INTRODUCTORY COURSE

Bookkeeping Defined. Every business man realizes the necessity of keeping a diary of the events that take place in his own business. This is necessary in order that he may be informed on any matter which concerns the financial welfare of his business, and further that he may know at certain periods whether his business is being conducted at a profit or at a loss. The recording of all business and financial events in an orderly and systematic manner is known as "bookkeeping." Bookkeeping is both an art and a science. It is an art in the sense that there should be a well-planned system of keeping such records, with all clerical work done in a neat and painstaking manner. As a science, it deals with the proper classification of property and of income and expense, with the making of sound deductions from the records kept, and with the interpretation of the results through the figures and data compiled. While it is desirable in every way that the records be neatly and carefully kept, it is of even greater importance that the books shall at all times reflect the absolute truth regarding what has taken place during the life of the business. Bookkeeping is not an end in itself; it is only a means to an end, and the end sought is that certain conclusions may be drawn and certain facts ascertained from the records kept.

Transaction Defined. — A transaction is a single event or occurrence in the affairs of an enterprise, such as a purchase of goods; a sale; a receipt or expenditure of cash; a payment of an expense bill; the borrowing or lending of money; etc.

Double Entry Bookkeeping. The method by which books are usually kept is known as "double entry." This scientific method is based upon the "equation of exchange" that exists in all business and financial transactions. Every transaction, regardless of its nature, consists of an exchange of value or of credit, which, from an economic standpoint, is an exchange of like values. It is thus apparent that every transaction has a twofold effect upon the affairs of any business, resulting from the fact that something has been given as well as received. In order, therefore, that a complete record be made of the transaction, it is necessary to record both the thing received and the thing given. This obviously results in a double entry, from which the method derives its name.

Under this method it is necessary to make a careful analysis of every transaction upon which is based the proper classification of the items involved in the exchange. This makes of double entry bookkeeping a subject founded upon fixed rules and principles which must be as thoroughly mastered by the student as would be the case in the study of any other science.

Single Entry Bookkeeping. Another method of keeping books is that known as "single entry." This method recognizes only that side of the exchange which for one reason or another it is thought desirable to record; in other words, only a single entry is made for each transaction. The method is rarely employed where any importance is attached to the bookkeeping records or where the work is in competent hands.

Single entry is difficult of concise definition because it exists in so many different forms. It is any method of keeping accounts which is not based upon double entry principles. It is employed most frequently in small businesses, institutions, societies, associations, and by private individuals and professional men. In such cases, the most important requirement is usually a record of cash receipts and disbursements, and inasmuch as some one who has no technical training in such work is generally delegated to keep the accounts, the system must of necessity be quite simple. As regards the use of single entry in mercantile houses buying and selling on credit, it is usually defined as a method which makes provision for keeping accounts with persons only.

Debit and Credit. Debit and credit are technical terms used in the application of bookkeeping principles to denote the twofold effect of every business transaction. They denote position chiefly; an item which is debited being entered on the left side of an account, while an item which is credited is entered on the right side.

Account Defined. - An account is a group of items of the same class. It has two sides, the left side being for debits to the account, the right side for credits. Separate accounts are kept with each class of property owned by a business, with persons with which the business has dealings, and with each class of income and expense.

Accounts may therefore be classified in a general way under the four following heads: (a) Accounts with persons.

(b) Accounts with cash, promissory notes, and other mediums of exchange.

(c) Accounts with property, both real and personal.

(d) Accounts with income, profit, or revenue, derived from any source, and with expenses, allowances, and services.

Books of Record. The books used in bookkeeping vary greatly in number and name, depending upon the nature and extent of the business.

In the early stages of the study of the subject only the primary books will be used, viz., the ledger and the journal. When the fundamental processes in bookkeeping are mastered and when facility has been acquired in the use of these two elementary books, other books in common use in mercantile houses, such as the cash book, purchases book, and sales book, will be studied and practice given in their use.

Books of original entry are books in which current transactions are recorded as they occur, and from which postings are made to the proper ledger accounts.

Ledger. The ledger is commonly called the "book of accounts," because in this book the accounts are opened with the various classes of items which it is desired to keep separate and distinct.

Entries for the transactions occurring from day to day are made in a journal or in some other book of original entry. At certain intervals these debits and credits are transferred to accounts of the same name in the ledger. Thus an account in the ledger becomes a summary of the debits and credits pertaining thereto found in the books of original entry.

The following illustration gives the ruling of a standard ledger page:

A careful study of the above form will show that the vertical three-line ruling down the center of the page separates the page into two parts, the ruling on the two sides being identical. The left half of the page is used for debits, and the right for credits. The following is an explanation of the use which is made of each ruled space on the debit side of the page, the numbers corresponding to the numbers inserted at the head of each space.

(1) Date column, the wider space being for the month, and the narrower space for the day of the month.

(2) Explanation space, which may or may not be used.

(3) Folio column, in which is inserted the number of the page in the book of original entry from which the item came.

(4) Money column, the wider space being for dollars, and the narrower space for cents. The spaces on the credit side of the ledger are identical with those on the debit side.

