they properly be charged to Depreciation Reserve Account? Give reasons for your answer.

(10) What do you understand to be the meaning of the term "Secret Reserves?" Give some examples of Secret Reserves, and state your opinion as to the propriety or otherwise of the creation of such Reserves, giving reasons.

(11) What is meant by the voucher system of bookkeeping? Describe the voucher record book.

(12) Describe the different methods of determining the loss or gain of a business. How is the loss or gain of a business determined from books kept by single entry? State the usual mode of procedure when the books are kept by double entry.

(13) What is understood by the term "net profit?" State the final disposition of net profit in the books of a partnership; of a corporation.

(14) What is a stock ledger? Explain the nature of its records and describe the manner in which they are made. What relation does this book bear to the general books of a corporation?

(15) You are requested to open the necessary books for recording the organization and business operations of an incorporated company having three forms of Capital Stock.

(a) State what books are necessary.

(b) Name the various forms of Capital Stock and how created, stating the rights and privileges of each.

ANSWERS: .

(1) "A Balance Sheet is a concise statement compiled from the books of a concern which have been kept by double entry, showing on the one side all the liabilities, and on the other side all the assets of a concern at a particular moment of time." (Lisle.)

A Statement of Assets and Liabilities deals with the same subjects, but may be compiled from any data, not necessarily from books. The latter is the proper title under which the resources and liabilities of a concern whose books have been kept by single entry, might be arranged. CASH BOOK..

DR.

(2)

190......

CR.

1,500
(4)

The principles of double entry bookkeeping are as follows:

$1,500

300

As every business transaction is a transfer of money or its equivalent and has a twofold effect, diminishing and increasing, consequently it requires an entry to show both, the increase and the decrease.

When all the accounts are correctly posted there is an equilibrium between debits and credits, thus affording a proof-by taking a Trial Balance as to the mathematical accuracy of the posting.

The results exhibited can be verified, as all sources of Profit or Loss are kept under properly classified accounts, and the final showing has to agree with the result shown in the Balance Sheet.

There are hardly any principles to speak of in Single Entry; it deals simply with personal book accounts, while nominal or real accounts are omitted, and, of course, there can be no equilibrium. The profit or loss can only be ascertained by a comparison of the assets and liabilities. The excess of the one over the other shows the profit or loss. The result, however, cannot be verified.

(5)
B'S JOURNAL.

Have this day drawn on A; for $1,000 at 60 days.

For 60 days draft accepted by the latter in our favor.
B'S CASH BOOK (Debit side).

$1,000

$1,000

“A Trial Balance is a statement of the Ledger accounts prepared after the books of a concern have been posted up, but before the closing entries are made, showing in two parallel money columns either the total of the debit and the credit side of each ledger account, or the difference between the debit side and the credit side of each ledger account." (Lisle.)

The purpose of a Trial Balance is primarily to test the equilibrium of the ledger, which, although not proving the absolute correctness of the ledger, is essential to such correctness, and is the first step to closing the books and preparing the business and financial statements.

"A Balance Sheet is a concise statement compiled from the books of a concern which have been kept by DOUBLE ENTRY, showing on the one side all the liabilities and on the other side all the assets of a concern at a particular moment of time" (Lisle).

Its purpose is to ascertain and show the financial condition of the concern at the time. It contains therefore the same accounts that appear on the Trial Balance at the beginning of the next fiscal period after all the nominal accounts have been closed, but they are classified and arranged in such an order as to give the clearest possible expression to the results exhibited.

A Statement of Affairs is a summary of the assets and liabilities of an insolvent concern, and is so arranged as to show nominal or book values of the assets and also the amounts they are expected to realize, as well as the nominal liabilities and how they are expected to rank. Preferred claims are deducted from the assets, and the excess of the liabilities over the assets is the amount of deficiency. This statement is generally accompanied by a "Deficiency Account" which is supposed to account for the deficiency shown by the Statement of Affairs. The latter is prepared for the purpose of ascertaining and exhibiting the true condition of an insolvent concern with reference to realization, and the measure of the deficiency with respect to liquidation.

A Trading Statement is prepared to show gross profit on trading; it is generally the first section of a Profit and Loss Account, being charged with the inventory on hand at the commencement, purchases and any direct expenditures on the acquisition, such as: freight (inward), duty, etc., and it is credited for sales and inventory at closing period, the balance, e. g., the excess of the amount credited for goods sold, over the amount charged for acquisition, is the gross or prime profit.

(7)

The modern practice for keeping a Merchandise Account is to subdivide it into three sections, viz.: Merchandise (Inventory), Purchases, and Sales. The proper use of these divisions is as follows: The Merchandise (Inventory) is to contain (on the debit side) balance at commencement, as well as net purchases; on the credit side net sales, at cost, and the inventory at closing period. Purchases is to contain (on the debit side) goods bought during the period under review, and (on the credit side) goods returned, the difference representing net purchases, or an increase of assets and hence being carried to the debit side of Merchandise (Inventory) section. The Sales section is credited with Sales and charged with returns, the net sales being carried down; against these net proceeds is entered the cost of goods sold (on the debit side), the final balance shows the profit made. (Advocated by Professor Sprague in his Philosophy of Accounts.)

a.

