Chapter VII: Part II: Classes of Accounts (5)

Many of the earlier forms of voucher checks were not checks until certain conditions had been complied with. On the face of the voucher was printed "when properly receipted this voucher will be paid through ... Bank." This required a receipt in some special place, instead of the usual endorsement of a check, and it was not always easy to tell, at a glance, the amount to be paid.

Very naturally, objections were raised by the banks against the use of these complicated forms, but forms have been simplified in ways that have largely overcome these objections.

An improvement is the ordinary check form arranged to provide a valid receipt for stated items. Such a form is illustrated in Fig. 4. This is an ordinary check form of regulation size, on which is noted the item or items paid. The checks are put up in pads and numbered as used. When endorsed, the check provides a valid receipt for the items covered.

A voucher check with some advantageous features is shown in Fig. 5. This is made in duplicate. _A_ is the original voucher check, while _B_ is the duplicate. When sent out, the stub shown in _B_, a duplicate of the statement on the original check, is attached to the check. This is detached by the payee for his records, and enables him to deposit the check without waiting to make the entry in his cash book.

These voucher checks are made in sheets and punched for filing in a loose-leaf binder. The balance of the form shown in _B_, the part remaining after the check and duplicate statement have been removed, is a copy of the check, and remains in the binder.

The checks are numbered consecutively, but the voucher number is entered when used and corresponds with the number of the voucher paid.

The office record of the items paid is made on the voucher form shown in Fig. 6. These are numbered consecutively, in the order in which they are approved, and when paid are filed in numerical sequence.

Another style of loose-sheet voucher check is illustrated in Fig. 7. This form is made on the typewriter, in triplicate, and includes the original check, a receipt and a copy of the check. The forms are made two to a sheet, and when a check is to be written the triplicate sheet is placed in the machine, three copies being made at one writing.

The triplicate form, or copy of the check, is the permanent record from which posting is done. Both the check and receipt are mailed and the payee is expected to return the receipt. If not returned within a reasonable time, the payee is followed up by letter and asked to return the receipt, as this becomes a part of the permanent office records.

An excellent form of voucher with check attached is shown in Fig. 8. The voucher is made in duplicate, the check being attached to the original. The duplicate is kept on file for the office record, while the original, with check attached, is mailed to the vendor. He detaches the check and deposits it, keeping the original statement in his files. In the event of discrepancies, the vendor is expected to return both voucher and check, endorsement being considered as a receipt in full for items included in the statement.

=5. Journal Vouchers.= As previously explained, a journal voucher is a properly signed authorization of a journal entry. Journal vouchers are not intended to be used for the ordinary journal entries of a business, as closing entries and ordinary adjusting entries. They are more particularly intended for special credit items or allowances, and special transfer or adjusting entries.

Fig. 9 illustrates a convenient form of journal voucher. This form is intended to be filed in a loose-leaf binder, and when so filed, becomes the journal itself, posting being made direct to ledger accounts. The usual method, however, is to make the entry in the journal and file this voucher as an evidence of authority.

A journal voucher should require the final approval of some one man before it becomes valid. The head of a business can keep in touch with all special allowances by having the journal vouchers brought to him for his signature.

One reason for the use of journal vouchers in large establishments having several departments is that special credits and allowances are constantly coming up, with which only one department manager is familiar. His O. K. is obtained, and the voucher must be approved by the manager, which makes these men responsible for the transaction.

=6. The Voucher Register.= Though the form of voucher is of considerable importance, and should be designed to meet the requirements of the business, the keystone of the voucher system of accounting is the voucher register. Wherever used, the voucher register possesses certain uniform characteristics, but in each business the form takes on special features; in fact, the voucher register is distinctively a special form.

The voucher register is really a form of purchase book, with other features added, and takes the place of these records. In addition to the usual features of the purchase book or invoice register, the voucher register furnishes a complete record of payment of bills, and shows at all times the net amount of Accounts Payable. Another most important feature is that it exhibits all expenditures, for whatever purpose. A voucher is provided and properly registered for every check issued, insuring a receipt in proper form for every dollar paid out.

When properly handled, the voucher system does away with the purchase ledger, no ledger accounts with creditors being necessary. The register in connection with a file of unpaid vouchers, furnished a complete record of each individual creditor's account. At the same time, a controlling account is provided, which exhibits the total of outstanding accounts, and balances with the voucher register.

To furnish representative illustrations, we show several forms of voucher registers, which exhibit the special features usually found in such records. These may be used as guides in designing registers for any business.

Figs. 10 and 11 show forms identical in general arrangement, except that one is designed for a mercantile business, while the other is intended for a manufacturing establishment. The columns beginning at the extreme left are as follows: _Date Entered_, _Voucher Number_, _Name of Payee_ and nature of account, _Date of Invoice_, _Vouchers Payable_ (the total), and _Date Due_. The columns following are for distribution of the total to the different accounts. Columns are provided for those accounts in each group to which most frequent charges are made. The amounts of the vouchers are extended in these columns and footings carried forward to the end of the month.

In every business there are certain expense accounts to which charges are infrequent, not more than one charge a month, and in some cases one or two in a year. Examples of these accounts are insurance, taxes, rent, etc. To add columns to an already large voucher register for the accommodation of these few items is impractical, hence the Sundries column is provided for charges to accounts for which special columns are not provided. Space is allowed for entering the names of the accounts, and each item is posted direct to the ledger account.

