Chapter D: A. Hall employs H. D. Snyder as traveling salesman for the purpose of (2)

An inventory results as follows:

Coal 3,750.00
Horses and Wagons 800.00
Furniture and Fixtures 300.00

Make necessary journal entries to change to double entry. Provide a reserve of 5% for uncollectible accounts, 10% for depreciation of horses and wagons, 10% for depreciation of furniture and fixtures. Declare a dividend of 10% and transfer balance of profits to surplus, making all journal entries to record these transactions.

TWO HEMISPHERICAL BOTTOMS FOR 100,000-GALLON ELEVATED TANKS RIVETED
TOGETHER, SHOWING CLASS OF WORKMANSHIP NECESSARY ON WORK OF THIS
CHARACTER
Chicago Bridge & Iron Works, Chicago, Ill.
]

TRIAL BALANCES AND COMPARATIVE STATEMENTS

=14.= The construction of comparative statements is one of the most important duties of the bookkeeper. The ability to properly classify the accounts that make up trading and profit and loss statements, and balance sheets is a valuable asset to the bookkeeper who aims to advance to the highest position.

Statements of this kind, unless properly classified, are unintelligible to the average business man. A mere statement of the balances of the ledger accounts arranged without respect to their relationship, one to the other, may show that the ledger is in balance, but does not present information of special value to the manager of a business. What he wants—and expects—is a statement from which he can readily extract desired information; it must emphasize the salient points.

The classification of accounts has already been touched upon, but no harm will be done by placing still greater emphasis on the importance of this feature. For with the right classification of accounts in the ledger, the trial balance itself will supply some very interesting information, instead of being a mere list of balances. The following rules should be observed in the arrangement of accounts in the ledger.

All asset accounts should be assembled in the first section and grouped according to their classification; i. e., active, fixed, and passive or fictitious.

The liabilities should be divided into secured or funded, unsecured or floating, and capital; the latter includes any reserve accounts that may be maintained.

The expense accounts should follow and should be subdivided as to selling, general, and administrative.

The trading accounts should be grouped and divided into purchases, in-freight, and sales.

If a manufacturing business, the manufacturing accounts should be divided as to purchases, labor, and expenses.

The advantages of card and loose leaf ledgers are apparent in connection with the proper arrangement of accounts. They readily lend themselves to any desired classification, and new accounts as needed can be inserted at any point.

For the purpose of showing some of the possibilities in the classification of accounts, we give a few examples of model trial balances.

TRIAL BALANCE

_Assets_
Cash $264.20
Bank 4,728.50
Accounts Receivable 6,270.00
Inventory (Jan. 1) 7,860.00
Real Estate 10,000.00
Furniture and Fixtures 5,000.00

_Liabilities_
Mortgage Payable $3,000.00
Bills Payable 5,000.00
Accounts Payable 6,120.00
Capital Stock 20,000.00

_Profit and Loss_
Advertising 475.00
Salesmen's Salaries 300.00
Traveling Expenses 189.70
General Expense 74.00
Interest and Discount 22.60
Building Maintenance 37.00
Taxes and Insurance 42.00
Salaries 525.00

_Trading_

Purchases 5,500.00
In-Freight and Cartage 96.20
Sales 7,219.00
--------- ---------
41,361.60 41,361.60

If the accounts in this trial balance were listed without regard to the groups in which they belong, it would merely show that the ledger balances. In its present form, it gives at a glance much valuable information. Total expenses and expenses of each class are readily ascertained, sales are shown, and expenses can be compared with sales. With the exception that it does not show the changes in the account of the inventory, this trial balance exhibits the condition of the business.

Supposing that an inventory is taken, the following statements are quickly prepared.

BALANCE SHEET
_Assets_
Cash $264.20
Bank 4,728.50
Accounts Receivable 6,270.00
Inventory (Feb. 1) 7,995.00
Real Estate 10,000.00
Furniture and Fixtures 5,000.00

_Liabilities_
Mortgage Payable $3,000.00
Bills Payable 5,000.00
Accounts Payable 6,120.00
Capital Stock 20,000.00
Surplus 137.70
--------- ----------
34,257.70 34,257.70

TRADING STATEMENT
Inventory (Jan. 1) 7,860.00
Purchases 5,500.00
In-Freight 96.20
----------
13,456.20
Less Inventory (Feb. 1) 7,995.00
----------
5,461.20
Sales 7,219.00
Gross Profit 1,757.80
--------- ---------
7,219.00 7,219.00
--------- ----------

PROFIT AND LOSS STATEMENT
Gross Profit $1,757.80
Advertising $475.00
Salesmen's Salaries 300.00
Traveling Expenses 189.70
General Expense 74.00
Interest and Discount 22.60
Building Maintenance 37.00
Taxes and Insurance 42.00
Salaries 525.00
Net Profits 137.70
--------- ---------
1,780.40 1,780.40
--------- ---------

The facts that sales were $7,219.00, or that the expense for salesmen's salaries was $300.00 mean nothing in themselves. It is only when compared that they exhibit vital facts. If we find that last month's sales were $8,400.00 and salesmen's salaries the same as this month, we know at once that our present selling cost is proportionately higher than during the preceding period.

The following trial balance should be compared with the preceding and the difference in their values, in respect to the information given, carefully noted. The accounts in this trial balance are arranged in the order in which they were found in the ledger.