Journal. The journal, used as an elementary book, is a book in which an entry is made for every business transaction as it takes place. The transaction is first analyzed, the account to be debited and credited decided upon from the nature of the exchange involved, and the debit and credit recorded with an appropriate explanation.

The word "journal" is derived from the French word jour, meaning "day"; hence, a journal is a book in which daily entries are made for current transactions.

In actual practice the journal is never used as the only book of original entry, but is invariably used in connection with other books. It then serves as a book in which are recorded all transactions of a miscellaneous character for which no special books are provided.

Memoranda and financial data of a historical nature are often recorded informally in the

journal.

The following illustration gives the ruling of a standard journal page:

The use made of the different spaces is explained as follows, the numbers corresponding to the numbers given at the head of each space:

(1) Folio column, in which is inserted, at the time of posting, the number of the page in the ledger to which the item is posted.

(2) Debit position, the name of the account to be debited being written against the vertical line to the left.

(3) Credit position, the name of the account to be credited being written against the vertical line to the left.

(4) Explanation space; a complete and concise explanation of the transaction is recorded in this space, the writing extending from the single vertical line bounding the space on the left to the first money column on the right.

(5) Debit money column, in which is inserted the amount debited to the account named. (6) Credit money column, in which is inserted the amount to be credited to the account

named.

Posting. Posting is the process of transferring the debits and credits from books of original entry to their proper ledger accounts.

Other Terms Defined.

A profit is an increase in value or an excess of the amount received for a commodity over the purchase price or cost of production.

The word income, often incorrectly used in the same sense as profit, refers to the return derived from labor, from a profession, from capital, or from property, either personal or real. A loss is a decline in the value of property or an excess of cost over selling price. In bookkeeping, the word "loss" also has reference to any item of expense necessary to the operation of a business.

An asset is anything of value owned by a business. It may be any form of real or personal property, or it may be property of either a tangible or an intangible nature. The good will of a business is, for example, an intangible asset.

An asset is frequently spoken of as a resource.

A liability is a debt or an obligation of any character.

The fiscal period is a business or financial period at the end of which the books are closed and financial statements and statistics compiled. If convenient, business houses have their fiscal period end with the closing of the calendar year, but for practical reasons many concerns find it advisable to close their books at some other time. A "fiscal period" is usually understood to mean a year, but the term may refer to a semiannual or quarterly division of the

year.

A wholesale house buys from the manufacturer or jobber in large quantities and sells to the retailer.

A retail house buys from the wholesaler and sells in turn to the consumer.

The practice sets given in this text embody in a general way the principles of bookkeeping for wholesale, rather than for retail, houses.

GENERAL RULES FOR DEBITING AND CREDITING ACCOUNTS

Debit the receiver, the thing received, and that which represents an expense or a loss.
Credit the giver, the thing given, and that which represents an income or a profit.

In explanation of the above rule for debiting accounts, it should be observed that the phrase "the receiver" refers to the persons who receive something of value from the business; “the thing received," to the cost of any article, commodity, or property, either personal or real, which comes into possession of the business; "an expense or a loss," to any charges or expenses incurred in carrying on the business.

In the rule for crediting accounts, the phrase "the giver" relates to all persons who give something of value to the business; "the thing given," to the value of any article, commodity, or property, either personal or real, which the business parts with; "an income or a profit," to any benefit or return derived from the business.

FUNCTIONS OF CERTAIN ACCOUNTS PECULIAR TO A MERCANTILE BUSINESS

General and Special Rules. The general rules given above for debiting and crediting apply to all accounts and may be used in the analysis of every transaction which may arise. In addition to these general rules, however, certain special rules are of great assistance in the classification of accounts, because they define in detail the function of each account, thus making it easier to determine the particular accounts which should be debited and credited in each transaction.

A thorough knowledge of these special rules, together with practice in their application, is highly essential to the student of bookkeeping, and this knowledge should precede any such continuous practice work as is involved in the writing of sets typical of certain lines of business.

Only the more elementary accounts and those which would be found in almost any type of mercantile business are presented at this time. Others will be studied as occasion for their use arises.

In studying the function of an account, a clear understanding of the following points is essential:

(a) The purpose of the account and the type of transaction which is recorded thereunder. (b) The nature of the debits and credits that pertain to the account, together with an understanding of the sources from which they are derived.

(c) What the balance of the account represents and what disposition is made of it in drawing up financial statements and in closing the books at the end of the fiscal period.

CASH ACCOUNT

The term cash, as used in bookkeeping, refers to money of all denominations, both coin and paper, bank deposits, checks, bank drafts, post-office and express money orders, -anything, in fact, that is in circulation as a common medium of exchange.

It is natural for every one to think of business transactions in terms of money or its equivalent, and it is impossible to conceive of a business enterprise being carried on without having at all times a certain amount of money or some other form of cash on hand. In fact, in small businesses conducted entirely on a cash basis, and in many institutions and societies, a method of recording cash receipts and payments is all that is thought necessary in the way of a bookkeeping system. The Cash account and the records that pertain thereto are therefore of particular importance in any bookkeeping system.

The rules for debiting and crediting the Cash account are as follows: