Questions. 1. What is a promissory note? 2. What is the face of a note? 3. Who is the payee? 4. Why are the words "or order" usually written in promissory notes? 5. Why are promissory notes not included in the cash? 6. What are the advantages of promissory notes? 7. Which side of bills payable account should be the larger when there is a difference? Why? 8. Which side of bills receivable account should be the larger when there is a difference? Why? 9. How can you prove bills payable and bills receivable accounts? 10. Why should the entries in bills payable and bills receivable accounts always be for the face values of the notes? 11. How often are these accounts usually closed? EXERCISE VI. ACCOUNTS SHOWING LOSSES AND GAINS. 80. The purpose of this exercise is to illustrate and explain some of the accounts needed to show the losses and gains of business. The principal gains and some of the losses will be shown by the property accounts; but there are certain losses and gains incident to every business for which other accounts must be provided. Usually it will be necessary to have at least three such accounts; Expense, Interest, and Discount, although the two latter are often combined 81. Expense Account. This account will include disbursements for rent, insurance, clerk hire, salaries, labor, fuel, lighting, stationery, postage, and all other items incident to the carrying on of the business. You have learned that merchandise account is debited with the cost of the goods that are bought for the purpose of selling; and, in like manner, expense account should be debited with the cost of each item of expense. On the other hand, whenever any article is sold that was previously charged to expense account, this account should be credited with the proceeds. In a large business it is desirable and usual to keep separate accounts with the individual kinds of expense; such as Labor, Salaries, Rent, Furniture and Fixtures, and Postage, in order to show the amounts expended for each. Such a classification of expenses is of especial value when the proprietor desires to make comparisons with the expenses of other years. RULE. Debit Expense for the cost of each expense item. Credit Expense, when anything is sold that was previously debited to the account, or for any rebates on account of such items. 82. Interest and Discount.-Money paid for the use of other money is called interest. Interest must be paid on any note or other contract that contains a specific promise to pay it, and it may be charged after maturity on any debt not paid at maturity. A note that contains a promise to pay interest will bear interest from its date to maturity at the rate specified in the note, or, if the rate is not specified, at the legal rate of the state in which the note is payable. A note not containing a specific promise to pay interest will bear no interest, unless it is not paid at maturity, and then it will bear interest from the date of maturity to the date of payment, at the legal rate. If a bill of goods is bought on a credit of a certain time and is not paid for within that time, interest may be charged after maturity, as in the case of the note. Discount is an allowance for the payment of a debt before it is due. It is usually equivalent to the interest on the principal for the unexpired time. A person cannot be compelled to pay a debt before it is due, but, if he does pay a debt before maturity, he is entitled to compensation for the use of the money for the unexpired time. Discount is really money paid for the use of money; the difference between it and interest being that interest is paid after one has enjoyed the use of the borrowed money, while discount is paid in advance. 83. Interest and Discount Account. -Since interest and discount are so much alike, we shall use only one account for the two. You have been taught to debit Merchandise for the cost of goods bought, and to debit Expense for the cost of each expense item; in like manner you should debit Interest and Discount for each sum which you pay for the use of money. It follows that when you receive pay for the use of your money, you should credit this account. RULE. Debit Interest and Discount, when either interest or discount is paid or allowed to others. Credit Interest and Discount, when either interest or discount is paid or allowed to the business. 84. The Computation of Simple Interest and Discount. - Discount is computed by the same method followed in computing simple interest, therefore one rule will answer for both in all ordinary business trans- . actions. The rate of interest used in this book is 6%, unless some other rate is specified. Discount will be computed for the exact number of days between the day of discount and the day of maturity. The following illustration will help you to understand the method. of finding the difference in time between two dates. If a note, dated June 1, at two months, were discounted June 18, the maturity of the note would be June 1 plus two months, or Aug. 1; and the time of discount would be the exact number of days between June 18 and Aug. 1, as shown by the following statement: Any text-book on commercial arithmetic will give you several good rules for reckoning interest and discount. It will be best for most pupils to master and use one rule for all problems. 85. Directions. You may solve the following problems and submit your results to your teacher for his approval. 1. Find the interest on $300 for 5 months 20 days at 6%. At 5%. 2. Find the interest on $416.19 for 76 days at 6%. At 4%. 3. Find the interest on $21.84 for 47 days at 6%. At 7%. 4. A note for $600, dated Jan. 1, 1905, at 2 months, was prepaid Feb. 1, Find the date of maturity, the time of discount, less the discount at 6%. and the amount paid. 5. A note for $ 89.17, dated Mar. 15, 1905, at 90 days, was prepaid June 1, less the discount at 5%. Find the date of maturity, the time of discount, and the amount paid. NOTE. If the pupils cannot solve problems in interest and discount readily, it will be well to give them fifteen-minute class drills each day for a few days. 86. Directions. The transactions for this exercise are a continuation of those used for the last exercise, and you will use the same accounts. In addition you may open such new personal accounts as you may need and also accounts with Expense and with Interest and Discount. See illustrations on the next page. Sept. 1. Pay the note of Aug. 2, in favor of Charles W. Richards. This note was given for $65 and interest, and you are paying not only the $65, but also 33 for the use of this sum for 30 days. Only $65 should be debited to Bills Payable, because this is the amount of the debt you are paying (§ 74). Since the use of this money has cost you 33, Interest and Discount must be debited for this sum (§ 83). The entry in cash account will balance these two entries. Sept. 2. M. W. Wicks desires to prepay his note of Aug. 23, and you may allow him to do so, less the discount for the unexpired time. This note had 60 days to run, and would not be due till Oct. 22. You will have the use of this money 50 days before it is due, and you must allow M. W. Wicks the discount for the unexpired time. The face of this note is $216, and, as the discount on this sum for 50 days is $1.80, you will receive only $214.20 in cash. Bills Receivable must be credited with $216, for that is the amount of the debt that is paid (§ 75). Since the use of this money for 50 days before it was due has cost you $1.80, Interest and Discount must be debited for this sum (§ 83). The entry in cash account will balance the other two entries. 4. Pay the note of Aug. 5, in favor of R. K. Baker. This item should be debited to Expense (§ 81). 9. Sell Robert E. Lane on his note at 60 days, 200 bu. corn @ 454. 10. A. N. Wheeler has paid his note of Aug. 21, for $100 and interest. You will of course credit Bills Receivable for the face of the note, and, since A. N. Wheeler is paying for the use of your money for 20 days, you must credit Interest and Discount for the amount of the interest. |