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“The Purpose of the Balance Sheet is to make the financial facts in regard to the business COMPREHENSIBLE to the proprietor and others. This idea cannot be emphasized too strongly, not only in regard to the Balance Sheet, but also in reference to all the other financial statements. It should be remembered that they are prepared primarily for the proprietor or creditors of the business, and many of them have no technical training in accounting. These statements should be in such a form that they can be readily understood by those for whom they are intended. Mr. Montgomery says: “Many intelligent people fail to grasp the usual conventional hypothesis underlying the theory of double entry bookkeeping, and, therefore, facts or figures presented to them in a technical or formal shape may not accomplish the intended result.'

Balance Sheet vs. Financial Statement. “Probably one of the first questions which arise in the mind of some readers is in reference to the propriety of the term ‘Balance Sheet'. The writer is well aware that this term is not generally used in elementary accounting texts. The term ‘financial statement' seems to be a favorite one with most text writers, although the terms ‘statement of resources and liabilities,' 'statement of assets and liabilities', and “business statement' are sometimes used. A financial statement is any statement of financial facts. The Balance Sheet is a financial statement, but so is a Profit and Loss statement, a statement of Affairs, or a statement of Receipts and Expenditures, as well as many others which might be added. To call this particular statement a financial statement does not differentiate it from many other such statements. In reference to the other terms mentioned, it is sufficient to say that they are rarely used by accountants, and when they are used, they are employed for a special purpose and not in reference to the statement which is defined as a Balance Sheet above. The writer has had occasion to examine numerous reports made by accountants of the highest rank, in three different large cities, during the last two years and he has never seen any term but Balance Sheet used in the above connection.

“As stated above, the purpose of the Balance Sheet is to set forth the financial condition of the business. This statement might be criticised on the ground that the true and complete financial condition is not shown unless the Balance Sheet is accompanied by the statement of Profit and Loss. In other words, it is impossible to intelligently judge of the present condition unless the causes of that condition and thereby some indication of the possibilities of the future are known. Leaving

* Instructor of Accounting at the University of Chicago. Author of “Bookkeeping and Accounting,” published by South-Western Publishin



aside this question for the present, it can be readily seen that the Balance Sheet should show three things:

I. The amount and nature of the assets.
2. The amount and nature of the liabilities.

3. The amount and nature of the differences between the assets and liabilities, which constitutes the interest of the proprietor.

“In order that this may be done satisfactorily, it is necessary that the accounting records be properly kept, so that the desired information may be obtained. This, of course, involves all the principles governing the proper construction of the different accounts. Assuming that the accounts are properly kept, the following will be confined to a brief discussion of the arrangement of the accounts on the Balance Sheet so that it will afford as much information as possible.

“Often no attempt is made to classify the assets and liabilities. They are arranged in no definite form or order, and their nature, other than by their name, is not indicated. It seems their only purpose is to state the amount of the items and the total thereof. This is, of course, essential, but since other important information can be given so easily, it seems desirable that some attention be given to the classification and arrangement of the accounts.

Classification of Assets and Liabilities. “The most simple, and at the same time the most important, classification of assets and liabilities is into the two classes: fixed and current. There are further divisions, but the above are the most important and are sufficient for elementary work in accounting.

“The two simple Balance Sheets given on page 44 illustrate the points previously discussed. The first illustration shows a Balance Sheet in the form frequently used. The second illustration shows the same Balance Sheet with the assets and liabilities classified as current and fixed.

“The headings of Balance Sheets are frequently omitted or stated incorrectly. The form shown here is the one employed by accountants in making Balance Sheets to submit with their reports. Only a few of the more elementary principles in regard to the Balance Sheet have been discussed here.”


Balance Sheet June 30, 1919

Assets Liabilities

Cash $ 900 Mortgages Payable $ 2000
Notes Receivable 2000 Notes Payable 3OOO
Accounts Receivable 28oo Accounts Payable 26OO
Merchandise Inventory 6000 John Jones, Capital 7500
Furniture & Fixtures 400
Real Estate 3000

$151oo $1510o

(Unclassified Balance Sheet)


Balance Sheet June 30, 1919

Assets Liabilities Current Assets: Current Liabilities: Cash $ 9oo Notes Payable $3000 Accounts Receivable 2800 Accounts Payable 26OO Mdse. Inventory 6000 Notes Receivable 2OOO Total Cur. Liabilities $5600 Total Current Assets $11700 Fixed Liabilities: Fixed Assets: Mortgages Payable 2OOO Furniture & Fixtures $ 400 Total Liabilities $ 7600 Real Estate: Land $10oo Capital or Proprietorship: Buildings 2000 3000 Total Fixed Assets $3400 Invest. June 30, 1919 $7ooo Profits for the Year 500 Present Investment 7500 Total Assets $1510o Total Liabilities & Prop. $151oo

(Classified Balance Sheet)



Contracts are not always valid. They may be illegal, void, voidable or unenforceable. The validity of a contract depends upon the law of the state in which it is executed. In case of a suit to enforce a contract, the laws of the state in which the suit is brought govern the remedy. If a contract is executed in one state and is delivered in another state, the laws of the state in which it is delivered govern the delivery.

