12. Account books are of two classes: (_a_) those in which complete

records of transactions, or complete accounts, are kept; (_b_) those which contain particulars of individual transactions which must afterward be transferred to books of the (_a_) class. Books of the (_a_) class are known as _principal books_ or _books of record_; that is, they contain the final or permanent record of an account. Books of the (_b_) class are of two kinds: (_ba_) books of _original entry_; (_bb_) _auxiliary books_. Any book which contains the first (or original) record of a transaction is a book of original entry (_ba_). [Illustration] [Illustration: A CORNER IN THE OFFICES OF THE PLATT IRON WORKS, DAYTON, OHIO] Any book in which records contained in books of original entry (_ba_) are assembled, to be transferred later to principal books (_a_), is an auxiliary book. Any book used for the purpose of assembling statistical information is an auxiliary book. The books most commonly used in double entry bookkeeping are: _Order Book_, _Day Book_, _Cash Book_, _Journal_, _Sales Book_, _Purchase Book_, _Ledger_. =13. Order Book.= An Order Book is a book of original entry in which is entered a record of each order or request for the shipment or delivery of merchandise. The record shows the name and address of the customer, the kinds and quantities of goods wanted, and the prices at which they are to be sold. The ruling of the order book varies according to the nature of the business. A simple form of ruling is shown. =14. Day Book.= A Day Book is a book of original entry in which are entered full particulars of each completed transaction. These records are afterwards assembled in auxiliary books, from which they are transferred to the principal books. [Illustration] The use of the day book was formerly universal, but it has been discarded by modern bookkeepers as its use involves unnecessary labor. The records formerly kept in the day book are now made directly in certain books then known as auxiliary, which makes of them books of original entry. The ruling of the day book is shown. =15. Cash Book.= A Cash Book is a book of original entry containing records of all transactions which involve either the receipt or payment of cash. The records in the cash book are in fact a complete account with cash. We debit cash for all money received, and credit cash with all money paid out; therefore, the difference between the total footings of the debit and credit sides of the cash book shows the amount of cash which we should have on hand. Since we cannot pay out more than we receive, the debit side should be the larger, unless both sides are equal, which shows that we have paid out all the cash received. The amounts entered on the debit side of the cash book are transferred (or _posted_) to the credit side of the account of the one from whom the cash is received. The amounts entered on the credit side of the cash book are posted to the debit side of the account of the one to whom the cash is paid. [Illustration] There are many special forms of ruling for cash books, with separate columns for entering certain classes of receipts and payments of a special nature. The ruling of the cash book should be made to meet the requirements of the business in which it is to be used. A simple form of ruling is shown. It will be noted that the left-hand page is used for the debit side, while the right-hand page is used for credits. This is the only account kept with cash. =16. Journal.= A Journal is a book in which separate transactions are entered in a manner to preserve the balance necessary in double entry--that is, showing the proper debit and credit for each transaction. The journal is used for making adjusting entries, and it was formerly the custom to copy into this book from the day book the particulars of every transaction. Records are now made in the journal directly, which makes it a book of original entry. The records in the journal are transferred or posted to the debit and credit sides of the accounts which they represent. The journal is frequently combined with the cash book, and is then called a _cash journal_. An ordinary form of journal ruling is shown in Article 11. =17. Sales Book.= A Sales Book is an auxiliary book in which is kept a record of all goods sold, showing name of purchaser, quantity and kind of articles, prices, and amounts. A sales book is a journal of sales. The amounts of individual sales are posted (transferred) to the debit side of the accounts of the purchasers. The footings of the sales book are carried forward until the end of the month, when the total amount is posted as one item to the credit side of the _merchandise_ account, completing the double entry. The merchandise account has been universally used in the past, all purchases being debited and all sales credited to this account. Certain other accounts (which will be explained later) are now recommended by leading accountants, to take the place of the merchandise account. Sales books are usually ruled to meet the special needs of each business, separate columns being provided for a record of special classes of sales, or sales of special kinds of goods. =18. Purchase Book.