Typical Forms of Voucher Registers

The form of voucher register illustrated in Fig. 12 is designed for use where a complete voucher system, including the use of journal vouchers, is maintained. The special feature of this form is the addition of several columns for credit accounts. Space is provided for entering the names of the accounts to be credited, the amounts being carried to the proper ledger columns. This makes it possible to enter any journal voucher, and since full particulars are shown in the voucher itself, no explanations are required in the register.

At the right of these forms are columns for recording particulars of settlement. A column headed _Unpaid Vouchers_ will also be noted. On the last day of the month, when all items have been entered, the amounts of all unpaid vouchers are extended in this column, and the total is carried forward to the next month's sheet, where it is entered in the _vouchers payable_ column. When these vouchers are paid, particulars of payment are entered on the sheets containing the original record; as would have been done if they were paid in the month in which they were entered.

The footings of all columns are carried forward to the end of the month, when the totals of all distribution columns, excepting sundries, are posted to the debit of the corresponding ledger accounts. The footing of the _vouchers payable_ column, less unpaid amount brought forward, must agree with the total footings of all distribution columns, since it represents the total of all vouchers registered. The net amount, that is, the footing of the _vouchers payable_ column, less the amount of unpaid vouchers brought forward, is posted to the credit of a vouchers payable account.

On the credit side of the cash book, two columns headed _Vouchers Payable_ are provided for the entry of payments. One column is headed Discount and the other _Amount of Check_, the discount column being a memorandum only. At the end of the month the total of these columns is posted to the debit of the vouchers payable account, the controlling account of the voucher register. When the footing of _unpaid vouchers_ is brought forward at the end of the month, it should agree with the balance of the vouchers payable account.

Another method of handling unpaid vouchers is to provide both _debit_ and _credit_ columns on the voucher register, headed _Suspense Accounts_, as shown in Fig. 13. All unpaid vouchers are carried to the credit column at the end of the month, and when paid the entry is made in the debit column. Footings of the suspense columns are carried forward in pencil, for, when all amounts on one sheet have been paid, those items need not be considered in obtaining the balance. One advantage claimed for this method is that it keeps the _vouchers payable_ column free of all but current items.

Another feature of this form, Fig. 13, is the absence of a check number in the _payment_ column. In this case, a voucher check is used, which necessitates but one series of numbers. When bills are audited, the voucher checks are made out and numbered, but the dates are omitted until payment is made, when they are entered with other particulars under the head of _Payments_.

An objection is sometimes made that with the voucher system, allowing but one line to an invoice, no provision is made for partial payments. This can be easily overcome with this form of register. Any unpaid balance of a current item will be carried to the _suspense_ column. If further partial payments are likely to be made, the amount should be entered in the _credit_ column and the name of the payee in the _remarks_ column. Several lines should then be allowed for the account, permitting the entry of as many separate payments.

When all bills are paid as soon as audited, taking advantage of cash discounts, there is no necessity for columns intended to care for suspense items. All vouchers will be paid not later than during the month next following the date of entry, and there will be no unpaid vouchers not found on the current or next preceding month's record.

=7. Operation of Voucher System.= While accountants have introduced many details into the operation of the voucher system, all intended to make the application of the system more nearly perfect in some particular business, the general routine of conducting the system is summed up in the following:

1. Auditing of invoices.
2. Executing and registering vouchers.
3. Filing audited vouchers.
4. Paying vouchers.
5. Filing paid vouchers.
6. Indexing paid vouchers.

=8. Auditing of Invoices.= When invoices are received they should immediately go to the purchasing agent. If there is no regularly appointed purchasing agent, or in a business like a department store where there are several buyers, the invoices should be kept by the auditor, comptroller, or chief accountant until the goods are received, when he will obtain the O. K. of the person who ordered the goods or incurred the obligation.

Pending the receipt of the goods, the invoices should be filed alphabetically, under the name of the vendor. The file may be one of the flat files which can be kept on the desk or if the number of invoices be large, a section of a vertical file drawer can be used.

When the goods have been received, which will be attested by a report in some form by the receiving clerk, the invoice is O. K.'d for quantities and prices by the buyer, and extensions are checked by the auditor or chief accountant.

=9. Executing and Registering Vouchers.= As soon as the invoices are audited, vouchers are executed and entered in the invoice register. Extensions are made to the proper columns, placing the accounts on the books, just as would be done if invoices were credited to accounts of the vendors in the general or purchase ledgers.

Vouchers should never be made for invoices in dispute, as to prices or on account of claims for shortage, damaged goods or other cause. Until such claims are adjusted, the invoices should be kept in a file reserved for items in suspense. When the books are closed, such items must be included under liabilities in the balance sheet. To avoid actually entering them on the books, they may be entered in the balance sheet under some such caption as "_Suspense Accounts_."

=10. Filing Audited Vouchers.= The vouchers are now ready for filing until date of payment. This does not apply if invoices are always paid as soon as audited, but in the majority of business houses at least a part of the vouchers will not be paid until the last due date; or if discounts are taken, they will be paid on the last discount date.

Some provision must be made for bringing these vouchers to notice on the date at which they should be paid. For this purpose, a "tickler" or date file is used. This consists of a file with an index of 31 numbered index sheets, intended to represent the days of the month, and sometimes a set of twelve index sheets printed with the names of the months.

