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It will be seen, therefore, that personal accounts affect both sides of the Balance Sheet, accounts receivable appearing on the debit side as assets, and accounts payable and proprietorship accounts appearing on the credit side of the Balance Sheet as liabilities.

Impersonal accounts represent either assets or liabilities. If assets, they may be either current or FIXED. Impersonal current assets would include such real accounts as Cash, Merchandise, Notes Receivable and any other accounts that can be converted into cash quickly and that do not constitute a fixed investment. On the other hand, impersonal fixed assets are those accounts which represent fixed investments, such as machinery, buildings, equipment, land and all property possessed and used directly by the owner himself for his enjoyment, or for business purposes, and maintained in fixed condition for long periods of time subject only to wear and tear and depreciation on account of use. Impersonal liabilities are likewise classified as either current or fixed. Those obligations which must be liquidated within a short time are current liabilities and those obligations, the liquidation of which is deferred to a future date usually beyond the present fiscal period, are fixed liabilities. Notes payable, dividends payable, all accrued expenses, deposits, guarantees, and similar accounts, are classified in the Balance Sheet as current liabilities, while mortages, bonds and collateral loans which do not mature within a year or within the present fiscal period, are listed as fixed liabilities.

The Public Service Commission of New York says: “Funded debt comprises all debt which by the terms of its creation does not mature until more than one year after date of creation”.

There is another subdivision of assets that might be mentioned here, that is, assets may be either TANGIBLE or INTANGIBLE. Kester” in his “Accounting, Theory and Practice,” says: “Asset and liability accounts may be called ‘real' or 'specific', because they represent, in the main, properties owned or owed which are definite and usually tangible.” Intangible accounts include such accounts as good will, trade marks, patents, copyrights, titles, trade names, franchises, etc.


Nominal accounts are subdivided into four classes: first, income accounts; second, operating cost accounts; third, special profit accounts; fourth, special loss accounts. Nominal accounts are sometimes referred to as ECONOMIC accounts. Wildman,” in his “Principles of Accounting”, says:

*Roy B. Kester, Columbia University

“Real accounts are those which reflect financial conditions.

“Nominal accounts are those which reflect changes in financial conditions.”

Under the heading of Income should be included accounts representing mercantile income, income from commissions, income from professional fees, banking income, etc. The exact classification will depend upon the nature of the business. If a business is a mercantile business, its principal income will be represented by returns from sales, and practically all other income will be in the nature of special profits. If the business is a professional business, the principal income will be from fees, and all other income will be in the nature of special profits. A stock broker's income would be in the nature of commissions; therefore, it is to be noted that in preparing a Profit and Loss statement, the arrangement of the accounts will depend upon the nature of the business. A man whose business is mercantile, but who chances to make a sale of a piece of real estate at a profit, would thereby create a special profit not in his usual line of business. Likewise, a loss by burglary is to be considered a special loss and not a customary loss in the usual course of the business. Operating costs, sometimes classed as operating expenses, are the expenses incident to the operation of a business such as advertising, salaries, rent, heat, light and all similar expense accounts. Special profits and special losses are sometimes listed as EXTRAORDINARY or EXTRANEOUS profits and losses.

A Profit and Loss statement is composed of nominal accounts. The usual procedure is to list the regular income accounts first, followed by the operating expense or operating cost accounts, thereby determining the net profit or net loss from operation. This would be followed by adding the special profits and deducting the special losses, to ascertain the net profit or net loss for the period. Naturally the owners, including the partners and stockholders, are interested in and want to know, first, what their total net income has been; second, what their total operating cost has been in producing the net income; third what additional profits there have been; and fourth, what additional losses have been incurred.

*Professor of Accounting at New York University.



Note: Since the LAW. OF CONTRACTS is without a doubt one of the most important parts of commercial law, naturally, the accountant is primarily concerned with it and, therefore, beginning with this chapter a brief discussion of the different phases of the law of contracts will be given.

Essential Conditions. Before an agreement partakes of the nature of a contract and becomes legally enforceable, there must be certain conditions adhered to. The agreement must be between two or more COMPETENT parties, based upon SUFFICIENT consideration, to do or not to do some LAWFUL, POSSIBLE thing. The agreement must be mutual, that is, the minds of the parties must have met. It will be seen, therefore, that there are four essentials to every contract:

I. Competent parties.
2. Mutual agreement.
3. Sufficient consideration.
4. Legal subject matter.

Methods of Making Contracts. There are but two ways of creating a contract. One is by a WRITTEN AGREEMENT and the other is by an ORAL UNDERSTANDING between the parties. Undoubtedly the most important thing to set forth in this lesson is that it is always best to make a written contract. A written contract may be under SEAL or may be a SIMPLE contract.

