Henry Rand Hatfield.

Modern accounting, its principles and some of its problems online

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PARTNERSHIP ACCOUNTS



333



Dr.



FORM 139.

A, Capital Account.



Cr.



Deficit $2,500

Cash 50% of 2d install-
ment 4,000

Cash 50% of 3d install-
ment 3,000

Balance 500

$10,000



Original capital $10,000



$10,000
Balance $500



Dr.



B, Capital Account.



Cr.



Deficit $1,500

Cash 40% 1st installment . 4,000

Cash 30% 2d installment . 2,400

Cash 30% 3d installment . 1,800

Balance : 300

$10,000



Original capital $10,000



Balance.



Dr.



C, Capital Account.



$10,000
$300

Cr.



Deficit $1,000

Cash 60% 1st installment. 6,000

Cash 20% 2d installment. 1,600

Cash 20% 3d installment. 1,200

Balance 200

$10,000



Original capital $10,000



Balance.



$10,000
~$200



of which refer to corporation and individual accounts as
well as to those of partnership. The partnership problems,
as such, are generally involved in the correct interpreta-
tion of the partnership agreements, perhaps ambiguously
drawn up or even resting on a vague oral agreement, and
have to do primarily with the essential relationship of the
individual partners, the terms on which they unite, the



334 MODERN ACCOUNTING

division of profits, the adjustment of unpaid capital con-
tributions through allowances for interest, and the final
distribution of assets, all of which transactions must con-
form to the rules of the partnership agreement.



BIBLIOGRAPHICAL NOTE TO CHAPTER XVII

CHILD, P. Partnership Accounts. Third edition. London, 1904.

DICKSEE, L. R. Advanced Accounting. Chapter XIII. Third
edition. London, 1908.

LINDLEY, N. A Treatise on the Law of Partnership. II, pp.
396-403. American edition. ' Jersey City, 1888.

LISLE, G. Interest on Capital in Partnership. Article in En-
cyclopedia of Accounting, III, pp. 432-438.



CHAPTER XVIII

THE STATEMENT OF AFFAIRS AND DEFICIENCY ACCOUNT

THESE statements, while somewhat outside of the regu-
lar scheme of accounts, are sufficiently important to de-
serve some notice. The Statement of Affairs is a statement
drawn up when a concern becomes insolvent, and designed
to indicate to creditors the probable amount which will be
realized in liquidation. The Deficiency Account is a sup-
plement to the Statement of Affairs and serves to explain
how the deficiency shown by the Statement of Affairs has
been caused.

The use of these forms is of English origin and depends
on the provisions of the Companies Acts which prescribes
the form in which they shall be made out. In the United
States the laws are less exact regarding bookkeeping forms,
and the statements submitted to the courts are generally
not in strict accounting form. But despite the absence of
legal authorization, the advantage which results from a
clear and formal presentation of the status of the involved
concern is so great that American accountants are also
frequently making use of the Statement of Affairs and
Deficiency Account.

The use of these forms may be illustrated by presenting
an example applying to a typical problem but one which
contains only a few items and is free from complications.

The firm of A & B finding itself financially embar-
rassed is forced to go into liquidation November 30, 1908.
A statement drawn from the books at that date shows the
Trial Balance exhibited on the following page.

335



336



MODERN ACCOUNTING



Dr.



Trial Balance.



Cr.



Real estate $70,000

Investments 140,000

Merchandise 100,000

Bills Receivable 2 1 ,250

Accounts Receivable. . . . 14,250

Drawings A 12,000

Drawings B 10,000

Bad debts charged off.. . . 1 5,000

Expenses 10,670

Cash 1,330

$394,500



A, Capital $35,000

B, Capital 30,000

Bills Payable 204,500

Accounts Payable 125,000



$394,500



A further examination of the condition of the firm dis-
closes the following facts:

Of the Investments, all of which are good, $100,000 are
pledged to secure a note of $85,000 and $15,000 are pledged
with the holder of a note of $20,000.

Of the Accounts Receivable $5,000 are recognized as
bad, $3,000 are doubtful with an estimated value of $1,000,
the remainder are good.

The Bills Receivable are estimated as worth $15,000.

The Merchandise is estimated as worth $60,000, and
the Real Estate as worth $50,000.

In addition to the liabilities shown on the books, $2,500
is due for wages, $1,000 for salaries, and $250 for taxes,
all of which are preferential claims against the assets.

With these facts and estimates the Statement of Affairs
and Deficiency Account would be as follows:





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837



MODEKN ACCOUNTING



Dr.



FORM 141.

