Volume I

(FIRST YEAR)

SECOND EDITION

Third Printing

NEW YORK THE RONALD PRESS COMPANY 1922

Copyright, 1917, by THE RONALD PRESS COMPANY

Copyright, 1922, by THE RONALD PRESS COMPANY

All Rights Reserved

To My Father and Mother AN APPRECIATION OF THEIR STEADFAST INTEREST IN MY WORK

PREFACE

The basic soundness of the method of instruction in Accounting developed in this book has received substantial demonstration throughout five years of test. The Introduction to the first edition contained the following statement regarding the development of the subject:

“The method of approach as given in this volume is perhaps not orthodox but it has seemed that the student, given an understanding of the purpose which the accounting records are to serve, will be able to make that record with real intelligence instead of by rule-of-thumb. Accordingly, the balance sheet and the profit and loss statement are presented first, as the goal towards which all record-keeping looks. The student is taught to analyze business facts and conditions from the very beginning. He is then led, step by step, through the use of non-technical terms, into the ledger, where he sees the way in which the data which he has been using are summarized. The books of original entry are next explained, and the method by which the information is classified as it is brought onto the books. Finally, the business papers and documents which constitute the source of all entries are described.”

To quote again from the original Introduction: “The subject is developed in such a way that the student knowing something of bookkeeping has little or no advantage over the one without such knowledge. This book has been written for the use of students in our colleges and universities desiring a first course in accounting. It gives the scope of the work in accounting offered in the first year of the School of Business of Columbia University.”

The method then advocated and used in a few institutions has become quite generally accepted. It has justified itself by the ease and extent to which students without any previous training in accounting have grasped the essentials of the subject. Experience with the book in the classroom, however, and changing ideas with regard to manner of presentation and sequence of material, have shown as desirable a rearrangement of some parts and an addition of new material in places. Accordingly, a systematic revision has been made.

The arrangement of the subject matter of the first portion of the book has been altered but slightly. The use and function of the balance sheet and profit and loss statement have been somewhat amplified. The working sheet has been introduced earlier than in the first edition to afford an easy summary of the period’s results. It should later on be made a part of the regular work of summarization. The controlling account is also explained earlier so as to afford more practice in its use. The accounting features of the partnership and of the corporation are given continuous treatment. Here a new chapter has been added, which discusses certain features of the corporation not treated in the original book such as the issue and sale of treasury stock and of bonds, bond interest as related to premium and discount, sinking fund, sinking fund reserve, redemption of bonds, etc.

The material presented in the last quarter of the book deals with the interrelations of accounting, financial management, buying, and marketing. Thus the chapters dealing with the handling of cash, notes receivable and payable, cash discounts, and balance sheet valuation, treat of the relations between accounting and financial management. Several chapters at the end treat of some special methods of accounting practice and of the basic principles of single entry. In this portion of the book new chapters on balance sheet valuation and on buying have been added.

Entirely new problem material has been furnished, carefully graded and related so far as possible to the subject matter of the chapters of the text. For the convenience of the student this material is separated from the text, and grouped in three appendices. A few of the problems have been drawn from the examinations of various state boards and the regents of the University of the State of New York, and from other miscellaneous sources, to all of which acknowledgment is due. The author is indebted to Mr. George B. Kelley for assistance in building up a large part of the practice material. It need hardly be said that a fundamentally sound knowledge of accounting cannot be gained without ample practice work. Theory can never be sure of itself until put to the test of practice.

The author desires to acknowledge again his debt to the many friends whose counsel and aid counted so largely in the first writing of this book. In the revision he finds himself still further indebted to many instructors in all sections of the country for criticism and suggestion. He desires especially to express his appreciation of the active co-operation of his associates on the Columbia staff of instructors in First Year Accounting, in particular Miss Nina Miller and Messrs. Ralph T. Bickell and E. Gaylord Davis. In the actual work of revision Messrs. Eskholme Wade, John Jaffee, and Raymond Gatchell have given valuable assistance.