The audited vouchers are filed under the date when payment is to be made, either the discount date or the last due date, by placing them back of the index sheet bearing the corresponding number. To illustrate; if an invoice is dated the 2nd of the month, and terms are 2/10, the last discount day will be the 12th, and the voucher will be filed back of the No. 12 index sheet. If payment is due in a subsequent month, the voucher is filed back of the corresponding monthly index, then on the first of the month these vouchers are distributed under the proper dates.

=11. Paying Vouchers.= Each day the vouchers filed back of that day's index are removed from the file for attention. If for any reason they are not to be paid that day, they should be filed under the next date when it is desired to bring them to notice. It may be well to note at this point that the vouchers and invoices are usually filed together in the date file.

The check is now written and entered in the cash book or the check register, attached to the voucher, and mailed. Or if a voucher check is used it is only necessary to date and enter. These payments are posted from the cash book to the voucher register. It is not a safe plan to enter the voucher check direct in the voucher register, as postings to the cash book are liable to be overlooked. Payments in one day may be recorded on widely separated pages of the voucher register, while in the cash book or check register they would be entered consecutively, making posting much less difficult.

When the voucher and check have been mailed the invoices are placed in a temporary file, indexed alphabetically, where they are kept until the return of the receipted voucher. It will be noted that we do not advocate mailing the original invoice with the voucher. This temporary file is examined from time to time, and if any vouchers have been out an unreasonable length of time, the vendors are asked to sign and return them, or sign duplicates sent for the purpose.

When the voucher check is used, the temporary file for invoices is not required. The checks, if cashed, must be returned through the bank, and the invoices can be filed permanently.

=12. Filing Paid Vouchers.= On the return of the voucher, properly receipted, the invoices which it pays are removed from the temporary file, when all are ready for permanent filing.

The invoices are permanently filed in an alphabetically indexed file, under the names of the vendors, keeping all invoices from each firm together. At some time before filing, preferably when the voucher is executed, the voucher number should be entered on the invoice, and when several invoices are paid by one check, they should be fastened together with a staple or other suitable device.

The paid vouchers should be filed in numerical sequence, with indexes numbered by 100's and 20's to separate them and to assist in locating any desired number. If we want to find voucher No. 964, we turn to the index 900, constituting the main division, then to index 60, back of which the desired voucher will be quickly located. A file should be procured of suitable size to accommodate the voucher to be filed.

=13. Indexing Vouchers.= With the permanent filing of the paid voucher the transaction is closed, with one exception. There must be another index to the voucher file. Knowing the number, we can quickly locate any voucher or find its record on the register, but if we want to locate the voucher paid to Jackson & Co.--without knowing the number--we have no guide.

Reference to the original invoices, filed alphabetically, on which the numbers are noted, will locate the voucher, but there are vouchers for which no invoices are on file. To locate these by name of payee, an alphabetical index is necessary, and it is advisable to include all vouchers even when invoices are on file.

For this purpose, a card index is recommended, and a suitable form is shown in Fig. 14. A card is used for each person or firm to whom vouchers are issued, and all vouchers are listed by date and number. The cards are filed alphabetically, making it easy to find any name.

=14. Voucher File.= The manner of filing and indexing invoices and vouchers, from the receipt of the invoices to the permanent filing of the paid voucher, has been explained. For the file itself, the vertical file is recommended.

Fig. 15 illustrates one drawer of a vertical file, subdivided with the different indexes required, showing how in a small business a single drawer can be made to answer all purposes.

In a large business several drawers would be required. The first drawer would be for pending invoices, where would be filed invoices for which shipments have not been received. The second drawer would contain audited vouchers held for payment, and suspense items; the latter including invoices held for adjustment of claims. Paid invoices and paid vouchers would each require a separate drawer.

Files should be selected with reference to the size of the papers to be filed. Manufacturers of such equipment now supply cabinets in sections, in a great variety of sizes, making it possible to build up a filing cabinet with drawers to fit every paper of standard size.

DEMONSTRATION

=15.= The operation of the voucher system in respect to the records in the register is demonstrated in the illustration, Fig. 16, the record showing how the following transactions are handled. Invoices listed have been audited for payment.

--Jan. 12th--
National Mercantile Co.
100 bbls. flour $4.25 $425.00
Dated Jan. 9th
Terms 2/10, N/30

--Jan. 12th--
Western Grocer Co.
50 cases soap 2.10 105.00
Dated Jan. 8th
Terms 2/10, N/30

--Jan. 14th--
Morton Salt Co.
100 bbls. salt .85 85.00
Dated Jan. 11th
Terms 1/10, N/30

--Jan. 15th--
Paid voucher No. 1 to
National Mercantile Co.

--Jan. 15th--
Paid voucher No. 2 to
Western Grocer Co.

--Jan. 16th--
Watson & Snow
60 bbls. vinegar, 3000 gals. .14 420.00
Dated Jan. 12th
Terms N/30

--Jan. 17th--
Jennings Coal Co.
3 tons coal 6.50 19.50
Dated Jan. 17th
Terms N/30

--Jan. 18th--
Paid pay roll
Wages of laborers 125.50
Office salaries 37.50

--Jan. 19th--
Paid voucher No. 3 to
Morton Salt Co.

The illustration, Fig. 16, shows the complete record of these transactions in the voucher register. The total footings of all distribution columns agree with the total of vouchers payable column, proving the extensions to be correct. The combined totals of checks and discounts equal the total payment column. Unpaid vouchers are extended, and the total of this column added to the total payments equals the total of vouchers payable.