TRIAL BALANCE
Dr. Cr.
Capital Stock $30,000.00
Sales 45,411.40
Accounts Receivable $7,190.00
Accounts Payable 2,720.00
General Expense 727.00
Salesmen's Salaries 3,000.00
Salaries, General 3,600.00
Interest and Discount 126.70
Returns and Allowances 942.20
Inventory 9,687.00
Purchases 26,250.00
In-Freight $396.40
Bank 6,470.00
Traveling Expense 1,759.00
Taxes and Insurance 236.50
Real Estate 25,000.00
Fixtures 3,000.00
Surplus 10,000.00
--------- ---------
88,258.10 88,258.10
--------- ---------

Fig. 15-a. Working Balance Sheet
]

WORKING BALANCE SHEET

=15.= A form much used by accountants combines the trial balance with the balance sheet, trading and profit and loss statements. The compilation of the information required for this form is greatly facilitated by a proper classification of accounts in the ledger. The form is known as a working balance sheet.

A working balance sheet is shown in Fig. 15 a. The figures used are taken from the last trial balance shown, and furnish a graphic illustration of the difference between proper and improper classification of accounts. It will be noticed that the first two columns constitute the trial balance. Following this are columns which classify the accounts under the headings of _Trading, Profit and Loss_, and _Balance Sheet_. The balance of each account is extended to its proper group.

At the bottom of the form, trading and net profits are extended as a memorandum only. Since no inventory has been taken these figures are not exact, but represent approximate results on the supposition that the inventory would be practically the same as when the last inventory was taken. Of course, if there was a noticeable change in the quantity of merchandise in stock, an estimate would be made and taken into consideration in making this statement of probable profits.

EXERCISE

From the following trial balance, prepare a working balance sheet showing actual gross and net profits.

TRIAL BALANCE
Bank $8,460.00
Capital Stock $25,000.00
Sales 11,201.00
Purchases 10,000.00
Returns and Allowances 400.00
Interest and Discount earned 260.00
General Expense 425.00
Salaries 360.00
Rent 300.00
Taxes and Insurance 37.60
Selling Expense 421.00
Inventory (Jan. 1st) 8,864.00
Fixtures 2,500.00
Accounts Receivable 5,680.00
Accounts Payable 1,274.00
Cash in Office 287.40
--------- ---------
37,735.00 37,735.00
Inventory (Feb 1) 9,650.00

COMPARATIVE STATEMENTS

=16.= The trial balances shown in the preceding pages illustrate some of the advantages of properly classified accounts. The information gained can be made of still greater value by the construction of comparative statements; for, as has been stated, the chief value of many of the figures shown lies in the opportunity for comparisons. Statements which permit of comparison of items of a like nature from month to month furnish a valuable survey of the progress of the business.

The following is a trial balance taken from the books of a manufacturing business, and will be used as a basis for the construction of comparative statements.

TRIAL BALANCE

Dr. Cr.
Cash in Office $162.50
Bank 8,500.00
Accounts Receivable 7,500.00
Bills Receivable 4,500.00
Inventory, Materials (Jan. 1) 9,500.00
Inventory, Manufactured Goods
(Jan. 1) 6,000.00
Real Estate 20,000.00
Machinery and Tools 17,500.00
Furniture and Fixtures 3,500.00
Bills Payable $7,000.00
Accounts Payable 5,000.00
Capital Stock 50,000.00
Surplus 10,000.00
Undivided Profits 900.00
Advertising 1,200.00
Salesmen's Salaries 1,000.00
Salesmen's Expenses 720.00
General Expense 430.00
Interest and Discount 97.50
Salaries Administrative 900.00
Factory Expense 850.00
Factory Labor 1,750.00
Repairs to Machinery 150.00
Depreciation 175.00
Taxes and Insurance 25.00
Material Purchases 4,600.00
In-Freight and Cartage 126.00
Sales 16,491.00
Returns and Allowances 400.00
--------- ---------
89,488.50 89,488.50
--------- ---------

In Fig. 16 _a._ is shown a working balance sheet in which the accounts as found in the trial balance are segregated in the four groups, _Manufacturing, Trading, Profit and Loss_, and _Balance Sheet_. First, the trial balance is entered in the two columns at the left. Next, the manufacturing account is made up by extending the inventory of material at end of preceding period, the manufacturing expense accounts, material purchases and freight on same. This gives the total charges to manufacturing account, but not the month's expenditures, for the present inventory of material must be considered. An inventory shows the value of material in stock to be $4,550.00. Deducting this leaves $12,626.00, the total operating cost for the month. To find the cost of goods completed during the month an inventory is taken of work in process, the amount is deducted from the total operating cost and the result, $9,126.00, represents cost of goods manufactured.

The trading account is now made up, this $9,126.00 taking the place of purchases, and the gross profit is carried to profit and loss account.

The manufacturing, trading, and profit and loss accounts are now ready for analysis, which is made on a percentage basis. In the analysis of the manufacturing account, the total operating cost is used as a basis and the different items of manufacturing cost are figured on this basis. We find that the expense items are 23.3% and the material 76.7% of the total which furnishes a tangible basis for a comparison of the same items in other months. Having the percentage of each item, we can note the fluctuations from month to month, and know where to retrench if any item appears to be increasing too rapidly.

The basis of the analysis of the trading and profit and loss accounts is the turnover. Figuring on this basis, we find the total expenses, exclusive of manufacturing costs, to be 41% of the turnover, and the net profit, 20%. The gross profit is 60% of the turnover. Ordinarily the total expense and net profit would equal the gross profit, but in this case there is a capital profit of $97.50 from interest earned.

