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he borrows the stock a check for the -full market value. This
broker in turn pays the borrowing broker interest for the use
of the money which he has received from him as a result of
the borrowing of the stock, and it is this interest that the
broker often divides equally with the customer. -

31. Balancins: the Ledger. — Once a month the Ledger
accounts are balanced as to cash and stock. This is done after
all interest items have been posted to the accounts. At this
time also the Customer's Statement is prepared. This will be
explained in detail further on.

The procedure of balancing the Ledger is as follows : First,
balance the account in the usual manner as to cash. Second,
balance the stock by comparison of securities noted as being
held long on the debit side of the account with those sold on
the credit side, and note how the account stands as to securi-
ties that are still held for that customer's account, or, as they
say in Wall Street, of which he is long, and as to securities
which the customer sold without having owned them, that is,
short sales.

It is readily seen that if a customer buys 100 shares of
U. S. Steel today and sells that same 100 shares of U. S. Steel
tomorrow, there can be no stock balance, but if the customer
sold at a higher price than that at which he bought there will be
a cash balance in his favor.

Then, again, should that customer buy 100 shares of U. S.
Steel today and also sell short 100 shares of Chino Copper
stock, there would be a long stock balance in U. S. Steel; a
short stock balance in Chino Copper, and a cash balance, which
is determined by the price at which Steel was bought and
Chino Copper was sold.

32. Example of Use. — As has been explained, all post-
ing to the customers' accounts is done directly from the Blot-
ters. The method of posting Mr. Fordham's Ledger account,



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ACCOUNTIN(} METHODS



27




as shown in Fig. 8, will now be
explained.

In the Clearing House Blot-
ter, a "sale is recorded for Mr.
Fordhani; therefore, according
to the rule for posting, Mr.
Fordham's account is credited
with the sale of 200 Rubber at
90, and. the amount credited in
the column for recording the
proceeds from the sale is equal
to the price received on the
market, minus charges for
commission, tax, or any other
charges.

The Clearing House Blotter
also shows that Mr. Fordham
has bought 100 U. S. Steel at
$98^, and, according to the rule,
Mr. Fordham's account is
debited with this purchase, the
data being recorded as re-
quired by the form ; the amount
as recorded in the amount col-
umn is made up of the market
price plus any charges for com-
mission.

The Ex-Clearing House Blot-
ter shows that Mr. Fordham
deposited a margin of $5,577.50
on his long holdings and short
sale, therefore* he is credited
with this amount.

H no further entries were
made in Mr. Fordham's ac-
count until July 31, it would at
that time be balanced in the
following manner:



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28 STOCK-BROKERAGE ' §33

Proceed as to close any other account for a cash balance,
then proceed to carry down any stock which the account owner
may be long or short of.

Since it has been shown that the manner of posting to a
customer's account in a broker's record and the manner of
balancing that account are the same as used in handling any
other ledger account, there should be no trouble in handling the
other accounts which are affected by the other items in the
Blotters.



CUSTOMER'S STATEMENT

33. Function. — ^The function of the Customer's State-
ment is to keep the customer fully informed as to his standing
with the broker; for, by it, the customer can see a complete
statement in detail showing what his purchases and sales have
been during the month which this statement covers.

By this statement the customer may know what have been
the amounts paid for the securities which he has bought, and
what have been the amounts received for securities sold for
his account. * He may also obtain from this statement what
have been the expense items of interest, commission, and tax
on sales. He may see at a glance from the item of cash what
has been the amount of margin deposited by him, and by adding
his profit from operating to this marginal deposit, or, in-the
case of a loss from operating, deducting this loss from the
marginal deposit, he may know the amount of his new marginal
deposit remaining to carry his account.

By reference to his statement the. customer may see his posi-
tion as to stocks short or long. In short, the statement shows
the customer all the details regarding his account as it stands in
the Customers' Ledger of his broker.

34. Check on Customer's Statement. — In the Section
on Operating on the New York Stock Exchange it was
explained that whenever a brokerage firm executes an order for
a customer, the customer receives a notice to the effect that the
order has been executed. On this notice the complete details
as to the price, name of security, and quantity sold or bought



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§33



ACCOUNTING METHODS



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are given. So, by comparing
these notices with the monthly
statement, a check can be had
on the statement as furnished
by the broker to his customer.

