The Goal of Account-Keeping.—Throughout the preceding chapters constant reference has been made to records or data of the business furnished by the accounting department. Knowing the use made of these data in the compilation of financial and profit and loss summaries, we shall trace the process of gathering that information in exactly reverse order; first, through the ledger, where it is grouped and summarized in accounts and made ready for the preparation of statements; then into the books of original entry, where the information is first sorted and classified for posting to the proper ledger accounts, with a view always to fit it ultimately into the final statements of financial and business condition; and finally, to the business papers arising out of the transactions, which are the basis or first source of all accounting records.

The Ledger and Its Content.—The ledger may be defined as the book of accounts. In it are collected most of the data needed for the final statements showing the financial condition of the business. By means of its account titles, it makes an analytical record of all transactions, according to the information desired, and through the mechanism of the account it groups and summarizes all data affecting each particular account, thus furnishing the proprietor with totals instead of items. In the ledger, therefore, must be kept two main classes of accounts, viz., those used for making up the balance sheet and those used for making up the profit and loss statement. The one group shows assets and liabilities, and the other temporary proprietorship increases and decreases brought about by the receipt of income and the payment of expenses. The ultimate or net proprietorship is determined by the summarization of all temporary accounts in the way shown in preceding chapters.

The Ledger Account Defined.—An account may be defined as a record of one or more items, either similar or dissimilar, relating to the same person or thing, kept under an appropriate heading or title. The record is kept in such a way as to make easy the addition of similar items and the subtraction of dissimilar items. Accounts are kept both with persons, as the accounts receivable and payable already mentioned, and with things, such as land, buildings, machinery, merchandise, cash, and the like. Some asset accounts and some accounts kept with persons are usually composed of both similar and dissimilar items. For example, the cash account is composed of both cash received and cash paid out items; the accounts receivable record both the items for which the person is in debt to the business and those which show the cancellation or settlement of the debt, in part or in full; and the accounts payable record the items for which the business is in debt to the person and those which show cancellation of the debt or settlement by the business. Accounts which record income and expenses usually comprise only similar items, as where all sales of merchandise are recorded under one head or account and all purchases under another.

The Account Title.—The title given to an account is important. It should indicate clearly the content of the account. Accuracy is a basic necessity in accounting. Correct titles are therefore essential. A title which does not clearly and truthfully indicate the nature of the account, or one which is so chosen that under it may be recorded items of various and doubtful kinds, gives prima facie evidence of an imperfect knowledge of accounting principles or of a desire to hide data which will not bear close scrutiny. Therefore, care should be exercised in the selection of titles.

The Two Sections of the Account.—To separate similar from dissimilar items, the account is divided into two sections, a left and a right section, as we shall call them for the present, which are shown in the standard form given in Form 1.

The account head or title is placed in the center over the division line. At the extreme left of each section are the date columns—year, month, and day. Note particularly where the “year” is shown. The space following is for explanatory matter; the next column, left blank in the illustration, is a reference column whose use will be explained later; and the last column in each section is the money column, where the dollar subsection column is further divided into columns for each digit of the amount. Care must be exercised to observe such rulings when writing in the amounts. The account with Cash in the illustration shows on the left a receipt of $150.25 from J. B. Givens, and on the right, the payment of $5.50 for stationery. These two items are entirely dissimilar. Another receipt of $72.69 on January 3 from cash sales is shown on the same side of the account as the record of the previous receipt and directly under it. Note that the name of the month is not repeated.

The Mechanism of the Account.—Thus the mechanism of the account is designed not only to give a brief history of each item entered therein, but primarily to bring together all items of the same kind relating to that account, so that they may be summarized. It should be thoroughly understood that all items on each side of the account are similar items, though the two sides themselves are of exactly opposite kinds. Where the account has entries on both sides, i.e., is composed of dissimilar items, a comparison of the totals of each group shows the condition of the account. In the Cash account given, the total of the left side, $222.94, showing receipts, compared with the total of the right, $5.50, showing disbursements, indicates that there is $217.44 cash now on hand. It is evident, therefore, that the account is a mathematical device for holding on one side all items to be added and on the other all items to be subtracted. Only in this way can addition and subtraction be performed within the account.

The Number of Accounts.—The number of accounts to be kept in the ledger is determined by the minuteness of detail desired for the guidance of the management of a business. The financial and profit and loss statements usually lack detail and for this reason the items appearing thereon are frequently subdivided in the ledger into numerous accounts.