40 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE. 
(8) Employee is paid wages in cash. There is a decrease in the Net Worth and a 
decrease in the asset Cash. 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 (1a). 
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-+Net Worth, and to ane 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 qmeseom 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 ata 
loss to do so, for our records have not been arranged so that results can be coliected 
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 
— gaeccounts. 
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 che 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 sep arat 
and distinct from that of the succeeding year. 
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