Sometimes these comparative percentages are figured on the gross sales, but the turnover is considered the proper basis, for it is less subject to marked fluctuations. The sales in one month may show abnormal profits, while in the next these profits may return to normal. If based on sales, the cost percentages would fluctuate accordingly, when in reality they may have remained stationary.

PROOF WITHOUT A TRIAL BALANCE

=17.= A comparison of the accounts in the last trial balance with the working balance sheet shows them to be arranged in the order in which they would appear in the balance sheet and profit and loss statements.

WORKING BALANCE SHEET
]

Fig. 16a. Working Balance Sheet for a Manufacturing Business
]

It should be remembered that manufacturing and trading accounts are subdivisions of the profit and loss account, and that the profit and loss account is a statement of income and disbursements including differences in inventories.

If it is desired to show the actual condition of the business at the end of each month, the inventory must be added. There may be objections to actually closing the books each month, but the complete statement can be made by adding the current inventories as shown in the working balance sheet illustrated. The amounts of these inventories and the gross and net current profits are, in such cases, memoranda only. The inventories may be arbitrary estimates, and while the results shown may not be exact they will be found of value for purposes of comparison; and care in estimating inventories will greatly increase their value.

Reference to our working balance sheet shows that the profit and loss statements—with current inventories added—agrees with the balance sheet in one respect. The current profit exactly agrees with the difference between assets and liabilities as shown by the balance sheet.

To prove the ledger without the usual trial balance these rules should be followed:

_First:_ Make up trading and profit and loss statements, taking balances direct from the ledger accounts, deducting current inventories.

_Second:_ Make up balance sheet using current inventories in listing assets.

If the current profit and loss agrees with the difference between assets and liabilities the ledger may be assumed to be in balance. This is, in effect, a sectional trial balance, since the accounts in the trial balance are all represented in the two statements. The reliability of this proof is not affected by the fact that the inventories are arbitrary—and perhaps inaccurate—since the same amounts are used in both the balance sheet and profit and loss statement.

BOOK INVENTORIES

=18.= To make the foregoing plan still more effective, perpetual inventories should be carried in the ledger. A perpetual or book inventory is an account showing the value of merchandise received, sold, and on hand. If an accurate account is kept of merchandise received and sold, the perpetual inventory will show the amount that should be in stock. To prove the accuracy of the account, it is necessary to take an actual inventory of the merchandise in stock, just as it is necessary to count the cash before we can know that the amount on hand agrees with the cash account.

A detailed perpetual inventory should be kept on cards or in a loose leaf book. A card or sheet is used for each article or class of material carried in stock. The sheets or cards should be arranged alphabetically according to the names of the articles. To make the system effective one person should have charge of these records and no goods should be taken from stock without an order or other proper record.

At the end of the month the receipts will be shown by the purchase accounts. The deliveries will be tabulated from the cards, and the necessary adjustments made on the ledger account. Adjustments should be made by journal entry debiting inventory accounts and crediting trading account for increase in inventory, and _vice versâ_ for decrease in inventory.

Fig. 18 _a._ is a typical form of stock ledger sheet for a loose leaf book. The form should in all cases be made to suit the requirements of the business in which it is to be used.

Fig. 18 _b._ is a card form of stock ledger which gives more detailed information about the article in stock. On the top line is recorded the name of the article, size or kind, where kept, and date of verification of the record. The second line gives the unit and maximum and minimum limits. The unit represents the unit in which the article is bought—as pounds, tons, dozen, feet, yards, etc. It is customary to establish a minimum limit, below which the stock is not allowed to go before re-ordering, and a maximum limit of a quantity sufficient for the needs of the business. The record of receipts and disbursements includes a detailed record of cost, including freight and cartage, and columns for costs per unit. This makes it possible to calculate the value of the stock in hand without referring elsewhere for prices.

In some lines of business it is possible to ascertain the quantities sold, at the end of each month, from the sales records. This applies where an article is sold in but one grade or size, and necessitates keeping sales records which show sales of each article. An example is the coal business. For such a business a card like the one shown in Fig. 18 _c._ can be used to good advantage. This provides for a monthly record of purchases and sales.

Fig. 18 _a._ Loose Leaf Stock Ledger
]

In this illustration the manner of indexing is shown. The cards are first arranged alphabetically under the names of the articles. If there is more than one size, the cards bearing the records of a certain article are filed in the order of their sizes. Indexed in this manner any card that may be desired is quickly found.

Fig. 18 _b._ Stock Ledger Card
]

Fig. 18 _c._ Stock Ledger Card and Indexes
]

DEMONSTRATION OF PROOF WITHOUT A TRIAL BALANCE

=19.= Taking the accounts in the following trial balance, a model ledger is illustrated which demonstrates the manner of proving the ledger without the aid of the conventional trial balance. It is assumed, of course, that a book inventory or stock ledger is kept, and in this demonstration the figures showing the change in inventory are used. Only the ledger is illustrated, it being expected that the student will understand the necessary journal adjusting entries.

