Fundamentals of accounting : principles and practice of bookkeeping

Front matter

LIBRARY

BRIGHAM YOUNG UNIVERSITY

From _ _

Preface

This work represents an endeavor to provide suitable text material covering the basic principles of accounting and book¬ keeping practice in convenient form for instruction by the class method. It is the result of years of experience both in the class¬ room and in business and its methods have brought uniformly good results.

The material here presented is designed as a one-year course for students beginning the subject. Since a student’s use of the general principles of accounting depends on his ability to apply them intelligently, his basic training is of vital impor¬ tance. His first steps must be taken with care. In this treatise the correct point of view is held constantly before him, the subject being developed logically and easily in a welL-graded course. Ample drill material is provided at the end of each chapter in the form of carefully graded problems to fix the principles treated. Not all the problems in every chapter may be required for every class. It is suggested that the teacher proceed with the new chapter as soon as the pupils can apply the principles discussed.

A second book is in course of preparation and will be ready within a year. The two books will present the materials usually covered in high school courses.

This text had its inception in the course. Methods of Teach¬ ing Bookkeeping and Accounting, given since 1916 to public and private secondary school teachers in the summer session at Columbia University. It forms the basis for the work in the Theodore Roosevelt High School where the members of the teaching staff have tested it out successfully and have secured excellent results.

iii

IV

PREFACE

The authors desire to express their appreciation of the assist¬ ance rendered by Miss Edith Fremdling and Mr. John Jaffe in the preparation of part of the practice material. They are under obligation, also, to the many business houses and banks that extended every courtesy in the use of business forms in this text.

New York City,

In a current survey of commercial education in the public high schools of the United States it is stated that the commercial course is a ‘‘technical training course giving instruction in mechanical routing”; that it is an “inheritance from the busi¬ ness college”; that it is an “attachment, not a coalescence to the old high school”; and finally that it is “utilitarian, not social” in its aims and ideals. Only within a very few years has there been even a partial appreciation of the real status of commercial education in the public high schools. This indict¬ ment applies in full to bookkeeping, which has always formed the backbone of the commercial course. The teaching of book¬ keeping has been seriously handicapped not only by the difficulty of securing professionally trained teachers but by the lack of text material organized to develop fundamental principles through reasoning.

A recent syllabus in bookkeeping gives the aims of the course as four, viz. :

1. To develop the fundamentals of accounting.

2. To teach the art of bookkeeping.

3. To give instruction concerning business practice.

4. To develop the mind, particularly the analytical and

imaginative abilities.

The authors of this text are in agreement with these aims, but prefer to state the purpose of bookkeeping instruction as the development of mental capacity by means of, and in relation to, the first three aims above tabulated. So-called education that does not stimulate the student to the free use of his mental equipment is spurious, and its inclusion is a criminal waste to be condoned only on the ground of ignorance, never on the ground of expediency.

VI

Heretofore bookkeeping has been studied primarily to fit the student to record information which the business man has found useful in conducting his business, the bookkeeper being a mere recorder or mechanical operator who acquires skill and accuracy by recording, day after day, information of the same type. Small wonder, then, that bookkeeping has been called a “blind alley job,” that it has been referred to as monotonous, deadening, mechanical work with but slight chances of promotion! Small wonder, then, that it is said to have little educational value!

The trouble is not in the subject matter, but in the manner of its presentation. The mechanical side has been emphasized as the great aim of the subject. Accordingly, those whose minds ran to order, neatness, carefulness, and detail were quite success¬ ful through following the rules provided by some mechanical recorder. But the successful bookkeeper usually remained a bookkeeper all his life, while a person who studied bookkeeping but did not practice it obtained practically no benefit from his study except a knowledge of business customs picked up incidentally.

A great deal of attention has been given to penmanship and arithmetic as aids in correctly gathering business data. They, however, only obscure the real educational value of bookkeeping when taught during the bookkeeping recitation and can be taught much more effectively as separate subjects. One never thinks of placing any emphasis on penmanship in teaching story- writing — the means of recording is always secondary. Just as we expect the student to writ^a legible hand, so we expect him to know ele¬ mentary arithmetic, including simple percentage and interest calculations.

