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An equipoise, thus established, continues throughout book-keeping by double-entry, so that at any time the correctness of the books may be tested by simply abstracting a list of the Dr. and Cr. postings from the ledger, see Trial Balance, page 20. The transactions during the six months are treated as follows:-Purchased Goods of John Blamires, £3,200. Dr. Goods Account (ledger folio 2), Cr. John Blamires, (ledger
Goods Account is the receiver, and therefore Dr.; John Blamires is the giver, and therefore Cr. Sold Goods to George Brownson, £7,200. Dr. George Brownson, as receiver (ledger folio 6), and Cr.
Goods Account, as giver (ledger folio 2). 3. Returned Goods (purchased) to Albert Lodge, £75. Dr. Albert Lodge, as receiver (ledger folio 8), and Cr. Goods
Account, as giver (ledger folio 2). 4. Received Cash, from George Brownson, £6,740. Dr. Cash Account, as receiver (ledger folio 4), and Cr. George
Brownson as giver (ledger folio 6). 5. Received from Thomas Allen, acceptance due 1st May, £2,100. Dr. Bills Receivable Account (s), as receiver (ledger folio 10),
and Cr. Thomas Allen, as giver (ledger folio 5). Thomas Allen, in lieu of paying cash, gives a bill (which is an undertaking to pay cash) due 1st May. Bills Receivable are kept in a distinct account under that head.
The effect of this transaction is simply that Thomas Allen remains indebted to Abraham Crosland, but instead of the amount of his debt appearing under his own account it is transferred to the Bills Receivable
Account. 6. Paid Albert Lodge, Cash, £200. Dr. Albert Lodge, as receiver (ledger folio 8), and Cr. Cash
Account, as giver (ledger folio 4). 7. Goods (sold) returned from Thomas Allen, £ 320. Dr. Goods Account, as receiver (ledger folio 2), and Cr. Thomas
Allen, as giver (ledger folio 5). 8. Purchased Goods of Ephraim Broadbent, £2,950. Dr. Goods Account, as receiver (ledger folio 2), and Cr.
Ephraim Broadbent (a new account) as giver (ledger
folio 11), as in No. I. 9. Accepted John Blamires' draft, due 17th June, £4,500. Dr. John Blamires, as receiver (ledger folio 7), and Cr. Bills
Payable Account (f), as giver (ledger folio 12).
(1) Bills receivable, i.e., bills for which payment has to be received when they become due.
Bills payable, i.e., bills hich have be paid when they become due.
cash, a bill (which is an undertaking to pay) is given to him, due 17th June. Bills payable are kept in a distinct account under that head. The liability to Joh Blamires remains the same, but the amount is transferred from his account to the Bills Payable Account.
10. Paid ready-money for the purchase of five looms at auction, £179. Dr. Plant and Machinery Account, as receiver (ledger folio 3),
and Cr. Cash Account, as giver (ledger folio 4).
Receivable Account, as giver (ledger folio 10).
Thomas Allen, hands over cash, and the bill is given back to him. 12. Sold Goods to Thomas Allen, £2,800. Dr. Thomas Allen, as receiver (ledger folio 5), and Cr. Goods
Account, as giver (ledger folio 2), as in No. 2. 13. Withdrew Cash from the West Yorkshire Bank, £3,100. Dr. Cash Account as receiver (ledger folio 4), and Cr. the West
Yorkshire Bank, as giver (ledger folio 9). 14. Paid Cash to the West Yorkshire Bank, £3,320. Dr. West Yorkshire Bank, as receiver (ledger folio 9), and Cr.
Cash Account as giver (ledger folio 4). 15. Paid Cash in discharge of my acceptance, due 17th June, to
John Blamires, £4,500.
Cash Account as giver (ledger folio 4).
The following transactions appertain to Nominal Accounts and differ in character from those already described. Cash is the giver in each case, but as no tangible property is received in exchange, each class of expenditure is treated as a person (see
pages 8 and 9) and is made the receiver (g). 16. Paid Cash for productive Wages, £2,700. Dr. Wages Account, as receiver (ledger folio 13), and Cr. Cash
Account, as giver (ledger folio 4). 17. Paid Cash for Trade Charges, £ 500. Dr. Trade Charges Account, as receiver (ledger folio 14), and
Cr. Cash Account, as giver (ledger folio 4).
(9) According to the rule stated on page 7, every increase or decrease of any part of the property, unless compensated by the like decrease or increase of another part, involves a corresponding increase or decrease of the whole. Here, cash is decreased, but there is no corresponding increase, therefore the property as a whole is decreased. The expenditure after passing into its own special account, and being thence transferred to Dr. of the Trading Account, ultimately reduces the Capital Account, and thus fulfils the rule. (see accounts on pages 20 and 17.)
18. Paid Cash for Salaries, £240. Dr. Salaries Account, as receiver (ledger folio 15), and Cr. Cash
Account as giver (ledger folio 4). 19. Paid Cash for Rent and Power, £250. Dr. Rent and Power Account, as receiver (ledger folio 16), and
Cr. Cash Account, as giver (ledger folio 4).
Cash Account, as giver (ledger folio 4). The ledger postings up to this point are given in Roman type, on pages 17 to 20.
