Accounting theory and practice ..

Front matter

illi(IIK'

HP

131 7

Introduction

There are many things, in the writing of a book, which can be said only in the foreword. First, the "raison d'etre" of the book may require an explanatory word. Second, it may not be out of place to discuss some of the many points of academic controversy; such as the difference between bookkeeping and accounting; as to whether accounting is an art or a science; the various theories of debit and credit, etc. Finally, consideration may be given to the need of a knowledge of accounting on the part not only of those preparing for business but also of those expecting to enter any of the professions.

With regard to the first point, it may be said that although there are available excellent treatises on accounting, the author feels that the field is rather barren of textbooks for the use of college students. This book is an effort to supply this need for students of first-year accounting.

As to the second point, suffice it to say that the author does not know the difference between bookkeeping and accounting and doubts whether there is any except in popular parlance. As to whether accounting is an art or a science, he believes that there is an art and also a science of accounting, the former resting upon the principles established by the latter. The necessary brevity of this introduction does not permit an adequate discussion of all the theories of debit and credit.

As to the necessity for a knowledge of accounting on the part of both business and professional men, it should suffice to direct attention to the inclusion of accounting in the courses of all schools of business administration and to the tendency on the part of many professional schools vi , INTRODUCTION

to offer in their curricula courses in general accounting. The author believes the time will come when a fundamental knowledge of accounting will be required of practically all candidates for a degree from a college or university.

It is to be remembered that accounting instruction is not standardized; it is still in a formative stage. A period of three years of graded work has received fairly general recognition as the minimum requirement for professional study, but the content of the three years' work is not entirely uniform, nor are the order and the method established in which the subject matter should be presented, nor the amount to be offered in each of the three years.

In some schools a knowledge of "bookkeeping" is a prerequisite to entrance upon the study of "accounting" ; in others the dry bones of theory are separated from their application in practice, although the tendency seems to be to treat the two, theory and practice, in the one course. Again, in some schools, an effort is made to cover in the one year all of the so-called accounting theory, while in other places there is a growing conviction that the subject matter is too broad for adequate presentation in the time usually allotted to the first year's work. In other places an attempt is made to differentiate between accounting as presented for the general student and accounting as offered to the one expecting to make it a vocation. It is being recognized, however, that both classes must have equal training in the essential fundamentals of the science. A diet of denatured accounting will deprive the general student of training that may seriously handicap him.

Most students on entering college do not have a knowledge of bookkeeping nor should it be required of them. Those few who do have such a knowledge, for the most part, understand only a partial application of debit and credit and not the fundamental principles on which rests

INTRODUCTION vii

the whole structure of accounting. This book is designed to meet this existing condition and will be found equally adapted to either class of students. The subject is developed in such a way that the student knowing something of bookkeeping has little or no advantage over the one without such knowledge. This book has been written for the use of students in our colleges and universities desiring a first course in accounting.

The present volume gives the scope of the work in accounting offered in the first year of the School of Business of Columbia University, and is an effort to mark out and define the portion of the whole subject which can be handled effectively in one year's time.

There is a real demand for a one-year course which will treat the subject in a general way and give a brief view of the entire field. The author believes, however, that accounting in its broadest sense is just beginning to receive the consideration which it deserves and that more and more is recognition being given to the necessity of a thorough knowledge of its principles and their application, for effective work in all lines of business activity. Accordingly, the material in this first volume is not presented to meet the demand of the casual reader or of the student seeking a bird's-eye view of the entire field, since much of the subject matter is reserved for presentation in a second volume which the author hopes to have ready in the course of another year. In that will be taken up a more detailed treatment of the balance sheet in connection with its problem of valuation ; various aspects of the corporation and of the income statement, not adequately handled in this volume; together with some miscellaneous topics, including forms of special statements, branch accounting, sinking funds, and other similar subjects.