ROY B. KESTER Columbia University, New York City, July 22, 1922

CONTENTS

CHAPTER PAGE I BASIC RELATIONSHIPS—PROPRIETORSHIP 1 II ASSETS, LIABILITIES, AND CAPITAL 11 III THE BALANCE SHEET 22 IV THE COMPARATIVE BALANCE SHEET 32 V THE ECONOMIC OR PROFIT AND LOSS ELEMENTS OF A BUSINESS 38 VI THE PROFIT AND LOSS SUMMARY 44 VII INTERRELATION BETWEEN THE ECONOMIC AND THE FINANCIAL ELEMENTS OF A BUSINESS, AND SOME INTER-RATIOS 57 VIII THE ACCOUNT 67 IX THE ACCOUNT (Continued) 72 X THE PHILOSOPHY OF DEBIT AND CREDIT 78 XI DEBIT AND CREDIT AS APPLIED TO ASSET AND LIABILITY ACCOUNTS 85 XII DEBIT AND CREDIT AS APPLIED TO PROPRIETORSHIP ACCOUNTS 91 XIII DEBIT AND CREDIT AS APPLIED TO MIXED ACCOUNTS 97 XIV PERIODIC WORK ON THE LEDGER 106 XV PERIODIC ADJUSTMENTS AND SUMMARIZATION 115 XVI SOURCES OF DATA FOR THE LEDGER 132 XVII THE SUBDIVISION OF THE JOURNAL 136 XVIII THE PURCHASE AND SALES JOURNALS 139 XIX THE CASH JOURNALS 147 XX THE MODERN JOURNAL 162 XXI BUSINESS PAPERS—NEGOTIABLE INSTRUMENTS 173 XXII BUSINESS PAPERS—THE GOODS INVOICE AND BILL OF LADING 185 XXIII BANKS AND THEIR METHODS 192 XXIV METHODS OF POSTING 199 XXV THE TRIAL BALANCE AND METHODS OF LOCATING ERRORS 204 XXVI THE CLASSIFICATION OF ACCOUNTS 213 XXVII THE WORK SHEET AND SUMMARY STATEMENTS 221 XXVIII ADJUSTING AND CLOSING THE BOOKS 237 XXIX TYPES OF ACCOUNTING RECORDS AND THEIR DEVELOPMENT 251 XXX CONTROLLING ACCOUNTS 264 XXXI HANDLING CONTROLLING ACCOUNTS 272 XXXII PARTNERSHIP FROM A BUSINESS VIEWPOINT 284 XXXIII PARTNERSHIP FROM THE ACCOUNTING VIEWPOINT 290 XXXIV CAPITALIZATION OF THE PARTNERSHIP 297 XXXV OTHER PARTNERSHIP PROBLEMS 305 XXXVI PARTNERSHIP PROFITS 313 XXXVII PARTNERSHIP DISSOLUTION 321 XXXVIII THE CORPORATION 330 XXXIX OPENING THE CORPORATION BOOKS 338 XL CURRENT AND CLOSING ENTRIES FOR THE CORPORATION 351 XLI HANDLING THE CASH 366 XLII NOTES RECEIVABLE AND PAYABLE 376 XLIII PROBLEMS ENCOUNTERED IN RECORDING NOTES RECEIVABLE AND PAYABLE 384 XLIV DISCOUNTS 392 XLV BALANCE SHEET VALUATION 403 XLVI BUYING AND STOCK CONTROL 420 XLVII SALES 433 XLVIII CONSIGNMENTS 447 XLIX ADVENTURE SALES 460 L ACCOUNTS CURRENT 468 LI BALANCING METHODS 477 LII SOME APPLICATION OF INTEREST AND PROPORTION 485 LIII SINGLE OR SIMPLE ENTRY 495 LIV ILLUSTRATION OF SINGLE ENTRY 504

Appendix A—PRACTICE WORK FOR STUDENT—FIRST HALF-YEAR 513 B—PRACTICE WORK FOR STUDENT—SECOND HALF-YEAR 553 C—MISCELLANEOUS PROBLEMS FOR SUPPLEMENTARY WORK 597

FORMS

FORM PAGE 1. Form of Ledger Accounts 70 2. Chart of Accounts 75 3. Accounts Balanced and Ruled 109 4. Transfer of Accounts to a New Page 112 5. Personal and Notes Payable Accounts 113 6. Standard Form of Journal 135 7. Purchase Journal 142 8. Modern Type of Purchase Journal 142 9. Departmental Purchase Journal 144 10. Cash Book (Cash Receipts Journal) 148 11. Cash Book (Disbursements Journal) 149 12. Columnar Cash Book—Debit Side 158 13. Columnar Cash Book—Credit Side 159 14. Divided Column Journal 164 15. Opening Entries on Books 166 16. A Promissory Note 175 17. A Draft 175 18. A Bank Draft 180 19. Forms of Checks 182 20. Monthly Statement of Account 191 21. Bank Deposit Ticket 193 22. Cross-indexing in Posting 202 23. Work Sheet 226-227 24. Balance Sheet—Report Form 232 25. Balance Sheet—Account Form 233 26. Statement of Profit and Loss—Report Form 234 27. Statement of Profit and Loss—Account Form 235 28. Profit and Loss Account in Ledger 249 29. Standard Ledger—Divided Column 258 30. Standard Ledger—Center Column 258 31. Balance Ledger Rulings 259 32. Balance Ledger Rulings 259 33. Boston Ledger Sometimes Used for Depositors 262 34. General Journal 279 35. Sales Journal Summary 279 36. General Journal Summary 281 37. Cash Book Summary Book—Receipts Side 282 38. Cash Books Summary Book—Disbursements Side 282 39. Petty Cash Book 369 40. Weekly Statement of Receipts and Disbursements 375 41. Notes Receivable Journal 380 42. Discount Columns Used for Cash Balance 400 43. Stock Control Card 430 44. Account Sales 451 45. Form of Adjusted Account Current 470 46. Account Marked for Analysis 478 47. Ledger Analysis Sheet 480

Accounting—Theory and Practice