Illegal Contracts are always void and have no standing whatever in the eyes of the law. Agreements to do anything contrary to law or agreements against the public policy are illegal and void. A Voidable Contract is one in which one of the parties may legally refuse to carry out the agreement, but at the same time, if the injured party desires, the other party can be compelled to carry out the agreement. It will be seen that the law is protecting one of the parties, but not the other. An example is a contract made with a minor, an alien, an insane person, or an intoxicated person. An Unenforceable Contract will not be enforced by courts if either party objects to its terms. , Suppose A agrees to sell B his house and lot for $5,000.00 and B agrees, orally to buy. The contract is unenforceable because contracts to sell real estate must be made in writing, or at least there must be a memorandum in writing. Mistakes. A Mistake of Fact exists when a mistake has been made as to whom one is contracting with, concerning the subject matter, or concerning the nature of the contract. When a mistake of fact exists the contract is void and cannot be enforced. A Mistake of Law exists when a party misunderstands the legal effect of his word or acts. “Ignorance of the law excuses no one,” therefore, a mistake of law is no cause for escape from a COntraCt. Fraud. Fraud is the wilful misrepresentation of material facts and if proven the contract becomes voidable. Misrepresentation in the form of a mere expression of an opinion does not constitute fraud. When fraud is performed, the contract may be declared void at the option of the defrauded party, but can not be annulled by the one committing the fraud.

Alteration of a contract wrongfully, amounts to fraud and makes it voidable. This must not be misconstrued. If one were to be given a check properly signed and made out with the exception that the date was omitted, he would have the right of filling out what was understood to be the correct date. Likewise, if the amount was omitted, he might fill in an amount himself, and if he could show that it was the correct amount the check would be good. Do not sign contracts of any kind with any part of the terms blank. Be sure that they are properly filled in in detail.


I. What is the chief consideration in the arrangement of ledger accounts? C. P. A. Ind.

2. What is meant by Controlling Accounts? Give three illustrations of the use of such accounts. State the advantages of such accounts. C. P. A. Ohio.

3. Describe a method of keeping accounts so that the aggregate sums due from customers and due to creditors can be known without preparing a schedule of the accounts of such customers and creditors, and so that an independent balance of the ledger, containing only the real, nominal, special and controlling accounts, exclusive of the individual accounts of customers and creditors may be taken. C. P. A. N. Y.

4. Wherein does the Trial Balance differ from the Balance Sheet?

5. Would you, or would you not, be satisfied with a list run off on an adding machine by some one connected with the institution under examination after you had compared the amount of each item with the listed figures? Give your reason. C. P. A. Del.


I. For the six months ending June 30, 1916, the balances appearing on the books of George Parker are as follows:

Cash in bank. . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,765.14
Cash on hand....... . . . . . . . . . . . . . . . . . . . IOO.64
Capital, George Parker. . . . . . . . . . . . . . . . . I7,821.04
Bills Receivable....... . . . . . . . . . . . . . . . . . 6, I64.92
Bills Payable... . . . . . . . . . . . . . . . . . . . . . . . . I,3OI.90
Debtors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,903.88
Creditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,263. I2
Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,642.42
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266,723.40
Furniture and Fixtures. . . . . . . . . . . . . . . . . 8II.32
Drawing, George Parker. . . . . . . . . . . . . . . . 4,000.00
Discounts Received. . . . . . . . . . . . . . . . . . . . 8,824.22
Discounts Allowed..... . . . . . . . . . . . . . . . . 5,240.52
Expenses New York office. . . . . . . . . . . . . . . 3,762. I8
Expenses branch office.... . . . . . . . . . . . . . . 44 I.IO
Expenses general office....... . . . . . . . . . . . 553.52
Reserve for Bad Debts. . . . . . . . . . . . . . . . . I,451.96

Prepare Trial Balance and Balance Sheet. (No merchandise inventory).

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