The Principles of Bookkeeping

Front matter

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Contents

PAGE

I. — ^The Mercantile Transaction and its Double

II. — The Several Accounts which a Business

Index

Acooonts whioh a business man will keep, 12 Adjustment of accounts in insolvency, 79

»» }> required before closing Ledger, 37

Administrative functions, 30 Advertising expenses carried forward, 28 39 Application to accounts of non-traders, 50 Artificial assets, 27 87 39 49 ,1 „ why Dr., 27

Uabilities, 26 37 42 49 n n why Or., 26 88

Assets, Meaning of, 15

,, brought to proper value, 87 40 81

Bad debts. Treatment of, 43 Balance Sheet, 18 27 29 42 45 48 94 Banking Account, 12

II II in Cash Book, 35 60 99

Bill Books, 34 Bills Payable Account, 85

„ Beceivable Account, 34

„ subject to rebate, 48 Book debts, Value of, 43 Bookkeeping, Definition of, 1 5 8 77 Bought Ledger, 95 Business expenses, why Dr., 24

Capital Account, 14 16, 81 89 90

„ why Or., 21 Gash Account, 12 33

„ Sales, 65 74 Charitable institution, 73 Closing the Ledger, 37 49 104 Commission earned, why Cr., 23 Company Accounts, 17 27 28 49 60 88 Consideration-liability from transaction, 6 Cr. and Dr., Meaning of, 19 Credit item implies a debit item, 28 Customers' Accounts, 12 81 84 3d 100

Vlll. INDEX.

Debit item implies a credit item, 28

Defioiency Account, 29 81 83 86

Depreciation, 40 41

„ Method of writing off, 42

Difficulties faced, 75

Discount Account, 35 46 65

„ column in Gash Book, 35 65 „ receivable, why Or., 23 „ reserved against debts, 45 » „ „ liabilities, 48

Distinguishing columns, 64

Dividend, Entries for, 49

Double entry, or complete BookkQeplng, 9 13

Dr. and Gr., Meaning of, 19

„ application to accounts, 20

Draft Gash Book, 62

Errors, Gorrection of, 78 Expenses, why Dr., 24

Facing difficulties, 75 Fluctuation and depreciation, 40 41 Formation expenses, 28 Fraud, 14 56 58 62 102

Gain, how it shows itself, 7 16 40 General Ledger, 95 Gk)ods Account, 52

Impersonal Accounts, 20

Income and Expenditure Account, 50

Insolvency, how shown, 21

Insolvent estate. Adjustment of, 79 -

Insurance paid in advance, 27 39

Interest accrued, 48

Labour saved, 59 Ledger, Division of, 94

„ the book of account, 20 Ledgers, Separate balancing of, 94 Liabilities brought to true amount, 37 47 48 „ Gross, discharged, 8

INDEX. ix.

Liabilities, Meaning of term, 5 15 Loss, why Dr., 23

Mercantile transaction, 5 Method of using Bank Column, 67 Methods of saving labour, 59 Monetary consideration of transaction, 5

New account. Use of, in closing Nominal Accounts, 39 46 Nominal Accounts, 20 31 61 Non-traders' accounts, 50

Partnership Accounts, 15 49 50 81 Percentage of profit in turnover, 53 57 Permanent assets, Value of, 26 40 41 Personal Accounts, 12 31 61 100 Priociples of Bookkeeping, Definition of, 1 Private Ledger, 103 Profit and Loss Account, 16 37 40 42 43 49 81

„ bow it shows itself, 7 16 40

„ why Cr., 22 Property Accounts, 17

•) II why Dr., 25

Purchases Account, 31 „ why Dr., 24

Quantities in turnover, 55

Bebate on bills, 43

Beoonciliation Account in separate balancing, 95

Bent accrued, 39 48

„ payable, why Dr., 24 Beserve for bad debts, 44

„ „ depreciation, 42

„ Fund, or Account, 26 49 91 Betailer's percentage of profit, 57 Beturns Books, 35

Salaries accrued, 48 Sales Account, 33 „ why Or., 23 Saving labour, 59 Separate balancing of Ledgers, 94

M n „ Advantage of, 101

Shareholders, 89 Single entry, 13 14

X. INDEX.

Sold Ledger, 95 Stock Books, 58

„ quantities of turnover checked, 55

„ in-trade, how valued, 38

„ „ Treatment of, at beginning and end, 24 38 53 54 104

„ „ why included with transactions, 8

Subordinate Accounts to Profit and Loss Account, 16 17 23 24 Subsidiary Books, Use of, 20 30 Suspense Account, 89 45

Trade discount, 48 Trading Account, 49 52 Transaction affects two Accounts, 9

„ Meaning of, 5

Transfer Book, 85 Travellers* Gash Book, 35 Trial Balance, 33 49 80 94 103 Turnover, Check upon, 55

Wages accrued, 48 „ why Dr., 24 Wasting assets, 43 Wealth, how acquired, 6 Withdrawals from business, 17

The Principles of Bookkeeping.

