monetary value attaching to the various transactions recorded. This last point is of especial importance, in that the monetary value of transactions may have been correctly recorded in the first instance, but owing to altered circumstances may have become inaccurate at a later date. This of course means that the altered circumstances constitute an additional "transaction" which has been omitted.
TRIAL BALANCE, 31ST DECEMBER 1906
----+-------------------------+---------------+-------------- | | _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.
JOURNAL 1906
-------+----------------------------+----+---------------+---------------+ | | | _Dr._ | _Cr._ | Dec. 31|Trading account |110 | L48,809 19 2 | | | To Stock account | 44 | | L 4,078 16 4 | | " Purchases account | 97 | | 44,731 2 10 | +----------------------------+ | | | " |Sales account |100 | 48,732 4 9 | | |Stock account | 44 | 5,751 3 10 | | | To Trading account |110 | | 54,483 8 7 | +----------------------------+ | | | " |Trading account |110 | 5,673 9 5 | | | To Profit and Loss | | | | | account |120 | | 5,673 9 5 | +----------------------------+ | | | " |Profit and Loss account |120 | 5,383 1 6 | | | To Rent, rates and taxes | 78 | | 1,242 13 8 | | " Salaries and wages | 65 | | 1,865 12 0 | | " General expenses | 82 | | 1,087 8 0 | | " Discounts allowed | 50 | | 975 3 3 | | " Bad debts | 40 | | 71 4 2 | | " Depreciation | 75 | | 141 0 5 | +----------------------------+ | | | " |Discounts received | 60 | 1,117 17 8 | | | To Profit and Loss account|120 | | 1,117 17 8 | +----------------------------+ | | | " |Profit and Loss account |120 | 1,408 5 7 | | | To A.B., Capital account | 1 | | 1,408 5 7 | +----------------------------+ | | | |A.B., Captial account | 1 | 1,500 0 0 | | | To Drawings account | 5 | | 1,500 0 0 | | | +---------------+---------------+ | | |L118,376 1 11 |L118,376 1 11 | ------------------------------------+----+---------------+---------------+
DAY BOOK 1906
-----+----------------------------------+---------+----------- | Forward | |L3761 7 8 +--------- 27th December. ---------+ | | A. Brown, | | | 492 New Street, Walworth-- | | 471 | 2 doz. V.C. port 31/- | L3 2 0 | | 1 " A.C. pale brandy 49/- | 2 9 0 | | | | -----+--------- 28th December. ---------+---------+ 5 11 0 | Fredk. Newton, | | | Farleigh House, Epsom-- | | 216 | 1 gall. E. Pale sherry 13/6 | L0 13 6 | | 2 doz. O.B. Heidsieck 1892 160/- | 16 0 0 | | 2 gall. P. Scotch 21/- | 2 2 0 | -----+----------------------------------+---------+ 18 15 6 | Robert French, | | | 214 High Road, Sutton-- | | 408 | 6 doz. F.D. Pommard, 1899 30/- | L9 0 0 | | 1 " M.F. Margaux, 1893 66/- | 3 6 0 | | 2 " A. Niersteiner 24/- | 2 8 0 | | +---------+ 14 14 0 | | +----------- | | |L3800 8 2 | | +----------- | | | | | | 100 | | | -----+----------------------------------+---------+-----------
With a view still further to split up the work, thus enabling a large staff to be simultaneously engaged, the ledger itself is now generally kept in sections. Thus the cash account and the bank account are frequently bound together in one separate book called the _cash book_, showing in parallel columns the movements of office cash and of cash at the bank, and by the addition of a third column for discounts the necessity of keeping an additional book of first entry as a _discount journal_ may also be avoided. Of late years, however, most businesses pay all moneys received into their bankers without deduction, and pay all accounts by cheque; the necessity of an account for office cash thus no longer exists, save in connexion with petty payments, which are recorded in a separate book called the _petty cash book_. With regard to the remaining ledger accounts, personal accounts--which are the most numerous--are frequently separated from the real and nominal accounts, and are further subdivided so that customers' accounts are kept separate from the accounts of trade creditors. The customers' accounts are kept in a ledger (or, if need be, in several ledgers) called _sales ledgers_, or _sold ledgers_; while the accounts of trade creditors are similarly kept in _purchases ledgers_ or _bought ledgers_. The nominal and real accounts, if together, are kept in what is called the _general ledger_; but this may be further subdivided into a _nominal ledger_ and a _private ledger_. This last subdivision is, however, rarely made upon a scientific basis, for such accounts as the profit and loss account and trading account are generally kept in the private ledger although strictly speaking nominal accounts; while the bills receivable account and the bills payable account are generally kept in the nominal ledger, so as to reduce to a minimum the amount of clerical work in connexion with the private ledger, which is kept either by the principal himself or by his confidential employee. By the employment of _adjustment accounts_, which complete the double-entry record in each ledger, these various ledgers may readily be made self-balancing, thus enabling clerical errors to be localized and responsibility enforced.
Tabular book-keeping.
Of recent years considerable attention has been devoted to further modifications of book-keeping methods with a view to reducing clerical work, increasing the speed with which results are available, and enabling them to be handled more quickly and with greater certainty. _Tabular book-keeping_ is a device to achieve one or more of these ends by the substitution of books ruled with numerous columns for the more usual form. The system may be applied either to books of first entry or to ledgers. As applied to books of first-entry it enables the same book to deal conveniently with more than one class of transaction; thus if the trading of a business is divided into several departments, by providing a separate column for the sales of each department it is possible readily to arrive at separate totals for the aggregate sales of each, thus simplifying the preparation of departmental trading accounts. As applied to ledgers, the application of the system may be best described by the aid of the above example (the proceedings of the columns being given only), which shows how a very large number of personal accounts may be recorded upon a single opening of a ledger provided the number of entries to be made against each individual be few.
-------+-------+-------+-------+-------+-------+-------+-------+-------+-------+-------+------- (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | (k) | (l) -------+-------+-------+-------+-------+-------+-------+-------+-------+-------+-------+------- | |L s. d.|L s. d.|L s. d.| |L s. d.|L s. d.|L s. d.|L s. d.|L s. d.| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) Reference No. (b) Name of Debtor. (c) Amount due on 1st Oct. 1906 (d) Charges for Current Quarter. (e) Total Debit. (f) Date received. (g) Amount Received. (h) Discounts. (i) Allowances. (j) Bad Debts. {k} Amount due on 31st Dec. 1906 (l) Remarks.
[Illustration: FIG 1.--Card-Ledger Tray (Librry Bureau System).]
Slip system.