An oral contract may be either EXPRESSED or IMPLIED. It is expressed when its terms are stated and agreed to by the parties. It is implied when its terms are inferred from the acts of the parties. A great many contracts are implied. For instance, if one calls in a physician in case of illness, it is understood that he expects to pay for the service whether he says anything about it or not. The same is true when one orders groceries delivered at his home without reference to payment.

Certain Contracts Must be in Writing. The Statute of Frauds requires that certain contracts must be in writing, or at least there must be a memorandum in writing. This statute has been adopted by nearly all the states and it is practically uniform.

Documents of greater importance must usually be made under seal. The state statutes cover this and, as they differ to some extent, it would be best to become familiar with the statutes covering this point in your state.

Contracts not made under seal are said to be CONTRACTS BY PAROL, or simple contracts. They may be either oral or written.


1. Distinguish between a Balance Sheet audit and a detailed audit. C. P. A. Ohio.

2. Large business concerns frequently have on their staff what are known as “internal auditors”. Under such conditions, would you approve the employment of Certified Public Accountants to make periodical audits? Give reasons for your anSWer. C. P. A. Ind.

3. Under what circumstances would you advise a client that a complete detailed audit should be made? Give yourarguments to convince him that a test audit would not be satisfactory. C. P. A. Ill.

4. How is the position of an auditor affected if the system of the concern under audit is defective as to internal check? Inst. Ex. 1918.

5. Why is it advisable to determine the legal responsibility of a client before accepting an engagement? 6. What do you understand by (a) personal account, (b) impersonal account, (c) real account, (d) nominal account? C. P. A. Ind. 7. Define the following: (a) Fixed assets and fixed liabilities. (b) Current assets and current liabilities. - C. P. A. Mich. 8. In making “detailed” audits some auditors verify all postings and footings of general and subsidiary ledgers, even though controlling accounts are kept. State reasons for and against such procedure. Inst. Ex. I919.


I. The Trial Balance of the Yellow Pine Timber Co. on January I, 1920, was as follows:

Cash. . . . . . . . . . . . . . . . . . . . . . . $ 2,618.03
Accounts Receivable. . . . . . . . . 2I, III. I7
Inventory. . . . . . . . . . . . . . . . . . 36, I33.32
Unexpired Insurance......... 559.44
Plant and Equipment. . . . . . . . 352, IO9.75
Timber and Lands....... . . . . 55I,539.31 -
Preferred Claims. . . . . . . . . . . . $ 37,011.99
First Mortgage Bonds, 6s. . . . 212,500.00
Bond Interest Accrued. . . . . . . 4,533.24
Unsecured Creditors. . . . . . . . . 64,471.64
Capital Stock..... . . . . . . . . . . 400,000.00
Surplus. . . . . . . . . . . . . . . . . . . . 245,554. I5

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Classify the accounts in accordance with the outline shown on page 26. C. P. A. N. Y.

(Note. The date of this Trial Balance is January 1, 1920, hence all nominal accounts have been closed into surplus. All accounts appearing in the Trial Balance are real accounts, but they should be classified, showing which are personal and which are impersonal with a further subdivision into assets—current and fixed; and liabilities—current and fixed.)

2. The office of a firm of traders, doing business in San Francisco was destroyed by an earthquake. The books of account, which had been fully posted, were badly damaged. The following ledger accounts were found to be legible: Purchases, net, $69,000; Discounts Lost, $640; Discounts Gained, $3,450; Sales, $54,000; Bills Receivable, $33,000.

Inquiry at the bank disclosed a balance on deposit, $129,000. Bills receivable amounting to $45,000 had been discounted at the bank. An audit of the checks paid by the bank showed that $99,000 had been paid creditors (including $60,000 notes payable).

A Balance Sheet prepared at the last closing of the books was produced, containing the following items: cash, $60,000; accounts receivable, $126,000; loans receivable, $24,000; real estate, $90,000; notes receivable, $78,000; capital, $318,000; notes payable, $60,000.

Prepare a Trial Balance supplying the missing accounts.
C. P. A. N. Y.

(Note. You should set up skeleton ledger accounts with Real Estate, Cash, Notes Receivable, Loans Receivable, Accounts Receivable, Accounts Payable, Capital, Sales, Purchases, Discounts Gained, and Discounts Lost.

I. Debit or credit each account with the amount shown in the Balance Sheet prepared at the last closing of the books.

2. Set up the balances of those ledger accounts which were found to be legible after the earthquake.

3. Make the necessary adjusting entries from the information obtained at the bank and from an audit of the checks paid by the bank.

After this work has been completed, you will have no difficulty in preparing a Trial Balance.)

3. From the Trial Balance prepared in the solution of Problem No. 2, you may prepare a list of the assets and liabilities. List the current assets first and the fixed assets second. Likewise, list the current liabilities first and the capital second. Show the amount of increase or decrease in the net worth of the business.

(Note. You may assume that the entire stock of merchandise was destroyed by fire following the earthquake.)

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