The method of approach as given in this volume is viii INTRODUCTION

perhaps not orthodox but it has seemed that the student, given an understanding of the purpose which the accounting records are to serve, will be able to make that record with real intelligence instead of by rule of thumb. Accordingly, the balance sheet and the profit and loss statement are presented first, as the goal towards which all record-keeping looks. The student is taught to analyze business facts and conditions from the very beginning. He is then led, step by step, through the use of non-technical terms, into the ledger, where he sees the way in which the data which he has been using are summarized. The books of original entry are next explained and the method by which the information is classified as it is brought onto the books. Finally, the business papers and documents which constitute the source of all entries are described.

It has been found that the student who has no knowledge of bookkeeping can thus acquire rapidly and intelligently a facility in its technique with no lost or wasted effort. Instead of laboring through many "simple" transactions and spending much duplicated effort, he is taught fundamental principles and their application right from the beginning, after which these principles are correlated and tied up in a complete whole. The process may be somewhat discouraging to the student at times and he may ask for a simpler diet, but in the end he has a surer and more fundamental grasp of the subject than could have been obtained otherwise in the same time.

The first half of the book is devoted principally to the work outlined above. The second half gives a broader and more intensive development of many of the subjects treated but incidentally up to that point. Here the order of arrangement is not so important. The guiding thought has been to present first the principles needed by the student in his practice work, and then to deal with the more detailed

INTRODUCTION ix

applications of these principles regardless of the fact that this has at times necessitated a break in the continuity of treatment of some subjects.

As to the general content of texts on accounting, it may be said that it is always necessary to include a treatment of many points of the law, of business organization, and of finance. This is so because accounting is so intimately connected with all business activities that the subject cannot be fully tmderstood and applied unless it is based on a fair knowledge of business practice. These subjects should be kept to a minimum and effort has been made to do so.

A word of explanation may be in order with regard to the practice work for the student. The material for this is presented at the end of each chapter and is intended as an application of the principles developed in that chapter or in preceding chapters. The various "Problems" given present disconnected material and bear no relation to each other; the "Practice Data," on the other hand, contain connected matter for record in blank books and relate to a business whose record the student is keeping.

One rather long set of practice data is included in the present volume because it is felt that in some quarters we have got away too far from the long set, the work having been cut up into such short periods that the student does not get adequate drill in the making of the record nor a proper perspective as to the volume of transactions during a fiscal period. Nor with these short sets does he get a realistic basis for the calculation of depreciation, bad debts, and other similar items. However, care has been exercised not to overburden the student with the drudgery of too much of this material, only enough being given to insure facility in the application of principles.

For the use of those instructors who desire to offer additional practice work, or desire an opportunity to vary

X INTRODUCTION

the problems or substitute detached problem work for a portion of the formal sets, a collection of classified problems is given in the second appendix. In gathering these problems together the author has drawn freely from many sources and desires here to acknowledge the kindness of David Friday and R. J. Bennett in permitting the use of problems prepared by them.

There remains the pleasant part of the foreword — the acknowledgment of the kind helpfulness of many whose best thought and effort have been given without stint in the production of this book. Acknowledgment is here made of helpful criticism and service from H. T. Scovill, of the University of Illinois; R. A. Klahr, of Colorado College; I, G. Flocken, of the University of Pittsburg; F. H. Elwell, of the University of Wisconsin ; D. W. Morton, of the University of Oregon; Ben Morris and C. W. Collins, of the University of Denver. J. E. Trelevan, of the University of Texas, and Earl A. Saliers, of Yale University, gave much help by their painstaking review and freely given suggestions. Particularly does the author acknowledge indebtedness to the Columbia staff of instructors in first-year accounting, F. P. Baltz, H. F. Seward, R. T. Bickell, C. M. Neubauer, E. M. Barber, and K. L. Baker.

During the period of preparation of this material, Professor R. H. Montgomery, in a life full of many activities, found time to lend a guiding hand and give ever-ready encouragement. Both for this and for valuable criticism on many points, and especially in fixing the emphasis of the book, the author takes this opportunity of publicly acknowledging his debt to him.

R. B. Kester.

New York City, May 12, 191 7.