TRIAL BALANCE

Cash in Office $575.00
Bank 8,750.00
Accounts Receivable 8,871.00
Bills Receivable 5,000.00
Inventory (Jan. 1) 12,500.00
Furniture and Fixtures 2,250.00
Bills Payable $4,000.00
Accounts Payable 3,325.00
Capital Stock $25,000.00
Purchases $6,750.00
Sales 15,000.00
Advertising 960.00
Salesmen's Salaries 450.00
Traveling Expense 190.00
Office Expense 46.50
Office Salaries 225.00
General Expense 34.20
Rent 175.00
Taxes and Insurance 21.30
Discounts Allowed 47.90
Interest Paid 33.10
Interest and Discount Earned 54.00
Administrative Salaries 500.00

On Feb. 1st the inventory shows a decrease of $3,500.00. A reserve of 3% on accounts receivable is to be created to provide for uncollectible accounts. To make these adjustments the following journal entries will be required:

Trading _a/c_ 3,500.00
To Inventory 3,500.00
Decrease in Inventory

A study of this entry will show that the result is the same if we make up the trading account by using purchases and adding or subtracting the decrease or increase in inventory, or if the preceding inventory is added and present inventory is deducted. The result in either case is the turnover and the above entry makes the necessary adjustment in the inventory account without closing the account through the trading account.

The entry for the reserve for uncollectible accounts is

Profit and Loss 266.13
To Reserves 266.13
Reserve of 3% to provide
for uncollectible accounts.

At the end of the next month this account will be adjusted by charging or crediting the amount necessary to maintain the total at the desired percentage of accounts receivable.

UNDERWOOD TYPEWRITERS USED IN MELBOURNE UNIVERSITY COMMERCIAL
EXAMINATIONS
]

Ledger with Accounts Classified
]

Ledger with Accounts Classified
]

Ledger with Accounts Classified
]

Ledger with Accounts Classified
]

Ledger with Accounts Classified
]

REVERSE OR SLIP POSTING

=20.= To feel absolutely sure that his work is correct is the ambition of every bookkeeper. The fear that an error will throw his books out of balance is always present, and is only dispelled when the ledger is proved at the end of the month.

Accountants, bookkeepers, and mathematicians have long searched for an infallible rule or method of checking which would detect an error as soon as it is made. No system could possibly prevent the making of an error, but if detected, an error is quickly corrected. Numerous formulas and checking systems, designed to detect errors in posting, have been put on the market from time to time. Each has been advertised as the only infallible system. All have been eagerly purchased, tried more or less faithfully, and, as a rule, speedily discarded.

Modern methods of bookkeeping have done more to aid in the detection of errors in posting than all of the checking systems combined. The sectionalization of accounts not only facilitates the detection of errors, but greatly minimizes the chances of their being made. As an illustration take a sales ledger which is subdivided into two or more parts, with special columns in cash book and sales book, and controlling accounts for each section. If the individual balances taken from the sales ledger do not agree with the controlling accounts, it is seen at a glance in which section the error has been made. Instead of a search through all postings to sales ledger accounts, it is only necessary to check postings to that particular section.

Ledger Proof Without a Trial Balance
]

Errors in posting to nominal accounts are minimized by special columns in cash book, sales book, and purchase record, with one posting at the end of the month, in place of a posting for each item entered.

But still, errors are and always will be made in posting, and for the bookkeeper who has a large number of accounts to post and wishes to keep a constant check on his work, the reverse posting or slip posting system will give satisfactory results with little labor.

Fig. 19. Monthly Posting Proof Sheet
]

This system is very simple, and easily operated. It consists of the use of a slip of paper with debit and credit columns in which accounts posted to the ledger are entered. A separate slip is used for each book from which postings are made, and the items are posted to the slip from the ledger. The slip should be placed on the desk on the opposite side of the ledger from the book of entry.

If posting is from the sales book, the ledger should be placed to the right of the sales book and the slip to the right of the ledger. After the item is entered in the ledger it is posted to the slip. When the work is completed the slip is footed and compared with the footing of the sales book. If the footings agree, it is quite evident that the correct amounts have been posted to the ledger, for it is scarcely possible that an incorrect amount has been posted to the ledger and the correct amount entered on the slip.

A further daily proof may be had by inserting a blank slip of paper in the ledger wherever an item is posted. At the end of the day these ledger accounts are referred to, the amounts are drawn off, and total postings compared with the totals of the checking slips from the different books.

When postings are not checked daily a form should be prepared to which daily totals will be carried. Columns are provided for each book from which posted, and these are footed at the end of the month and compared with the footings of the books. If the ledger does not balance a comparison of this proof slip with the column footings of the books will show in which book the error has been made. The form of the monthly proof slip is illustrated in Fig. 19.

SPECIAL ACCOUNTING FORMS

=21.= Bookkeeping, if it is to fulfil its mission, must furnish a complete record of the transactions of a business. The record must show, as well, the results of each transaction or class of transactions, with respect to their bearing on the business as a whole, or on specific sections or departments of that business. From a mere record of personal debits and credits, bookkeeping has grown into a detailed history of a business.

The principles of bookkeeping are the same regardless of the nature, size, or condition of a business. But different businesses require different kinds of information; vital facts in one business may be valueless in another. The success or failure of each depends upon certain elements which must be recorded in its history. It is the work of the bookkeeper to record these facts—to write the history of the business in language that will be understood by anyone who may read it.

Laying out the business history is the work of the accountant. He makes an analysis of those elements which bear on the success of the business, and determines what facts, when properly recorded, will furnish the clearest and most understandable history. And when he has determined what facts should be recorded he must plan how they are to be recorded—in what form they will present the most concise history of business transactions. His work should result in a system of bookkeeping that will present the most vitally important information, with a minimum expenditure of labor.

The increasing demand for more intelligible records—for facts—has stimulated the ingenuity of accountants in devising forms that will not only accommodate the records desired but will permit of their being made with the least labor. Special forms exactly suited to the records which they are to contain, are now made for every purpose. Labor-saving devices and methods have minimized the drudgery of bookkeeping.

