hand at the end of the period. The Inventory account remains open until the books are closed again, when the account is closed into Purchases, and the new inventory set up. This method is the one generally recommended by accountants and has the advantage of removing from the Purchases account, which is primarily a trading account, the inventory of goods on hand, which represents an asset, thus avoiding an account which has two separate functions. However, it is felt that the first method illustrated is more easily understood by the beginner. The instructor may adopt the method which he desires. The closing entries are posted to the ledger, each posting being paged as is done when posting any other entries, and the accounts are ruled. The ledger accounts affected by such entries, after they have been ruled, would appear as shown above. Note, however, that the paging indicating the page in the journal from which such entries are supposed to have been posted, is not shown; and that the accounts are not in the order in which they would appear in the ledger, this arrangement being given to show in better sequence the steps taken in closing the ledger. The Profit and Loss account thus becomes an account which is used only at the time of closing the ledger, when by means of the closing entries all items of profit and loss are brought together in compact form. The function of such an account is stated as follows: Debit : PROFIT AND LOSS At the time of closing the ledger with all items of loss or expense, such items being transferred to this account by means of closing entries. With the net profit for the period, the corresponding credit being to the proprietor's account. Credit: At the time of closing the ledger with all items of profit or income, such items being transferred to this account by means of closing entries. Credit with a net loss for the period, the corresponding debit being to the proprietor's account. The account will then balance and will remain closed during the following period. All extraordinary or unexpected items of profit or loss are frequently credited or debited directly to the Profit and Loss account as they arise, thus making use of the account for current transactions of an exceptional type. A much better practice, however, is to open special current accounts for such extraordinary profits or losses, closing them into Profit and Loss at the time of closing the ledger. Items of this character would consist of loss by burglary or fire, cash "overs" or "shorts," any discrepancy in a trial balance which cannot be located, gifts to charity, counterfeit money received, etc. The diagram on page 58 will serve to illustrate in a rather more graphic manner the purpose of closing the ledger and the results accomplished thereby. The following work is now to be done by the student: (a) Profit and Loss Statement, February 1-March 31, 19-. Inventory of merchandise on hand, March 31, $2416.20. (b) Balance Sheet, March 31, 19—. (c) Closing Entries, March 31, 19—. (d) Ruling of ledger accounts. The two statements and the closing entries should be prepared on separate sheets of journal paper, submitted for inspection and criticism, and then copied in the proper blank book. In addition to ruling the accounts which were closed by closing entries, it is customary to balance all accounts showing an asset or a liability. This consists in (1) writing the word "Inventory" in red ink on the credit side of the Purchases account, ruling the account, and bringing down the inventory on the debit side of the account, immediately beneath the ruling, in red ink, under date of March 1; (2) writing "Net Worth" in red ink on the debit side of the proprietor's account and bringing it down on the credit side; (3) balancing the accounts with Cash, Notes Receivable and Notes Payable, and all personal accounts by writing the word "Balance" on the smaller side in red ink, ruling the accounts, and bringing down the balance on the larger side, in black ink, under date of April 1. The balancing of such accounts has already been illustrated under the section on individual accounts. (e) Proof Trial Balance. REVIEW QUESTIONS JOURNALIZING, POSTING, TRIAL BALANCE, FINANCIAL STATEMENTS, and CLOSING THE LEDGER 1 What is meant by journalizing, and why is the process of such importance? 2 Why is a clear and complete explanation an important part of an entry in the journal? 3 When should posting be done? 4 In what ways may posting be performed? 5 What is folioing? Check posting? 6 How should an entry made incorrectly, but not discovered until posted, be corrected? Give an example. 7 Define a trial balance. What is the object in taking a trial balance? 8 What does a trial balance prove? Is it an absolute test of accuracy? 9 Give examples of errors which would not have any effect on the trial balance. 10 What would be the effect on a trial balance of posting a debit item of $100 as a credit? 11 How much would a trial balance be "out" if an item of $50 were posted as 50¢? If an item of $985 were posted as $895? 12 What test would suggest the probability of the errors in Question 11 having been made? 13 If an account having a debit balance of $250 were shown on the trial balance with a credit balance of $250, how much out of balance would the trial balance be? If shown as a debit balance of $2.50? 