Accounting Theory and Practice, Volume 2 (of 3)

Volume Ii

(SECOND YEAR)

Twelfth Printing

NEW YORK THE RONALD PRESS COMPANY 1922

Copyright, 1918, by THE RONALD PRESS COMPANY

To Nancy

AS A TRIBUTE OF LOVE AND TENDER MEMORY TO HER MOTHER

PREFACE

A knowledge of the subject matter of Volume I is a prerequisite to the profitable study of the present work. Therefore, it may be well to review briefly the contents of the latter as an introduction to this book. In Volume I the attempt was made to formulate and illustrate the basic principles upon which the practice of accounting is founded. The principles of debit and credit were developed and their application explained—as related ultimately to the balance sheet and statement of profit and loss. The chief books of original entry (the voucher register excepted) and the various ledgers were described and illustrated. Columnar books, controlling accounts, methods and devices for preventing and detecting errors, methods for the proper handling of purchases, sales, cash, and trade discounts, and some phases of proportion and interest were discussed in detail.

Some special applications of accounting principles, as viewed in relation to the accounting problems involved therein, were also explained and illustrated under such heads as: notes receivable discounted and dishonored; consignments and approval sales; single and joint venture accounts; accounts current, their reconciliation and adjustment; instalment sales; sales for future delivery; single entry, its methods and the results attainable under it; etc.

From the standpoint of business organization, the accounting problems peculiar to the single proprietorship and the partnership were given full treatment. The advantages and disadvantages of the various types of organization, the rights and duties of owners among themselves and to outsiders, the accounting procedure necessary under different conditions for changing from one form of organization to another, and other like items were set forth. Underlying the entire treatment of the subject was the guiding principle that accounting is never an end in itself, that its right to existence depends solely on the service it can render from the standpoint of administrative and financial management.

In content, the present volume is primarily a study of the corporation, its accounting and financial problems, although most of the material, in so far as it consists of a statement of general principles, is equally applicable to other types of organization. The emphasis of the volume is laid upon the problem of valuation as met in the commercial balance sheet. Chapters IV to XXVII inclusive comprise this portion of the subject matter. The other chapters treat miscellaneous matters, a knowledge of which is essential to the student of accounting. These latter form parts of the work of the second year as mapped out in the author’s scheme of instruction, whereby the whole field of accounting is covered by a well-graded three-year course of study. In this scheme cost accounting should be studied concurrently and as a parallel course with the work of this second volume. Only a bare outline of some of the problems and methods of cost accounting is presented in this volume.

As to the division of the text and its use in the general scheme, it is suggested that the first twenty-seven chapters should comprise the text material for the first semester, leaving the remainder for the second semester in which the chief emphasis should be placed on the solution of problems rather than on the formal classroom lecture. Hence the text material is lessened for this semester’s work, and the student’s main effort is directed towards the application to the problems of business of the principles already established.

Instead of following the plan of the first volume in placing the practice work for the student at the end of each chapter of text, this material is presented separately in three appendices. It is believed that this will be found a more convenient arrangement.

The author desires to emphasize the need of ample practice work and at the same time to take a stand against the method of teaching accounting exclusively by the so-called laboratory or case method. A happy combination of text containing a statement of principles and showing methods of application, together with practice material intelligently made up so as to require a knowledge of principles before solution, is the desideratum in any course of instruction. Principles, theory, without application are barren and soon slip away, even if seemingly understood at the time. Practice without a thorough grounding in fundamental theory can never be sure of itself. An equitable division of the student’s time between theory and practice portions should be aimed at. In the present volume, while the time required for the practice assignments may at times seem heavy, an attempt has been made to keep it to the minimum deemed essential for adequate training either for general or professional use. It cannot be too emphatically stated that accounting as a profession ranks as to subject matter and the need for its services with the other professions. If it is to enjoy equal honor, dignity, and professional standing, teachers and practitioners must condemn without qualification the idea prevalent among many that a few months’ training suffices to turn out a finished product. Too often has such a course given point to the witticism that an accountant is a bookkeeper without a job. As stated in the preface of Volume I, a course of at least three years’ professional study is now quite generally recognized as essential. Accounting is so broad in its many ramifications that less than that gives inadequate training.