35. Rule for Payment
of Interest. — When a broker
furnishes capital to a customer
he charges interest at the rate
of 6 per cent, per annum, while
on the credit balances he allows
the customer interest at the rate
of 2 per cent, per annum.

This rule is subject to the
one modification that in the
case of a short sale, which gives
the customer a fictitious credit
balance, no interest is allowed
the customer by the broker. It
is readily seen that any cash
coming from the sale of a se-
curity which is not owned by a
customer does not in the larger
sepse belong to that customer;
for some part of it at least must
be used to borrow that security
at some future date in order to
make a delivery on that cus-
tomer's short sale, since a check
for the market value of this
stock will have been given to
the broker from whom *the
stock will be borrowed. From
this explanation it will be seen
that in reality the customer
does not have the cash' as a
credit to his account.



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30 STOCK-BROKERAGE § 33

36. Relation of the Statement to the Account.

The statement must agree in detail with the customer's account,
as it appears in the Ledger, and must show all long holdings, all
short transactions, along with the balance in cash, carried down
either as a debit or a credit, as the case may be.

37. Example of Use. — It has been explained that a cus-
tomer's statement agrees in detail with the customer's account
in the Ledger, showing all long holdings and all short trans-
actions, with the cash balances carried down, either Dr. or Cr.
as the case may be, therefore no further discussion is needed
to explain the form shown in Fig. 9, which is a statement for
Af r. Fordham, taken from his account as shown in the Ledger.



SECURITIES LEDGER

38. Function. — The Securities Ledger, or Stock Record,
as it is known usually in Wall Street, is used to list the securi-
ties held for customers' accounts, and to show the place of
deposit, or any other disposition made of them. •

39. Structure. — The Securities Ledger may be either a
loose-leaf volume or a bound one, as best suits the needs of
the firm. Usually the loose-leaf form is used ; for the holdings
of a firm doing much business are of many different kinds of
securities and the volume of any one security held so fluctuates
that it is often necessary to allot more than one page to a single
security, and this can be easily done with a loose-leaf volume.

All certificates of the same kind of stock are listed under
one head ; thus, if a broker had one or one hundred different
certificates of stock of the U. S. Steel Corporation, these cer-
tificates would all be listed under the heading of U. S. Steel, on
the U. S. Steel sheet.

On the left-hand side of the Ledger sheet are recorded:
(1) the holdings of the customers, or (2) stocks borrowed
from some other broker to make a delivery on a short sale.
The following data are recorded :

1. Date received.

2. Number of shares received.



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i33



ACCOUNTING METHODS



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3. By whom owned.

4. In case of borrowed
stock, for whose account bor-
rowed.

5. From whom borrowed.
On the right-hand side are

shown the securities which are
short or those that .can be
loaned in the street, or those
which are on deposit either in
the vault, as collateral for a
loan at the bank, or at the trans-
fer office. The data recorded
are as follows:

1. Date.

2. Number of shares.

3. To whom loaned, if
loaned.

4. For whose account short.

5. Place of deposit.

40. Manner of Use.

Since the Securities Ledger is
one of the records of the
cashier's - department, it is kept
under his supervision, if not by
himself directly, and from it he
is able to check the securities
for which his firm is respon-
sible. When a stock certificate
enters the cashier's hands, it is ,
recorded in this Stock Record.

41. Example of Use.

A page of the Securities Ledger
showing the record kept of
U. S. Steel stock is illustrated
in Fig. 10. This shows that the
U. S. Steel purchased by Mr.



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32 STOCK-BROKERAGE §33

Fordham was received July 2, 1919, and that it was loaned to
T. M. Ford, another broker. It also shows that on July 3,
W. T. Appel sold short 300 shares of Steel, and that to make a
delivery for him his broker borrowed 300 shares of Steel from
T. M. Ford. The manner of entering these transactions is
clearly shown.



STOCKS BORROWED AND LOANED BOOK

42. Function. — The function of the Stocks Borrowed
and Lx)aned Book is to provide a record of all 'stocks borrowed
and loaned. Such a record is necessary in order that the broker
may at all times know how he stands in regard to stocks that
he has borrowed or loaned.

