CONTENTS Nature of Commerce-What is Accounting-Relation to Economics- What is Bookkeeping-The Accounting Profession-Development of Accountancy-Scope of Accountancy Examinations. Object of the Account-Classification of Facts-Losses and Gains- Debtor and Creditor-Nature of the Account-The Accounting System -Accounts Reviewed-The Accounts of John Smith. Practical Problems-Traditional Books-The Ledger-The Journal- Classification of Books-Classes of Ledgers-Other Books-Relation Between Books-Balancing and Closing-Technique of Closing-Bal- The Capital Account-How Capital is Contributed-Corporation Capi- Theory of Cash-Modern Means of Payment-The Bank_and_the Check-Use of Commercial Paper-Process of Discount-Bills Dis- honored-Bills Payable-Relation Between Cash and Quasi-Cash Ac- • counts. Nature of Goods-Goods on Invoice-Goods Returned-Consignments -Trading Accounts-Closing Inventory. VII. PLANT AND PROPERTY ACCOUNTS- Relation to Preceding Discussion-Plant and Property Accounts De- scribed-Depreciation-"Wiiting Down" the Assets-"Writing Down" not always Satisfactory-Depreciation Reserve-Choice of Methods- Causes of Deterioration-Estimating Depreciation-Example of In- Special Problem of Manufacturing-Organization of Accounts-Pecul- iarity of Manufacturing-Technical Profit or Loss-Selling the Goods- Contents of General Ledger-Aids to the Accounting-Analysis of Reason for Cost Accounting-Object of Cost Accounting-Simple Cost Accounting-Individual Cost Sheets-Cost Accounts in the General Books-Cost Books-Cost Ledger-Analysis of Costs-Bases of Cost Accounting-Selecting a Cost System-Accounting Controversies. Page. Relation of Profit and Loss to Business-General Profit and Loss Ac- counts-Sections of Profit and Loss-Uses of Profit and Loss Account -Income and Expenditure-Income Sheet of a Railroad-Business Results-Profit and Loss Analysis-Declaration of Dividends. Object of the Balance Sheet-What are Assets and Liabilities-Pre- paring the Balance Sheet-Form of Balance Sheet-Grouping the Items -Interpretation of Balance Sheet-Capital and Revenue Items-State- Object of an Audit-Checking the Accounts-Protection Against Fraud -Responsibilities of Auditor-Report on Condition of Business-Ex- amples of an Audit-Analysis of Accounts-The Auditor's Report. THE PRINCIPLES OF ACCOUNTING. BY HENRY PARKER WILLIS, Ph. D. [Born Weymouth, Mass., 1874; B. A., University of Chicago, 1894; Student University of Berlin, University of Leipsic, University of Vienna, 1896-7; Ph. D., University of Chicago, 1898; Assistant Indianapolis Monetary Commission and Joint Author of its Report, 1898; Adjunct Professor Economics and Politics, Washington and Lee University, 1898-1901; Editorial Writer New York Post and Nation, 1901-1902; Wilson Professor of Economics and Politics in Washington and Lee University, 1903-6; Editorial Writer and Washington Correspondent, New York Journal of Commerce and Commercial Bulletin, 1906; Professor of Finance George Washington University, 1906—; Associate Editor, Journal of Accountancy.] PART I. INTRODUCTION. The following pages have been written for the purpose of setting forth the general principles upon which modern accounting systems in the broad sense of the term are organized. Comparatively little attention has been paid to bookkeeping as such, therefore, the treatment offered in Sections II and III being intended simply to afford a basis or setting for the theory of the account and its relation to the traditional or conventional books of account. While it has not been attempted to go, in detail, into all of the books that are customarily employed, or to give forms representing more than a very few of them, it has been sought to present enough elementary descriptive matter to make plain the theoretical treatment in its application to the bookkeeping side of the subject. On the other hand, it has been attempted to avoid purely abstract discussion of the philosophy of accounts and to emphasize the discussion of the principles upon which actual accounting is founded. The reader who has not already made a study of bookkeeping technique should read in conjunction with this discussion some work on practical bookkeeping. A B-VIII-1 1 list of available works on accounting and bookkeeping is afforded in Part II, p. 210, of the present volume. I. FUNDAMENTAL IDEAS. Nature of Commerce. The process by which economic relations between men are carried on is ordinarily known as trade or commerce. Such commerce consists of the exchange of goods against goods, services against services, services against goods, or any one or all of these against money. In practice, civilized societies state all transactions in terms of money, and even where an interchange of goods takes place upon what amounts to a basis of barter, the operation is usually reduced to terms of money, and thus a common denominator designed for the purpose of rendering transactions readily comparable is adopted. The fact that in practice such a common denominator is in this way accepted and that every transaction is reduced to a money basis, renders it possible to institute comparisons of commercial transactions which shall show what the net outcome of a complex process of buying and selling is. At the same time, the complexity of such a process of buying and selling in different quantities and to different individuals as well as at different rates, renders it imperative that an individual or group of individuals engaged in the process of interchanging goods or services with others shall have some system whereby operations are regularly recorded. If there were no such system, confusion would exist as soon as the volume of the transactions handled at all exceeded what could be readily carried in a single memory. Moreover, as soon as transactions reach a somewhat developed stage, it becomes evident that a mere straightforward record of what has been bought and what has been sold does not suffice to indicate the true position of the owners of the goods. Economic institutions, such as banking, transportation, |