Deficiency Account.



Cr.



To Capital on Jan. 1, 190- $65,000
" Deficiency as per

statement of affairs. 59,670



$124,670



By sundry trade losses. . . . $29,420
" Shrinkage as per
statement of affairs,
viz.:

Book Accounts . $7,000
Bills Receivable . 6,250

Merchandise 40,000

Real Estate 20,000 73,250

" Drawings of partners.. . . 22,000
$124,670



Considerable variation is, however, found in the ar-
rangement of such statements. In the form given above
it is noticed that the Liabilities are given on the left hand,
just as they appear on that side in English Balance Sheets.
By some accountants this order is reversed. Similarly there
is a disagreement in practice regarding the arrangement
of the sides of the Deficiency Account, some placing the
Deficiency and Capital items on the Debit side, and .the
items showing how the losses occurred on the Credit side of
the account, as is done above, while others reverse this
order. There are, accordingly, four different combinations,
all of which have the support of authorities of repute.
These may be scheduled as follows :

Variations in Arrangement of Statement of Affairs and Deficiency Account.





Statement of Affairs.


Deficiency Account.


la.
Ib.

Ila.
lib.


Left Column.


Right Column.


Left Column.


Right Column.


Liabilities.
a

Assets.



Assets.



Liabilities.
n


Capital and Deficiency.
Shrinkages, etc.
Capital and Deficiency.
Shrinkages, etc.


Shrinkages, etc.
j Capital and )
( Deficiency. )
Shrinkages, etc.
\ Capital and )
"( Deficiency, f



STATEMENT OF AFFAIES 339

Of these various forms la corresponds to the schedules
of the English Companies Acts, is most generally used in
England, and in this country is used, for instance, in
Broaker and Chapman's " American Accountants' Man-
ual," and in W. H. Dennis's " Practical Accounting."
The second arrangement (Ib) is the one approved by Lisle.
The third (Ila) is favored by F. S. Tipson in his " Theory
of Accounting " and in the model form given by Leo
Greendlinger in the Journal of Accountancy. The last
form bears the approval of A. G. Platt as shown in the
appendix to Kahili's " Corporation Accounting."

Some of the authors mentioned above have argued at
some length in favor of one or the other arrangement.
Some ingenuity has been exhibited in showing that the
arrangement, Liabilities Assets, has some particular logi-
cal justification when used in the Statement of Affairs.
But historically it doubtless arose as the result of that
arrangement in the Balance Sheet, which has not been fol-
lowed elsewhere than in England. It may furthermore be
noted that in forms la and lib the deficiency shown in the
Statement of Affairs is carried to the opposite side of the
"Deficiency Account, just as a balance of any account is thus
transferred to another account. But in forms Ib and Ila
the deficiency item appears on the same side of the two
accounts. Probably the preponderance of custom is in
favor of the form given above (la), although in view of
the divergences noted it cannot be said that this form is
at all binding. One may accept the prevalent custom with-
out agreeing with the arguments given to show that the
arrangement is logical as well as customary.

The purpose of these statements being to present to the
general creditors a succinct view of the status of the con-
cern, the best arrangement is to eliminate all secured
claims and the property by which they are protected from
the figures showing the net assets and the ranking lia-

93



340 MODERN ACCOUNTING

bilities. A comparison of the resulting totals gives the per
centage on general claims which may be expected, without
allowing for expenses of liquidation. "Where a claim is
secured by some specific collateral the two items should
be canceled against each other as is shown in the treat-
ment of the ' ' Creditors fully secured ' ' above. But where
the claim is not secured by a specific security it is deducted,
from the total assets, as in case of the "Wages and Taxes
in the illustration given. Some accountants object to thus
subtracting claims not secured by specific collateral, but
the general practice favors so doing.

In the Deficiency Account given above the business had
been run at a loss, as shown by the item of Sundry Trade
Losses. It is desirable to make the showing in the de
ficiency account as complete as possible, and therefore it
may cover the operations of several years, showing on one
side the original capital and the profits made in certain
years, on the other side of the account the net losses of
other years, separately displayed. If the concern is a
corporation, dividends paid should be disclosed just as
withdrawals by the partners are shown in the present
illustration.



BIBLIOGRAPHICAL NOTE TO CHAPTER XVIII

BROAKER, F. and CHAPMAN, R. M. The American Accountants'
Manual. I, pp. 109-130. New York, 1897.

DICKSEE, L. R. Advanced Accounting. Chapters XI V-XV. Third
edition. London, 1908.