CONTENTS*

I History and Development of Accounting . i Antiquity of Accounting Business Progress in Babylon Egyptian Records Accounting in Ancient Greece Roman Records The Medieval Retrogression Early English Accounting The Rise of Double Entry Ancient Double-Entry Bookkeeping Early Text Books

Development of the Ledger Account Organizations of Accountants Organizations of Accountants in the United States

II Proprietorship . . . . . .12

Relation of Accountancy to Economics

Relation of Accountancy to Law

The Fundamental Problem of Accountancy

Definition of Terms

The Proprietorship Equation Illustrated

III Types of Business Organization . . .19

The Single Proprietorship The Partnership The Corporation

The Showing of Proprietorship Under These Types

IV The Financial Statement . . . .26

Its Purpose and Use

Its Content and Subdivisions

Its Titles, Principal and Group

Principles Governing Fulness of Detail

Illustration

V Comparative Financial Statements . . 33 Comparison of Net Worths How a Gain or Loss May Be Evidenced The Comparative Financial Statement — Its Content ana Method

'Illustrative Problems or Practice Data accompany each chapter except Chapter I.

xi xii CONTENTS

CHAPTER - PACE

' Vl The Economic or Profit and Loss Elements of

I / a Business . 3^

" Fuller Information Needed

The Two Kinds of Records Temporary Proprietorship Records

( VII^ The Profit and Loss Summary . . -43

\ / Titles for the Profit and Loss Summary

""^ The Fiscal Period

Need for the Physical Inventory

Principles Governing the Make-up of Profit and

Loss Summary Content of the Statement

Algebraic Content of the Profit and Loss Statement The Disposition of the Net Profit Additional Information Sometimes Given The Two Methods of Determining Net Profit

VIII Interrelation Between the Economic and the

Financial Elements of a Business . . 51

Various Aspects of Temporary Proprietorship

Records Relation Between Profit and Loss and Financial

Elements Exchanges Within the Asset and Liability Groups Illustration

IX The Account . . . . . . . 56

The Goal of Account Keeping The Ledger Account Defined The Account Title The Two Sections of the Account The Mechanism of the Account The Ledger and Its Content The Number of Accounts

X The Account (Continued) . . . .61

The Balance of the Account The Account Title Indicative of Its Classification The Meaning of Account Balances The Business Transaction Defined Analyzing the Transaction as to Its Accounting

Record The Use of Debit and Credit Fundamental Principle of Debit and Credit

The Philosophy of Debit and Credit . . 67

Attempts to Reduce Debit and Credit to One Rule Origin of the Use of Debit and Credit Basis of Debit and Credit as Used Here

CONTENTS xiii

The Debit and Credit Schedule

Debit and Credit Determination Illustrated

Necessary Equilibrium of Debits and Credits

Debit and Credit as Applied to Asset and Liability Accounts . . . . -73 Student's Use of Working Rules Accounts Receivable Accounts Payable Accounts with Media of Exchange Other Liability Accounts Accounts with Fixed Assets

XIII Debit and Credit as Applied to Proprietorship Accounts ....... 8o

Proprietorship Accounts Defined

Customary Explanations of Debit and Credit of

Temporary Proprietorship Accounts Fundamental Consideration of Proprietorship

Debits and Credits Income Debits and Credits Expense Debits and Credits Vested Proprietorship Debits and Credits

XIV Debit and Credit as Applied to Mixed Accounts ........ 87

Analysis of a Sale Transaction

The Old Merchandise Account, Its Content and

Significance Modern Practice in Showing Merchandising

Transactions Accounts with Assets Subject to Depreciation Capital and Revenue Expenditures

XV Periodic Work on the Ledger . . . -97 The Trial Balance

Work Preliminary to the Trial Balance Balancing an Account Use of Red Ink Rulings Transferring Summarizing the Ledger

Rulings and Entries in Personal and Note Accounts

XVI Treatment of Inventories and Appraisals . 109 Why the Current Record of the Ledger Needs

Adjustment Basis of Adjustment Entries Adjusting and Closing the Merchandise Records Handling Depreciation on Fixed Assets Handling Prepaid and Accrued Expenses and

