CLASSIFICATION OF LEDGER ACCOUNTS FOR- CREAMERIES. 



39 



Assets = Liabilitie3+Net Worth. 



All accounts being included in one of these groups, it is evident that all transac- 

 tions must be considered in the light of their effect on the respective groups. 



It is also evident that any transaction affecting one of the groups must likewise 

 produce an equal net change in the other groups, except in a few instances when 

 the transaction by its nature effects a change in the detail of one of the three groups 

 and does not change the total of the affected group. We may classify these changes as: 

 Increase or decrease in assets. 

 Increase or decrease in liabilities. - • - i 

 Increase or decrease in net worth. 

 'Transfer between items within any one group. 

 The customary bookkeeping names for these changes are "debit" and "credit." 

 These same titles are used to show the side of the account on which the entry is made, 

 debit being used for the left-hand side and credit for the right-hand side. Keeping 

 these names in mind, the statement changes may be classified as follows: 



Debit: 



Credit: 



(1) Increase in assets. 



(la) Decrease in assets. 



(2) Decrease in liabilities. 



(2a) Increase in liabilities. 



(3) Decrease in net worth. 



(3a) Increase in- net worth. 



It may be well to consider some of the more usual transactions which will arise in 

 a business, and to note the way in which they affect our statement, and the classi- 

 fication shown above. 



(1)- Capital stock issued upon payment of cash. " The result is an increase in the 

 asset Cash and a corresponding increase in the Net Worth account Capital Stock. 

 Using the above table, the transaction would be entered by a debit to Cash (1) and 

 a credit to Capital Stock (3a). 6 



(2) Capital stock paid for by a note. The result is an increase in the asset Notes 

 Receivable, and an equal increase in the Net Worth account, Capital Stock. There- 

 fore, debit Notes Receivable (1) and credit Capital Stock (3a). 



(3) A note receivable is paid in :ash, without interest. There is an increase in 

 the asset Ca^h and a decrease in the asset Notes Receivable. This is one of the 

 transactions described as being a transfer affecting the detail of one of the three 

 parts of the business statement, and not in any way changing the totals of the part. 

 Being both an increase and a decrease in asset values, we must debit Cash (1), the 

 asset increased, and credit Notes Receivable (la), the asset decreased. 



(4) Purchase of merchandise for cash. The asset Merchandise has increased; 

 the asset Cash has decreased. Applying our table we have a debit to Merchandise 

 (1) and a credit to Cash (la). 



(5) Purchase of merchandise on account. We have an increase in the asset Mer- 

 chandise and an increase in the liability Accounts Payable; therefore, we will debit 

 Merchandise (1), and credit Accounts Payable (2a). 



(6) Merchandise sold for cash. There is an increase in the asset Cash and a decrease 

 in the asset Merchandise. Debit Cash (1) and credit Merchandise (la). 7 



(7) Merchandise sold on ac:ount. There is an increase in the asset Accounts 

 Receivable and a decrease in the asset Merchandise. Debit Accounts Receivable 

 (1) and credit Merchandise (la). 



All numbers shown in parentheses thus (3^) refer to the number of entry in the table. 



7 Sales of merchandise or product actually affect two parts of our statement; i. e., that part of the 

 sale price which represents the actual cost of the merchandise is a decrease in the asset, while the part 

 representing profit is an increase in the net worth. These sales in actual practice aro credited to 

 Merchandise Sales and closed into Loss aud Gain account at the end of the fiscal period. 



