which capital stock account shows a credit entry of $8,000, while real estate shows a debit entry of $3,000 and goods account a debit entry of $3,000. Another debit entry of $2,000 must be provided somewhere not merely from the standpoint of practical bookkeeping in order that the books in which these accounts are recorded may "balance," but also in order that the student of these accounts may know exactly what was the nature of the value or assets on the strength of which the capital stock was issued. It is necessary, then, to raise another account to carry this $2,000. Almost any appropriate heading may be employed for this account. One frequently employed is that of "good will." By opening a "good will account" with a debit entry of $2,000 it is made to appear that, of the capital stock issued by Smith & Brown, incorporated, $3,000 is real estate, $3,000 actual value of goods, while $2,000 is represented merely by experience, prestige, or business acquaintance-in other words, "good will." Some concerns, where the process of putting the shares on the market has been long and expensive, carry an account called "organization expenses." In this may be put as debit entries any discounts that may have been allowed to stockholders in order to induce them to come in as well as commissions paid to persons who have assisted in putting the stock on the market. On the other hand, the stock may be issued at a premium. Suppose for example that Smith & Brown considered the assets they had contributed as worth more than the par value of the stock outstanding, they would still have a capital account which would show the par value of the stock outstanding. The real estate and goods account would show debit entries of (say) $4,500 respectively. It would be necessary then to open some account to show what disposition has been made of the excess of real assets over capital. This might be done by opening an account entitled "reserve" or "surplus" with a credit entry of $1,000. This credit entry would be composed of

(in our illustration) two items "By real estate... ....$500" and "By goods ...$500," because $500 was the excess of the value of the real estate contributed by Smith over and above the stock issued to him, while $500 is also the excess of the value of the goods contributed by Brown issued by him. If the stock had been issued for cash the credit entry in reserve account would be "By cash......$1,000."

Payment for Bonds.

Although the capitalization of a concern is usually spoken of as if it applied only to the stock issued, and although a great many people are in the habit of thinking of bonds as if they represented a loan made by a company for the purpose of making up deficits or losses or for the purpose of paying in part for property purchased which the concern was unable to liquidate in cash, such is by no means usually the case. On the contrary, bonds are frequently issued at the outset of the business as a means of representing a part of the capitalization of the concern. In that event there is no reason why the accounting for the bonds should not be carried on as a phase of the capital account. A "bond account" is opened and is conducted in precisely the same way as capital account. The total bonds issued have yielded a certain amount of cash. The first entry in bond account then is on the credit side just as in the case of capital and is "By cash....$ ." If the bonds are issued at a discount or at a premium, the method of dealing with them is the same as that which was followed in dealing with capital stock under similar conditions.

V. CASH ACCOUNT.

Theory of Cash.

In our early simple illustrations, it was assumed that actual cash was received and paid for every item bought and every item sold. Thus, when an individual went into

business he was supposed to put in cash as representing his capital. This gave rise at once to a debit entry in cash account corresponding to the credit entry in capital account and signifying that the stock of cash held by the concern was simply the amount of cash that had been put in as capital. That is to say, the concern at starting had a certain amount of cash which constituted its assets and owed an equal amount to the proprietor for the capital which he had invested. Later we saw that the capital is not necessarily represented by cash at all, although for the sake of convenience it may be assumed that the property is put in in the form of cash and that this cash is as promptly disbursed at a specified rate to the members of the concern in return for various tangible assets which it has been agreed they shall put in at a determined valuation. However this may be arranged, every concern starts with some cash, since that is necessary to pay running expenses, so that as a matter of fact the first entry in cash account in the ledger is invariably on the debtor side where it indicates that a portion of the capital has taken the form of, or has been contributed in, actual cash. This is strictly true, however, only in those cases where the concern has the cash physically on hand in its safe or cash drawer. It should be understood, however, that the amount of cash which is carried in this way in modern businesses is not large. Theoretically, a concern might insist on being paid in cash for everything it sold or did, and might stand ready to pay cash for everything it bought or had done for it. It might go so far as to demand the actual transfer of money in each case. But ordinarily it does not do this.

Modern Means of Payment.

In lieu of cash payments, it is much more customary to pay or be paid in a check or draft on a bank or in commercial paper. The use of these means of payment in lieu of cash makes it necessary to establish other methods of ac

counting corresponding thereto. These other accounts, however, have a very close and intimate relationship to cash, inasmuch as ultimate convertibility into cash is the test of the goodness of every check, draft, or piece of commercial paper that passes between business men. It is necessary, therefore, to consider the methods of accounting applicable to these other means of payment not only in their relation to the business itself but also in their relation to cash account for the reason just stated. The other methods of payment may now be considered.

The Bank and the Check.

In modern business every man who carries on transactions of any considerable size, and even those whose transactions are small but who want to have an accurate record of everything they pay, deal through banks. The relation of the bank to the business man has several aspects, but at this point we will consider merely its aspect as a keeper of actual money. For example, Smith & Brown when they started business may be assumed to have put in their capital in the form of actual gold coin to the extent of $8,000. Not wishing to keep this amount in the safe, they decide to deposit it in a bank which they have selected for the purpose. The entry in the cash account as has been seen is on the debtor side and is (Smith & Brown being organized as a corporation) "To capital... . . . $8,000." When this cash is placed in the bank (the First National having been selected) the cash account will stand as follows:

This simply shows that $8,000 was paid in in cash as a result of the contributions of capital and was promptly paid out again in the form of a deposit in the First National Bank. Of course a bank account with the First National

should likewise be opened and that would stand as follows:

Dr.

Jan. 1 To cash deposit

FIRST NATIONAL BANK.

|$8,000

Cr.

Suppose that Smith and Brown, instead of paying in their contributions of capital in the form of coin, have simply turned them in in the form of checks. After endorsing these checks in the firm's name, the bookkeeper or cashier of the concern might take them direct to the bank and deposit them, in which case the account of the First National Bank would stand exactly as above. There would then be no absolute necessity for passing the items through cash account. Theoretically, since they are equivalent to cash and could be changed into cash at the banks on which they are drawn, they might be treated simply as gold coin and entered on the debtor side of cash account just as in the illustration already given, then re-entered on the creditor side when deposited, a corresponding debtor entry being made in the First National Bank account as soon as the deposit had been effected. This would merely mean that there had been a compensating entry on each side of cash account which was thereby relieved of further responsibility for the $8,000, such responsibility being transferred to the bank. A method which might be followed by some concerns would be to omit bank account entirely and treat all checks received as actual cash items. In such a case it would be left to the bank to keep track of the deposits made with it, whether in the form of cash or checks, and to record them in the pass book of the concern. That is to say, the concern would simply conduct its cash account on the original basis, regarding checks received and checks given by it as cash, and simply treating its deposit in the bank as a fund placed there for safekeeping. Proper accounting, however, calls for a segregation of cash and bank items. What has been said about sums that are received in the