The reception accorded the first volume and the report of results achieved in the classroom, through its use leads the author to hope that this second volume may have a courteous hearing and trial. Criticisms and suggestions will be much appreciated. The author hopes to be able to offer in the not too remote future the third and concluding volume in this series on general accounting.

The author is indebted for much assistance and counsel. Acknowledgment is due Miss Nina Miller of the Columbia staff and Eric Bodine for help in gathering and preparing much of the material for Chapters XXVIII to XXXIII; to H. A. Inghram of the University of Georgia, for preparation of a large part of Appendix D; to Leo Greendlinger and David E. Boyce for the use of problems prepared by them; and to his good friend, Joseph Gill, for help in reading the proof. To S. B. Koopman and James F. Hughes of the Columbia staff in second year accounting, the author is under special obligation for many suggestions. Mr. Koopman has furnished most of the problems for Appendix B, and has collected those for Appendix C.

As with Volume I, so in shaping the content of the present volume the author has had the good counsel and ever ready help of his chief, Robert H. Montgomery, and desires again to offer goodly acknowledgment, for his debt is large.

R. B. KESTER. Columbia University, New York City, August 5, 1918.

CONTENTS

CHAPTER PAGE I THE CORPORATION 1 The Corporation Classification and Definitions Method of Ownership Working Organization Different Classes of Stock Common Stock Preferred Stock Guaranteed Stock Founders’ Stock Debenture Stock Stock of No Par Value Watered Stock Treasury Stock Forfeited Stock Bonus Stocks or Bonds

ACCOUNTING FOR STOCKS Discount on Stock Premium on Stock Property Exchanged for Stock Treasury Stock Donated Bonus Stock Treasury Stock Purchased Redemption of Preferred Stock Forfeited Stock Stock of No Par Value Distinctive Records Stock Ledger Minute Book Conclusion

II THE VOUCHER SYSTEM 26 Purchasing for the Manufacturing Business Expansion of the Purchase Journal Development of Voucher System Definition and Description of Voucher Operation of Voucher System Voucher Check Form of Voucher Register Distribution of Vouchers Posting of Summary Totals Effect on Cash Book and Bank Account Payment of Vouchers Voucher Index of Creditors Control of Vouchers Payable Introduction of System Purchase Returns and Allowances Partial Payments Handling of Notes Payable Cash Discount on Purchases Modifications of System Summary of Operation and Advantages

III FACTORY COSTS 49 Difference Between Factory and Financial Accounting Definitions of Terms Special Purposes of Cost Records Nature of Raw Materials and Supplies Accounting for Material Cost Direct and Indirect Labor Time-Keeping Records Pay-Roll Safeguarding the Pay-Roll Distribution of Labor Charges Expense Summary of Manufacturing Cost

IV THE BALANCE SHEET 60 Business Methods under the Microscope The Reading of the Balance Sheet Definition Relation Between Balance Sheet and Trial Balance Form of Balance Sheet Purpose and Uses Types of Balance Sheet Origin of English Form of Balance Sheet Variation of English Form Balance Sheet Titles Grouping and Classification Arrangement of Groups Report and Account Forms Valuation Accounts Statutory Requirements as to Frequency of Balance Sheets Condensation of Information in the Balance Sheet Use of Supporting Schedules

V GENERAL PRINCIPLES OF VALUATION 81 Content of the Balance Sheet Valuations for Rate Regulation Valuation for Sale and Purchase Other Kinds of Valuations Going Concern Valuation Kinds of Value Source of Data as to Values Cost Value the Usual Basis Definition of Capital and Revenue Expenditures Organization Expenses Definition of Replacements, Renewals, Maintenance, etc. Treatment of Renewal of Parts Treatment of Cost-Cutting Changes Asset Subject to Depreciation a Deferred Charge to Operations Authorization of Booking Capital Expenditures Repairs on Second-Hand Plant Construction Costs Distinction Between Capital and Revenue Expenditures Often Based on Opinion Main Groups of Asset Items Valuation of Liability Items Over- and Under-Valuation The Balance Sheet an Expression of Opinion

Continue reading Accounting Theory and Practice, Volume 2 (of 3) free in the Wunder reader →