INTRODDCTION.

AT the outset ic is necessary that we should have some clear idea of what we mean by the Principles of Bookkeeping. By Bookkeeping, we mean, the recording, analyzing and totalling, of mercantile transactions, with a view to showing a business man the monetary relations in which other people stand to him, his own financial position generally, and to what extent, and through what causes, that financial position has altered from time to time. The Principles of Bookkeeping will, therefore, be the fundamental truths, hypotheses, and rules , which will guide him in recording, analyzing, and totalling, with these important objects in view. For example, as a fundamental truth, we shall see that a transaction has precisely the opposite effect upon one of the parties to it to what it has upon the other party ; as a hypothesis, that every credit implies a debit of corresponding amount, and every debit a credit of corresponding amount, whether the first entry taken is the immediate record of a transaction or no ; as a general rule, that a column on the left-hand side is used for debit entries, and a column on the right for credit entries.

As it is better to survey your country before beginning to construct a railway than to survey the country from the carriage windows when the line is constructed, so if the bookkeeper makes his mind familiar with the theory or plan of Bookkeeping, he will easily understand what work requires to

2 THE PEINCIPLE8 OF BOOKKEEPING.

be done, and will do that work correctly ; but if he is unacquainted with the general purpose and design, he is always liable to occasional error.

Again, as the architect designs his building to fit the shape of his piece of land, so a bookkeeper who understands the principles of his work has not his mind cramped and stunted, and feels at liberty to modify his methods to suit the nature of the business. He has more boldness to judge whether a practice is right or wrong, under the circumstances, instead of simply whether it has been the custom or no.

It would seem, therefore, that the principles should be the first things to be mastered, whereas, in practice, they are frequently the last to be learned. In most ofl&ces, although much of the detail of Bookkeeping is performed by the junior clerks, they do not see how the accounts are finally closed ; and, though they may be taught to keep the accounts with the customers of the firm perfectly accurate, they do not learn how the impersonal accounts are treated, so as to show the benefits accruing to the firm, for the advantage of which the business is solely conducted. Occasionally, persons are found who have kept books for a long period, but having simply followed on with entries similar to those which had been previously made, they have managed to get through their work without fully knowing the why and the wherefore of it. As we should hardly call a person a musician who could not read music, so we can hardly call a person a bookkeeper who has only learned his work by rote. The consequence is that, if any entries are required of an unusual character, such persons are quite at a loss, and it does not occur to them, or they dare not venture, to make any alteration in their system, even though it may be causing them unnecessary trouble.

As an illustration, the Journal in a business having almost world-wide fame, showed a curious specimen of a minor inaccuracy. The entries were correctly written in and posted.

INTBODUCTION. 3

but the figures had always been put into the reverse columns, making the book rather awkward to work from when in the hands of a stranger. Supposing £100 for rent had become due to John Brown, the entry in this Journal would have appeared : —

To John Brown

When asked why this was done, the explanation was given that it was so that the posting to the Ledger would come on the reverse side, hke the posting from a Cash Book ; showing that, to the very last, a misapprehension lingered. Evidently it was not understood that the Cash Book is to. be viewed as a Ledger Account, for convenience kept in another book (this will be seen later on), hence the reason for posting on the reverse side ; but the Journal, being solely a subsidiary book intended for simply preparing the entries for the Ledger, they should appear in it exactly as they will in the Ledger.

Many a person who has been used to keeping books refrains from the study of a book upon the subject (unwisely, nevertheless) because a book with long examples worked out seems tedious to read, especially as the greater part of the subject dealt with is already familiar to him. But this should not apply to a study of the principles separately.

This book does not profess in itself to teach Bookkeeping, though it would, of course, be contrary to my purpose to detract from the idea of its possible use in that respect, for if the foundation principles are grasped the adaptation of them to ordinary practice is a simple matter. It is hoped, therefore, that the book may be of some little use if it throws a glimmer of light upon the Principles of Bookkeeping.

The first five chapters will be found to deal with the principles underlying the more elementary part of Bookkeeping. The last four deal with topics of a more advanced character, which are given for the direct use they may be in themselves, and also as serving to give a kind of bird's-eye view of much of the more ordinary part of Bookkeeping. For instance, it will do no one any harm to know how to balance Ledgers separately, even though he may never want to do it ; he will be none the less able to balance them as a whole because he knows how to balance them separately. So he will be none the less able to adjust the accounts of a solvent estate because he has some idea how to adjust the accounts of an insolvent estate, just in the same way that, if we would wish to impress our minds with the general shape of a figure, it would be well to look at it upside down as well as right way up.