= A Purchase or Invoice Book is the opposite of the sales book, being used for a record of all purchases made. Like the sales book, the totals are carried forward to the end of the month, and posted as one item to the debit side of the _merchandise_ account. The amounts of the separate transactions are posted daily to the credit of the persons from whom the goods are purchased. [Illustration] The purchase book is a purchase journal, and the ruling is the same as that of other journals. =19. Ledger.= The Ledger is the principal book, in which particulars of every transaction of every nature are summarized. It is, in fact, a transcript of all other books of the business except those used solely for statistical purposes. The ledger is the book which contains the final or complete records of all dealings, either with an individual or with respect to a specific class of transactions--as expenditures for a certain purpose, or receipts of a given character, or sales of a given kind of goods. A transcript of the ledger accounts exhibits the progress and standing of the business. Like other books, ledgers are now made with special forms of ruling, depending on the purpose for which they are to be used. The old style or common form of ledger ruling is shown (p. 35). =20. Invoice or Bill.= An Invoice or Bill is an itemized statement or record of goods sold by one person to another. The invoice or bill is used in every line of business. A conventional form of invoice is shown (p. 5). RECORDING TRANSACTIONS =21.= The records of transactions in the journal which show what accounts are debited and what accounts are credited are called _journal entries_. The act of making these entries is known as _journalizing_. It was formerly the custom to journalize each individual transaction from the day book, but in modern bookkeeping the journal is used only for adjusting and special entries. =22. Posting.= When the record of a transaction is transferred to the ledger from a book of Class (_b_), it is said to be _posted_. The act of making the transfer is called _posting_. The original method was to itemize all transactions in the ledger, but the present custom is to post the totals only. =23.= When a record is transferred from one book of Class (_b_) to another, or posted to the ledger, the page number of the book to or from which it is transferred or posted is entered in the column known as the _folio column_. This is done that the transaction may be traced from one book to another. The presence of the page number also serves as a check to show that the item has been posted. _Example_--An item is to be posted from page 1 of the sales book to page 10 of the ledger. In the folio column of the ledger will be entered "S 1" indicating that the item will be found on page 1 of the sales book. In the folio column of the sales book will be entered "10" indicating that the item has been posted to page 10 of the ledger. =24. Ledger Index.= An index to the ledger is necessary to enable us to find the accounts. In small ledgers the index is placed in the front of the book itself, while for large ledgers a separate index book is used. There is a distinct advantage in this, as the index book can be kept open on the desk while posting is being done, and the names found much quicker than when it is necessary to turn the leaves of the ledger to find the index. When an account is opened in the ledger, the name should be written in the index, followed by the page number. The names in the index are arranged in alphabetical order, each name being written under the letter of the alphabet corresponding to the first letter in the name. For example: =A= =B= =C= Adams, J. C. 11 Bacon, I. H. 2 Crandall, Jas. 7 Andrews, Henry 14 Brown, Henry 9 Campbell, Don. 12 In a large index, one or more pages are used for a letter; while in a small index, several letters may be placed on the same page. SAMPLE TRANSACTIONS =25.= The following sample transactions are carried through the books described in this section, showing the proper entries and postings (see pp. 40-43). The day book has been omitted, as it is practically obsolete, not being used by progressive bookkeepers. Muskegon, Mich., Nov. 1, 1907. I, ROBERT B. ROBINSON, have this day commenced business as a wholesale dealer in groceries and provisions. I have rented the store located at 68 Pine St., from Geo. Baker, at $40.00 a month. My resources and liabilities are as follows: RESOURCES Cash on hand $2,462.50 Merchandise per inventory 1,147.20 Due me from Roger Bros. 219.40 LIABILITIES C. B. Whitney, Grand Rapids $ 126.90 My net investment 3,702.20 --Nov. 1-- Bought from Grand Rapids Gro. Co., Grand Rapids, Mich. On account 10 cwt. sugar $4.85 $ 48.50 10 bbls. flour 5.25 52.50 150 " salt 1.10 165.00 2 " molasses 48 50,98 gals. .30 29.40 $295.40 --1-- Paid Geo. Baker For 1 month's rent Cash 40.00 --2-- Sold to Geo. Wiggins, 110 Ottawa St. On account 1 box B. B. soap 3.75 1 case X. X. corn 1.60 100# soda biscuit 4.25 9.60 --3-- Sold to Smith & Nixon, 262 Western Av. On account 2 bbl. flour 6.15 12.30 2 cwt. sugar 5.15 10.30 1 bbl. molasses, 48 gal. .35 16.80 39.40 --5-- Bought from William Bratton, 48 Jefferson Av., Detroit On account 10 