or gains cash from, cash account, while cash account does the same with respect to bank, and bills receivable may be converted into bank credit or cash at any time while bills payable maturing become claims upon and thereby reduce cash or bank account. It is thus clear that a concern which, in making a showing of its assets and liabilities, merely states the amount of cash on hand or the sum to its credit in bank does not give a fair idea of its position. The inquirer wants to know about how heavy a draft is likely to be made upon its cash or its bank credit by reason of the approaching maturity of bills payable, and conversely he needs to know about how much the cash or bank account is likely to be strengthened by the maturing of bills receivable which will presumably result in bringing cash into the possession of the concern. If the concern has discounted its bills receivable as they came in at the bank, endorsing them of course as it is obliged to do, it has thereby created what is called a "contingent liability," which of course does not appear in the accounts, as explained, because it is assumed that every maturing bill will be met. The contingent liability of the concern can then be fairly and truly exhibited to the student of its condition only by a statement of such contingent liabilities or by the adoption of some system of designating on the books of the concern the amounts that were realized through the discounting of bills having the firm's endorsement and which therefore may be regarded as a possible liability that will have to be met in case the persons who gave the bills do not meet them upon presentation.

VI. GOODS ACCOUNTS.

Nature of Goods.

In dealing with the goods or merchandise account of a concern we practically assumed, when speaking of the subject first, that there was no entry except the general entry

representing the total value of goods which had been realized and placed on the shelves or in the storage rooms of the business as the result of the outlay of capital, to await the disposal by sale in the course of trade. This might theoretically be true-that is, goods might be obtained by direct purchase in specified amounts. They would come in as independent consignments and could be entered in the way already indicated. As a matter of fact, goods would not come in in this way in ordinary business nor would the single entry to which we have referred be an adequate amount of information for a concern which was beginning business. For instance, in our illustration of a case where Smith & Brown were supposed to put in actual property instead of cash, Brown supplying a stock of goods worth at estimated value $4,000, the concern would want to know a good deal more about the details of the operation than would be indicated in that way. Probably in such a case a complete inventory of all of the items of goods thus put in by Brown would be made out and filed. With this in hand, the goods account might be opened in the way indicated or with an entry of this kind: "To capital; goods contributed by Richard Brown as per inventory......$4,000." If it were desired to do so, there would be no reason why a short consolidated statement of these goods might not be entered on the debtor side of goods account thus:

The statement might be continued to any desired length, but in practice it would be better to refer to the inventory which gives the complete detailed statement of items and

can be referred to as occasion may demand when information about the quantity of goods obtained from Brown at the start is wanted.

Goods on Invoice.

In our previous illustrations we assumed that when the concern bought goods from William Wilson it simply made a corresponding entry showing the total bought from William Wilson and thus added to goods. Of course it would want to have a much more detailed record than this of the items it received. William Wilson would bill the goods in detail in the form of an invoice which would be received by Smith & Brown either previous to, or simultaneously with, the receipt of the consignment. By preserving this invoice in a book established for the purpose (see p. 33 foregoing), he would have a complete record of the items received from William Wilson. If the concern was in the habit of buying from Wilson regularly, it would want to know what entries in the goods account corresponded to Wilson's shipments and so in making the entry now under consideration it would assign the invoice a number. Then the entry might be as follows: "To William Wilson, Invoice No. 1......$500." $500." By referring to the invoice book at any time when the information was desired, it could then be seen what had been obtained on that occasion from Wilson.

Goods Returned.

But in many instances Smith & Brown would not find that the invoice corresponded exactly to what they wanted and they might therefore wish to return the goods. In the same way persons who bought from them might be dissatisfied and return goods to Smith & Brown. This would give rise to a necessity for some way of recording the fact that goods once sold or bought had been returned. In practical bookkeeping, this question of returns is a

matter involving some little difficulty of technique in order to keep exact account of goods received or sent out. A bare reference may be made to the bookkeeping phase of the matter and then the accounting side of such transactions can be explained. It is likely to be necessary to make such returns both to firms from whom goods have been purchased and to accept them from individuals who have purchased from the firm, quite constantly. The wrong goods may be shipped, or they may arrive in an imperfect condition, or returns may be necessary for other reasons. The invoices, as we have seen, including of course on their face the items that are now to be returned, have been recorded or filed and it may be that the proper ledger entries (as well as the entries in intervening books) have been made up before the necessity of returns is discovered. One way of taking care of such transactions as a matter of original entry is to have a book dealing with "inward returns" and one dealing with "outward returns." In the first is set down each day the goods that come back to the concern from persons to whom they have been sold, while in the latter is set down the merchandise returned by the concern to firms and individuals from whom it has been bought. The inward and outward returns books are thus supplementary to the purchases and sales books and the purchases book, which shows by transactions in chronological order (see p. 30) the goods that have been obtained by the firm, will, when studied in connection with the outward returns book, show the net amount that has been obtained by the concern from outsiders. So also the sales book when studied in connection with the inward returns book will show the net amount that has been disposed of by the concern during the fiscal period under consideration. We may now glance at the accounting side of this question of returns. Going back to our original illustration where William Wilson sold Smith & Brown a bill

of goods worth $500, it will be remembered that the transaction gave rise to a debit entry of $500 in goods account and a credit entry of $500 in William Wilson's account. Now suppose that a day or two after receipt of the consignment, Smith & Brown on unpacking the goods find that one item sisting of 100 yards of dress goods is damaged. The goods are shipped back to Wilson (assuming of course that the responsibility for the damage has been fixed upon Wilson and that it has not occurred enroute, in which case of course it may fall on someone else) and the proper entries are made in the outward returns book. This practically reduces the amount of the goods that were obtained from Wilson. The whole of the goods has been entered in goods account on the debtor side, however, and so this item is entered on the creditor side as offsetting the quantity of goods represented by the total invoice on the debtor side. The account will then stand as follows:

This shows that Wilson's Invoice No. 1 has given rise to a credit in goods account of $100 which means that Wilson has had that value of goods shipped back to him. In Wilson's own account there will be a corresponding entry and his account will stand somewhat as follows:

Dr.

Jan. 1 To goods returned

L..

(Inv. No. 1)

This process would be reversed if James Jones who bought a bill of goods from Smith & Brown had been dissatisfied with one item in the consignment and had consequently shipped it back to Smith & Brown. It may