Income xiv CONTENTS

XVII Sources of Data for the Ledger ... • 120 Insufficiency of the Ledger Record The Book of First Record Posting to the Ledger The Journal

Characteristics of the Journal Equilibrium of the Journal Entry; Compound

Entries Standard Form of Journal

XVIII The Subdivision of the Journal . . . 126

Inadequacy of the Old Journal

The Subsidiary Journal a Labor-Saving Device

Basis of Subdivisions

Customary Subdivisions

XIX The Purchase Journal . . . . -13° Meaningless Distinction Between Book and

Journal Expanded Use of the Purchase Journal Analysis of the Purchase Transaction The Purchase on Account The Cash Purchase Handling the Cash Purchase Posting the Purchase Journal Form and Method of Use of the Purchase

Journal Departmental Analysis of Purchases

XX The Sales Journal ...... 140

Kind of Transactions Recorded Here

Analysis of the Sales Transaction and Method

of Record Summarization of the Sales Journal Goods Sold to the Owner

XXI The Cash Journals ...... 143

The Cash Book

Analysis and Entry of a Cash Receipt

Analysis and Entry of a Cash Disbursement

Form of the Cash Journals

Cash Book Taking the Place of the Cash

Account Posting the Cash Book Balancing and Ruling the Cash Book The Cash Short and Over Account Analysis of Cash Receipts and Disbursements Cash Discounts Analyzed Handling Discounts in the Cash Book Illustration and Explanation of the Analytic

Cash Receipts Journal Handling Cash Sales

CONTENTS XV

CHAPTER PACE

Illustration and Explanation of the Analytic

Cash Disbursements Journal Alternative Treatment for Cash Discounts

XXII The Modern Journal ..... 159 Matter Left for Record in the Journal Kinds of Transactions Recorded in the Journal Journal Explanations Closing and Posting the Journal The Analytic Journal with Divided Columns Illustrations — Opening Entries Adjusting and Closing Entries Objection to the Direct Ledger Method of Adjusting and Closing the Books

XXIII Business Papers 170

The Invoice

Handling the Purchase Invoice

Handling the Sales Invoice

Returned Goods Invoices

XXIV . Business Papers (Continued) . . . . 175

Use of the Note Receivable

Negotiable Instruments — Their Use and Requisites

Negotiable Instruments — Kinds and Definitions

The Draft

The Accepted Draft

Illustrative Entries

Entries After Payment of the Draft

Classification of Drafts

Checks

Other Negotiable Instruments

Principles Governing the Writing of Commercial Paper

Kinds of Indorsement

XXV Business Methods 187

Shipping Goods — The Bill of Lading Freight Notice and Expense Bill C. O. D. Shipments Duties of the Traffic Department The Statement of Account

XXVI Business Methods (Continued) . . . 194

Service of the Bank to the Community Opening an Account with the Bank The Deposit Ticket The Pass-Book The Check Book

XVI CONTENTS

Securing a Loan Through the Discount of a

Note Principles to Be Observed in the Calculation ot

Interest Short Methods of Interest Computation

XXVII Methods of Posting 204

The Journal and Ledger Records Differentiated

— Posting Time of Posting Methods of Posting

Cross-Indexing the Entries

,.,'" ^\ Explanatory Matter in the Ledger

XXVip' The Trial Balance and Methods of Locating

^^ Errors 210

The Trial Balance

Errors in the Trial Balance

Suggestions for Locating Errors

Transpositions

Transplacements

Checking the Postings

XXIX Adjustment Entries and Corrections . . 221 The Need for Adjustment Entries Inventory of Stock in Trade , Other Adjustment Entries

Depreciation, and Loss on Doubtful Accounts

Expense Paid in Advance

Accrued Expense Items

Prepaid Income Items

Accrued Income Items

Corrections

XXX Closing the Books — Summary Statements . 231 Purpose of Summarizing Method of Closing Effect of Closing the Ledger Profit and Loss Not an Account for Current