The value of bookkeeping training must be judged from two standpoints — educational and vocational. It is doubtful whether any subject can be allowed a place in the school curriculum solely on a vocational basis. It must also possess educational value in large measure. If properly presented, bookkeeping has a distinct educational value, and will develop the student’s vii

reasoning powers in regard to business affairs, because book¬ keeping is applied economics. It is vocational only because of its subject matter. It is intensely practical, but that, instead of detracting from its educational value, should largely increase it because of the element of interest involved. This interest is too often killed by the mechanical methods used in teaching the sub¬ ject. Not the recording, but the effect of a business transaction on the financial affairs of a business should be emphasized. The record-making, while important, is only incidental. The real \ educational value of bookkeeping comes from the development of the student’s ability to form correct judgments as to the finan¬ cial effect of the operations of a business unit. This, the manage¬ ment viewpoint, is the important thing for the student’s future growth. The student no longer looks to the collecting of informa¬ tion as an end in itself, but only as a means of directing the operation of the business more effectively. His viewpoint is larger; it is that of the manager or executive instead of the recorder or bookkeeper.

What, then, is the best method of presenting the subject to secure the desired results? Psychologists maintain that a per¬ son works more intelligently and with greater interest if he knows the goal toward which he is headed, i. e., the mind forms a better concept of the new thing by studying it as a unit first, then sepa¬ rating it into its parts, studying each part in its relation to the whole, and finally building up the whole from its parts. This method proceeds from the general to the particular and then from the particular to the general. By this method a general rule is deduced which the student uses in determining the relation of the parts to the whole.

Not the mechanical or the logical order, but the pyschological order of presenting the subject should be followed. The ma¬ terial is arranged in such order that the mind can grasp the new concept most easily and interpret (apperceive) it most completely in terms of related concepts already in the mind. In teaft:hing, old related material should be recalled before the new matter is

Vlll presented. It is generally understood that only one new thing should be presented at a time. The new thing should then be associated as closely as possible with the old related material, after which should follow a generalization or summary for the purpose of placing the particular item in a general class. This generalization or summary often takes the form of a rule or principle. Finally the new concept should be fixed in mind by means of application or drill.

The Equation Method used in this text is an attempt to present the fundamentals of accounting in psychological order. This method emphasizes the organization and management viewpoint, stressing the effect of business transactions rather than aiming at mechanical dexterity in recording them.

The personal possessions and debts of the student are taken as the foundation upon which to lay proper concepts of things owned (assets) and things owed (liabilities). The student is personally interested in these, and therefore grasps their new relation more easily than if the approach were in connection with things of others. When the student once knows how to deter¬ mine his own financial condition, he can easily apply the same principles to the financial condition of business enterprises. Ac¬ cording to this plan, the small business of an individual owner is considered and his proprietorship interest is measured by means of the basic equation : Assets minus liabilities equals capital. A statement of his financial condition as of a later date is then prepared.

A comparison of his proprietorship as of the two dates will show that a change has occurred. Realization that the causes of such changes are not apparent leads naturally to inquiry for other data that will give causes. To obtain this additional in¬ formation comprising the income and expenses of business opera¬ tion, records must be kept. The most complete and satisfactory record consists of double-entry books of account, which contain all chinges in assets and liabilities and so provide the desired in¬ formation concerning income and expenses. The process thus

IX naturally works back to the ledger which furnishes this classified information, after which the journals or books of original entry are introduced as devices for collecting the desired information. Thus at every step the goal is in sight and the relation of the new devices introduced to the fundamental equation is easily dis¬ cernible. This is accomplished through the constant insistence that each transaction be explained in terms of assets, liabilities, and proprietorship. The student thus obtains a comprehensive knowledge of the accounting procedures required for a small, simple business unit during an accounting period. Since all succeeding work consists merely of more complex applications of the same principle, the student can easily understand the new work. There is continuous interest because new items — classes of assets and liabilities and subdivisions of proprietorship — are being added one at a time. The student’s attention is every¬ where directed toward the economic rather than the mechanical aspect of the subject.

Depending on the amount of study devoted to the subject the student will acquire such a knowledge of business data and the ability to record and interpret them as will enable him to act as a bookkeeper or office assistant. Since the great majority of those entering business, however, either never become book¬ keepers or do not continue as bookkeepers, the emphasis in teach¬ ing should be placed on the general grasp of financial problems, rather than upon mechanical recording. Principles must, how¬ ever, always be given ample application before the process of teaching is complete. Some practical applications of accounting can be taught without teaching accounting, but the student secures only a one-sided view and is therefore likely to make wrong judgments. He does not know how the operations which have taken place in the various departments of the business have produced the figures found in the different financial state¬ ments. Therefore the subject cannot be taught effectively by ehminating all mechanical recording.

