Bookkeeping A comprehensive course for Made self-study and review Simple Louis W. Fields Digitized by the Internet Archive 2011 in http://www.archive.org/details/bookkeepingmadesOOnewy I BOOKKEEPING MADE SIMPLE BY LOUIS W. FIELDS, B.S, C.P.A. MADE SIMPLE BOOKS DOUBLEDAY & COMPANY, INC. GARDEN CITY, NEW YORK Copyright © 1956 by Doubleday & Company, Inc. All Rights Reserved Printed in the United States of America ABOUT THIS BOOK It is no exaggeration to say that Bookkeeping is one of the basic operations of our enormously complex economic system; it is, in fact, that operation which describes and records business transactions, which brings order where there had been chaos. Without it, no business enterprise could function efficiently or, in all likelihood, even long survive. Since this is so, there is naturally the widest interest among those who are in some way part of the business community in its method and techniques. But these are themselves complex, although they need not be. It is the author's belief that this book presents the subject matter of Bookkeeping and Basic Ac- counting in such a way as to cut through its complexities and to make it availa- ble to anyone who has the simple will to learn, the dedication to absorb its contents. Although there is perhaps no true substitute for an extended, rigorous (and expensive) course of study, not many people are in a position to expend the necessary time and effort that such a course of study demands. It is principally for those persons that the author has prepared this book, with the conviction that it will thoroughly ground its readers in the understanding and knowledge which will make for expertness. With that end in view, each element of the book has been conceived and executed. The author has borne in mind the varied needs and interests of several groups: those who plan to enter the field of Bookkeeping as a profession; businessmen — who wish to keep their own books; those businessmen and other associated — with business who have occasion to review and interpret bookkeeping records; and those who for diverse reasons seek better to understand and interpret the significance of business transactions. It is our hope and belief that no one will find his or her interests scanted. Assuming no prior knowledge of the subject on the part of the reader, this book begins at the beginning and, omitting nothing, methodically develops its material so that complete command of the theory, methods and techniques may be gained. Where words alone do not suffice, graphic illustrations are used, and text and picture are further augmented by numerous examples. Finally, it is the author's belief, based on wide professional experience, that Bookkeeping and Basic Accounting cannot be absorbed thoroughly without testing the theory in practice, without learning by doing. To this end, he has devised exercises and problems (the solutions are, of course, provided) designed to reenforce what has already been learned so that it will remain with the reader permanently. — Louis W. Fields TABLE OF CONTENTS CHAPTER ONE .... Assets, Capital, and Liabilities Recording Increases Due to Advances by Meaning and Function of Business the Proprietor 9 . Business Transaction Comparison of the Personal and Capital Ac- The Ledger counts 9 .... Definition of Bookkeeping Interpretation of the Account 9 Assets Accounts Receivable 9 .... Definition of Assets Credit as a Basis of Exchange 9 Classification of Assets Terms of Payment 10 Capital 2 Recording Increases and Decreases in Ac- Definition of Capital 2 counts Receivable 10 The Fundamental Equation 2 Business Forms 10 .1 The Balance Sheet 2 Sales Order ... The Account 2 Sales Invoice .... 1 Need for the Account 2 Monthly Statement ofAccount .... 1 Correspondence ofPosition 3 Interpretation of the Account ... 