Having recorded in the ledger the Capital and Assets and Liabilities at the commencement of the year, and the transactions during the six months' trading, the accuracy of the book-keeping may now be tested.
Every amount which has been posted to one side of the ledger having its equivalent on the other side (but in a different account), it follows that an abstract of all the items posted to the Dr. side should agree in total with an abstract of all the items posted to the Cr. side.
We therefore prepare what is termed a Trial Balance by making a list of all the ledger accounts and placing in two columns alongside the title of each account:
(i.) The sum of the items posted to the Dr.
(ii.) The sum of the items posted to the Cr. See Trial Balance on page 20. When the grand totals on both sides of the trial balance agree the one with the other, the book-keeping may be regarded as correct. A further test may, however, be applied by comparing the total postings, as abstracted and shown by either side of the trial balance, with the total entries from which the postings were made, thus :
The total postings shown by either side of the trial balance amount to £ 57,910. The entries from which the postings were made are as follows :
£ £ (i.) The surplus of assets over liabilities (i.e. Capital,) posted to the Cr. side of the ledger
(ii.) The total assets, posted to several accounts on
the Dr. side of the ledger
(iii.) The total liabilities, posted to several accounts
on the Cr. side of the ledger
(iv.) The transactions during the six months'trad
ing (see page 10), posted to each side of
We now proceed to ascertain the profit or loss resulting from the six months' trading. This
may, and should be done by two distinct operations :(i.) By finding the surplus of assets over liabilities at the end of the six months' trading and comparing the same with the surplus at the commencement. Thus in our illustration :
£ The surplus at the end of the period is
4979 The surplus at the beginning of the period is
4500 Therefore the six months' trading has resulted in an increase of
£479 (h) (ii.) By tracing the precise income and expenditure which has led to such profit or loss. The former operation may be accomplished with or without the aid of properly kept books, but the latter is essentially the function of double-entry, and its importance is obvious.
According to our remarks on page 8, the accounts given in our illustration should comprise three distinct classes, viz :
(i.) Personal accounts. (ii.) Property accounts.
(iii.) Nominal accounts. Dealing first with the Personal Accounts, viz. :-Nos. 5, 6, 7, 8, 9, 10 (i), 11, and 12 (i), we ascertain from each whether it represents an asset or a liability. The totals of the Dr. and Cr. sides of the accounts Nos. 10 and 12 are equal, and it is only required to rule them off. In Account No. 5,
£ The total of the Dr. side is
5800 And the total of the Cr. side is
Leaving a Dr. balance owing by Thomas Allen of £3380 This account might be closed, or equalised, by inserting the balance £3380 on the Cr. (or lesser) side, and re-opened by entering the same amount on the Dr. side, thus :Dr. Thomas Allen.
Cr. 5. £
£ To Balance, owing by him
5 By Bill Receivable due at commencement.... 3000
2100 12 „ Goods....
2800 7 Goods returned..... 320
Balance carried down..] 3380
5800 : 0:0
5800 : 0:0
To Balance brought down .. 3380
(h) To this £479 the drawings £256 may be added, making total earnings £735.
(i) The classification of the Bills Receivable Account and Bills Payable Account is debatable, but they are here regarded as collective personal accounts.
It is, however, often inconvenient in practice, and especially so in a manufacturer's books, to bring down the balances of personal accounts in this manner at the time when the balance sheet is prepared. It is quite sufficient to ascertain the balance by subtracting one side from the other.
A list of Dr. and Cr. balances should be made out in this way, as on page 21.
Secondly, the Property Accounts.
Before closing the Goods ACCOUNT (No. 2) the value of the stock of goods left on hand must be ascertained. The value is assumed at £ 3980, and that amount is passed to the Cr. of the Goods Account, and is brought down as a Dr. balance to the account for the ensuing
The Dr. balance of £3,980 is recorded in the list of
The account is closed, or equalised, by transferring (j) this balance to the Cr. of the Trading Account (ledger folio 18) as gross earnings, or income for the half-year (k).
The Plant AND MACHINERY (ledger folio 3) is assumed to be of the full value (1) shown by the account. The balance is, therefore, merely brought down, and is added to the list of balances on page 21.
The balance of the Cash ACCOUNT (ledger folio 4), after being compared and verified with the money in the cash-box is brought down in like manner, and added to the list of balances on page 21.
Thirdly, the Nominal Accounts.
The balances of ledger folios 13, 14, 15, and 16 are respectively transferred to the Dr. of the Trading Account as expenditure for the half-year.
The balance of ledger folio 17 is transferred to the Dr. of the Capital Account as money drawn out in reduction of Capital.
Turning now to the TRADING ACCOUNT (ledger folio 18) we find on the Cr. side the gross earnings or income, and on the Dr. side the various items of expenditure of the business. The balance, or surplus, of £735, is the excess of earnings or income over and above the expenditure, and the amount is therefore transferred to the Cr. of the Capital Account as profit.
(j) In transferring an amount from one account to another the entries are always on opposite sides ; thus, £4,425 is entered on the Dr. side of the Goods Account and on the Cr. side of the Trading Account. The rule, that every Dr. must have its corresponding Cr., is thus maintained.
(k) The balance represents the difference between the cost of the raw goods purchased and the amount realised from the finished goods sold.
(1) The question of depreciation is treated fully hereafter,