Principles without practice are vain. Practice based on

X rule-of-thumb and not on logical principles can never be sure of itself. The authors have, therefore, attempted to develop a textbook for the beginner based on a proper balance between these two essential elements. To supply a text providing in¬ struction from the standpoint of a class recitation rather than a mere laboratory exercise has been an aim kept constantly in view. The laboratory method is a holdover from the time of the ap¬ prentice system when one could learn only by doing. It is narrowing, wasteful, and non-educational, and can be defended only where the instruction material has not been sufficiently organized for proper presentation in the classroom. The method of the class recitation comprising a simple and psychological development and discussion of basic principles together with a careful application of them should be used in teaching bookkeep¬ ing just as in teaching mathematics, science, or language. Plenty of practice problems should be required of the student to make sure of his grasp of principles. The student is therefore given home or study assignments both of text matter and of practice problems.

The authors believe that teachers of bookkeeping all over the country are awakening to the needs of the situation and are equipping themselves for better service by home and continuation study in schools of commerce.

Contents

Chapter Page

I Why Study Accounting ? . i

II Business, Accounting, and Proprietorship . . ii

Chapter I Why Study Accounting?

Education as a Preparation for Life. — In our country, where every boy and girl is familiar with the system of public education, it may seem hardly necessary to state that the purpose of educa¬ tion is to prepare one for his life’s work. From the beginning of our country’s existence one of her chief aims has been the educa¬ tion of her youth. Almost all states have compulsory education laws in accordance with which a boy or girl must continue in school until he has attained a certain age or a certain grade in his school work. When one compares men in various walks of life, one cannot help noting that a very large percentage of the success¬ ful men in a community are educated men.

Of the boys and girls who finish the eighth grade, not more than 20% finish the high school course; and of those who finish high school only a very small percentage finish a course in college. While we have notable examples of men deemed successful in life who have not had a college education, yet it is recognized that in our present-day civilization an educated man has a much better chance of success than a man without education.

As to what constitutes a successful life, opinion of course differs. One man may set for himself the acquiring of a large fortune. If he falls short of his goal, he will not consider himself successful. Another man may set for himself perfection in music or painting. Unless he attains the standard of perfection set for himself, he will not consider himself successful, although by others he may be proclaimed an artist. Success is often measured in terms of happiness. Ethical values are often considered the measure of success. It is frequently said that a man who has given the most of himself to the community, that is, to the civilization in which he lives, gets the most of real satisfaction out of life. Certainly, when measured by this standard of success, education is a necessary preparation for a successful life.

In its broader sense education should not be limited to the training acquired in the schoolroom, but should be looked upon as a continuous process. The habits of thought and the training that one acquires in the classroom should be carried into every¬ thing done after the formal school life is over. When so viewed everything a man does may be used for educative purposes. Unless education is something more than a cloak to be put on or laid aside at will, there is little of permanent value in it.

The fundamental purpose in education is to teach the learner how to use his mental abilities in making the most of the life and civilization in which his lot is cast. Development of any sort, be it of muscle or of mind, can come only from use. The start which one acquires in school should be looked upon simply as a start. Habits are formed and methods of using one’s abilities are acquired which, unless developed through daily use, will soon become of no value. What particular place one may fill in the life of one’s community is always a most important question and one which faces every boy and girl of high school age. It is proposed in this first chapter to point out some of the kinds of work which may prove attractive to high school students.

Vocations as Forms of Service. — In the earlier history of the human race it is supposed that every man, or at least every family, was more or less self-supporting and self-sufficient. Each family made all of the things necessary to secure the best kind of a living possible in those days. Building a house for shelter, making clothing, getting food — all these were done by each family for itself. As civilization advanced and men became more dependent on one another, divisions of labor developed. In this way one group of men did certain things for which they were best fitted.

WHY STUDY ACCOUNTING?

and furnished certain necessaries to their fellow-men, who in turn did other things for which they were best fitted, and so furnished some of the other necessaries of life. Thus the many duties and tasks which have to be performed to make living satisfactory were divided and men began to specialize, that is, they limited them¬ selves to one kind of work instead of trying to do all kinds. In this sense, then, a man’s work or his vocation may be said to consist in or arise from the services which society has to have performed.