Our voucher register being in balance, footings are now posted. The total of _vouchers payable_ column is posted to the credit of that account in the general or private ledger, and the footings of the distribution columns are posted to the debit of their respective accounts.

Fig. 17 illustrates how the payments are recorded on the disbursement or credit side of the cash book. When the checks are written they are entered in the cash book, from which they are posted to the voucher register. Voucher numbers are entered when the amounts are posted.

At the end of the month the columns are footed, and the totals of the discount and check columns are posted to the debit of vouchers payable. Footings of _discount_ and _total_ columns are posted to the credit of discount on purchases and bank accounts.

The vouchers payable account in the ledger would now appear as follows:

_Vouchers Payable_
Dr. Cr. Balance
$777.00 $1,216.50 $439.50

We have already seen that the voucher register balances, and turning to that record, we find the footing of the unpaid vouchers column to be $439.50, which agrees with the balance of vouchers payable account.

EXERCISE

Prepare a form of voucher register providing for distribution to the following accounts: Merchandise, Purchases, In-Freight, Expense, Salaries, and Sundries. One of the chief requisites of the accountant is the ability to prepare suitable forms for accounting records. Care should be used in preparing this form to omit no detail that should be included in such a voucher register.

When the register has been prepared, record the following transactions.

--Feb. 12th--
Enter the following invoices
#1 Jones & Laughlin
For merchandise $164.20
Date 2/10, Terms 2/10, N/30.
#2 Francis & Roberts
For expense
Date 2/12, Terms cash 27.50

--Feb. 13th--
#3 David Nelson & Sons
For merchandise 239.80
Date 2/11, Terms 3/10, N/30
Paid Henry Meyer
For salary 25.00
Check #1

--Feb. 14th--
Paid Jones & Laughlin
by check #2, Voucher #1
less cash discount

--Feb. 15th--
Paid Francis & Roberts
by Check #3, Voucher #2
less cash discount

--Feb. 16th--
Paid David Newman
for rent 40.00
Check #4

--Feb. 17th--
Enter the following invoices
#4 National Furniture Co.
For office furniture 65.00
Date 2/16, Terms 2/10, N/30
#5 Watkins & Hollister
For merchandise 84.00
Date 2/15, Terms 2/10, N/30

--Feb. 19th--
Paid David Gillette, Agt.
For in-freight 9.62
Check #5

Foot all columns as for posting at end of the month.

UNIT SYSTEM OF VOUCHER ACCOUNTING

=16.= In all classes of accounting records, the unit system is rapidly gaining in popularity. The unit system, so called, consists of individual records of each transaction or each item recorded, instead of a combination of several transactions in one record.

The increase in the use of the unit system has been brought about very largely by the improvements in typewriters, which make it possible to produce several copies of a given document at one writing. An example of the application of the unit idea is seen in modern sales records, where duplicate invoices are made, one copy serving as a sales sheet and posting medium.

The unit system has been very successfully applied to voucher accounting, saving much time and resulting in very complete records. Compared with ordinary voucher systems, the most prominent feature of the unit system is a method of distribution by filing, rather than by means of a voucher register.

All vouchers are made on the typewriter, in manifold, one or more copies being used for record purposes only. The original is used exactly as described in the preceding pages.

An essential feature of the system is that a copy of the voucher is provided for each account to which it is to be distributed. When one account only is involved, the voucher is made in duplicate, but if the amount is to be distributed to two accounts an extra copy is required. The voucher should be so arranged that the distribution can be shown on the face of the duplicate and triplicate copies.

The duplicate voucher is filed according to its distribution, instead of recording the amount in the voucher register. A vertical file is used for this purpose. The index cards are headed with the names of the accounts, and are arranged in the order of the accounts in the ledger; this being the order in which the same accounts would be arranged in a voucher register. Back of each index is a folder in which the vouchers are filed.

Each voucher copy is filed in the folder representing its proper account, and is securely fastened to the folder with a staple or paper fastener. When this voucher is filed it is also recorded on the outside of the folder, which is printed as shown in Fig. 18.

This form is designed for a record of amounts, distributed under the proper monthly headings. The amount of each voucher is carried to the current month's column. At the end of the month, the footing of the column shows the amount to be charged to that particular account in the general ledger.

To arrive at the total of vouchers payable account, a recapitulation sheet, ruled as shown in Fig. 19, is used. This is an index card, and is placed in the front of the file. Totals of all account folders are entered in the proper columns of this sheet, at the end of each month. Payments are posted to this sheet at the end of the month, from the cash book, and the balance extended. This balance, of course, represents the unpaid vouchers and is checked against the unpaid voucher file.

The totals of the different account columns are posted to their respective accounts in the general ledgers, either directly from the recapitulation sheet, or through the journal. The recapitulation sheet, as here shown, is a transcript of the vouchers payable account, and might be used as a ledger card, but it is generally considered better practice to carry the account in the general or private ledger, as usual.

Such a voucher system furnishes a complete record, with much less transcribing of items, than is involved in the use of the voucher register. The copy of the voucher is made at the same writing as the original, the amount of each individual voucher is entered but once, on the account folder, and monthly totals, only, are carried to the distribution columns on the recapitulation card.

This system is equally well adapted to the loose-leaf method. A sheet is used for each account, behind which the vouchers are filed, and a monthly recapitulation sheet is provided for distribution.