GOTTSBERGER, F. Accountant's Guide for Executors, Administra-
tors, Assignees, Receivers, and Trustees. New York, 1902.



CHAPTER XIX

TECHNICAL IMPROVEMENTS IN ACCOUNTING PRACTICE

WHILE bookkeeping has preserved unaltered the essen-
tial principles involved in Paciolo's treatise, yet the prac-
tice of the art has not been stationary during the past four
centuries. Two lines of development may be mentioned.
One has been in the direction of technical devices, of one
kind and another, designed to lessen the routine drudgery
of the bookkeeper labor-saving devices which either elimi-
nate part of the work not essential to securing the neces-
sary results, or assist the accountant in performing the un-
avoidable operations. The second line of development is
one in which the operations of bookkeeping and the results
obtained are made to correspond with the changing eco-
nomic conditions and the resulting modifications of busi-
ness activities.

The more technical improvements which have taken
place may be grouped as affecting

1. The relation between the chronological and classified
records of business transactions.

2. The form and arrangement of the ledger.

3. The performance of the necessary mathematical cal-
culations by substituting machine labor in such operations.

1. It has been seen that the significant feature of double
entry bookkeeping is a classified outline of all business
operations, which is kept in what is called a ledger. The
ledger is thus the essential book, at least so far as account-
ing theory is concerned. Indeed, it has occasionally been

341



342 MODEKN ACCOUNTING

the only book kept, as for instance by the earlier Venetian
accountants, or as advocated as though it were a distinct
invention of his own by Lizet in 1660; yet it has been
well-nigh universally recognized that it is practically neces-
sary to have a chronological as well as a classified record
of business transactions.

But the form in which this chronological record is kept,
and the method by which the record is transcribed from
the original record into the ledger have been greatly modi-
fied,' always with a view to eliminate needless repetition
and to save unnecessary labor. Paciolo considered it de-
sirable to have a threefold series of records. The first called
Memorial, a term still used in Germany, contained a mere
description of the transaction, generally expressed in un-
technical language. The second, or Journal, repeated the
record but expressed it in technical terms, with values re-
duced to the current money of account, and with a clear
indication of which ledger account was to be debited and
which was to be credited. From the Journal the proper
postings were made into the Ledger.

This complicated process was perhaps originally neces-
sary. As Row-Fogo has pointed out, in the beginnings of
modern commerce, when there was no uniform coinage, it
was frequently a difficult task to translate the transaction
into terms suitable for posting into the Ledger. Yet it was
desirable to make the first record at once, leaving the pro-
prietor to determine later the form in which it should ulti-
mately appear in the Ledger. This was perhaps all the
more necessary as it was customary to use the books of
account not merely as a record of the transaction but as
well as legal evidence of the contract, with the signatures
of the verifying witnesses. Such an entry may be shown
by quoting from an account book kept more than five hun-
dred years ago by a merchant of Hamburg :

' ' Bertold Scroder and Herr Johann, his son, the Pres-



TECHNICAL IMPEOVEMENTS 343

byter, are together indebted for 24 marks for two pieces of
Oldenard cloth viz: 1 red and 1 blue which they bought
on the day after the feast of St. Peters Chains, to be paid
at the beginning of Fast time. In presence of Herren
Johann Stuveke and Luke and Albert Albecke."

But the elaborateness of entry became needless and un-
desirable as commerce became better systematized. Evi-
dences of contract were more conveniently kept elsewhere,
instead of crowding them into the record of transactions;
the use of uniform currency made a definite entry no lon-
ger difficult; and the conventional threefold series of Me-
morial, Journal, and Ledger, if not altogether abandoned,
is at least obsolescent.

Especially in American practice has there been a tend-
ency to simplify and abridge. The Memorial, called in
English the Day Book, a most inappropriate term to be
used in contradistinction to Journal, both having the same
root meaning, has largely disappeared as a separate book.
Where detailed description of the transaction is still re-
quired it is written directly in the Journal itself. But not
content with the elimination of the Memorial or Day Book,
modern bookkeeping has gone farther and has to a con-
siderable extent dispensed with the Journal, at least in the
sense of the formal and somewhat stately record in which
the bookkeepers of the last generation thought necessary to
make the entry before it could appear in the Ledger, and
from which each item was separately transcribed.

This has been brought about by using a columnar rec-
ord, in which items of a similar nature, as, for instance,
Cash, Discount, and Merchandise, are placed in separate
columns and the footings of these columns, not the indi-
vidual items, are posted into the Ledger.

This device, which appears in myriad forms, may be
illustrated by a Columnar Journal-Cash Book, as shown
in Form 142.