CHAPTER I. The Mercantile Transaction and its Double Effect

Meaniog of Transaction — Consideration-Liability attaohed— Distribution of Wealth depends on Transactions — Wealth the Result of Throwing Consideration-Liabilities in our Favour— Discharging Cross Liabilities— Saleable Qoods on hand— Two Accounts affected by a Transaction — ^Error of neglecting this — A Transaction has Reverse Effect on one Account to what it has on the other.

IT is the province of Bookkeeping to treat of only commercial wealth and indebtedness. Bookkeeping cannot take into account wealth that is not saleable nor moral obligations ; it can only deal with values and indebtedness when reduced to terms of money.

The lowest unit of commerce is the transaction ; all commercial wealth and indebtedness are the result of individual transactions.

A transaction means the doing of something across, the agreeing to pass something from one person to another. That which passes is one of four things — (1) goods; (2) money; (3) the use of a thing; (4) personal service. As a comet always has a tail attached to it, so the subject of the transaction in passing to the receiver has always a monetary consideration attached (nebulous yet potent) which becomes a liability, or in itself tends to a liability. In the first of the four cases, the consideration-liability is the agreed price of the goods ; in the second, the amount of money, with perhaps a further liability for interest accruing by the year ; in the third, the rent or hire accruing from time to time ; in the fourth, the wages accruing from time to time. In the third case there is also the responsibility for the return of the thing ; but this, of course, is only treated in Bookkeeping when the responsibility changes into a liability through failure to return as agreed. If a transaction does not tend to the creation of a liability by either of the parties, then it must be accounted for in one of two ways : First, that two transactions have taken place simultaneously (each of which, taken separately, would tend to a liability), as when goods are sold and cash paid for them at the same time ; or, secondly , the deliverer of the thing has agreed to forego the consideration-liability, and it is not a commercial transaction at all, but a gift. Beggars often profess the liability is still there ; this is so when they say, ** Lend me 6d." These two cases do not interfere with the above proposition that every commercial transaction tends to the creation of a liability attaching to one of the parties to it. It is the province of Bookkeeping to collect up and give due effect to these liabilities resulting from transactions. This will show us the final amount of indebtedness between traders, and something important besides.

The realisation of commercial wealth depends upon the transactions that are made. The increase of intrinsic wealth (i.e., the possession of useful things) in the world is, we know, due to the operations of nature and the industry of man ; but the distribution of it between man and man depends directly upon the transactions made, and the power of nature and industry are only felt in influencing the terms of the transactions. There may be intrinsic wealth in the blade of com, but it is only when the wheat is ripe and sold that the farmer knows whether he is richer or poorer. So a man may make a good transaction after the bestowal of little industry, and a bad transaction after the bestowal of much industry, and he

THE MERCANfTILE TRANSACTION AND ITS DOUBLE EFFECT. 7

is richer or poorer according to the nature of the transaction. If it were not so, there would not be such a tendency to leave off industry and speculate, — that is, make one transaction against another transaction for a chance profit. At the same time, industry should always command a certain amount of power to make favourable transactions. Tf our labour has improved a thing we may expect a higher price, Le,, a favourable transaction. Thus, as gains or losses are the direct result of transactions, if we duly record transactions we shall also be recording gains or losses.

The process of acquiring commercial wealth consists in arranging that the balance of liabilities resulting from transactions shall be thrown in our favour. Thus, buy a horse for £20 ; sell it for £25 ; draw the £25 ; pay the £20. The profit was fixed when the price {i.e,, the liability) was fixed, no matter whether the horse was paid for at the same interview or long afterwards. Indebtedness may be thrown in our favour by one transaction, as, for example, when we agree to work for a week, if the master will become Uable to us for £2 at the end of the week ; or it may be done by cross transactions, as it would be if we agreed to buy wheat for £1,000, made it into flour, and agreed to sell the flour for £1,100. The consideration-liability resulting from a transaction does not necessarily remain an enforceable liability, because there might be a liability the other way from a previous transaction, or it might be instantly discharged by another transaction (as a cash payment) ; but it is true that every transaction tends in itself to the creation of a liability by one of the parties to the other, and, therefore, if we keep due record of all these tendencies to liabiUty by one party to the other we shall then know what is the enforceable liability between them. It is also true that profits or losses depend upon whether the balance of these consideration-liabilities is thrown in our favour or against us. If, therefore, we give due effect to these

8 THB FBINCIPLSS OF BOOEEBEPING.

consideration-liabilities, our books will give fall particulars of the mutual indebtedness of traders, as well as of the acquisition or loss of individual wealth.