14 If the trial balance were ten cents, one dollar, ten dollars, one hundred dollars, or one thousand dollars out of balance, what would the error in all probability be? 15 State in detail as many suggestions as possible for locating errors in a trial balance. 16 If both sides of the accounts were shown, would you recommend entering both debit and credit postings of accounts in a trial balance, or only the difference between the two sides? Give reason. 17 How often should a trial balance be taken? 66 18 What is meant by a trial balance being cumulative" from month to month within a fiscal period? 19 At the end of a fiscal period, what important results does the business man expect from his bookkeeping records? 20 What use can be made of "business statistics" obtained from bookkeeping records? 21 What are financial statements? What do they show? 22 Define Profit and Loss Statement; Balance Sheet. What is the difference between the two? 23 State fully from what sources the financial statements are prepared. 24 If an account has a debit balance, what must it represent? If a credit balance? 25 Why should the heading of the Profit and Loss Statement show the period covered rather than one date? How may the period covered be indicated? 26 In what way does the heading of the Balance Sheet differ? Why? 27 In what order should the assets appear on the Balance Sheet? The liabilities? Can you think of another arrangement that would be proper? Give arguments supporting both methods, bearing in mind the nature of the business and the use to be made of the balance sheet. 28 Why is the Balance Sheet so named? 29 Define net worth or proprietorship. 30 What is meant by the account "form of financial statement? Has the term any reference to debit and credit? 32 Why is it necessary to close the ledger at the end of a fiscal period? 33 Are all the accounts closed? Which kind of accounts are left open, and why? 34 Describe the process of closing the ledger by means of journal entries. What is the advantage of this method over making cross entries in the ledger? 35 What is the purpose of the Profit and Loss account? Functions? 36 What is a proof trial balance? With what will its totals agree? Why? 37 Explain the difference between a trial balance taken before closing the ledger and one taken after doing so. 38 State the equation which is always shown by the balance sheet. 39 A bookkeeper finds that the debit side of his trial balance exceeds the credit by $127.60, which difference he is unable to locate. Until he has time to make further search for the mistake, he opens a Suspense account in the ledger and credits it with the amount of the difference. Later he discovers the following errors: (a) $262.50 posted to the credit of a customer instead of $226.50. (b) Notes Receivable credit of $50 posted to the debit side of the account. Make journal entries to correct these two errors, the adjustment being made through the Suspense account, and state whether all errors have been located. 40 Inventory of merchandise on hand is taken by A. B. & Co. on December 31, 191-, which amounts to $17,624.30. The inventory taken six months previous, at the last closing of the books, amounted to $21,472.50. The purchases during the period amounted to $62,572.40; the sales, $84,641.20. Show as you would in setting up a Profit and Loss Statement the manner in which you would arrive at the gross profit on sales. 41 Where would you expect to find the following accounts in the financial statements prepared at the close of a fiscal year? (a) Notes Payable (b) Freight and Cartage In (c) Accounts Receivable (d) Merchandise Inventory 42 What is the reason for opening a separate Inventory account at the time of closing the ledger, transferring to such account the inventory at the close of the period? 43 Should the Profit and Loss account be used as an active account during the fiscal period? Explain and give examples. BUSINESS PAPERS In the next practice set, in addition to making entries in the proper books for the transactions as they occur, practice will be given in handling certain business papers which are in common use. These include invoices, promissory notes, checks, receipts, etc. The incoming papers will come to the student properly made out and ready for inspection, entering, and filing, while all papers issued by the business will be written by the student on blanks furnished for that purpose. Previous to beginning this work, it is important that the form, wording, and use of such papers be well understood, in order that the practice work may be done intelligently and with full appreciation of its value. Only those papers which will be used in the coming exercise are here discussed. An invoice is an itemized list of goods bought, showing date of purchase, from whom purchased, terms of purchase, quantities, names of goods, prices, and amounts. When an invoice is received, it should be checked for quantities, prices, extensions, and additions. If the goods received correspond to the items shown on the bill, a check mark is made against each item in the vertical column to the left. If the multiplications and additions are correct, a check mark is placed to the left of each item as it is verified. If the invoice is found to be correct in every detail, it may be O.K.'d with the bookkeeper's initials beneath. The following is a model invoice with all verifications made as explained above: |