43. Structure. — This record is either a bound volume or
a loose-leaf one, the bound volume being usually preferred.
The record is divided into two parts, namely, the Borrowed
and the Loaned sections, and columns for recording the follow-
ing data are provided :

On the Borrowed section are recorded :

1. Date of borrowing.

2. Number of shares borrowed.

3. Description of securities.

4. From whom borrowed.

5. Price at which the securities were borrowed. (Price
used is either the Clearing !House price for that day or the
market price at the time of borrowing.)

6. Rate of interest, and any changes in the interest rate as
shown by the money market, together with the number of days
the stock is borrowed.

7. The date of return.

On the Loaned section, the data recorded are :

1. Date of loaning.

2. Number of shares loaned.
' 3. Description of securities.

4. To whom loaned.

5. Price at which stock was loaned.



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§33



ACCOUNTING METHODS



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6. Rates of interest and
number of days the stock was
loaned.

7. Date of return.

44. Manner of Check-
ing. — To provide a check upon
this record one need only com-
pare the stock listed in it with
the Securities Ledger in order
to verify the stock entry;
whereas, the price entries are
checked by comparing them
with the entries ia the Stock
Borrowed and Loaned Account
in the General Ledger.

45. Example of Use.

By reference to the Loaned
Stock section as shown in
Fig. 11, it will be seen that
Broker Jones, the owner of this
book, loaned to T. M. Ford, on
July 2, 100 shares of U. S. Steel
at the Clearing House price of
$99 per share. For this stock
T. M. Ford gave Broker Jones
a check, which represented the
value, at Clearing House price,
of the stock borrowed by him.
For the use of this money,
Broker Jones paid T. M. Ford
interest at the rate of 4 per cent,
from July 2 to 5, and 4J per
cent, from July 5 to 6 when the
loaned stock was returned to
Broker Jones. Broker Jones
returned the check to J. M.
Ford, plus interest.



I LT 234-9



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STOCK-BROKERAGE



§33




The check mark (V) i^ the
column headed 6 indicates that
the interest, 4^ jper cent., (col-
umn 5) was in force to and in-
cluding the 6th, at which time
Broker Jones returned the
check to T. M. Ford, plus in-
terest at the rates shown.

This explanation should
make clear also the entries in
the Borrowed Stock section, as
shown in Fig. 12. To be able
to understand and interpret
these data, the main thing to be
remembered is that when
Broker A loans Broker B stock,
then Broker B pays to Broker A
a check for its market value.
Then Broker A pays interest
for the use of thisjnoney at the
rates indicated.



MONEY BORROWED
AND LOANED BOOK

46. Function. — The

Money Borrowed and Loaned
Book is used to record all the
essential data regarding the
money borrowed and loaned by
a broker for his customers.

Just as a broker is able to
borrow stock in order to pro-
vide for the delivery of securi-
ties which a customer has sold
short, or to loan his surplus
securities which are not needed



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§33 ACCOUNTING METHODS 35

for delivery, so also is he able to borrow money from banks by
depositing securities as collateral. One broker may also bor-
row from another broker. On the other hand, should the
broker have excess funds, he may loan them to other brokers
in the street. Therefore, to record these acts a Money
Borrowed and Loaned Book is used.

47. Structure. — The record has two parts, the Money
Borrowed and the Money Loaned sections. In the Borrowed
section are recorded the following facts : -

1. Date of borrowing.

2. Amount borrowed.

3. Collateral deposited.

4. Substitutions in collateral from time to time.

5. From whom borrowed.

6. Rates of interest and duration of loan.

7. Date of payment.

Hi the Loaned section are recorded :

1. Date of loan.

2. Amount of loan.

3. Collateral deposited.

4. Substitutions in collateral.

5. To whom loaned.

6. Rates of interest and duration of loan.

7. Date of payment.

48. Manner of Checking. — Since it is readily seen that
only the securities listed on the Borrowed side of this record,
as collateral for a loan to the owner of this book, are the securi-
ties controlled or owned by him, it follows that they should
appear in the Securities Ledger as well, therefore the two
records may be compared.