1 Treatment on the Balance Sheet 1 Changes in Assets 3 .1 Notes Receivable Exchange of Assets 3 Purpose, Use, Form and Content of the Rules for Debiting and Crediting Asset Ac- Promissory Note 11 counts 4 Non-Interest Bearing and Interest Bearing Double Entry Bookkeeping 4 ... Notes 12 Finding the Balance of an Account 5 Indorsements 12 Interpretation of the Account 5 The Note Register 12 The Capital Account 5 Comparison of Notes with Accounts Re- Recording Increases and Decreases in Capi- ceivable 12 tal 5 Recording Increases and Decreases 12 . . Rules for Debiting and Crediting the Capital Interpretation of the Account . .. ... .12 Account 5 Treatment on the Balance Sheet 12 Finding the Balance of the Capital Ac- Liabilities 13 count 6 Definition of Liabilities 13 Interpretation of the Capital Account . . 6 Effect of Liabilities Upon the Fundamental The Trial Balance 6 Equation 13 Trial Balance of Totals 6 Creditor's Versus Proprietor's Interest in Trial Balance of Balance.s ..... 6 the Assets 13 The Sales Income Account 7 Accounts Payable 13 Record of Sales 7 Recording Increases and Decreases 13 . . The Kind ofAccount 8 Business Forms 14 ... Establishing Gross Profits on Sales 8 Purchase Requisition 14 ... The Proprietor's Personal Account 9 Purchase Order 14 Recording Decreases in Capital Due to Purchase Invoice .... 14 Withdrawals of Assets in Anticipation of Credit Memorandum 14 Profits 9 Monthly Statement ofAccount . . . . 14 VI Contents ... Interpretation 15 Comparison with Accounts Payable 15 .15 Treatment on the Balance Sheet Recording Increases and Decreases 15 . . Notes Payable 15 Treatment on the Balance Sheet 16 . CHAPTER TWO .... General and Special Journals 18 The Cash Receipts Journal 26 . . General Journal 18 Purpose 26 Purpose 18 Form, Content and Use 26 Form, Content and Use 18 Posting 27 Posting 18 The Cash Disbursements Journal 27 . . ,. Special Journals 23 Purpose 27 Purpose 23 Form, Content and Use 27 Names 23 Posting 28 The Sales Journal 24 Sales Returns and Allowances Journal 29 . Purpose 24 Purpose 29 Form, Content and Use 24 Form, Content and Use 29 Posting 24 Posting 29 The Purchase Journal 25 Purchase Returns and Allowances Journal 29 Purpose 25 Purpose 29 Form, Content and Use 25 Form, Content and Use 29 Posting 26 Posting 29 CHAPTER THREE Controlling Accounts — 30 The Accounts Payable Controlling Account 35 Subdivision of the Ledger Its Purpose 30 The Purchase Journal and Its Posting 35 . Controlling Accounts 30 The Purchase Returns and Allowances .... Interrelationship Between the General Journal and Its Posting 35 Ledger and the Subsidiary Ledgers 30 The Three Column Cash Disbursements . .... The Accounts Receivable Controlling Ac- Journal and Its Posting 36 count 31 The Four Column General Journal and The Sales Journal and Its Posting 31 Its Posting 36 . The Sales Returns and Allo.wan.ce.s . The Trial Balance of the General Ledger 37 Journal and Its Posting 31 The Schedule of Accounts Payable and The Three Column Cash Book and Its Its Agreement with the Ac.co.unt.s.Pay- Posting 31 able Controlling Account 38 Schedule of Accounts Receivable and Its Agreement with the Accounts Receivable Controlling Account 35 . CHAPTER FOUR Discounts and Interest 40 Sales Discount 41 Reasons for Offering Cash Discounts 40 Rule for Recording 41 . . Distinction Between Cash Discounts The Special Sales Discount Column in and Trade Discounts 40 the Cash Receipts Journal 41 Treatment of Cash and Trade Discounts 40 Posting the Sales Discount Column 41 . . Discount on Sales and Discounton Pur- Purchase Discount 41 chases 40 Rule for Recording 41 Contents vu The Special Purchase Discount Column Posting 43 in the Cash Disbursements Journal .41 Interest Income 43 . Posting the Purchase Discount Column 41 