Choosing a Vocation Early. — Because of the way in which society is constituted at the present time, boys and girls growing up into manhood and womanhood must prepare to take their places in the various vocations of life. Which vocation will be best for each is the greatest problem that faces any boy or girl. It is, indeed, a very unhappy situation to find yourself, like a square peg in a round hole, unfitted for the task confronting you. Happy is the youth who can settle early in life the position or vocation he desires to enter and can then train himself definitely with that end in view. There is always a waste of effort and bss of time in changing about from one thing to another until one at last finds the particular vocation for which he thinks himself best fitted. We shall try now to give the student an idea of the main vocations or kinds of service which life today requires to be performed.

Classification of Vocations. — Vocations may be broadly divided into two groups, public and private.

I Public Group

I. Government Service. Under this head are found three major kinds

of services:

(a) Legislative, which concerns itself with law-making.

(b) Judicial, which concerns itself with the interpretation and

meaning of the laws.

(c) Executive, which concerns itself with the carrying out of the

laws. Under each of these branches of government service there are many bureaus and departments. The Post-Office

Department, the Farm Bureau, the Interstate Commerce Commission with its man}'- activities, the Federal Trade Commission, and the Consular Service are examples of the many differert kinds of governmental service.

2. Religious Service. This includes services which the church and

allied societies perform.

3. Educational Service. This includes both public and private schools

and all formal educational activities wherever found, such as employees’ training classes in banks and other corporations, gov¬ ernment bureaus, etc.

II Private Group

1. The Professions, under which are included the vocations of medicine,

teaching, law, accounting, engineering, dentistry, journalism, chemistry, etc.

2. The Non-Professional Vocations, which comprise all of those gen¬

erally spoken of as business.

It is not possible to indicate at this time the many positions which are found under each one of these classes or subclasses. Every boy and girl knows what a good many of these are, and many a student is training specifically for some one of them.

How important the commercial occupations are, as dis¬ tinguished from industrial or manufacturing occupations, is seen from the following quotation from Bulletin No. 34, issued by the Federal Board for Vocational Education:

More young people between the ages of 14 and 16 years are employed in commercial occupations than in industrial pursuits.

A recent survey of such workers in an eastern city of about 300,000 population revealed the fact that out of 2,750 boys and girls included, only 300 were in occupations which, by the widest stretch of the imagination, could be classified as industrial. The remaining 2,450 were recorded as commercial employees.

With a knowledge of the whole field of vocations, it should be possible to choose one which seems most attractive and for which the student thinks himself best fitted.

Private Ownership of Property. — In whatever vocation one’s lot may be cast it will always be found that the private ownership

WHY STUDY ACCOUNTING?

of property is an unquestioned right of the individual. Proprietor¬ ship, that is, the ownership of property, is looked upon as a very desirable thing. Men strive for property, not so much for its own sake, but because of the many satisfactions which the ownership of property gives to them. In the ownership of prop¬ erty it is necessary to keep a record of the kinds and amounts of property owned. In order to do this it is necessary to place a money value on them. Thus the amount of one’s property is more easily kept track of. All businesses are concerned with the ownership of property.

In the acquisition and control of property, proper manage¬ ment is necessary. The ways in which businesses are organized into single proprietorships, partnerships, and corporations, and also into departments and subdepartments for the more efficient handling of the work to be done must be studied carefully by the business man if he expects to bring his undertaking to a successful issue. In every enterprise provision must be made for gathering information about the business, for analyzing and organizing it, and finally for using it in the administration of the business. Unless a business man has reliable information about the many details of his business, he cannot hope to manage it efficiently.

Place of Accounting in Business. — It is in this connection that accounting has a place in business. It provides a simple Y method for getting information and for analyzing and organizing it. The information furnished by the accounting records shows the relation of each department and of each activity to the busi¬ ness as a whole and to each of the other departments. The ac¬ countant by watching his records can almost see the business grow under his fingertips as he makes the record. If he is wide¬ awake and really understands what he is doing, he can gain a complete understanding of the way in which the business is or¬ ganized, the relations of one department to another, and can gain a concept of the problems of business management. Ac¬ counting may be said to make a record of the pulse of the business and, therefore, to indicate its condition as to health or sickness. It is apparent, therefore, how important the accounting records are in any business.