COMBINED PURCHASE LEDGER AND INVOICE FILE

=17.= Not every business readily adapts itself to a complete voucher system. Special conditions sometimes arise which make it seem advisable to keep ledger accounts with all firms from whom the business is making purchases. A case in point is a business, lacking capital to pay all bills promptly, necessitating payments on account, or by note, instead of payments covering certain invoices in full.

To obviate the difficulties, in maintaining a complete voucher record, under these and similar conditions, many substitutes have been devised. As an example of what may be accomplished in this direction, we illustrate a system which is in successful operation in a manufacturing business.

In the ledger, the usual nominal accounts are kept but no purchase or voucher register is used. Columns are provided on the credit side of the cash book for such expense accounts as are usually paid in cash, that is, for which no invoices are rendered, and for accounts payable.

For the purchase accounts with firms and individuals, a vertical file is used. Each creditor is assigned a folder, on the front of which a suitable record form is printed. This form is shown in Fig. 20. The name and address are written at the top, and the ledger account is kept in the columns at the extreme left of the form. All of the columns for distribution are left blank, it being seldom that purchases from one firm are distributed to more than a half dozen different accounts.

When an invoice has been O. K.'d it is immediately filed in the proper folder. The total is entered in the credit column and distributed to the proper accounts, the names of which are written at the head of the distribution columns. Payments on account are posted to these ledger accounts from the cash book.

If the distribution is properly made, the totals of all distribution columns will agree with the total of the credit column. At the end of the month the total of these distribution columns on the individual account folders are drawn off on the monthly recapitulation sheet illustrated by Fig. 21. The totals shown by the recapitulation are posted to the debit of the corresponding ledger accounts, while the grand total is posted to the credit of accounts payable account;--which is the controlling account of the purchase ledger. Totals of payments on account are posted to the controlling account from the cash book.

The proof of accuracy of the controlling account is found in the usual way, by checking against the balances of the individual purchase accounts.

With this system, invoices are filed, and the amounts posted, with practically one operation. The items which make up each ledger account are distributed as soon as posted, totals only being carried to the recapitulation sheet, from whence they reach the ledger.

Accounts are quickly located, as the folders are indexed alphabetically. When an account is balanced it must be left in its place until the end of the month, provided credits have been entered in the current month, so that totals of distribution will be carried to the recapitulation sheet. At the end of the month, all accounts which balance may be transferred to a section of the file reserved for closed accounts. Should any of these accounts again become active, they are transferred to the regular file without the slightest confusion.

For the purpose of saving time, the balances of all open accounts may be drawn off when the totals of the distribution columns are obtained.

While not recommended for general adoption this system has its points of merit, and in certain contingencies would undoubtedly prove very satisfactory. The main reason for its publication in this work is to show the possibilities of modifying a system, in respect to details, without destroying its more important features. The voucher feature, the obtaining of a formal receipt for every payment, can be maintained just as effectively with this system as with a more formal voucher system.

THE PRIVATE LEDGER

=18.= A ledger, devised to contain such accounts as the principals of a business desire to keep from the knowledge of the bookkeeper or other office employes, is known as a private ledger. The title is also frequently used to designate an ordinary general ledger.

The accounts most frequently found in the private ledger are Capital accounts, Profit and Loss, Reserves, Surplus, Bills Payable, Bonds and Mortgages Payable, and Controlling accounts with the general or personal ledgers. It may also contain such accounts as Salaries of Officers, or Partners, Investment and Drawing accounts, and accounts with real or nominal assets. If it is desired to keep from the employes, knowledge of the exact nature of any transaction, or the standing of a particular account, it can be done by making use of the private ledger.

When both ledgers are used, the private ledger contains only those accounts which it is desired to keep _private_, while the general ledger is kept for all other accounts, except those included in the personal ledgers.

The private ledger is most commonly used in large businesses where, for various reasons, a number of employes have access to the books, and it is desired to keep them in ignorance of the private affairs of the concern. The private ledger is usually kept by one of the partners, an officer, the auditor, or the chief accountant.

=19. Advantages of Private Ledger.= The primary advantage of the private ledger to the principals of a business, is that by its use, they can keep to themselves all details of transactions of a special nature.

Some other advantages that accrue to the principal may be enumerated as follows:

He can, through the private ledger, keep an eye on the activities and condition of the business as a whole, or of any particular department or branch of that business.

He can keep in touch with the liabilities, or with the total amount of personal accounts outstanding.

He can absolutely control the distribution of expense in manufacturing operations.

He can keep from his employes, knowledge of the profits or losses of the business.

Partners can keep private the amount of their investments, or the salaries drawn.

Salaries paid to individual officers or employes can be kept private.

Dividends declared, capital subscribed, investments of a special nature, or amount of assets of any kind, can all be kept from the knowledge of employes.

=20. How Operated.= Accounts in the private ledger must not conflict with accounts in general or personal ledgers, and the fact that private accounts are kept should not interfere with the balance of the general books. To insure against any such conflict, a private ledger controlling account is kept in the general ledger.

In the general cash book, and sometimes in the journal, debit and credit columns headed _Private Ledger_ are provided. All entries affecting private ledger accounts are extended in these columns, but no particulars are recorded. At the end of the month, the totals of these columns are posted to a private ledger account in the general ledger. This controlling account then appears in the general ledger trial balance, and must agree with the balance of accounts in the private ledger.

