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Online Encyclopedia
Originally appearing in Volume V04, Page 228 of the 1911 Encyclopedia Britannica.
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31ST DECEMBER TRIAL BALANCE 1906 Dr. Cr. Capital account £15,010 7 5 Drawings 1,500 0 0 20 Trade creditors 4,961 I0 0 24 Fixtures, furniture, &c. 1,269 4 3 27 Bills payable . 2,620 18 4 40 Bad debts . 71 4 2 44 Stock 1st Jan. 1906 4,078 1 4 50 Discounts allowed 975 3 3 53 Trade debtors . 3,842 7 9 60 Discounts received I,I17 17 8 65 Wages and salaries 1,865 I2 0 75 Depreciation 141 0 5 78 Rent, rates and taxes 1,242 13 8 82 General expenses 1,087 8 0 90 Bills receivable 7,468 14 3 97 Purchases 44,731 2 I0 too Sales 48,732 4 9 c56 Cash at bank 4,169 5 5 £72,442 12 4 £72,442 12 4 in the ledger of transactions which have never taken place. A trial balance is thus no very adequate safeguard against fraud, nor does it bring to light mistakes in the monetary value attaching to the various transactions recorded. This last point is of especial importance, in that the monetary value of transactions may have been correctly recorded in the first instance, but owing to altered circumstances may have become inaccurate at a later date. This of course means that the altered circumstances constitute an additional " transaction " which has been omitted. It will be observed, therefore, that in order to complete the record of the transactions by double-entry, it has becomenecessary to introduce into the ledger a third class of accounts, known as impersonal or nominal accounts. These accounts record the transferences of money, or of money's worth, which, so far from representing a mere reshuffling of assets and liabilities, involve an increase in or a reduction of the amount invested in the business, i.e. a profit or a loss. Transactions representing profits are recorded upon the Cr. side of nominal accounts, and those representing losses (including expenses) upon the Dr. side. This is consistent with the rules already laid down in connexion with real and nominal accounts, inasmuch as expenditure which does not result in the acquisition of an asset is a loss, whereas receipts which do not involve the creation of liabilities represent profits. All debit balances therefore that are not assets are losses, and per contra all credit balances that are not liabilities are profits. So that, inasmuch as double-entry provides inter ilia a complete statement under suitable headings of all profits and all losses, it is possible by aggregating these results to deduce therefrom the net profit or loss of carrying on the business -and that by a method entirely distinct from that previously described in connexion with single-entry, thus constituting a valuable additional check. Taking the trial balance shown above, the following represent the trading account, profit and loss account, and balance sheet compiled therefrom. The trading account may be variously regarded as the account recording the movements of goods which represent the stock-in-trade, and as a preliminary to (or a subdivision of) the profit and loss account. The balance sheet is a statement of the assets and liabilities; but-inasmuch as, by transferring the balance of the profit and loss account to the capital account, it is possible to bring the latter account up to date and to show the credit balance representing the surplus of assets over liabilities to date-the balance sheet, instead of showing a difference, or a " balance," representing what is assumed to be the amount of the capital to date, shows an absolute agreement of assets upon the one hand and of liabilities plus capital upon the other. The two sides of the account thus balance-hencl' the name. Balance sheet. Dr. TRADING ACCOUNT for the Year ended 31st December 1906 Cr. To Stock on hand, 1st Jan. 1906 £4,078 16 4 By Sales . . £48,732 4 9 „ Purchases 44,731 2 10 „ Stock on hand, 31st Dec. 1906 5,751 3 10 „ Gross Profit, transferred to Profit 5,673 9 5 and Loss account . £54,483 8 7 £54,483 8 7 Dr. PROFIT AND Loss ACCOUNT for the Year ended 31st December 1906 Cr. To Rent, rates and taxes £I242 13 8 By Gross Profit as per Trading Account £5673 9 5 Salaries and wages 1865 12 0 „ Discount received 1It7 17 8 „ General expenses 1087 8 0 £4195 13 8 ~/ „ Discounts allowed . 975 3 3 „ Bad debts 71 4 2 Depreciation . 141 0 5 Net Profit for the year transferred 1408 5 7 to Capital account . £6791 7 I £6791 7 Dr. BALANCE SHEET as at 31st December 1906 Cr. To A. B., Capital account . £14,918 7 2 By Fixtures, furniture, &c. £I,269 4 3 „ Trade creditors 4,961 10 0 ,, Stock on hand 5,751 3 10 „ Bills payable . 2,620 18 4 „ Trade debtors 3,842 7 9 Bills receivable . 7,468 14 3 Cash at bank 4,169 5 5 £22,500 15 6 £22,500 15 6 Dr. A.B., CAPITAI, ACCOUNT Cr. 1906. 1906. Dec. 31 To Drawings account . £1,500 0 0 lan. i By Balance from last account . . I £15,010 7 „ Balance carried down 14,918 7 2 ec. 31 „ Profit and Loss account, being net profit for the year ended this date 1,408 5 7 £16,418 7 2 £16,418 7 2 1907. Jan. I By Balance brought down.' . £14,918 7 2 In the foregoing example the customary method has been followed of deducting withdrawals of capital from the capital account and of adding profits thereto. Sometimes, however, the balance of the capital account remains constant, and the drawings and net profits are transferred to a separate account called current account. This plan is but rarely observed in the case of undertakings owned by individuals, or private firms, but is invariably adopted in connexion with joint-stock companies, although in such cases the name appropriation of profit account is generally employed. Although it is now usual to employ several books of first-entry, in the case of comparatively small businesses one such book is Journal. sufficient for all purposes, in that it is practicable for one person to record all the transactions that take place as and when they occur. A book of this description is called the journal, and for many years represented the only book of first-entry employed in book-keeping. An example of the journal is given below. The entries appearing therein are such as would be necessary to prepare the trading and profit and loss accounts from the trial balance shown above, and to bring the capital account up to date. In modern times, however, with the growth of business, it was soon found impracticable to keep one book of first-entry for all transactions, and accordingly it became necessary either to treat the journal as an intermediate book, in which the trans-actions might be brought together and focused as a preliminary to being recorded in the ledger, or else to split up the journal into numerous books of first-entry, each of which might in that case be employed for the record of a particular class of transaction. The first method has been generally adopted in the continental countries of Europe, as will be shown later on, whereas in Great Britain and in North America the latter method more generally obtains; that is, instead of having one journal in which all classes of transactions are recorded in the first instance, it is usual to employ several journals, as follows: a sales journal, sales book or day book, to record particulars of goods sold; a bought journal,

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