The bookkeeper who would rise above mediocrity requires something besides the ability to record business transactions in the proper columns of books prepared for him. He must know how to devise forms and books, how to adapt correct principles to the building of a system of bookkeeping for any line of business. If certain facts assume importance, he must know how those facts can best be obtained and recorded.

To assist in familiarizing the student with the more modern methods, this section is devoted to illustrations and descriptions of special forms of books for various purposes. The student should devote careful study to these forms, for while they have been in the main devised to meet special conditions, the principles can be adapted to any line of business where similar conditions exist.

SPECIAL LEDGERS

=22. Loose Leaf Ledgers.= A loose leaf ledger is one in which the leaves are removable. Instead of the sheets being bound in solid book form, each leaf is a separate sheet ruled for one ledger account. The sheets are filed or bound in what is known as the binder, being securely held in place by a mechanical device. The binder can be locked so that only the person holding the key can insert or remove the sheets.

The loose leaf ledger is indexed either numerically or alphabetically. When the numerical method is used the sheets are numbered and placed in the binder in numerical order which gives the same arrangement as a bound book. A separate index is required with the numerical method. The alphabetical method of indexing necessitates the use of sheets on the edges of which are tabs or projections printed with the letters of the alphabet. These index sheets are placed in the binder in alphabetical order and the ledger sheets are placed between them. The alphabetical method is preferred by many as it makes the ledger self-indexing. Another method of indexing is a combination of the alphabetical and numerical. The alphabetical index sheet is used, and under it are filed all accounts of persons whose names begin with that letter. These sheets are numbered Account No. 1, No. 2, etc., and the names are written on the index sheet, followed by the account number. This practically divides the ledger into separate numerical ledgers for each letter of the alphabet.

Fig. 20. Loose Leaf Ledger
]

Binders for loose leaf ledgers are made to hold from a few sheets up to one thousand or more. By proper arrangement of the indexes, more than one ledger can be accommodated in one binder. As an illustration, the general, purchase, and sales ledgers, each with its separate index, may all be in the same binder.

One of the chief advantages of the loose leaf ledger is that all "dead" matter can be removed. When a sheet becomes filled, it can be removed to another binder called a transfer binder, and a new sheet put in its place. Or if the account be permanently closed, it is transferred, leaving only live accounts in the ledger. When new accounts are to be opened, it is only necessary to insert additional sheets. There is no transferring of all accounts from one ledger to another as with bound books, for the loose leaf ledger is never filled. If the number of sheets increases beyond the capacity of the binder, the ledger can be divided by transferring a part of the sheets to a new binder.

The ruling of loose leaf ledger sheets is the same as in bound books, the forms usually being made to fit the business. A sheet with a conventional form of ruling is illustrated.

=23. Card Ledgers.= For certain classes of accounts, the card ledger is very desirable. It is well adapted for a sales ledger in a business having a large number of customers, and especially so if the nature of the business is such that the purchases of a customer are infrequent. In many businesses handling a single line of goods known as seasonable, sales are made in the spring and fall so that a customer purchases practically an entire year's supply in two orders.

Fig. 21 _a._ Ledger Card for Dentists
]

The card ledger is largely used in banks for keeping accounts with depositors in the savings department. A card 5 inches x 8 inches in size gives room for forty items on each side, and for the average savings account will last more than two years.

Some advantages claimed for the card ledger are:

_First:_ Dead records are eliminated, as filled cards and closed accounts are transferred to a separate file, leaving only open accounts in the current file.

_Second:_ It can be expanded to any size, which makes it ideal for business with a large number of customers. The opening of a new account, or re-opening of a closed account, is accomplished by merely dropping a card in the right place.

_Third:_ The labor of making trial balances is greatly reduced, as there are no closed accounts to refer to in the current file.

_Fourth:_ Statements can be mailed much earlier as the cards can be distributed among several clerks who can be working on them at the same time.

_Fifth:_ The ledger can be subdivided as desired by the use of proper index cards. When one drawer or tray is filled, a part of the cards can be taken out and placed in another tray without disturbing their arrangement.

There are two general plans of indexing the card ledger—alphabetical and numerical. The alphabetical method consists of a set of guide or index cards between which the cards are filed. This index may consist of one index for each letter of the alphabet, a smaller number with two or more letters on one index, or a much larger number subdividing the alphabet into as many parts as may be necessary. In planning an index for a card ledger, a safe rule to follow is to provide one index card for every ten ledger cards.

Fig. 21 _b._ Ledger Card for Publishers
]

A subdivision of the alphabetical index is the geographical or territorial. This divides the ledger by states and towns. Guide cards, printed with the names of the states, provide the main division; other guides, printed with names of towns, subdivide the state sections; and where necessary, alphabetical guides subdivide the names in the towns. If desired, the ledger may be divided into territorial sections, as East and West; or each section may include the territory covered by one salesman.

