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Results--Profit and Loss Analysis—Declaration of Dividends.
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.)
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
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,