Entry Making the Closing Entries Closing the Books Illustrated The Profit and Loss Account Need for the Summary Statements The Financial Statement Financial Statement — Report Form Financial Statement — Account Form Balance Sheet and Financial Statement Differentiated T^o Forms for the Profit and Loss' Statement Profit and Loss Statement — Report Form Profit and Loss Statement — Account Form

CONTENTS xvii

XXXI The Classification of Accounts . . . 246 The Purpose and Method of Account-Keeping Classification of Accounts Early Classifications Recent Classifications Classification Used Here Fundamentals of a Good Classification Classifying Business Transactions Detailed Classifications Chart of Accounts

XXXII The Two Basic Methods of Accounting and

Some Applications ..... 258 Accounting, Its Field and Method Analysis and Synthesis

Analysis and Synthesis Applied to Account Classification The Ledger; an Example of Analysis and Synthesis

1. Rulings

The Progressive Ruling

2. Bindings

Method of Arranging Accounts in the Ledger

XXXIII Partnership from the Business Viewpoint . 271

Partnership Defined

Operating Feature and Working Organization

Essential Characteristics of the Partnership

The Partnership Contract

Partnerships Classified

The Joint-Stock Company

Partners Classified

XXXIV Partnership from the Accounting Viewpoint 279

Profit-Sharing in the Partnership Average Investment as a Basis for Profit- Sharing Interest on Partners' Investments Valuation and Correct Booking of Original Investments Distinction Between Buying Out an Interest and Making an Investment to Secure an Interest Final Considerations

XXXV Handling the Cash ..... 289

General Considerations Principle of the Double Record Handling the Petty Cash The Petty Cash Book Keeping the Bank Account Entering Checks on the Cash Book Branch Cash — The Working Fund xviii CONTENTS

XXXVI Discounts 298

Definition and Kinds

The Method and Purpose of Trade Discount Methods of Calculation

The Nature of Cash Discount— Its Basic Elements Showing Cash Discount in the Trading Section Correct Method of Showing Cash Discount Account Titles for Cash Discounts Methods of Booking Cash Discount Securing Information as to Neglected Discounts Trade Acceptances and Cash Discounts

XXXVII Notes Receivable and Payable . . • 3^3

Conditions Precedent to the Present Use of

Notes and Bills The Titles "Notes" and "Bills"

Relation of the Note to the Open Account Relative Liquidity of the Note and Open Account Method of Recording Notes The Note Journals Notes Entered at Face Value Always The Interest Accounts

XXXVIII Problems Encountered in Recording Notes Receivable and Payable ..... 322

Entries in the Account

The Discounted Note

The Dishonored Note

The Classification of Notes

Notes Receivable Out as Collateral

Note Renewals and Partial Payments

/ XXXIX /Sales 335

\ / Importance of the Sales Department

\ ,' Basis for Sales Classification

■-.,, ^ The Sales Analysis in Books of Original Entry

Principles Governing Booking the Analysis

Use of the Sales Ticket in Analysis

Analyzing Sales Returns

Purchases and Returned Purchases

The Handling of Cash Sales

Sales to Branches

Consignment Sales

Instalment Sales

Sales for Future Delivery

Department Store Sales

C. O. D. Sales

The Bill and Charge System

Salesmen's Commissions and Efficiency Records

CONTENTS xix

CHAPTEK PAGE

XL Capitalization of the Partnership . . 347

The Real Capital

Original Contributions

Adjustment of Capital Contributions

Averaging Investments

Accretions of Capital Through Profits

Additional Contributions and Loans

Borrowed Capital

XLI Other Partnership Problems .... 357

Admission of a New Partner

First Case ; Second Case

I Third Case

Consolidation of Partnerships

Partners' Loans in Relation to Firm Credit

XLII Partnership Profits ..... 368

Ambiguity of Definition of Profits Compensation for Time and Services Interest on Investment Partnership Profits Defined Profit and Loss for Comparative Purposes Allowance of Salaries Allowance of Interest Interest on Partners' Loans Closing Profits to Partners' Accounts Reserved Profits Distributing a Deficit Partners' Withdrawals