(8)

Reserve Account is a term given to a sum set aside to meet depreciation of property, or to provide for loss upon bad debts, and is created on the books by charging revenue and crediting the Reserve Account.

b. Reserve Fund is a term given to the amount set aside from profits to meet contingencies. (Dicksee's Auditing.)

Excessive losses may and will wipe out the Reserve Fund, but it will not affect the Reserve Account.

c. The term Income and Expenditures is given to an account kept by a concern, not conducted for profit, and is similar to what is called in an ordinary trading concern Profit and Loss Account.

d. Receipts and Disbursements refer to a summarized Cash Account, showing on the debit side, properly analyzed, under appropriate headings, the total money received during the period embraced by the account. The credit or payment side shows the cash disbursed during the period to which the account relates. The statement shows the balance of cash on hand at the beginning as well as at the close of the period. (Lisle.)

e. Good-will is that intangible quality of patronage that attaches to an established business and is presumed to attach to it regardless of change of ownership. It is a legitimate asset; its value depending on many circumstances, such as location, duration of lease, annual profits, etc. In some instances it is allowed to stand on the books at what it cost; in other instances it is gradually written off. In the case of corporations, it is best to write it off; regarding it not as a permanent asset of the corporation, but as a part of the cost of acquiring the assets, a premium paid on them to be distributed over a number of years. (Rahill.)

f. Income Bonds is a term given to securities issued against the surplus income of a corporation as security, after fixed charges have been paid. Sometimes physical property may also be mortgaged as additional security, especially is this the case at a reorganization when stockholders respond to cash assessments.

(9)

Repairs and renewals should be charged to Profit and Loss and not against Reserve Account. Dicksee, in his "Advanced Accounting," defines Depreciation as follows: "It is necessary, in addition to charging actual expenditure upon repairs and replacements to revenue, to charge against the Revenue Account of each year a further sum, with a view to (as far as possible) averaging the expenditure on Revenue Account over a term of years and that provision which it is so necessary to charge is usually called by the name of 'Depreciation.'" This definition makes it quite clear that ordinary repairs, necessary to maintain the property in a condition to earn revenue, should be charged to Profit and Loss, because, if they are charged against the Depreciation Reserve Account, the reserve is depleted and the wear and tear of the property remains unprotected. (10)

The term Secret Reserve" is applied to a reserve, created by making charges against revenue which are unnecessary, and which reserve does not appear upon the book accounts, and either inflates the liabilities or undervalues the assets.

As examples of Secret Reserves may be stated: Appreciation of real estate not shown on the books, or the value of same may be carried at a nominal and not real figure; stock which has been "taken low" may be written up; excessive provision for bad and doubtful debts may be made, etc.

It is rather difficult to give an exact opinion as to the propriety or

impropriety of a Secret Reserve; considering, however, the many abuses to which such a reserve is liable, one would think it improper, because, unless the utmost confidence can be placed in the managers, there is great risk. Subordinates can be induced to certify false valuations of assets, for the beneefit of principals, by alleging that it is necessary to write up this asset, and that the "Secret Reserve" will cover it, while as a matter of fact the "Reserve" may not exist any longer.

(11)

By the "Voucher System of Bookkeeping" is meant a plan by the use of which the keeping of accounts with creditors whose invoices are promptly settled is avoided. The voucher has appended the invoice and at the same time a receipt for the payment of the account as well as a classification of the accounts to which it should be charged.

Where the Voucher System of Bookkeeping is used a "Voucher Record Book" is kept. This book contains columns for the following:

Date, Voucher No., Name of Creditor, For What, Folio, Personal Accounts, Terms, Date, Amount and Mode of Payment, Distribution of Items, Total, and Sundries.

(12)

There are two methods by which the loss or gain of a business may be determined, namely: The Resource and Liability method, and the Loss and Gain method. By the former the loss or gain is found by a comparison of the condition of the Resources and Liabilities of one period, with their condition at another period; if the Resources have increased, and the Liabilities remain unchanged, or if the Liabilities have decreased, and the Resources remain stationary, the result will show a gain, otherwise a loss. By the second method we consider each item of loss or gain (shown by the nominal accounts) and determine the profit or loss on each account separately.

The Resource and Liability method would be the method adopted to determine the loss or gain of business whose books were kept by single entry, the Loss and Gain method would be the form used to determine the loss or gain of a business whose books were kept on the double entry principle.

(13)

Net profit is a term given to the net result shown on a Profit and Loss Account, and arrived at after charging up all expenses, including Interest, Depreciation, etc.

In the case of a partnership the net profit is disposed of by being credited to the partners' respective Drawing Accounts, from which it is carried, after deducting withdrawals, to the Capital Accounts. In the case of a corporation it is carried to a Surplus Account, while in banks and financial institutions this account is called "Undivided Profits."

(14)

A Stock Ledger is an auxiliary book designed to show the amount of the individual holdings of a corporation. Whenever stock is issued it is posted from the stock certificate book to the credit of the respective individual accounts. It is advisable to have a Capital Stock Account and