Scope of Accountancy Examinations. Because of the broad scope of the accountant's labors, because the accountant is frequently brought into contact with large problems which involve some knowledge of law and other allied sciences, it is customary to include in these examinations matter additional to that which properly falls within the scope of accounting in the sense in which that term has been defined in preceding pages. Practically every regular examination for public accountants now includes, besides questions on the theory of accounts, problems in practical accounting and auditing and the outlines at least of commercial law. Behind these is usually the requirement of a high school education or its equivalent and in some cases other and additional training. In what is set forth in the following pages, the effort is made to present in outline the so-called theory of accounts with some of its applications in practice. The subject of auditing is also dealt with in very general terms. By auditing is meant the examination of records or accounts that have already been made and whose correctness is tested and certified to by the auditor. The auditor of course has to be one who is familiar with accounting and bookkeeping, although his work is not primarily constructive but chiefly critical and analytical. The practical process of auditing involves the use of various methods and expedients which save time or serve as easily available tests. This phase of the subject therefore cannot be fully discussed in the treatment which is here intended, but that treatment, as already indicated, will address itself to the setting forth of the principles of accounting and the way in which they are practically applied, along broad lines. II. CONSTRUCTION OF THE ACCOUNT. Object of the Account. As we have seen, the fundamental problem of the accountant is that of devising a suitable system for recording business facts and their relations, and "business," as we have noted, consists of a process of buying and selling—in a word, exchanging. In the simplest sense of the term, then, a "record" of such operations would be found in a mere statement of what had been done, written down in diary form with no attempt at classification. Thus, suppose a boy buys a stock of one hundred apples for which he pays $3.00 and which he thinks he will sell at five cents each. He might record his operations as follows: January 1, Bought 100 apples for $3.00. Here would be a mere summary statement of what had been done. It would be far better than nothing because it would, at least presumably, be an accurate and detailed statement of just what the boy had done. If this were supplemented by any additional facts, such as the record of the number of apples that had rotted or spoiled and had consequently been thrown away owing to inability to sell them, it would give a fair idea of the whole scope of the undertaking. It is evident, however, that if the transactions were numerous the record would become so long and complex that presently it would of itself be valueless, because it would not carry any clear idea to the mind of the reader. It would be of service then only as furnishing material on which to base a further classification or arrangement of the facts referred to. Such a classification might, however, easily be obtained. Classification of Facts. The most obvious idea in classifying commercial transactions is to separate them into the two great groups of opposed character already spoken of-buying and selling. If John, the boy of our illustration, should do this at the outset, he might think it well to reserve one page of his notebook for "bought" items and one page for "sold" items. In that case his operations might look like this: John would now have a separation between his bought and sold items which would be of more value to him as his transactions became more and more numerous and involved more and more kinds of commodities. If, for example, he extended his operations to oranges and bananas and bought the various kinds of fruit, as well as sold them, on different days or some of each on the same day, the classification of bought and sold items would be absolutely necessary, while he would find it further desirable to group each day's transactions separately. At the end of a week or a month, by going through his bought and sold records extending over the period, he could see how much he had expended and how much he had taken in. Supposing that he then took account of stock and found what balance, if any, of the various kinds of fruit remained in his possession, he would have a substantially clear knowledge of what the result of the month's transactions had been. Losses and Gains. It would not be long before the fruit dealer, or anyone else engaged in business, would find that there were a number of other items that he must take into account in addition to goods and money. The summary record of transactions already described would throw no light on anything except the goods he dealt in and the money he received. And even if it were supplemented by a statement at the end of the month or other period showing just what was left of the fruit, the statement would probably prove to be unsatisfactory as a genuine analysis of John's operations. He would find that in the course of his sales he had to take account of the fact that expenses of one kind or another were incurred in doing the business. His food, lodging, clothing, etc., might be reckoned by him as incidental expenses, while the same might be true of such fruit as spoiled while in his possession, thereby resulting in a loss. As a result of considering these factors, it is probable that John or anyone in his position would before long be inclined to modify the general classification of "bought" and "sold" and to substitute something else that would be more inclusive. What would this be? The difficulty which John has encountered in getting a true idea of his business in relation to himself is found in the fact that the classification of "bought" and "sold" merely takes account of goods obtained or disposed of and money received or spent, while what he needs is a statement of all items of cost or outlay or loss involving a reduction of his resources or income and a classification of all items of receipt or gain or advantage representing such income. Debtor and Creditor. The terms which have been accepted by the business world as the conventional designation of the ideas just set forth are those of "debtor" and "creditor," usually abbreviated to "Dr." and "Cr." By these terms is meant the comparative showing of advantage and sacrifice to which we have referred. The use of the terms can be illustrated simply, from the theoretical standpoint, by a further development of our illustration about John and his fruit. Let us suppose that during John's transactions with the 100 apples which he has bought, he finds that 10 of them spoil while he is obliged to pay, say, 50 cents for the use of a stand on which to exhibit his fruit to passers-by. Now what are John's groupings or classifications of advantage or sacrifice? He has purchased 100 apples giving in exchange $3.00 in money. He has spent 50 cents for "rent." He has lost 10 apples without any return and he has sold 90 apples at 5 cents each, bringing him in a gross return of $4.50. It is evident then that he might account for the transactions he has carried on by summarizing at the end of the week or month during which he has disposed of his apples in such a way as to show a condensed grouping of income and outgo. If he were to do this in simple form, he might make the following showing:* From this it is seen that John, the boy of the illustration, regards himself as having received from someone else goods (apples), services (rent), and at the same time he has been subjected to conditions which have inflicted on him a loss of 10 apples which he figures at the cost price of these apples or 3 cents each. In other words he himself, or his business, is obliged to get back from the world at large enough to cover the items of goods, services and loss. In the course of the business transactions he does so recover cash and is therefore credited with the amount of cash thus received, and therefore furnished to the business. The difference or "balance" simply shows whether John *Assuming that the apples sold are not raised in price sufficiently to make up for the loss through deterioration. |