To check the money values listed in the Money Borrowed
and Loaned Book, reference should be made to the Loan
Account in the General Ledger to check items appearing in the
Loaned section, whereas the items listed in the Borrowed
section should be checked with the items as shown in the
Sundry Debits account in the General Ledger.



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STOCK-BROKERAGE



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49. Example of Use.

The method of recording money
loaned is illustrated in Fig. 13,
which represents a page from
the Money Loaned section.
When a broker loans money,
the one borrowing the money
furnishes collateral for the loan.
The data recorded are shown in
the form. In this case, the
broker who owns the record
has loaned $20,000, and for
that loan W. T. Hyde has de-
posited collateral, at first con-
sisting of 500 shares of Chile
Copper with a market value of
$30 a share and 300 shares of
Sugar with a market value of.
$50 a share. Later on, W. T.
Hyde makes a substitution in
that collateral. He withdraws
the 500 shares of Chile Copper
and substitutes 600 shares of
Smelters worth $25 a share on
the market. When one figures
the market value of the securi-
ties deposited as collateral, as
against the loan of $20,000, it is
readily seen that a wide margin
is put up by the borrowing
broker, W. T. Hyde.

The loan was made on July
8, 1919, at an interest rate of
4 per cent., and this rate was
continued till the 28th of the
month, when it was changed to
4i per cent., which held till the
30th, when the loan of $20,000



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ACCOUNTING METHODS



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1^



KV

t



was returned by W. T. Hyde
and his collateral was returned
to him. W. T. Hyde also paid
his interest charges when the
principal was returned.

With this explanation -it
should be clear just how the
entries are made on the Money
Borrowed sheet, Fig. 14, which
records the money borrowed by
the broker who owns this rec-
ord. In this case it is seen that
this broker has borrowed
$40,000 from the Manhattan
Company and has deposited
securities as collateral, with
the interest rates changing as
before. The loan was paid on
the 29th of the month.



STOCK TRANSFER
REGISTER

50. Use. — As it frequently
becomes necessary to transfer
a certain block of stock from
one holder's name to that of
another, it is necessary to pro-
vide a record of such stocks as
may be sent to the transfer
office in order that none may be
lost through the operation.
Therefore, the Stock Transfer
Register has come into use.

In this are recorded all
stocks deposited with the trans-
fer office. By reference to the
form, as shown in Fig. 15, it



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38



STOCK-BROKERAGE



§33



II






^i



T
1



^
^






will be seen that columns are
provided for recording the im-
portant data regarding the
stock deposited, such as :

1. Date of deposit.

2. Number of shares de-
posited.

3. A description of such
shares.

4. In whose name, or from
whom transferred.

5. Certificate number.

6. Date of withdrawal.

7. For whom withdrawn
(to whom transferred).

8. New certificate number.

51. Reason for Trans-

^ f er. — Whenever dividends are

2 due on stock certificates, the
^ . . . .

dividends will naturally be paid

to the last-recorded holders as
shown on the books of the cor-
poration or company whose
stock these certificates repre-
sent. Therefore, it is good
policy to have a stock certificate
recorded under the name of
the present owner, especially
when a dividend is due.

In this connection it is well
to know that the usual custom
in the street is for the broker
to charge ^ of 1 per cent, for
the collection of dividends on
certificates held for customers,
and 1 per cent, on all coupons
collected.



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§33 ACCOUNTING METHODS 39

52. Example of Use. — Fig. 15 show^ the entries
made in the Stock Transfer Register in connection with the
transfer of the 100 shares of U. S. Steel, which Mr. Fordham
bought, from the name of the previous owner to his own
name.

The headings for each column, with the exception of "In
whose name,'' require no further discussion. The column "In
whose name" is used to record the previous owner's name as
appeared on the stock certificate when that certificate was
delivered to the transfer office.



VAULT LIST

53« Function. — The Vault List, as used in the broker-
age house, is a form for recording the securities that are
deposited in the safe-deposit vault, in order that the broker or
his clerks may readily know, by reference to it, just what
securities are on hand.

54. What It Records. — This record provides a place
for recording the following data regarding securities in the
vault :

1. Date of deposit.

2. Number of shares.

3. Kind of securities.

4. Name of owner.

When a certificate is taken out of the vault the following
data are recorded :

1. Date of withdrawal.

2. Number of shares withdrawn.

3. Kind of securities withdrawn.

4. Purpose of withdrawal.

This record may be verified by checking it with the Securi-
ties Ledger.

