the sales with the total amount of the sales, a relationship which the keen business man is constantly watching. It also shows the important expenses of the business in such a way that a study of the relative amounts expended for the several purposes may be made, and any necessary decreases or increases in the amounts decided upon.

Financial statement. While the profit-and-loss statement summarizes the results of the merchant's transactions for the year, it does not tell much about the financial condition of the business at the end of the period.

Thus, the fact that John Martin in the above case made a net profit of $4349.27 during the year does not mean that he will have this much more in actual cash at the end of the year.

In considering the financial condition of a business it is necessary to show the relation between certain factors. The first of these factors are the assets, or resources, of the business, which include all items of value (property belonging to the business or amounts due the business) that the business owns. The second are the liabilities, which are the amounts that the business owes. The third factor is proprietary interest, which represents the money, or capital, invested in the business.

Proprietary interest is the excess of assets over liabilities and hence is the net worth of the business at the time under consideration. If the liabilities exceed the assets, the business is insolvent.

In preparing the financial statement, or balance sheet, which is to set forth the financial condition of the business it is again necessary to turn to the books of the business for the totals of the various asset and liability accounts.

For example, suppose that John Martin, mentioned above, finds from his books that on Dec. 31 the amount of cash on hand in the store and in the bank is $899.25, that the total amount of Notes Receivable (written promises to pay money due the business) is $1275.50, and that the various Accounts Receivable (p. 30) stand as follows: L. C. Long owes $212.40, A. D. Nash owes $378.25, and M. R. Rich owes $520.10. His inventory shows him that on Dec. 31 the value of goods on hand is $7438.82, and the value of his store equipment on the same date is $3137.50.

He further finds that Notes Payable (written promises which he has made to pay money) total $380, and that he owes the following Accounts Payable Land & Co., $915.45; Orton & Co., $893.75.

His books also show that on Jan. 1 his investment in the business was $7323.35, and his profit-and-loss statement (p. 254) shows that during the year he made a net profit of $4349.27.

All these items are then arranged in a special order as shown in the following financial statement, first the asset accounts, then the liability accounts, and then the proprietary-interest account:

In determining the proprietary interest, or net worth of Martin's business on Dec. 31, the total of the liabilities ($2189.20) is subtracted from the total of the assets ($13,861.82). The result is the net worth at the end of the year, or $11,672.62.

The statement further shows that this proprietary interest is made up of Martin's investment on Jan. 1 ($7323.35) and the net profit ($4349.27) which was made during the year. The sum of these two items is equal to the result of subtracting the liabilities from the assets.

EXERCISES

1. Following the model form on page 254, prepare a profit-andloss statement from the following facts about the year's business taken from the books of F. H. Bond's dry-goods store:

Sales, $47,865.87; Inventory, Jan. 1, $61,730.28; Purchases, $25,435.52; Inventory, Dec. 31, $51,480.13.

Operating Expenses: Fuel, $311.25; Advertising, $1060.50; Light, $255.17; Delivery Expense, $2476.24; Rent, $1000; Salaries, $5535.80; Sundry General Expense, $1119.02.

2. If Bond's investment in Ex. 1 was $40,000 on Jan. 1 and his assets and liabilities on Dec. 31 of the same year were as follows, prepare a financial statement, following the model form on page 256, from these facts:

Assets: Cash, $2609.82; Notes Receivable, $856.75; L. D. North, $460.20; F. M. Fish, $2946.34; L. F. Spaith, $2618.56; Merchandise Inventory, see Ex. 1; Store Furniture, $5297.16.

Liabilities: Notes Payable, $12,525.39; L. M. Smith, $8926.78; F. H. Dick, $2463.43; F. M. Pratt, $1931.14.

The personal accounts listed above should be grouped under the heading Accounts Receivable or Accounts Payable, as in the model form.

3. Prepare a profit-and-loss statement from the following facts taken from the books of J. D. Brown, a clothing merchant: Sales, $53,579.56; Inventory, Jan. 1, $13,051.82; Purchases, $35,124.60; Inventory, Dec. 31, $15,186.04.

Operating Expenses: Insurance, $1525; Heat and Light, $2338.29; Rent, $1920; Wages, $9216.47; Traveling Expenses, $1173.98; Advertising, $1102.16; Sundry Expense, $4811.07.

4. If Brown's investment in Ex. 3 was $34,950 on Jan. 1 and his assets and liabilities on Dec. 31 of the same year were as follows, prepare a financial statement from these facts:

Assets: Cash, $8964.94; Notes Receivable, $6251.82; L. M. Roberts, $3103.82; F. H. Smith, $4026.48; R. E. Ellis, $1773.35; Merchandise Inventory, see Ex. 3; Furniture and Fixtures, $750.

Liabilities Notes Payable, $2600; F. S. Green, $3261.97; Stevenson & Co., $742.27.

CHAPTER VIII

INTEREST AND BANKING

SIMPLE INTEREST

Interest. If a merchant borrows money from a bank with which to carry on his business, he must pay for the use of it. The compensation paid for the use of money is called interest.

Interest is sometimes paid in other cases where the idea of interest as compensation for the use of borrowed money is not so evident, such as on overdue accounts. But if A fails to settle his account with B at the proper time, he is really withholding B's money for his own use, and may properly be asked to pay interest until the account is settled.

2

Interest is computed as a per cent of the sum borrowed, which is called the principal. The per cent is called the rate of interest, and is generally understood to be the rate of borrowing money for 1 yr. unless the contrary is expressly stated.

Thus, if a man borrows $400 for 1 yr. at 6%, the principal is $400, and the rate of interest is 6%.

In many states the rate of interest which may be charged is fixed by law. While borrower and lender may agree on a lower rate than this legal rate, the charging of a higher rate is forbidden, except under circumstances defined by the law. An agreement for interest greater than the legal rate is called usury, and there are various penalties for this offense in the different states.

Computing interest for 1 yr. Since the problem of computing interest involves a sum (the principal) and a per cent (the rate), finding the amount of interest on a given sum for 1 yr. is simply a case of finding a per cent of a number; that is,

principal rate = interest.
×

Thus, if a man borrows $1000 for 1 yr. at 7%, the amount of interest which he will have to pay is $1000 x 0.07, or $70.

The sum of the principal and the interest is called the amount. Thus, in the above case, the amount of the debt at the end of the year is $1000 + $70, or $1070.

Interest computed in this way is called simple interest, to distinguish it from other methods of computing interest which will be discussed later.

ORAL EXERCISES

State the interest for 1 yr. on each of the following:

Computing interest for longer periods. In ordinary cases it seldom happens that money is borrowed for a period longer than a year, and generally not for so long a period. Further, when money is borrowed for a period of years some provision is generally made that interest shall be paid at least once a year. It is occasionally necessary, however, to find interest on a principal for a period longer than a year.

In such cases the best method is to find the interest on the principal for 1 yr., and then to multiply the result by the length of the period expressed in years.

EXAMPLE. Find the interest on $475.25 for 24 yr. at 5%.

Solution. The interest for 1 yr. is

$475.25 × 0.05 = $23.7625.

Disregarding the fraction of a cent, the interest for 2 yr. is