With the private ledger a private journal is used, in which entries affecting private ledger accounts are made, with explanations in detail.

As an example of the use of the private ledger we will suppose that a payment of $500.00 is to be made to a certain party, and it is desired to keep that transaction private. The bookkeeper is instructed to draw a check for the amount, to be charged to private ledger account. He enters the check in the general cash book, debiting private ledger and crediting cash or bank. The entry is posted from the general cash book to the private journal, where full particulars are recorded, from which it is posted to the private ledger. In the case referred to, the amount of the check is debited to the proper nominal account, and credited to a general ledger account.

The general ledger account in the private ledger is a controlling account which agrees with the private ledger account in the general ledger. Only entries affecting general ledger accounts are posted to this account. Entries involving changes in private ledger accounts only, are made in the private journal direct.

Some concerns keep the controlling accounts with the sales and purchase ledgers in the private ledger. At the end of the month, total debits and credits to accounts in these ledgers are entered in the private journal. These totals are obtained from the general cash book, sales book, purchase book, and any other books from which postings are regularly made.

When a private ledger is kept, it precludes the possibility of forced balances in the general ledger trial balance, since the balances of the private ledger accounts must agree with the private ledger controlling account in the general ledger, and if sales and purchase ledger controlling accounts are kept in the private ledger, these must balance with the personal accounts in those ledgers. The use of a private ledger not only acts as a check on trial balance errors, but simplifies the trial balance by making possible a proof of ledgers in sections.

Fig. 22 is an illustration of a cash book with columns for the private ledger account.

=21. Manufacturing Accounts in the Private Ledger.= Not infrequently, manufacturers find it advisable to keep private certain details which affect costs, or even all knowledge of the exact cost of their manufactured product. This may be done by keeping certain manufacturing controlling accounts in the private ledger.

In determining the cost of manufacture of any class of goods, three elements enter into the computation; material, labor, and expense. To determine the cost of the first two items is comparatively simple, requiring only an efficient system of records in the factory. But to determine the amount of expense of all classes, included in the cost of a given article, job, or operation, is more difficult.

A system of records that will show the exact cost of such items as power, heat, or taxes properly chargeable to an individual job or operation is obviously impossible, and it has been found necessary to apportion these, and all similar items of expense, on a percentage basis. Usually this percentage is based on some element of cost which can be determined with accuracy.

Cost accountants and engineers have worked out this percentage on the basis of various elements of cost, as direct labor, material, machine hour, man hour, or a combination of two or more of these elements. The exact method used, which must be adapted to the conditions existing in the individual factory, does not enter into this discussion.

Since there are numerous items of expense of the character referred to, it is customary to group them, for purposes of cost computation. Sometimes all such expense items are grouped under the one head of General Expense. It is by means of a controlling account in the private ledger, that the distribution of expense is made, thereby keeping private the exact cost of manufacture.

The known cost of a certain job or article--the cost of material and labor--is frequently referred to as the prime cost. The duties of the cost clerk may end with determining the prime cost, his computations not including expense items.

The total cost of material and labor for the month is charged to private ledger account, material and labor accounts receiving proper credit. The exact amounts of the various items of expense for the month are also charged to private ledger account, with credits to expense accounts.

In the private journal, these items are charged to various controlling accounts, and credited to the general ledger controlling account. The usual entries are:

Manufacturing Account $______
General Ledger $______
For material $______
For labor $______
Expense Distribution $______
General Ledger $______
For rent $______
For power $______
For repairs $______
Etc. Etc.

The percentage of expense for the current month on whatever element based, has been determined from the actual results of the preceding month. To illustrate, we will suppose that expense is apportioned on the basis of direct labor; the cost of this item during the month was $1,600.00, and the amount of expense charged to operation of the plant during the same period was $240.00;--which gives us a ratio of 15%.

We wish to determine the cost of jobs as they are completed during the current month. The records turned in by the cost department give us the actual cost of material and direct labor, but not knowing the exact ratio of expense to direct labor for this month, we use last month's ratio, and add an amount equal to 15% of the known cost of direct labor. When the actual results for the month are determined it is quite probable that the ratio will vary from last month's record, as either factor may change. It will be necessary to adjust this difference, which is the reason for an expense distribution or expense adjustment account in the private ledger.

By keeping the expense controlling account in the private ledger, the principal can keep private, not only the actual cost of an article, but the percentage of expense and the basis of the expense apportionment. If thought desirable, he can add further amounts for the purpose of establishing a selling price.

In actual operation, the amount of expense to be charged against completed work will be computed, and the following entry made:

Manufacturing Account $______
Expense Distribution $______
The amount of expense charged
to jobs completed.

If the expense ratio used were exact, the expense distribution account would balance at the end of each month, but owing to the fluctuations, a balance will remain. This is adjusted by increasing or decreasing the percentage used during the following month, and in this way the accounts are kept in balance.

Manufacturing account has been charged with labor, material, and expense,--the total manufacturing cost. Completed goods are charged to a finished goods account, the entry being:

Finished Goods $______
Manufacturing Account $______
Net cost of goods completed

But manufacturing account will not balance, for there always will be work in process, and the balance of the account will be the cost to date of this work in process, a most important record.

This discussion is not intended to cover every possible use of the private ledger, but, by means of examples, to suggest its possibilities. The explanations and examples should afford the student many hints of value.