Profits Determination Upon Admitting a New Partner

XLIII Problems and Methods Connected with Summarizing THE Period's Results . . . 379

Introductory Adjustments

Problems Connected with the Merchandise Inventory Methods of Recording Deferred Expenses The Summary Accounts The Trading or Selling Account Posting the Closing Entries The Balance Sheet The Working Sheet

XLIV Partnership Dissolution .... 392

Temporary Nature of Partnership Causes of Dissolution Problems Incident to Dissolution Partnership Provisions Covering Liquidation

XX CONTENTS

CHAPTER . P-*''^

Partners' Rights and Procedure During Liquidation Distribution of Proceeds Sharing Losses

1. Sharing Losses Equally

2. Capital Deficit

3. Personal Insolvency of One Partner Distribution by Instalments

Treatment of Good-Will Upon Liquidation by Sale

XLV Types of Accounting Records and Their Development ....... 403

Evolution of Analytical Journals Principle to Be Followed in Securing Analysis Subdivision of the Ledgers

Types of Sales Journals and Methods of Handling The Sales Returns and Allowances Journal Posting the Sales Journal Development of the Purchase Journal Handling Expenses Through the Purchase

Journal Note Journals Analysis in the Cash Book Analysis in the General Journal

XLVI Controlling Accounts ..... 413 Introductory

Advantage of a Controlling Account Controlling Account Necessitates Changed Idea

of Ledger Equilibrium Debits to the Controlling Account Credits to the Controlling Account Proving the Customers Ledger Accounts Payable Account Basic Principle as to Postings to Controlling

Accounts Making the Subsidiary Ledger Self-Balancing

XLVII Handling Controlling Accounts . . . 422 Introduction of the Controlling Account Recording Withdrawals of Stock in Trade The Problem of the Sales Journal Summary The Problem of the Purchase Journal Summary Accounts Both Receivable and Payable The Problem of the Note Journals Summaries Summary Entries for Columnar Books The Sales Journal Summary The General Journal Summary The Cash Book Summaries Other Controlling Accounts Principle Governing Content of Subsidiary Ledgers

CONTENTS xxi

XLVIII The Corporation ...... 438

Growth of the Corporate Form of Organization

Advantages

Disadvantages

The Formation of a Corporation

Certificate of Incorporation — New York State

Filing the Certificate — New York State

Organization Tax — New York State

Initial Acts of Corporation

State Control

Working Organization and Management

Annual Election of Directors

Officers

The Showing of Proprietorship

The Subscription Book and Subscription Ledger

The Stock Certificate Book and Stock Ledger

The Stock Transfer Book

The Minute Book

Other Records

XLIX Opening and Closing the Corporation Books . 450 Corporation Accounting Records Real Capital and Capital Stock Common and Preferred Stock Opening the Books of a Corporation — First

Method Opening the Books of a Corporation — Second

Method Opening the Books of a Corporation — Third

Method Opening the Books of a Corporation — Fourth

Method Premium or Discount on Stock Instalments

Entries for Common and Preferred Stock Payment of Subscriptions by Property- Change from Partnership to Corporation Current Record on Corporation Books Dividends

Ultimate Control of Stockholders Dividends Out of Profits Only Distribution of Profits Reserves Dividend Liability

L Consignments ....... 465

Legal Status

The Broker

The Factor

Duties of the Factor

Factor Must Protect Goods jyj-ii CONTENTS

PACE CHAPTEK ^ T^ o

Consignments to Be Kept Separate

Expenses Charged Against Consignment

Factor's Lien on Consigned Goods

Account Sales

Compensation of Factor

"Del Credere" Agency

Advantages of Consignments

The Consignor's Entries

Two Methods of Entering Sales on Consignor s Books

Consignor's Inventory

The Consignee's Entries— First Method

The Consignee's Entries— Second Method

Consignments Must Have Distinguishing Marks

Factor's Books at Close of Fiscal Period

Consignee's Inventory

Illustrative Entries on Consignor's and Consignee's Books

LI Approval Sales and Adventure Accounts . 482

Approval Sales

Accounting for Approval Sales

Tickler File Method of Handling Approval

Sales Adventure Transactions Single and Joint Ventures Relations Between Parties Accounting for the Joint Venture Interest Allowances and Charges Distribution of Profits Joint Venture Accounts Illustrated

