IV. CAPITAL.

Thus far we have spoken first of the construction of an accounting system, and then of the keeping of certain books designed to record the facts or data which are fitted into this system, in such simple terms as were necessary in order to convey the bare outline theory of the subject. This was necessary in order to establish a basis for the further discussion of the theory of accounting in more general and technical terms. It is now time to take up in greater detail, and with a more analytical method, the broader questions surrounding the various accounts and to show how these must be dealt with.

The Capital Account.

In speaking of the simple transactions which were assumed for purposes of illustration in our earlier discussion, it was noted that the fundamental problem which the merchant always has in mind is whether or not his capital has been increased or diminished. In speaking of bookkeeping we showed that the capital account is theoretically the first to be opened and the last to be closed. In making a more elaborate analysis of the question of capital, it is therefore worth while to bear these facts in mind, remembering that it is around the capital accounts that the accounting and bookkeeping process revolves. Capital account when analytically discussed, however, implies considerations affecting a number of others. But in the first place it is necessary to take up the simple assumptions upon which we based our earlier discussion and to see how far they must be modified in order to apply them in practice.

How Capital Is Contributed.

The first assumption thus far made, and the one which naturally suggests itself, is that capital is put into a busi

ness by some individual who designs to use it in the conduct of that business. This, however, is not necessarily the case. Today the rapid rise of the corporate method of doing business has brought it about that a considerable number of businesses, perhaps a majority, are organized as corporations. Recent investigations by the Federal Government have shown that there are 400,000 such corporations organized in the United States today. A corporation consists of individuals, to at least a specified number named in the law governing incorporation, who thereby become participants in the affairs of the concern and who jointly contribute its capital. If there are not very many such persons and if they contemplate the retention of the active control in their own hands, they may prefer to form a partnership. But whether the business is organized as a partnership under the laws of the state in which it is created or as a corporation under the law of incorporation in that state, the point just noted is the same, as the capital is contributed by several persons who become joint contributors and joint participants in the business. In any of these cases the capital account is the same in its essential nature, but where there is more than one person involved there arises an additional problem of keeping track of the different relations to the business which are occupied by the various persons who participate in such ownership. Fundamentally, capital account remains unchanged in its essential nature. If John Smith is alone in the business his capital account bears the title: John Smith, Capital Account.

If John Smith and Richard Brown are jointly engaged the capital account is entitled:

Smith & Brown, Capital Account.

If they are incorporated along with a number of others the title may be:

The Smith & Brown Co., Capital Account.

Taking up first the case where two or more persons are united as partners, it is clear that their relations to the business may be sufficiently indicated by subdividing the capital account into as many separate sections or divisions as there are partners. Thus under the heading "Smith & Brown, Capital Account" there might be a sub-heading "John Smith" under which would be entered the amount of capital contributed by Smith at the start and another sub-heading "Richard Brown" in which would be entered as a credit the amount of capital originally contributed by Richard Brown. Then, when the profits are to be carried to capital account from profit and loss, they will be apportioned between Smith's subdivision and that of Brown, according to the terms of the original agreement. If Smith and Brown are equal partners and are to share equally, one-half the net profits will be credited to each. Or, if by virtue of some special agreement set forth in the articles of partnership, one is to be favored above another, the entry will be made upon the proportionate basis which is thus indicated-as two-thirds to one, and one-third to the other. It is entirely possible that the individual or partners who are in control of the business may one or all desire to draw some cash from time to time. If John Smith, for example, being alone in the business, desired to do so, the proper entry would be a debit entry on the capital account which would amount merely to a statement that he had reduced his capital by that amount. The same thing is true where two or more partners are engaged. By simply debiting each with the amount he draws, the net reduction effected in his capital is indicated and the corresponding change in the distribution of profits will be determined either by reference to the partnership agreement or by reference to some oral or other understanding. If the individual or individuals who are conducting the business are likely to draw out money quite frequently in small sums, it may be worth while in order

to avoid making the capital account long and complex to open what is called a "drawing" account. This account is nothing more than a memorandum carried for the purpose of keeping track of numerous debit items which would otherwise appear in capital account. At the end of the year or other fiscal period, the total of these debit entries in drawing account is transferred to the debit side of that section of capital account which belongs to the particular partner whose transactions are recorded. After the books have been fully written up, the sum total of the net capital shown in each of the partner's subdivisions indicates the gross capital of the concern. The situation is more complicated when the business assumes a corporate form. This is because of the conditions surrounding the corporate type of organization.

Corporation Capital Accounts.

Suppose it has been determined to organize the Smith & Brown Company, a corporation. Articles of incorporation are prepared and the concern is legally incorporated. In order to become thus legally incorporated, it is obliged to fix as a definite sum the amount of its capital or at all events to name the maximum amount of capital it designs to employ. Such nominal capital is described as the "capitalization" of the concern and may or may not be fully paid up. It is at all events the named valuation of what is being put into the concern by those who start it. It is customary to divide this capitalization into so-called "shares," each of which indicates a distinct fraction of the total capitalization. It would be theoretically possible to have shares of stock issued as "one one-hundredth part of the Smith & Brown Company" or one one-thousandth part, but in practice, under existing law, it is customary to assign to each share of stock a nominal face, or par, value of its own. The figure which is most commonly used as the par value of a share of stock is $100. Suppose

that Smith & Brown were incorporated for $10,000 with shares at a par value of $100. This would mean that in all there were 100 shares outstanding, each of the nominal value of $100, or, in other words, that the owner of each share was entitled to one-hundredth part of the value of the concern. Now suppose that Smith & Brown, finding it impossible by themselves to hold the total of the stock in their own possession, decided to sell twenty shares of the par value of $100 each-$2,000 in all-to other persons, say employes of the company, at the rate of one share to each. This will at once raise the question of keeping track of the accounts of the different shareholders and of knowing how the ownership of the shares changes, since laws providing for the government of corporations invariably furnish a means for the sale or transfer of any share or shares from their existing owner to a new or prospective owner. Theoretically, the fact that the concern is organized as a corporation would not necessarily make any difference with the accounting. There might be opened in the ledger a series of subdivisions of capital account each with the name of the owner of the share as a descriptive heading and the amount of the par value of the share held by him as the credit entry in his section of capital account. Practically, this would be out of the question as soon as the number of shareholders became considerable and would be substantially impossible for bookkeeping reasons as soon as the shareholders began to transfer or combine their holdings. For this reason, additional bookkeeping and accounting methods are resorted to as soon as a concern is organized in a corporate form. If the concern does not require that its stock shall be paid up by the persons who subscribe to it (that is put in the capital) at the outset, they being allowed to pay it in on the installment plan, what is called an installment book must be kept. This is nothing more than an outline record of the names of the original subscribers and the amounts they have paid on the