344



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TECHNICAL IMPROVEMENTS 345

Here only the footings of the several columns, Accounts
Receivable, Accounts Payable, etc., are posted into the
Ledger. Items occurring too infrequently to need a spe-
cial column can, however, be entered in the last column,
with the name of the account to which the special entry is
to be posted.

Carried to a logical extreme the columnar system be-
comes at once Journal and Ledger, the column for the
descriptive text furnishing the chronological record, while
the distribution of amounts into various columns a sepa-
rate column being provided for each account serves for
the classified record or Ledger. This is what was done in
Form 1 on page 5. In that example the perfect com-
bination of Journal and Ledger was easily accomplished
because the scheme of accounts consisted of only three ac-
counts. With a large number of accounts it is easily seen
that such a system is impossible. Even where there is no
attempt to dispense with the Ledger and the columnar
Journal is used only as a means of obtaining footings for
posting, the increase in the number of such columns soon
becomes objectionable. The book itself becomes unwieldy,
it is uneconomical of paper, and the danger of making the
entry in the wrong column becomes increasingly great.
While the columnar system thus has clear limitations, its
acceptance has become very widespread, especially in the
United States. It is less common in Europe, where the
term American Bookkeeping is applied to a system using
books so ruled.

Parallel with the abolition of the unnecessary duplica-
tion of Memorial and Journal, there has been an increase
in the number of books from which postings are made into
the ledger. In Paciolo's scheme all entries came into the
Ledger through the Journal, in modern accounting there
may be a dozen books from which postings, generally of
footings, are made into the Ledger. This is rendered neces-



346 MODERN ACCOUNTING

sary by the increase in the amount of business transacted,
which makes it impossible for one person to make all the
entries of current transactions. By dividing the books of
original entry, so that transactions of different classes are
made in separate books, an indefinite number of clerks can
be simultaneously engaged in making entries, while the
posting into the Ledger can be done later, by totals. The
first division of this kind to be made was the separation of
all transactions in which a cash payment is involved. The
separate Cash Book was not known to Paciolo and did not
appear until about the middle of the sixteenth century.
At present not only cash, but many other transactions, pur-
chases, sales, discounts, loans, etc., are entered indepen-
dently in separate books and posted thence into the Ledger,
generally without passing at all through the Journal, al-
though by some an entry of the totals is passed through
that book.

In these coordinate books of original entry, as well as
in the Journal, the principle of columnar ruling is applied.
It is interesting to note that this device was presented in
the first American text-book on bookkeeping published by
William Mitchell in 1796. In this valuable but little-
known work each side of the Cash Book is provided with
columns for Merchandise, Bills Receivable (or Payable),
and Sundries.

It is thus seen that there has been a steady line of de-
velopment in bookkeeping technic in connection with the
relation between the chronological and the classified rec-
ords, whereby the Ledger has been brought closer to the
original entries, duplications have been avoided, totals have
been entered instead of needlessly minute details,- and
facilities have been created for attending to a greater
amount of business than could have been accomplished by
the older forms. But in all this nothing has been done at
all opposed to the principles of double entry bookkeeping,



TECHNICAL IMPROVEMENTS 347

and everywhere the equation between Goods and Proprie-
torship is maintained as carefully as ever.

2. The second line of improvements has been in the
form and arrangement of the Ledger itself. In general the
traditional ruling of the Ledger has been preserved, and
there are still two columns for the Debit and Credit items
respectively. Some little variation exists in the position
of these two columns relative to each other and to the col-
umn for descriptive text, and at times a third column is
added to contain the balance. This latter device means
some additional writing, but it has the advantage of mak-
ing immediately available the desired information concern-
ing the state of the account. It is especially valuable in
connection with personal accounts, particularly those kept
by a bank with its customers, where immediate information
is essential. Such rulings have a further advantage in
doing away with some of the rather cumbersome forms of
ruling off and balancing an account, the saving in time
and space in this regard offsetting to some extent the ad-
ditional labor of indicating the new balance after each
transaction.

There is also a tendency to eliminate unnecessary detail
from the Ledger entries, it being more economical to make
an occasional reference to some other record than to tran-
scribe all the details, most of which serve no purpose, in
the Ledger. The regulation on which the older writers
insisted that each Ledger entry should give the name of
the other account religiously preceded by the formula
" To " or " By " in which the counter entry appeared,
became impossible so far as totals only were posted. It is
now recognized as altogether needless. The custom was
doubtless once useful. The older bookkeeping technic
verified the accuracy of the Ledger, not by taking a trial


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