BOOKKEEPING 



823 



BOOKKEEPING 



that Furniture and Fixtures is relieved of re- 

 sponsibility for that amount. As the trial 

 balance shows that the account has debits of 

 $346 and no credits, there has been a loss of 

 $46. An account called Profit and Loss is now 

 opened and this loss transferred to it. This 

 may be done by a journal entry: 



Profit and Loss 

 Furniture and 

 Fixtures 



41! 



it; 



The more favored procedure, however, is to 

 write the balance of loss on the credit side of 

 Furniture and Fixtures in red ink and then 

 to write it on the debit side of Profit and Loss 

 in black ink. The difference in inks shows 

 that in the one case the entry is arbitrarily 

 introduced to balance the accounts, but in the 

 other is in effect a posting. In both, the fig- 

 ure in the checking or index column is pre- 

 ceded by the letter L to show that it refers to 

 a page in the ledger instead of the journal. 

 The totals of Furniture and Fixtures are now 

 found. The balance of the books has been 

 destroyed by the introduction of the inventory 

 figure on the credit side with no correspond- 

 ing debit entry. But this fault is corrected 

 by writing a debit to the account for the new 

 year. This will be in black ink, because it is 

 practically posted from above. The whole 

 account then appears as shown below: 



1917 

 May 



1918 

 Jan. 



Office equipment 



Inventory 



346 



346 



300 



Expense is exactly like Furniture and Fix- 

 tures. Ordinarily, of course, its items repre- 

 sent total losses. But suppose, for instance, 

 that the stock of postage stamps charged to it 

 has not been used up, or that magazine adver- 

 tising has been paid for that will not be 

 published until next year. In either of these 

 cases there will be an inventory and a transfer 

 of the balance to Profit and Loss, just as ex- 

 plained above. 



Machinery account is also treated in the 

 same manner as Furniture and Fixtures. 



For reasons which will appear later, the 

 Capital accounts are the last ones to be closed. 

 The Personal accounts, as used by Gordon and 

 Steele, are merely to show the salaries which 



each proprietor earns and draws. The credits 

 to them represent debits to the Wages account, 

 and the debits to them show the money which 

 each has drawn from the business. Neither 

 partner has drawn his full salary, so the ac- 

 counts will be closed exactly like Accounts 

 Payable, to indicate that the firm owes them 

 a balance. 



Insurance presents a different type of ac- 

 count from any we have examined. Insurance 

 premiums are generally paid in advance for 

 one or more years. In the present figures let 

 it be assumed that Gordon and Steele have 

 insured for three years. But they have only 

 been in business eight months of this time. 

 To charge the profits of the present year with 

 the expense of insurance for the twenty-eight 

 months to follow would obviously misrepre- 

 sent the facts. So an inventory is taken of 

 insurance just as of furniture and fixtures; 

 that is, a red ink entry is made to show that 

 next year's accounts relieve this year's accounts 

 of responsibility for part of the money paid 

 for insurance. The result is as in Example A, 

 on the following page. 



Rent and taxes are handled in the same 

 manner as Insurance. 



Interest is just the reverse of insurance, in 

 one respect. It is paid after it is earned, in- 

 stead of before. Therefore a certain amount 

 of interest on Bills Payable and Bills Receiv- 

 able has accrued during the present year but 



Dec. 



31 



Inventory 

 Profit and Loss 



300 

 46 



346 



will not fall due until the next. To make the 

 books tell the proper story for each year, ad- 

 justing entries" must be made. This year's 

 account must assume the responsibility for 

 interest which will have to be paid next year 

 on this year's borrowings, and it must get the 

 credit for interest which will be received next 

 year on this year's loans. Therefore a red ink 

 debit is made for accrued interest on Bills 

 Payable, and a red ink credit for that on Bills 

 Receivable. The close of the account will 

 then appear as shown in Example B. 



Wages account is treated like interest on 

 Bills Payable. 



Material account, if its balance is trans- 

 ferred directly to Profit and Loss, will appear 



