BOOKKEEPING 



sjn 



BOOKKEEPING 



Interest is the next item in the entry which 

 we made for Gordon and Steclc. Shaw's note 

 has been earning interest since November 7. 

 This interest is not due until the note itself 

 is payable, but part of it has been earned, 

 ami the paper is worth more than its face 

 valut/ of $2.500. Therefore the firm must 

 credit Gordon its full worth, including the 

 :icrnu-d interest of $73.33 (for five months 

 and twenty-six days). Bills Receivable is 

 made responsible for the face of the note and 

 Interest for the remainder. When the note is 

 paid, only the amount of $2,500 will be credited 

 to Bills Receivable. The balance will be a 

 credit to Interest. If the note is paid on time 

 the interest credit will be $75. As the account 

 has already been debited $73.33, the net result 

 will be a credit of $1.67, the amount of 

 interest earned by the note after it came into 

 the firm's hands. 



Suppose, for further illustration, a case in 

 which the note had been drawn without inter- 

 est, so that on May 7 Shaw will pay $2,500 

 and no more. If we took the note to the 

 bank on May 3, we could not sell it for its 

 face value, for the bank must make interest 

 on its money in the meantime. Deducting 

 $1.67 (see DISCOUNT) we find the note to be 

 worth $2,498.33. If we debit Bills Receivable 

 only this amount and when the note is paid 

 credit Bills Receivable the full $2,500, there 

 will be a discrepancy, for as the debit side 

 represents assets and the credit side payments 

 on them, it will appear that we have been 

 overpaid. To avoid this we debit Bills 

 Receivable $2,500 in our first entry and credit 

 Interest $1.67, the amount of the discount. 

 Then when the note is paid Bills Receivable 

 will balance and interest will have received 

 credit for earning $1.67; the exact state of 

 affairs then appears in the pages of the ledger. 

 Our entry under this supposition would read as 

 follows: 



debited or credited their face value, any differ- 

 ences being assigned to Interest. 



Interest on Bills Payable is similarly handled. 

 If you discount ut the bank a note signed by 

 your own firm you will credit Bills Payable 

 the face value, and debit Interest for the 

 amount which the bank deducts. If you pay 

 the note before it is due, you then debit Bills 

 Payable for the face, and credit Interest for the 

 difference between the face and the sum you 

 actually pay. 



Some Common Accounts. To illustrate the 

 accounts which most frequently occur in the 

 average business let us continue with the en- 

 tries of Gordon and Steele. 



Rent. As it is customary to pay rent in 

 advance this would probably be the firm's first 

 entry. It is clearly a debit, for the expense 

 has taken something from the business. With 

 the first entry it is well to write an explanation 

 including the description of the rented premises 

 and the length of the time paid for. Unless 

 there is a written lease the terms of occupation 

 are often added. In all subsequent entries 

 only the time need be recorded. The first 

 entry might be: 



Rent 27 High St. to 

 June 3 

 Cash 



r,o 



50 



A credit to rent may appear in two ways. If 

 the firm owns premises which it lets to others, 

 rent will be a source of revenue instead of 

 a cause of expense. Secondly, if a portion of 

 rent already paid is refunded either actually, 

 or, in the case of closing the books as ex- 

 plained below, theoretically, it will be income. 

 Bank. Practically all payments of a busi- 

 ness firm, including rent, are nowadays made 

 by check instead of in cash. But it is seldom 

 found worth while in keeping books to dis- 

 tinguish cash in the bank from cash in the till, 



Machinery 



Bills Receivable (note of Q. A. Shaw Nov. 7, 



1916, due May 7) 

 Cash 



W. F. Gordon 



Interest (Discount on above) 

 Accounts Payable 



8000 

 2500 



134 



81 



10000 



1 



633 



Until one has the principles of debiting and 

 crediting interest thoroughly in hand, the 

 easiest way to remember the proper treatment 

 of interest and* discounts of this nature is to 

 keep in mind that bills must always be 



or checks from currency. The account named 

 Cash covers all money transactions. In many 

 businesses, however, the Bank account is kept 

 separate from the Cash account. In such 

 event Bank is debited and Cash is credited 