Educational Value of Accounting. — It has been said that commercial subjects have little real educational value, that they are more in the nature of manual training subjects than of those which give mental discipline. This early impression of the value of commercial training has been largely discarded. It is now fully realized that the problems which arise in business require for their solution as high a type of mental discipline and training as the problems met in any other activity. It follows, therefore, that the study of business subjects and business problems will give as good a mental discipline as will the ‘‘hypothetical” prob¬ lems of the classical education.

Reasoning power is developed through practice in the forma¬ tion of correct judgments in business affairs and through analysis of a given set of facts to show the relation of one part to another. All phases of mental discipline are found in the study of business subjects and to a marked degree in the study of accounting. There is, however, always the danger that the mechanical opera¬ tions involved in making the record in the books of account may be emphasized rather than the fundamental principles in accory dance with which the records must be made. If the underlying principles are first studied and then put into practice by means of drill work, the subject of accounting can be made to rank high as to educational value. Principles for their own sake have little value; but when put to use in solving the practical prob¬ lems of every-day business, principles have a large measure of value. ^

Vocational Value of Accounting. — Accounting has come to be one of the best of the younger professions. There are two divisions, one devoting itself to public, the other to private practice.

WHY STUDY ACCOUNTING?

The public accountant is called in for consultation and advice by men in all kinds of business. He has an office and a staff of assistants just as has the lawyer. Accounting firms are com¬ posed usually of partners who are the owners of the business. Under them are supervising seniors who supervise the work being done for the various clients. The supervising senior, who may be in charge of a number of jobs or assignments at the same time, has Under his direction the senior accountants, who are each actively in charge of an individual assignment. The senior will have as his assistants men known as ‘‘ semiseniors ” and “juniors.” A young man entering the accounting profession may expect to pass through the varying grades of accountants, junior, semi¬ senior, senior, and supervising senior, and may look forward after a thorough training in the practical phases of the work to being the proprietor of his own accounting business.

The private accountant gives his entire time to one business. There are many grades of bookkeepers and accountants in most businesses. The larger the business, the greater the subdivision of duties, some requiring very little knowledge of accounting for the proper performance of the task. It is this sort of position, known as a “blind-alley job,” into which the person who knows only the mechanical side of bookkeeping usually falls. Only by means of a mastery of the fundamental principles of accounting and through a knowledge of business practice in general can an employee hope to avoid this kind of job, or work out of it if he finds himself in it. The higher positions — head bookkeeper, head accountant, auditor, manager, comptroller, secretary, or treasurer — all require a broad knowledge not only of accounting but also of the allied subjects, economics, business organization, banking, and law.

Value of Accounting to the Business Man. — For the man who does not expect to follow accounting professionally a fundamental knowledge of the subject is extremely valuable in the conduct of his business. As stated before, business cannot be conducted

B today on any other basis than a complete knowledge of all of its activities. This is furnished largely by the accounting records. Unless, therefore, the business man knows how the accounts can be made to give this information, he is greatly handicapped in knowing what to expect from his accounting department and in making sure that he gets all the assistance and information to which he is entitled.

Scope of This Course in Accounting. — The student will want to know what he may expect to learn from this first course in the fundamentals of accounting. As the title indicates, it covers the fundamentals and some of their applications. Any training which is worth while in the business life of the community must of necessity be severe and of long duration. It is not possible, there¬ fore, in a brief one year’s course, to cover more than the barest fundamentals. On a foundation which has been securely laid, however, a solid superstructure may be built. It is the purpose, therefore, of this course to lay a good foundation. The student who really desires a complete mastery of the subject will not be content with anything less than a full understanding of the foundations on which he expects to rest his training for a lifework. It may be said that at the close of the first year’s work he should be able to keep a simple set of books. From the way in which the subject is presented, he will have a much surer founda¬ tion and will be better able to handle the ordinary problems of the bookkeeper than one who has been trained by the usual methods. This results from the fact that he is taught to think about the problems that arise in the keeping of records and in the manage¬ ment of business. He is led to see the proper solution of these problems. The emphasis is never placed upon the mechanical operation of keeping the record, but always on the principles underlying the record, and on the judgments which must be made in determining the kind of record and the way in which it must be kept. It is in this feature of the work that its real educational and practical value lies.

WHY STUDY ACCOUNTING?

1. What is the basic purpose of education?

2. Why are compulsory education laws in force in most states?

3. Has the educated man a better chance of success than the unedu¬ cated or partly educated man? Why?