LII Accounts Current ...... 491

Interest on Balances

Joint Venture Accounts

Partners' Accounts and the Account Current

Adjusting the Current Account

The Bank Account an Account Current

Reconciliation of Bank Balance

Other Reconciliation Factors

Reconciliation Statement a Permanent Record

Reconciling Other Accounts

LIII Safeguarding Cash ; Instalment Sales ; Proportion ; Book Inventories .... 500 Safeguarding the Cash General Principles Internal Check Statement of Receipts and Disbursements

Instalment Sales The Problem Involved Accounting for Instalment Sales

CONTENTS xxiii

Separation of Instalment from Regular Sales

Records Delinquency Records

Chief Considerations in Handling Instalment Sales

Proportion Simple and Weighed Apportioning Freight Charges

Book or Estimated, Inventories

LIV Balancing Methods ..... 511

The "Fool-Proof" Trial Balance Ledger Analysis Procedure of Analysis The Analysis Sheet Use of Ledger Analysis The Slip or Reverse Posting System Check Figures in Posting

Errors in Columnar Books and Controlling Accounts Trial Balance Adjustment Account

LV Single or Simple Entry ..... 520

Different Systems of Bookkeeping

Single Entry

Books Required and Methods of Record — The

Journal Cash Book Ledger

Single Entry as Adapted to Modern Needs Debits and Credits The Proprietor's Account Proof of Posting Profit and Loss Inventory and Appraisal Liabilities

Accrued and Deferred Items The Balance Sheet and the Determination of

Profit

LVI Illustration of Single Entry ..... 529 Single and Double Entry Compared Opening Entries Net Profits Change from Single to Double Entry

LVII Some Phases of Interest ...... 543

The Nature of Interest Commercial Interest Simple and Compound Interest Equation of Payments Average Due Date xxiv CONTENTS

The 100% Method

Compound Equation

The Cash Balance

Interest on Partial Payments

United States Rule

Interest on Daily and Savings Bank Balances

Bank and True Discount

Appendix A — Review Questions . . . . -553

Appendix B — Problems ....... 572

Partnerships — Formation

Partnerships — Closing the Books

Partnerships — Dissolution

Joint Venture

Corporations — Opening the Books

Corporations — Closing the Books

Corporations — Miscellaneous

Single Entry

Inventory Adjustments

Fire Loss Adjustments

Notes, Drafts, etc.

Cash Disbursements

Chapter I History And Development Of Accounting

Antiquity of Accounting

Accounting or the keeping of records is undoubtedly as old as civilization itself. Wherever trade and credit were introduced, some method of keeping a record must have been employed. With the rise of powerful chiefs and organized government, the necessity for keeping account of many and varied complex transactions must have provided the means of doing so. Little record has been left by ancient peoples whereby a very definite idea can be formed as to their methods, but sufficient data have been discovered to prove the existence of a highly organized trade and to point out some of the tools and means by which that trade was conducted.

Business Progress in Babylon

Three or four thousand years before our era, Babylonia was a flourishing state. The code of Hammurabi, a ruler of Babylonia, 2285 B. C. to 2242 B. C., shows that the partnership form was known ; also the relation of principal and agent; drafts and checks were common; legal decisions had been recorded covering contracts, conveyances by deed, bonds, receipts, inventories, sales, and accounts of all sorts ; customs and ferry dues were collected ; highway tolls

I and water rates were imposed. The records of two banking and money-lending firms, the Sons of Egibi of Babylon and the Marashu Sons of Nippur, have come down to us. The method of keeping their records was by means of sun-baked tablets or slabs, one-half by three-quarters inches in size, written on the front, back, and sometimes on the edges; others were as large as nine by twelve inches. Also carefully prepared registers for the state made record of the ownership of property as the basis of taxation. All these records, it seems, were kept by scribes, who were presumably the only ones who could make the record.