A numerical index divides the cards by tens and hundreds. Guide cards numbered by hundreds—100, 200, etc.—provide the main divisions. Between these are placed guides numbered 10, 20, 30, etc. to subdivide these sections by tens, and the ledger cards are filed in numerical order between these guides. To facilitate locating any number desired, the cards themselves are made with small projections numbered from 0 to 9 to represent the units. Each card bears one tab, and all tabs bearing the same unit are in the same relative position on the card; that is—0 is always at the extreme left, while 9 is ten positions to the right. When the cards are placed in numerical sequence, between the guides numbered by 10's, any number can be found instantly. To find number 2,987, we refer first to the main guide number 29, then to the guide numbered 8—in the section between 29 and 30—and then to the number 7 tab next following. As there are never more than one thousand cards in a tray, any number can be found more quickly than in a bound book. If a card is misplaced in filing, the unit tab will greatly assist in locating the missing card. Suppose card No. 964 is missing; a search through the row of No. 4 tabs will locate it, no matter where filed. With this system of filing, a separate index by name is required, and this also is made on cards. For a very large ledger the numerical system is more frequently adopted than the alphabetical.

Fig. 21 _c._ Balance Form of Ledger Card
]

It is claimed that the numerical tab scheme affords one safeguard not found in an alphabetical system. A missing card is at once detected by the break in the row of tabs, but to make the safeguard of value it is necessary to leave the cards in the file even after accounts are closed.

There is no good reason why an alphabetical card ledger should not be as safe as the numerical. If it is desired to guard against the removal of one card and the substitution of another, the blank cards should be placed in the custody of one man, who will issue them to the bookkeeper as needed, first placing his initials on the card. In any event, the card ledger should be provided with a locking device which will prevent the removal of a card, except by the one who has the key.

These suggestions may be of assistance to the bookkeeper who is called upon to use a card ledger.

Never leave ledger cards lying on the desk. When you leave your work, put them back in the file, where they belong.

Before leaving the office, lock the ledger so that no one can remove a card in your absence.

If your superior asks you to see a certain ledger account, do not give him that one card. He may lose it. Give him the entire tray, with the cards securely locked. Should he insist on having that one card, ask him to give you a receipt for it.

Some special forms of ledger cards are illustrated. Fig. 21 _a._ is a form used by a dental supply house. The special feature of the form is a separate column for each different class of goods purchased by the customer. Fig. 21 _b._ is used by a publisher for advertising accounts. Fig. 21 _c._ is a conventional balance ledger form adapted for use in almost any line of business.

=24. Tabular Ledger.= This is a ledger in which the names are written down the side of the page, with debits, credits, and balances extending across the page. Columns are arranged to group entries during uniform periods, as a month, week, or day. A special feature of this style of ledger is that it can be more quickly balanced and proved than any other style. To prove this ledger add the balances at the end of the preceding period to the debit postings of the current period. This will equal the total of the credit postings added to the new balances, if the balances have been correctly extended. The postings to all of the accounts on a page—30 to 40—can be footed at one operation, saving much time.

Fig. 22 _a._ is a form of a tabular ledger used by banks, known as the _Boston bank ledger_. It is specially arranged to exhibit daily balances, as it is necessary that the depositor's ledger be balanced daily. This form can be used in a mercantile business, but as balances are not required daily, the form shown in Fig. 22 _b._ is better adapted to the purpose. These tabular forms of ledgers are not commonly used except in banks.

=25. Balance Ledgers.= Three forms of balance ledgers are illustrated, each one of which is specially adapted to some particular class of business.

Fig. 22 _a._ Boston Bank Ledger
]

Fig. 22 _b._ Commercial Tabular Ledger
]

The special feature of Fig. 23 _a._ is two credit columns—one for cash and one for merchandise returns. This form is favored in certain lines of business where merchandise returns are frequent. A special column serves to separate returns of merchandise sent out on approval, which in some businesses is an important item.

Fig. 23 _a._ Ledger with Special Credit Columns
]

Fig. 23 _b._ is provided with two balance columns, for debit and credit balances. This form saves time in taking trial balances, as it is seen at a glance whether the balance is a debit or a credit.

Fig. 23 _b._ Balance Ledger
]

The feature of Fig. 23 _c._ is several credit columns to one debit column. This form is largely used where sales are made subject to periodical payments. It is well adapted for installment accounts, rent accounts, insurance accounts, and similar classes. The number of credit columns can be extended indefinitely to meet existing conditions.

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Fig. 23 _c._ Balance Ledger for Installment Accounts
]

CASH BOOKS

=26.= Since the almost universal adoption of special forms of sales books, purchase books, and check registers, the journal proper is only used for adjusting entries. The cash journal, which is a combination of cash book and journal, has taken the place of the two books. Some forms of this book have been illustrated earlier in this text, and a typical form is shown in Fig. 24 _a._ A study of this form will be found instructive as it suggests the many possibilities of segregating distinct classes of receipts and expenditures. Note the segregation of charges to manufacturing, selling, and administrative branches of the business. Under each branch the different kinds of expense might be shown with all their subdivisions by providing additional columns.

In fact, as we have already stated, there is no end to the possibilities of segregating different classes of transactions by means of the columnar principle in designing books of entry. But it may not be out of place to sound a note of warning against increasing the size of the pages of a book beyond a reasonable limit. While the saving of time is the important factor that influences the introduction of columnar books, there has grown up a tendency to go to such extremes that the unwieldy book defeats this very purpose.

Fig. 24. Cash Journal—Left-Hand Page
]

While the "sundries" columns in the form shown render possible the making of any kind of adjusting entries in this cash journal, we recommend that it be reserved for cash transactions and that all adjusting entries be made in an ordinary journal. This will segregate cash transactions, just as sales and purchases are segregated, and render much easier an audit of the books. The journal of the ordinary type also affords abundant space for explanations which should be exceptionally complete for adjusting entries. Entries of this kind are frequently used to cover up fraud and they are sure to receive the careful attention of the auditor.