EXERCISE

On a certain date, the following transactions are recorded on the books of Carter & Adams:

Purchases on account $560.00
Sales on account 420.00
Paid for rent 75.00
Sales for cash 82.00
Henry Carter (partner)
Withdrew cash 50.00
John Adams (partner)
Advanced to the business 300.00

What items in the above list of transactions should, in your opinion, be posted to the private ledger? On journal paper, make the entries and show necessary private ledger accounts.

CHARTING THE ACCOUNTS

=22.= The proper arrangement of the accounts of a business is best shown by a chart, in which the accounts to be kept are grouped according to their relative importance. In laying out a chart of accounts, they should be first separated into their proper divisions. The natural divisions are capital, trading, and profit and loss.

Each division contains only those accounts that naturally belong in that particular class. These divisions are then subdivided into groups containing specific kinds of accounts, the groups being arranged in logical sequence. As an example, the trading division of a manufacturing business is divided into manufacturing and trading. There may be several subdivisions of the manufacturing account; several classes of goods may be manufactured and a manufacturing account kept for each class, or it may be necessary to manufacture completed parts, each requiring a complete manufacturing process. Detailed costs being required for each of these completed parts, manufacturing accounts are kept for each, the main division representing the cost of the finished product, as a result of the assembling of the parts. The completed parts are treated as raw material, when drawn for use in the finished product, the total costs being finally absorbed by the main manufacturing account. One of the many examples that might be cited is a packing business, operating its own can factory and keeping a manufacturing account to show the cost of cans. Other accounts show the cost of the product packed in those cans, and both costs are absorbed in the cost of the commodity as marketed.

The trading account is similarly subdivided. In a department store, the manager of a department may receive a certain percentage of the profits of his department. This necessitates trading accounts for each department. A mercantile concern may operate branch stores and keep trading accounts with each, on the books of the main office; a factory may produce several lines of goods, with a corresponding subdivision of trading accounts.

A chart of accounts not only furnishes a guide to the bookkeeper, but presents in the most logical form, the natural divisions of the business. It is both a working guide and a mirror of the accounting records.

=23. Chart of Small Trading Business.= The most simple chart of accounts is one for a small trading business conducted by a single proprietor. Following is a chart of the accounts of such a business.

A study of this chart will disclose the reasons for the general grouping of the accounts. The first general group, capital accounts is subdivided into assets and liabilities. The assets are grouped in the order of their availability; the order in which they can most readily be converted into cash. The liabilities are grouped according to the security; unsecured, secured and capital.

There being but one trading account, it is represented by a single group, purchases and in-freight representing the cost of goods, and sales the gross proceeds. The balance of this account exhibits the gross profits.

We now come to the profit and loss account by which the trading or gross profits are absorbed. This group contains, first, the revenue producing accounts not represented in the trading account; second, the revenue expenditures or expense accounts. The outer brackets of the chart group all of the accounts under _Debit_ and _Credit_. This shows that the balances of the accounts are debit or credit as the case may be.

We have traced the profits to the profit and loss account, but in closing the books they will finally be absorbed by the proprietor's capital account. The chart, Fig. 23, traces the profits from trading to proprietor's account. In the trading account, the gross profit completes the balance. This profit is now absorbed by the profit and loss account. Net profit completes the balance of profit and loss account, and is, in turn, absorbed by the proprietor's account. Here, the net profit added to previous investment, equals the present worth. The chart, Fig. 24, also traces profits to the proprietor's account.

=24. Chart of Manufacturing Accounts.= A chart of the accounts of a manufacturing business follows similar lines to that of a trading business, the only change being the addition of the accounts of the manufacturing group. The accounts of this group will depend both upon the nature of the business and the extent to which the details of operation are recorded.

A chart of the accounts of a harness and saddlery manufacturing business is given herein. This business is divided into three departments; harness, collar, and saddlery.

A record of the gross profits, resulting from the operation of each department, being desired, we have three manufacturing and three trading accounts.

The chart shows the accounts classified to exhibit detailed operations of each department. The number of accounts in this chart is 98. This is rather more than is required in the average business of this character, but the chart furnishes a good illustration of the possibility of segregating accounts of various classes.

Even so large a number of accounts, with the minute subdivisions here shown, does not present the difficulties that might appear at first glance. The principal requirement is a thorough knowledge of the items entering into each account; the actual keeping of the accounts is a matter of close attention to these details. When an elaborate chart of accounts is laid out, it should be accompanied by detailed explanations and instructions. Some large concerns issue printed instructions which are given to all officers and employes who may be called upon to determine, to what account an item should be charged.

CHART OF ACCOUNTS--HARNESS MANUFACTURING

CAPITAL ACCOUNTS
_Assets_
1 Cash
2 Bills Receivable
3 Accounts Receivable
Inventories--Harness Department
4 Finished Stock
5 Leather
6 Hardware
7 Supplies

Inventories--Collar Department
8 Finished Stock
9 Leather
10 Hardware
11 Supplies

Inventories--Saddlery Department
12 Finished Stock
13 Leather
14 Hardware
15 Supplies

Inventories--Machinery
16 Machinery--Harness
17 Machinery--Collar
18 Machinery--Saddlery

Inventories--Tools
19 Tools--Harness
20 Tools--Collar
21 Tools--Saddlery

Inventories--General
22 Office Fixtures and Supplies
23 Delivery Equipment
24 Real Estate--Land and Buildings

