C. LEGAL QUESTIONS

I. What are the essential elements to every valid contract?

2.

C. P. A. Mich.

What special element is required in some contracts but not in all?

3. How is a contract made?

4. Can a contract be implied?

C. P. A. Ohio.

C. P. A. N. Y.

C. P. A. Mich.

5. Where a contract is in writing is it admissable for one of the parties to it, to vary it by proving that at the time it was entered into, such was their oral agreement?

C. P. A. Ill.

Books of Account. Before proceeding with a Balance Sheet audit, the auditor must thoroughly understand the various systems of account in general use and be familiar with all books of account, both those of original entry, including AUXILIARY books, and those of final entry, including SUBSIDIARY books. By auxiliary books is meant those which contain detailed information supporting the record in the books of original entry. They include check stubs, note stubs, draft stubs, receipt stubs, bank pass books, etc.

By subsidiary books are meant subsidiary ledgers controlled by accounts in the general ledger. They include customers' ledgers, creditors' ledgers, stockholders' ledgers, cost ledgers,

etc.

The following discussion and the accompanying chart is intended as a review of the ordinary principles of bookkeeping and accounting as taught in the leading texts.

BOOKS OF ORIGINAL ENTRY

The Journal. It is possible to record all transactions in what is known as a general journal and, regardless of how many subdivisions of this journal there may be in a system of accounts, all books of original entry which are used as a posting media constitute a part of the journal. James W. Baker, in his "20th Century Bookkeeping and Accounting", says:

"The Journal is a book of original entry in which all the transactions may be recorded. If it is the only book of original entry, all the transactions are recorded in it; if the purchases, sales, cash receipts, and cash payments are recorded in special books, it contains only those transactions not recorded in these books. The record shows the date, name of the account debited and amount, name of the account credited and amount, and the explanation or information for the auditor."

17

Roy B. Kester, C. P. A., in his "Accounting, Theory and Practice," says:

"A Journal may be defined as a diary or log in which the happenings or transactions of a business are recorded. Formerly it was sometimes called a day-book or blotter. The day-book or blotter record was a rough record giving all the essential data relating to each transaction without regard to accounting terminology, and was used as a sort of memorandum from which a formal record might be made in accounting terminology. This day-book or blotter, still in use in some places, has very largely given place to the journal which, either a single book or separated into many subsidiary books, is the book of original entry."

Reference to the illustration on page 35 will show how the journal might be subdivided in a highly organized system of accounts. Under such a subdivision, it will be seen that transactions of a similar nature are recorded in separate books. The saving of time in posting is evident although it is not the only reason for such a subdivision of the journal. Another reason is the fact that it enables several bookkeepers to record entries in the original books at the same time, where if only one or a few books of original entry were in use, the volume of business might be so great that the bookkeepers could not handle the work.

Therefore, in planning a system of accounts, it is always necessary to provide special records or books for recording each class of transactions in accordance with the volume and nature of the business, and depending upon the number of employees involved in recording the transactions.

Regardless of the detailed subdivision of the journal, there will still remain certain transactions that should be recorded in the general journal. A. Lowes Dickinson, C. P. A., in his "Accounting Practice and Procedure,*" says:

"A journal is, however, still necessary for special entries, correction entries, and other miscellaneous matters which do not fall within the scope of any of the books or forms described."

The principal use for the general journal will be for recording opening entries at the beginning of the business, correction entries during the fiscal period, and adjusting and closing entries at the end of the fiscal period. Of course, any special entries that cannot properly be classified in the special journals will be recorded in the general journal.

BOOKS OF FINAL ENTRY

If the journal is to be subdivided into special books for the sake of saving time, for analyzing purposes, and to enable more bookkeepers to work on them at the same time, likewise, it is equally advisable to subdivide the ledger.

*Published by Ronald Press Co.

The Ledger. If only a general ledger were maintained in a large firm, where there may be thousands of accounts, one can readily see that no bookkeeper could possibly keep up with the volume of work, unless some sort of a card or loose-leaf ledger were used enabling different persons to post at the same time. Hence it not only becomes advisable, but absolutely necessary, to subdivide the ledger. The process in subdividing the ledger, however, differs from the subdivisions of the journal in this respect, that the general ledger controls all accounts which are kept in what are known as subsidiary ledgers.

Subsidiary Ledgers. In an ordinary mercantile business, the principal subsidiary ledgers are the sales and purchases ledgers. From the standpoint of terminology, a number of different names have been applied to these ledgers. Accounts receivable ledger, sales ledger, customers' ledger and debtors' ledger are all synonymous terms and mean the same thing. Likewise, purchases ledger, accounts payable ledger and creditors' ledger are synonymous terms. Other terms are also used, for instance, a sales ledger may be arranged so as to show accounts with customers in either alphabetical, geographical or numerical order. In the event that they are arranged in alphabetical order, then there may be one or more ledgers with controlling accounts for each. The controlling account might be named A to C Ledger, D to E Ledger, etc. If the arrangement is geographical, the ledgers might be known as city ledgers, country ledgers, foreign ledgers, state ledgers. etc. Furthermore, the ledgers may be in the form of bound books, loose leaf books, cards or vouchers. One will frequently find a system of arranging the accounts numerically, in which case the bookkeeper in charge of a customers' ledger may not know who the customers are as he does his posting from information in memorandum form, the name of the account being represented by numbers only. Experience only will enable one to become familiar with all the different methods and plans used.

Controlling Accounts. A controlling account for each subsidiary ledger will be kept in the general ledger, and this controlling account will show at all times the exact status of the subsidiary ledger. By means of controlling accounts for the subsidiary ledgers, the general bookkeeper keeps his ledger in balance at all times without the necessity of preparing schedules of the accounts in the subsidiary ledgers.

W. A. Paton,* Ph. D., and R. A. Stevenson,† Ph. D., in their text on Principles of Accounting, say:

"The possibility for labor saving is often dependent upon the use of controlling accounts and subsidiary ledgers. The total amount receivable on customers' accounts constitutes one distinct asset item for Balance Sheet purposes.

*Assistant Professor of Economics in the University of Michigan. †Associate Professor of Accounting in the University of Iowa.