It is a simple matter to set the liabilities due to us off against the liabilities due from us. This is done by passing money, cheques, or bills of exchange. It should be noticed, by the way, that indebtedness may often be discharged with rather less money if it is tendered promptly — this is the case of cash discounts — so that profits may be affected by the transactions expressly made to discharge indebtedness, as well as by the transactions at first creating indebtedness.

If we have ihade a profit, the balance of indebtedness in our favour enables us to incur indebtedness against us in our household economy, when the one kind of indebtedness can be set off against the other, just in the same way as was done in the business itself. Thus a trader's profits find their way into the banker's hands, cheques are drawn upon the banker to shopkeepers, and the indebtedness to these gets set off against the indebtedness by the banker.

While we saw just now that Bookkeeping consists in recording the consideration-Habilities of transactions duly made, it should also be pointed out that the trader may, and should, anticipate the result of future transactions, if he has put himself in a position to absolutely command transactions solely in his favour. This is the case of goods on hand. He has the goods, there can be no more liability against him for them, yet he is certain people will make themselves indebted to him in order to secure possession of his goods. It is right for him, therefore, to anticipate these future transactions at a fair price. He does this by making an entry in his books as though the goods were indebted to him, in the same way as he might have shown a person indebted to him who had bought them.

In the next place, it is most important to remember that in

THE MERCANTILE TRANSACTION AND ITS DOUBIiE EFFECT. 9

every transaction two persons are concerned, and as it is the office of Bookkeeping to properly record and classify transactions it is necessary to show the double effect in each case. I cannot pay money to Brown, but Brown must receive money from me. I must have an account for myself to show that the money has gone from me ; I must have an account for Brown, and show the money received by him. Hence the term '* double entry.'' In actual practice my account will be divided into several accounts as Gash, Sales, Discount ; but for our present purpose it is simplest to view these subdivisions as comprising one whole, " my account,'* as opposed to **my customer's account."

Now, it cannot be too strongly impressed that the double entries should be there in every case, either in detail or in total. A bookkeeper may well pause occasionally, unless he is quite famiUar with his work, and say to himself, '* Now I am " charging this item here : where am I allowing it ?" or '' I am " aUowing this item here : where am I charging it ?" It is not difficult to realise the double effect of the transaction where goods or cash pass, for if, in my dealings with Brown, he gets to have more goods, I must have less ; or if I get to have more cash, he must have less : especially is this forced upon people by the customary routine of passing such items through Gash Book and Day Book. But it must be remembered that the items which seem to grow of themselves, or are the indirect result of principal transactions, have the double effect just the same. Take an illustration: I have to allow Brown £5 because the last lot of goods I sold him proved to be partially damaged. What must I do ? Deduct £5 from the amount owing by Brown. That is quite right ; but do I stop there? No, I cannot allow Brown £5, but I must lose it myself. I know that very well, for I argued with him for three-quarters of an hour in my endeavour to make him see that I need not allow him anything. If I deduct £5 from Brown's account I must deduct £5 from the profit I make on selling goods. Again, Brown may be my landlord, and in course of time rent becomes due to him ; I deduct the amount from his account, but this is also a loss to me, and I must deduct it from my profits.

Three-quarters of the bad Bookkeeping in small businesses is due to a want of care in this respect. A few items are treated for only one of their effects ; the entry gets into the customer's account, because we are forced to agree money with him, but the effect the item has upon the firm's own business is calmly ignored. So, for the want of a little care at the time, a large amount of trouble is occasioned in picking up stray items, if ever the books have to be properly balanced. The white sheep have been safely herded in the pen, but the black ones are hidden away in every conceivable dark hole and corner. Let it be remembered, then, that as it takes two persons to make a bargain, so two persons are affected by a transaction, and accordingly two accounts should in theory be altered, whether we choose to be at the trouble or no. As a nail which it is intended shall hold, so let this fact be driven home and clenched.

Having decided that every transaction should properly affect two accounts, we have in the last place to notice that this effect is the reverse in one account to what it is in the other. Take our dealings with Brown : — ^If I receive. Brown pays ; if Brown's goods are increased, mine are reduced ; if Brown owes money, money is owing to me ; that which increases Brown's gains, (by itself) reduces mine. Everybody knows this, for the buyer wishes always to lower the price, the seller to raise it. We may settle it then that if we know the effect a transaction will have upon one account, we may be sure it will have the reverse effect upon the other account. There are no exceptions to this, and it is the reason why books properly kept must balance.

THE MEBCANTUjE TBANBACTION AND ITS DOUBLE EFFECT. 11

We see, therefore, that all commercial wealth and indebtedness depend upon the monetary considerations of individual transactions ; that there are two persons affected by every transaction, and two accounts to be altered; and that a transaction has the reverse effect upon one account to what it has upon the other.