sacks Java coffee, 1,000# .25 250.00 --6-- Sent to C. B. Whitney, Grand Rapids Draft to balance account 126.90 --7-- Sold to H. A. Brainerd, 961 Lake Av. On account 2 bbls. salt 1.35 2.70 10# baking powder .42 4.20 6.90 --8-- Charge Grand Rapids Gro. Co. 1 bbl. flour received in bad order 5.25 --9-- Sold to Bryan Bros., Lakeside On account 2 bbls. salt 1.35 2.70 20# raisins .08 1.60 4.30 --10-- Bought from H. A. Edwin, Chicago On account 20 bbls. pork 10.30 206.00 --12-- Sold for cash 3 bbl. pork 11.35 34.05 --13-- Sold to R. C. Ellison, 10 Jefferson Av. On account 2 bbl. pork 11.40 22.80 5 bu. beans 2.10 10.50 33.30 --14-- Received from Geo. Wiggins Cash to balance 9.60 --15-- Sent to Grand Rapids Gro. Co. Draft to balance 290.15 --16-- Sold for cash 1 box soap 3.75 --17-- Received from Smith & Nixon Cash on account 25.00 [Illustration] [Illustration] [Illustration] [Illustration] PROMISSORY NOTES =26.= A promissory note is a form of commercial paper much used in business. Goods are sold on specific terms--that is, to be paid for in a certain time after date. Profits are based on the supposition that the bills will be paid when due. When not so paid, the debtor is virtually borrowing money from the creditor, and should pay interest for the use of that money just as he would if he had borrowed it from a bank. To settle the account when it is not convenient to pay cash, it is customary to give a promissory note for the amount, plus interest, payable on a certain date. The promissory note is more convenient for the creditor; for when it bears his endorsement, his bankers will discount it, thus giving him the money for use in his business. Even though he may not discount it, the promissory note is better for the creditor, as it gives him a definite promise to pay, which he does not have when the debt is represented by an open account. =27. Bills Receivable and Bills Payable.= The commercial term for promissory notes accepted by us is _Bills Receivable_. The commercial term for promissory notes given by us is _Bills Payable_. The term "bill" is used in this connection for the reason that a promissory note is a negotiable instrument, and when indorsed it becomes practically a bill of exchange. The accounts in the ledger which represent notes receivable and notes payable are called _Bills Receivable Account_ and _Bills Payable Account_. The bills receivable account is debited when a note is received, and credited when a note is paid. The balance of bills receivable account shows the amount of unpaid notes payable to us. The bills payable account is credited when we give a note and debited when we pay a note. The balance of bills payable account shows the amount of the notes that we owe. =28. Bill Book.= For the purpose of keeping a record of bills receivable and bills payable, a book known as a _bill book_ is used. Any draft, note, due bill, or other written promise to pay a specified sum at a stated time, should be treated as a note or bill--receivable or payable, as the case may be. The bill book is an auxiliary book, and the record kept is usually treated as a memorandum only, records of each transaction being made in the journal. The form shown (p. 45) is one in common use. [Illustration] =29. Acceptances.= A draft when accepted--that is, when it becomes an _acceptance_--has the same value as a promissory note, for it is a definite promise to pay on a specified date. Drafts are used for the collection of accounts in other cities than the one in which the creditor's place of business is located. A draft may call for payment a certain number of days after date, or it may call for payment at sight. The former is known as a _time draft_, while the latter is a _sight draft_. =30. Discount and Exchange.= When a promissory note is taken to the bank for the purpose of raising money, it is customary for the banks to calculate the interest for the time the note is to run, and to deduct this from the principal, giving the borrower the net amount only. In other words, the interest is paid in advance, and such advance payment of interest is called _discount_. When a draft is collected through a bank, a small fee is charged, and this fee is called _exchange_. Exchange is also charged for the collection of out-of-town checks, especially if they are drawn on banks in small towns and cities. BANK DEPOSITS =31.= When money is deposited in a bank, a list of the items in the deposit is made on a blank known as a _deposit ticket_ or _deposit slip_. These deposit tickets are furnished by the bank for the convenience of its customers. =32. Signature Card.= Money deposited in a bank can be withdrawn only by presenting a written order or _check_, signed by the one in whose name the money is deposited. That the bank may know that money is not paid on checks that do not bear the correct signature, each depositor is required to leave at the bank the signature or signatures which are to be honored. These signatures are written on a card, known as a _signature card_, which the bank keeps for reference. =33. Check Books.