40 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE. 



- Employee is paid wages in cash. There is a decrease in the Net "Worth and a 

 decrease in the asset ('ash. "Wages are a cost of operation and therefore decrease the 

 net worth. They are an expense as distinguished from income. Debit Labor (tem- 

 porary Net Worth account) (3a) and credit Cash (la). 



After this manner, all transactions can be analyzed and classified to indicate the 

 proper entry to be made. 



Again referring to our statement, Assets=Liabilities-j-Net Worth, and to the dis- 

 cussion and illustrations which follow the statement, it should be noted that every 

 transaction is composed of two parts, the debits and the credits, and that these two 

 parts are always exactly equal and opposite in their effect. 



If. then, we start with any statement, the two sides of which must be equal, and 

 every transaction affecting this statement has its two sides equal, the two sides of the 

 result must be equal. As the sides are called in bookkeeping debit side and credit 

 side, or debit and credit, respectively, we may formulate the following rule: The 

 debits and credits by which any transaction is recorded must be equal. 



In this discussion we have considered only the three elements assets, liabilities, 

 and net worth, and have classified the transactions as affecting two or more of these 

 elements. In observing the changes in net worth, there are other effects to be con- 

 sidered besides the question that a change has occurred, and the total amount of 

 such change. 



It would be possible to discover this effect (in total) by recording the increases 

 and decreases directly in the Net Worth account. However, when we attempt to 

 discover the reasons for the increase or decrease in the total net worth, we are at a 

 loss to do so, for our records have not been arranged so that results can be collected 

 with proper regard to the relevant cause. 



For this reason it is desirable that we introduce' another series of accounts called 

 Income and Expense accounts, which are in reality subdivisions of the Net Worth 

 accounts. 



Into these accounts are entered the various changes which are the result of the 

 business operations, and which either increase or decrease the net worth, the Income 

 accounts showing the increases and the Expense accounts showing the decreases. 

 The net results of these accounts will show, then, the effect, increase or decrease, 

 on the net worth of the business. 



To arrive at the net result of these operations the various Expense accounts should 

 be closed, their total being carried as a debit to. the Loss and Gain account and the 

 various Income accounts carried as a credit to the same account. The resulting 

 balance of the Loss and Gain account is the net income or loss for the period, which 

 result should be carried to the Surplus or Deficit accounts by order of the Board of 

 Directors if the concern is a corporation or association, or to the proprietorship account 

 if owned by a partnership or individual. 



It will be noted that in making the annual entries to the debit and credit of this 

 account, all the Income and Expense accounts will be balanced or closed. Accounts 

 so closed should be ruled in red ink so that the year's business will be kept separat 

 and distinct from that of the succeeding year. 



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