55. Example of Use. — The form of the Vault List is
shown in Fig. '16. If it be assumed that the securities, as
recorded in the form shown, were actually deposited and with-



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STOCK-BROKERAGE



§33



drawn, an idea of the manner of handling this record will be
had.

The first entry records the fact that on the third of July,
100 shares of Anaconda Copper, belonging to F. H. Towne,




Fig. 16



were deposited in the vault, and on the sixth of July 100 shares
of Anaconda which belonged to F. H. Towne were taken out
because of a sale.



PRIVATE LEDGER

56. Use. — ^Whatever is true regarding the use of the

private ledger in a mercantile concern is equally true regard-
ing its use in Wall Street.

The Private Ledger is used to segregate a few accounts from
those kept in the General Ledger, and to complete a trial bal-
ance or to make a Balance Sheet correct, the balances from the
Private Ledger must be used.

The Private Ledger is used in order to keep a knowledge of
the income of the concern, the capital accounts of the partners,
and other important business accounts, from being known to
all who may have access to the books of the office. The man-
ner of handling the accounts recorded in it is the same as for
handling any other ledger account.

The Private Ledger would contain the accounts from which
the true profit and loss would be known, and what accounts
are included therein would be determined by the firm.



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§ 33 ACCOUNTING METHODS 41

The ruling and arrangement are the same as in any other
ledger.

A control account for this ledger would be kept in the Gen-
eral Ledger.



GENERAL. LEDGER

57. Use. — Where the ledgers already explained are used,
the General Ledger of a Wall Street firm contains the asset
and liability accounts and the general nominal accounts. In
short, it contains all the accounts not kept in the Customers' or
the Private ledger, as well as controlling accounts for these
ledgers.

58. Structure. — ^Where a Customers' and a Private
ledger are used, the General Ledger is usually a bound volume.
Its ruling and arrangement is that of the usual ledger sheet
with the standard ruling.



CLOSING THE BOOKS

59. Procedure. — At certain periods of the year the
broker's books are closed in the same manner as are the books
in a mercantile\ concern. The balances from the income
accounts in the General Ledger, along with the expense
accounts, are posted to the customary temporary account
called Profit and Loss Account. The final balance of this
account will then represent the net profit or net loss to be
debited or credited to the proprietor's account.



PROFIT AND LOSS STATEMENT

60. The form of Profit and Loss, or Net Income, State-
ment is given herewith. In preparing this statement, the first
step is to find the operating income; from this is subtracted
the operating expense, and the remainder will be the net oper-
ating income. The net operating income having been found, it
is extended to the third column.



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42 STOCK-BROKERAGE § 33

Profit and Loss, or Net Income, Statement
1. Operating Income :

Commissions

2." Less Operating Expense:

General office expenses

Administration expenses

Branch office operating expense

Salesmen's salaries and expenses

3. Total operating expense *

4. Net operating income

5. Additional Income:.

Interest on customers' accounts

Interest on notes receivable

Interest on stocks borrowed

Premiums on stocks loaned

Interest on bonds held for investment

Dividends on stocks held for investment

6. Total additional income

• 7. Less Additional Expense:

Interest on stock loans, equivalent to

money borrowed

Interest on money borrowed

Interest on notes payable

8. Total additional expense

9. Net additional income

10. Net income from all sources

The next step is to find the total additional income; then
from that subtract the total additional expense, and the remain-
der is the net additional income. Then to find the net income
from all sources, add the net operating income and the net addi-
tional income, and the result will be the net income from all
sources.

The headings as given in the statement show just what ele-
ments enter into the preparation of a Profit and Loss, or
Income, Statement for a Wall Street house. The data for
making up this statement will be obtained from the General and
also the Private Ledger, for it will be recalled that the Cus-
tomers' Ledger is used to record the customers' accounts only,
therefore they cannot represent any of the nominal or pro-
prietorship accounts. Also, it is to be remembered that the
profit or loss for a given period is determined by subtracting
from the total income the total expense of that period; the



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§33 ACCOUNTING METHODS 43

result represents the net profit, or income, or loss, from all



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