Fig. 24. Cash Journal—Right-Hand Page
]

TABULAR SALES BOOKS

=27.= In no department of a business are tabulated records of greater value than in the sales department, for only by studying the records of sales of different classes of goods or of different departments can a manager determine which departments of his business are most profitable. A tabular sales book makes it possible to record sales in detail with very little additional labor, resulting in greater economy of time in collecting valuable data.

Fig. 25 _a._ Tabular Sales Book
]

In certain lines of business a record of quantities of different kinds of merchandise sold is of almost equal value to records of values. Examples are—wholesale coal business, in which records are kept of quantities and values of different grades and sizes or the product of different mines; lumber, in which sales are divided as to lumber, lath, shingles, sash, and doors; wholesale paper, in which some of the divisions are book, flats, bonds, cover, etc. A sales book designed for a business of this class is shown in Fig. 25 _a._ This is arranged for a record of sales in a coal business, segregating sales of the product of each of three mines.

There are businesses in which returns and allowances are so frequent as to constitute an important item in the record of transactions. Such cases demand special columns in either journal or sales book. Another condition occasionally met with is where purchases are frequently made from customers, resulting in accounts in both ledgers. This requires journal entries to adjust the accounts, but instead of making these in the regular journal, special columns can be provided for the purpose in the sales book. Fig. 25 _b._ illustrates a sales journal with columns for returns and allowances, and columns for purchase adjustments. The total of these adjustment columns are posted to the sales ledger controlling account.

Fig. 25 _b._ Sales Journal with Adjustment Column
]

_Sales recapitulations_ are of very great importance in department stores and similar businesses where it is desired to ascertain the total sales of each sales person as well as the result by departments. In Fig. 25 _c._ is shown a sales recapitulation sheet arranged for daily records of sales of each clerk and of each department. All sales tickets are lettered or numbered to indicate the clerk, and at the end of the day these tickets are tabulated by numbers. One of these recapitulation sheets is used for a month's record, and it can of course be designed to accommodate as many departments and clerks as there are in the establishment. Recapitulation sheets arranged on this plan are found very convenient in many lines other than department stores.

Fig. 25 _c._ Sales Recapitulation Sheet
]

Fig. 26. Departmental Pay-Roll Record for Piece Work and Day Workers
]

PAY-ROLL RECORDS

=28.= The designing of pay-roll records to meet the special conditions in the great variety of manufacturing industries, offers a wide field for the ingenuity of the bookkeeper or accountant. Where all employes are paid a stated wage and their employment in one department is continuous, the problem is a simple one, resolving itself into a mere record of the number of hours worked each day, the rate, and the amount due. But this condition seldom exists.

In most industries more complex problems are encountered. The same employe may be called upon to work in more than one department during a pay-roll period, or he may do several different kinds of work in the same department. In either case the form for the record must be so constructed as to furnish complete information relative to the cost of the different classes of work. Elaborate systems for gathering records of time on each detail of the work are employed in most modern factories, and the pay-roll record or time book is arranged for a consolidation of these detailed records.

Fig. 26 illustrates a form used in one factory for a distribution of time records where men are employed on different kinds of work in different departments, and on both day wage and piece work plans. In this form provision is made for the record in each department, and each day's record is divided between time and piece work. Several lines are set aside for each employe, so that the record will be complete for each kind of work. At the extreme right, department totals are extended. These are quickly calculated for the reason that while an employe may do different kinds of work and in different departments the same operation is not performed in more than one department. To provide for records of more kinds of work this principle can be carried still farther by allowing more space for each employe, and in some cases a full sheet is assigned for each. In one factory the pay-roll book is loose leaf, one sheet being used for each employe. Each side of the sheet holds the record for two weeks, and by using both sides, it gives a complete record for four pay-roll periods.

=29. Combined Pay-Roll and Check Register.= Many industries pay their employes by means of checks instead of in currency. Special pay checks are used which merchants willingly cash as an accommodation to their customers. Whenever the check system of payments is adopted it is best to carry a special bank account for the purpose. When the amount of the pay-roll is determined, a check should be drawn on the regular bank account and deposited in a special fund against which the pay checks will be drawn.

Fig. 27 shows a form, designed for the use of a concern paying by check, which combines a check register with the pay-roll record. Since all checks drawn against this special fund are pay checks, this register gives a complete record of the special bank account.

Fig. 27. Combined Pay-Roll and Check Register
]

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TRUSTEES AND EXECUTORS' ACCOUNTS

=1.= From the accounting standpoint, business can be divided into two general classes: (a) Business conducted by the owner or a person appointed by him for the benefit of the owner; (b) Business that is the property of persons incapable of transacting business, necessitating the appointment, by the owners or other authority, of persons to transact business in place of the owner. It is with business of the latter class that we now have to deal.

In this class the owner or proprietor is supplanted by the _administrator_ of the business. The generic term _trustee_ applies to the administrator, who also takes more specific titles, depending upon the nature of the trust—as _executor_, _administrator_, _assignee_, _guardian, receiver_, etc. He is subject to the powers granted by the source of his appointment, and to the restrictions and requirements imposed by law.

A trustee—by whatever specific name designated—acting in his capacity as substitute for the owner, is the owner of the trust property as against the public. He is accountable to no one but the beneficiaries for whom he is acting as custodian. As owner of the estate, he can sue or be sued and perform many functions pertaining to the ordinary property owner. The beneficiary, by reason of his equity in the estate, can compel the trustee to carry out the provisions of his trust.