= Blank checks are usually bound in book form, the checks themselves being perforated so that they can be easily removed. These _check books_ are in most cases furnished by the bank. The number of checks on a page varies, but is seldom more than four. When a check is written, the number, date, name, and amount should be written on the face of the stub. To keep a convenient record of the balance in the bank, it is well to enter a list of all checks and deposits on the back of the check stubs. [Illustration: Signature Card] =34. Pass Book.= The bank _pass-book_ should be taken to the bank whenever a deposit is made, as it contains the bank's receipt for all money deposited. =35. Indorsement of Checks.= Before a check can be deposited in the bank, it must be indorsed by writing the name of the payee across the back. The indorsement should be on the back of the left end of the check--never on the right end. Several forms of indorsement are shown (p. 48). When the name only is written, it makes the check payable to the bearer, and is known as a _blank indorsement_. When the words "Pay to" are used, the check becomes payable to the one whose, name appears immediately under the words. It can only be paid to him in person or credited to his account at any bank at which he may deposit the check. A check indorsed with the words "Pay to the order of" permits of a further transfer, and provides a receipt from the one to whom it is so indorsed. When a check is to be deposited, the proper indorsement is "For deposit only." This is of special importance when deposits are sent by messenger. Such indorsements usually include the name of the bank, and are made with a rubber stamp. =36. Depositing Cash.= It is a good plan to deposit all cash received and to pay all bills by check, except such small items as are paid from petty cash. By doing this, all transactions pass through the bank, providing a receipt in every case in the form of a canceled check bearing the indorsement of the payee. [Illustration: Endorsement] =37. Treatment of Petty Cash.= It is customary in business establishments to keep on hand a certain sum of cash out of which to pay items of expense such as office supplies, etc., when the amount is too small or it is not convenient to write a check. The best way to handle this is to draw a check for a certain amount, and keep this money separate from the cash received from day to day. At the end of the month, or sooner if the fund is low, draw a check payable to cash for the amount paid out and charge it to expense. This will leave the fund intact. _Example_--We shall suppose the amount of petty cash to be kept on hand to be $25.00; and the amount paid out, $15.60, leaving $9.40 on hand. A check will be made for $15.60, to be charged to expense through the regular cash book. The cash will be drawn from the bank, and the amount added to the $9.40, making a total of $25.00. A record of petty cash is usually kept in a small book called a _petty cash book_. This book has the regular two-column journal ruling. In handling petty cash, great care should be taken to secure a receipt in some form for every payment. [Illustration: A BIRD'S-EYE VIEW OF THE BELOIT, WIS., FACTORY OF THE FAIRBANKS-MORSE CO.] SAMPLE TRANSACTIONS =38.= The following sample transactions taken from the books of W. B. Clark, Ames, Ia., illustrate the use of the papers and accounts explained in this section, and show how the transactions would appear on the books. Mr. Clark is a shipper of produce, and a retail dealer in coal. His assets and liabilities are as follows: ASSETS Cash in bank $1,262.78 Inventory, Produce 685.00 " Coal 747.50 Geo. White--Open account 21.00 F. H. Russel " " 7.00 Henry Brown " " 8.00 O. L. Duncan--Note due Dec. 1 27.00 $2,758.28 -------- LIABILITIES Iowa Coal Co., Des Moines, Open acct. $120.00 Lehigh Coal Co., Chicago, Ill., Open acct. 325.00 George Hardy, Open account 60.00 505.00 -------- As he wishes to know how much business he is doing in each department of his business, he keeps accounts in the ledger with both produce and coal instead of one merchandise account. In the sales book, one column is used for coal sales, and one for produce sales. No purchase book is kept, all purchases being posted from the journal or cash book. --Oct. 22-- Bought from David Andrews, for cash 200 bu. potatoes @ .42c $84.00 Paid by check No. 11. --22-- Sold to Albert Long on account 2 tons run of mine coal $3.25 6.50 --23-- Received from Geo. White on account Cash 10.00 --24-- Sold to Taft Produce Co., Des Moines, on account 148 bu. beans 3.10 458.80 --24-- Drew from bank for petty cash 10.00 Check No. 12. --25-- Sold to Geo. Hardy on account 1½ tons nut coal 9.00 13.50 Gave him check No. 13. 46.50 --27-- Gave to Lehigh Coal Co., Chicago. 60-day note 200.00 Check No. 14. 125.00 --28-- Taft Produce Co. paid sight draft through Iowa National Bank 458.80 --29-- Accepted 30-day draft made by Iowa Coal Co. 120.00 Payable at Ames State Bank --30-- Deposited in Ames State Bank Draft Iowa National Bank 458.80 Cash 10.00 --30-- Paid for repairs to stove, cash 1.20 --31-- Sold for cash, ½ ton egg coal 4.50 [Illustration] [Illustration] [Illustration] [Illustration] [Illustration] [Illustration] [Illustration: ACCOUNTING DEPARTMENT IN THE NEW YORK OFFICE OF J. WALTER THOMPSON COMPANY] THEORY OF ACCOUNTS