Student’s Use of Working Rules.—In order to indicate the more usual types of transactions which affect the asset, liability, and proprietorship accounts, a set-up of the various groups of accounts will be given, under which will be shown transactions recorded as debits and those recorded as credits. Accounts will be shown in the order in which they appear in the balance sheet. The accounts under each group will, of course, bear their own individual titles and not the title of the group. Only such entries as are more frequently met with will be given. Since in the group accounts given as guides only those entries appear which affect these group accounts, it is deemed impracticable to attempt to show the contra, or other side of each entry arising out of the transactions. However, the student should always supply mentally the contra of each entry shown in the group reference account. For the sake of clarity, the personal pronouns “we” and “us” will be used instead of the impersonal name.

Accounts with Cash and Notes Receivable.—Entries to the Cash and Notes Receivable accounts are comparatively simple and are shown in the following schedule:

Transactions with cash are self-explanatory.

The accounts representing transactions with notes require some explanation. When, in the course of business, we receive a note, Notes Receivable is debited and the person who gives it is credited, because our asset Notes Receivable is increased and the claim against the open account of the person giving the note is decreased. Similarly, when that note is disbursed by us, i.e., goes out of our possession, the asset is diminished and therefore Notes Receivable is credited.

A note receivable can be disposed of in several ways:

In all of these cases the credit goes to Notes Receivable. In cases 1 and 3, the asset increased, viz., Cash, is debited; and in case 2 the liability canceled or decreased is debited. It may be stated, however, that in cases 2 and 3, instead of making the credit direct to the asset account Notes Receivable, it is better carried to a supplementary account, Notes Receivable Discounted, in order to show the liability arising from the fact that, through our indorsement, we guarantee to pay the note at its maturity in case the maker fails to do so. This is later explained in detail.

Accounts with Customers

The balance owing us by a customer is an asset, and therefore a debit item.

Goods sold on account are charged to the customer because our claim against him constitutes an asset; at the same time the income account, Sales, is credited.

When a customer pays us on account, his account is credited and Cash is debited, showing an increase of the asset Cash and a decrease of the asset Accounts Receivable. Such an entry is simply a transfer from one account to another, an increase of one asset offset by a decrease of another asset.

When a customer gives us his note, his account is credited and Notes Receivable is debited, usually, with the face of the note.

When a customer returns goods to us, he is credited to decrease the original charge to his account and Sales or Returned Sales is debited to reduce the income originally credited to Sales. It is not necessary to make any other record of the returned goods, because, as was explained in Chapter VI, no day-to-day record is kept to show the decrease of the asset Merchandise through Sales. So, when goods are returned by a customer, the increase of the asset Merchandise will be shown at the end of the fiscal period when the merchandise inventory is taken, and no other record than that indicated is necessary.

When a customer is allowed a discount for the early payment of his bill, he is credited to reduce the original charge by the amount of the discount, and some temporary proprietorship account, as Discount on Sales, is debited to show the decrease in proprietorship resulting from the allowance of the discount.

When a customer is allowed a claim for reduction in his bill on account of damaged goods or the like, the entry is similar to the one next above—debit Claims and Allowances and credit the customer.

The Merchandise Account

Entries in the Merchandise account require no explanation excepting the debit entry (3). The value of the asset Merchandise is not the price paid for it at the point where purchased, for it is of no value to the business until it is placed on the shelves ready for sale. Accordingly, the value of the asset Merchandise is not determined merely by the price paid the vendor, but by this price plus all of the costs necessary to bring the merchandise to the store. Inasmuch as the merchandise is sold normally for more than it cost, the credit entry in the Merchandise account includes two items: (1) the decrease of the asset, as indicated by the cost price of the goods sold; and (2) the amount of profit on the sale, that is, the amount of the increase in proprietorship.

The record of merchandise transactions is thus seen to be rather complex and will be explained fully in Chapter XIII. The above schedule is simply an indication of the types of transactions recorded in the Merchandise account and will be sufficient for the present. It will be seen that the sale of goods results in a debit to the customer’s account and a credit to Merchandise.

Accounts with Fixed Assets.—Accounts with fixed assets are those with land, buildings, and equipment of all sorts.

The debit to this account is not for invoice or first cost only, but should include all expenditures necessary to secure full title or to place the equipment in position for use by the business, such as abstract of title costs, freight, drayage, and, in the case of machinery, setting-up and placement costs. The corresponding credit is usually to Cash, or to Notes or Accounts Payable.

The account is credited for the sale of all or a portion of the asset at the same price at which it was originally charged, so that the balance in the account shows the pro rata cost of the part left. A loss from fire or otherwise is treated similarly. If the asset is sold at a profit (an unlikely occurrence), the account is credited with its cost price, while the excess of the sale price over the cost price is credited to a proprietorship account, such as Profit on Sale of Machinery. The debit corresponding to these two credits is usually to Cash or some other asset received in payment. Where the asset is sold at a loss, the account is credited with: (1) the sum received, and (2) the difference between this sum and the cost of the asset, which difference represents a loss. The loss or deficiency is debited to a proprietorship account, such as Loss on Sale of Machinery, and the additional debit is to Cash or some other asset received. This latter debit amount plus the debit to Loss on Sale of Machinery must, of course, equal the two amounts credited to the fixed asset account and representing the cost of the asset sold.

Fixed asset accounts are further considered in Chapter XIII, where the manner of recording loss through depreciation is shown.

Accounts with Notes Payable.—When we issue our own note, the credit is to Notes Payable and the debit is either to the liability account reduced or to the asset account increased. When we call the note in, either by paying it or by canceling our claim against the person returning the note, Notes Payable is debited and Cash or the person returning the note is credited.

Accounts Payable

As will be noted by reference to the customer’s account, the entries to the creditor’s account, being viewed from the opposite standpoint, are exactly the reverse of the entries to the customer’s account.

Other Liability Accounts.—Accounts with other liabilities, such as Mortgages, Bonds, Expenses Payable, and the like, follow in the main the general principles laid down (pages 81 to 83). Specific treatment will be given them as they are met in the discussion. In the case of long-time notes payable supported by mortgages, record should be made under the title “Mortgages Payable” rather than “Notes Payable.”