Interest Income as Opposed to Interest . Interest Expense 42 Expense 43 Meaning of Interest 42 Rule for Recording 43 Rule for Recording 42 Entry in the Cash Receipts Journal 43 . . Entry in the Cash DisbursementsJournal 42 Posting 44 . CHAPTER FIVE Double Posting Entries and Special General Journal 46 Columns 45 Special Columns In Journals 46 Double Posting 45 Reason 46 Reason 45 Cash Receipts Journal .46 .... Cash Receipts Journal 45 Cash Disbursements Journal 47 .... — Cash Disbursements Journal 45 Purchase andSalesJournals Posting 47 . . CHAPTER SIX Payroll Records — 48 Treatment of Withholdings on the Books 48 Social Security T—ax Its Purpose . 48 Payment of Social Security Taxes and Withholding Tax Its Purpose 48 Other Amounts Withheld from Em- . Computation of the Withholding Tax 48 ployees' and Employers' Payroll Taxes 48 Other Deductions 48 CHAPTER SEVEN ... Cash and Petty Cash Procedures 50 Petty Cash or Imprest Cash Fund .53 . . Business Procedures Relating to Cash . 50 Establishing the Fund — 53 The CheckingAccount andBank Practice 50 Petty Cash Disbursements The Petty . Proof of Cash .... 50 Cash Voucher .... 53 Cash Short and Over Account 50 Proving the Petty Cash Box 54 The Bank Reconciliation 51 Replenishing thePetty (Imprest) Cash Entries in the Cash Journal and Check Fund 54 Book 52 The Petty Cash Journal 54 The Petty Cash System 52 Purpose 54 Purpose 52 Form, Use and Content 55 CHAPTER EIGHT .... Negotiable Instruments 56 Entries by the Consignee 57 The Sight Draft 56 Special Forms of the Sight Draft 58 . Purpose, Use and Form — 56 Certified Checks 58 Entry in the Cash Receipts Journal The Cashier's Check 58 Collection and Exchange Account 56 Bank Draft 58 . Entry in the Cash Disbursements Journal 56 Money Order 58 . C.O.D. Freight Shipments 56 The Time Draft 59 The OrderBillofLading with SightDraft Purpose, UseandForm 59 Attached 57 Payable After Date; Payable After Time 59 Entries by the Shipper 57 Bookkeeping Records 59 viii Contents Trade Acceptances 59 Discounting Customer's Interest Bearing Purposes, Use and Form 59 Notes 62 Bookkeeping Records 60 Bookkeeping Records When the Dis- Bank Discount .... 61 counted Note IsPaid . . . .... 62 Discounting of NotesPayable 61 Bookkeeping Records When the.Di.s-.. Discounting Customers' Non-Interest counted Note Is Dishonored 62 .61 Bearing Notes and Drafts . . . CHAPTER NINE .... Deferments and Acc—ruals 65 AdjustmentEntryatthe Endofthe The Balance Sheet Its Purpos—e and Use 65 Period 67 ......... The Profit and Loss Statement Its Pur- Accrued Income 67 pose and Use 65 Definition 67 Adjustment Entries 65 Treatment of Accrued Income in the Deferred Expense 65 Statements 67 Treatment of Deferred Expenses on the AdjustmentEntryat theEndof the Statements 65 Period 67 TheAdjustmentEntryatthe Endof the Accrued Expense 68 Period 65 Definition 68 The Profit and Loss Account 66 Treatment of Accrued Expense on the . Deferred Income 67 Statements 68 Definition 67 Adjustment Entry at theEndof the Treatment of Deferred Income on the Period 68 Statements 67 CHAPTER TEN Reserves for Depreciation and Bad Reserve for Bad Debts 72 Debts 69 Purpose 72 Causes of Depreciation 69 EstimatingtheAmountof theReserve . 72 Determining the Amount of Depreciation . 69 Adjusting Entry at the End o.f t.he.Pe.riod 73 Adjusting Entry at the End of the Period 69 Treatment on Statements 73 . Treatment on Financial Statements 69 Writing Off Bad Debts 73 . TheReserve Accountat the Time ofDis- Recovery of Bad Debts Previously Writ- posal of Equipment 70 ten Off 74 CHAPTER ELEVEN The Work Sheet 75 Preparation 75 Purpose 75 Solution 76 . Problem 75 CHAPTER TWELVE Financial Statements 79 Profit and Loss Statement 81 Balance Sheet 79 Purpose 81 Purpose 79 Preparation 81 Preparation 79 Interpretation 81 Interpretation 79