EXECUTOR'S ACCOUNTING

=2.= While an executor may keep his accounts in a manner chosen by himself, his _accounting_ must conform to the legal requirements of the state in which the accounting is made. The form in which the accounting is to be made is not subject to rigid rules, but must conform to certain regulations. While requirements differ according to the jurisdiction, the regulations in general are as follows:

The preliminary accounting consists in filing an inventory of the personal estate of the deceased, showing both the nominal or face value of the assets and the amount they are expected to realize as stated by the appraisers. An executor usually files two accounts—an _intermediate account_, filed at some date prior to the final account, and a _final account_, showing the property in his hands subject to distribution by judicial decree. The intermediate account may be filed either voluntarily or by order of the court. The account must be accompanied by the following schedules:

=SCHEDULE A=

1. Statement of property contained in the inventory, which has been sold, with the manner of sale and amounts realized. 2. Statements of debts due the estate as scheduled in the inventory, which have been collected. 3. Statement of all interest and dividends received by the executor.

=SCHEDULE B=

1. Statement of debts due the estate that have not been collected or are uncollectible, with reasons. 2. Statement of personal property named in inventory that has not been sold, with reasons, and the appraised value of such property. 3. Statement of all property belonging to the estate that is lost through no fault of the executor, with the cause of loss and appraised valuation. 4. Statement that no other property than set forth in the inventory or schedules has come into the possession or the knowledge of the executor. 5. Statement that the increase or decrease in value of all assets of the deceased is allowed for or charged in Schedules A and B.

=SCHEDULE C=

1. Statement of all amounts expended by the executor for funeral and other necessary expenses, together with the receipts for, and objects of, such expenditures.

2. Statement of the date when the executor caused a notice for claimant to present claims against the estate to be published, together with order, notice, and proof of publication herewith filed, to which the executor refers as a part of his account.

=SCHEDULE D=

1. Statement of all claims of creditors allowed by executor or disputed by him, for which a judgment or decree has been rendered, with the names of the claimants, nature of claim, amount and date of judgment.

2. Statement of all money paid to creditors of the deceased, with
names and time of payment.

=SCHEDULE E=

1. Statement of all money paid to legatees, widow, or next of
kin, of the deceased.

=SCHEDULE F=

1. Statement of names of all persons entitled—as widow, legatee, and next of kin, of the deceased—to a share of his estate, with place of residence, degree of relationship, and statement as to which are minors, whether they have a general guardian, and if so, the name and place of residence to the best of the executor's knowledge, information, and belief.

=SCHEDULE G=

1. Statement of all other facts affecting the administration of
said estate, executor's rights, and those of others interested.

These schedules provide all the material from which to make the
account proper. In his account, the executor charges himself as follows:

With amount of inventory $_________
With amount of increase as per schedule A _________
With amount of income as per schedule A _________
_________
Total debits _________

He credits himself:

With amount of losses on sales as per schedule B $_________
With debts not collected as per schedule B _________
With articles mentioned in inventory lost, schedule B _________
With funeral expenses and other expenses, schedule C _________
With money paid creditors, schedule D _________
With money paid to legatees, widow, or next of kin, schedule E _________
Total credits $_________
Balance _________
Add articles unsold _________
Add debts not collected _________
_________
Total to be distributed _________

FORM OF ACCOUNTS

=3.= The devising of forms of trust and executory accounts offers a wide scope for the application of accounting knowledge. Many intricate problems arise in the interpretation of details of the trust and in the apportionment of sums received, between capital and revenue. Broadly, these accounts are prepared in one of two forms: (a) An account of charge and discharge; (b) in the form of regular ledger accounts. As has been intimated, legal requirements are complied with by the first form, but the second form is preferable. When ledger accounts are kept on the double entry plan, the fullest information can be obtained about the condition of the trust at any time, and from these accounts, the account of charge and discharge or any form required by the court can be made for each period.

In preparing the accounts the exact relationship of the trustee to the estate (as the property in trust is called) must be kept in mind. As the owner of the property, he is a creditor of the estate (the business) just as the proprietor of the business is the creditor of that business. On the other hand, as custodian, he is a debtor, being in possession of the property of others.

In the ledger, property accounts are opened with the different classes of properties represented in the estate, which accounts are debited for the appraised value of the properties. These are known as _custodian accounts_.

A contra account representing the estate—sometimes called the capital—is opened under some such caption as _Personal Estate Account_. This account is credited with the combined values of all properties represented by the custodian accounts.

When the assets are entered and posted, the ledger accounts will appear as follows:

These asset accounts represent the value of the individual properties, while the personal estate account represents the combined values of all personal property of the estate (No. 1, No. 2, and No. 3). The personal estate is known as the _corpus_, distinguishing it from the real estate.

If the trustee, as the custodian, is called upon merely to distribute the estate to the beneficiaries, his accounting is a very simple problem. In many cases, however, he is called upon to take care of the income arising from the corpus or the real estate.

When he receives such income in the shape of cash, he debits himself as custodian through a cash account, and credits an income account under an appropriate title—as _interest account_, _rent account_, _dividend account_, etc. The account may represent the income from a specific property, or all income of a stated class. For example, rent account may represent the rents received from all properties, or there may be a separate rent account for each.

Distinguished from the income accounts, the trustee sometimes has accounts representing the sale of real estate, which must then be treated as personal property. When real estate is sold, cash is credited and an account, usually called _Sale of Real Estate_, is credited.