_Liabilities_
25 Accounts Payable
26 Bills Payable
27 Mortgages

Reserves
28 Depreciation of Buildings
29 Depreciation of Machinery
30 Depreciation of Tools and Fixtures
31 Bad Debts
32 Capital Stock
33 Surplus

MANUFACTURING ACCOUNTS

_A_ Harness Department
34 Purchases--Leather
35 Purchases--Hardware
36 Purchases--Supplies
37 In-Freight
38 Labor--Cutting Department
39 Labor--Manufacturing Department
40 Inventory Adjustment

_B_ Collar Department
41 Purchases--Leather
42 Purchases--Hardware
43 Purchases--Supplies
44 In-freight
45 Labor--Cutting Department
46 Labor--Manufacturing Department
47 Inventory Adjustment

_C_ Saddlery Department
48 Purchases--Leather
49 Purchases--Hardware
50 Purchases--Supplies
51 In-Freight
52 Labor--Cutting Department
53 Labor--Manufacturing Department
54 Inventory Adjustment

_D_ Manufacturing Expense Adjustment
55 Power, Heat and Light
56 Engine Room Supplies
57 Salaries--Superintendent and Factory Clerks
58 Wages Engineers and Miscellaneous
59 General Factory Expense
60 Repairs and Maintenance--Buildings
61 Repairs and Maintenance--Machinery
62 Repairs and Maintenance--Tools

Trading Accounts
_E_ Harness Department
63 Sales
64 Returns and Allowances
65 Inventory Adjustment
_F_ Collar Department
66 Sales
67 Returns and Allowances
68 Inventory Adjustment
_G_ Saddlery Department
69 Sales
70 Returns and Allowances
71 Inventory Adjustment
_H_ Profit and Loss
72 Interest Credits
73 Cash Discount Credits
74 Rent Credits
_I_ Administration
75 Insurance and Taxes
76 Salaries--Officers
77 Salaries--Bookkeepers and Clerks
78 Printing and Stationery
79 Legal Expenses
80 Postage, Telegraph and Telephone
81 Office Expenses
82 Traveling Expense--Officers
83 Misc. General Expense
_J_ Sales Expense
84 Advertising
85 Salaries--Salesmen
86 Commission
87 Traveling Expense--Salesmen
88 Trade Show Expense
89 Out-Freight and Express
_K_ Collecting
90 Collection Fees
91 Cash Discounts Allowed
_L_ Delivery Expense
92 Wages
93 Maintenance Horses and Wagons
94 Maintenance Motor Trucks
_M_ Depreciation Adjustment
95 Buildings
96 Machinery
97 Tools and Fixtures
98 Bad Debts

=25. Chart Explained.= The following explanations will give the student a working knowledge of the operation of these accounts. Accounts, 1 to 33, inclusive, comprising assets and liabilities, are omitted, as no instructions will be required for keeping these accounts. All accounts are referred to by number.

34. _Purchases--Leather._ Charged with all purchases of leather for use in harness department. Credited with all leather transferred to other departments.

35. _Purchases--Hardware._ Charged with all purchases of hardware for use in harness department. Credited with all hardware transferred to other departments,

36. _Purchases--Supplies._ Charged with all purchases of supplies and materials, other than leather and hardware, for use in harness department. Credited with all transfers to other departments.

37. _In-Freight._ Charged with the cost of freight and cartage on all purchases for the harness department. Totals pro-rated to department purchase accounts at the end of each month.

38. _Labor--Cutting Department._ Charged with the wages of all men employed in cutting department, including foreman.

39. _Labor--Manufacturing Department._ Charged with the wages of all harness makers, and others employed in the harness manufacturing department.

40. _Inventory Adjustment._ An account used for the temporary adjustment of inventories for the purpose of obtaining monthly balances. At the end of the fiscal period, or whenever the books are closed, the balance of this account is transferred to inventory accounts.

Accounts 34 to 40, inclusive, are finally closed into a harness manufacturing account.

The same instructions apply to accounts 41 to 47, inclusive, in respect to the collar department, and to accounts 48 to 54, inclusive, in respect to the saddlery department.

55. _Power, Heat and Light._ Charged with all fuel and electric power, consumed for power, heat and light.

56. _Engine Room Supplies._ Charged with all oils, waste and other supplies, used in the engine room.

57. _Salaries--Superintendents and Factory Clerks._ Charged with salaries of general superintendent, superintendent's clerk and all clerks employed exclusively in the factory, as time keepers and clerks.

58. _Wages--Engineers and Miscellaneous._ Charged with wages of engineer and assistants, wages of shipping clerk and assistants, wages of receiving and stock clerks, wages of all general laborers whose time is not chargeable to a specific department.

59. _General Factory Expense._ Charged with all miscellaneous items of factory expense not provided for in other accounts.

60. _Repairs and Maintenance--Buildings._ Charged with all material and labor consumed in the repairs and maintenance of buildings.

61. _Repairs and Maintenance--Machinery._ Charged with same items as No. 60, as applied to machinery.

62. _Repairs and Maintenance--Tools._ Same as No. 61, applied to tools.

Accounts 55 to 62, inclusive, are closed into a manufacturing expense adjustment account, monthly. This account is credited with expense charged to each departmental manufacturing account, the distribution being made on a percentage basis.

63. _Sales--Harness Department._ Credited with the amount of all sales in the harness department.

64. _Returns and Allowances._ Charged with all returns and allowances on account of harness sales, except cash discount.