Bookkeeping

BOOKKEEPING. A systematic record of business trans actions, in a form conveniently available for reference, made by individuals or corporations engaged in commercial or financial operations with a view to enabling them with the minimum amount of trouble and of dislocation to the business itself to as certain at any time (I) the detailed particulars of the transactions undertaken, and (2) their cumulative effect upon the business and its financial relations to others. The ideal of any system of book keeping is the maximum of record and of speed in arriving at re sults, combined with the minimum of labour; but as dishonesty has to be guarded against, no system of bookkeeping can be re garded as adequate which does not enable the record to be readily verified as a true and complete statement of the transactions in volved. Such a verification is called an audit, and in the case of public and other large concerns is ordinarily undertaken by pro fessional accountants (q.v.). Where the bookkeeping staff is large it is usually organized so that its members, to some extent at least, check each other's work, and to that extent an audit, known as a "staff audit" or "internal check" is frequently performed. Formerly, when credit was a considerably less important factor in commercial transactions than now, bookkeeping was frequently limited to an account of receipts and payments of money; and in early times, before money was in use, to an account of the receipt and issue of goods of different kinds. Even now what may be called the "cash system" of accounts is almost exclusively used by governments, local authorities, and charitable and other insti tutions; but in business it is equally necessary to record move ments of credit, as a mere statement of receipts and payments of money would show only a part of the total transactions. History.—The origin of bookkeeping is lost in obscurity, but recent researches would appear to show that some method of keep ing accounts has existed from the remotest times. Babylonian records have been found dating back as far as 2600 B.C., written with a stylus on small slabs of clay, and it is of interest to note (Records of the Past, xi. 89) that these slabs or tablets "usually contain impressions from cylinder seals, and nail marks, which were considered to be a man's natural seal," thus showing that the modern method of identifying criminals by finger-prints had its counterpart in Babylonia some 4,500 years ago. Ancient Egyp tian records were commonly written on papyrus, and contempo rary pictures show a scribe keeping account of the quantities of grain brought into and removed from the Government store houses. It will thus be seen that some form of bookkeeping existed long before hound books were known, and therefore the more general term accounting would seem to be preferable—the more so as the most modern developments are in the direction of again abandoning the bound book in favour of loose or easily detached sheets of paper or cards, capable of being rearranged as circum stances or convenience may dictate. At the present time all book keeping records are kept in three distinct columns, dealing respec tively with the date of the transaction, its nature, and its money value. The earliest extant example of accounts so kept is probably a ledger in the Advocates' Library (now the National Library of Scotland) at Edinburgh, dated 1697, which, it is of interest to note, is ruled by hand. Before that double-entry bookkeeping had been in general use. The exact date of its introduction is unknown ; but it was certainly not, as often stated, the invention of Lucas de Bergo, in or about 1494. This, however, is the date of the first issue (at Venice) of a printed book entitled Everything about Arithmetic, Geometry, and Proportion, by Luca Pacioli, which contains inter alia an explanation of bookkeeping by double entry as then understood; but in all probability the system had then been in use for something like 200 years.

General Principles.

The centre of all bookkeeping systems is the ledger, and it may be said that all other books are only kept as a matter of practical convenience—hence the name "sub sidiary books" that is frequently applied to them. Inasmuch, how ever, as the transactions are first recorded in these subsidiary books, and afterwards classified therefrom into the ledger, the names books of entry or books of first entry are often em ployed. Subsidiary books which do not form the basis of subse quent entries into the ledger, but are merely used for statistical purposes, are known as statistical or auxiliary books. In the early days of bookkeeping the ledger comprised merely those accounts which it was thought desirable to keep, and was not a complete record of all transactions. Thus in many instances records were only kept of transactions with other business houses, known as personal accounts. In the earliest examples transactions tending to reduce indebtedness were recorded in order of date, as they oc curred, underneath transactions recording the creation of the in debtedness; and the amount of the reduction was subtracted from the sum of the indebtedness up to that date. This method was found to be inconvenient, and the next step was to keep one ac count of the transactions recording the creation of indebtedness and another account (called the contra account) of those trans actions reducing or extinguishing it. For convenience these two accounts were kept on opposite sides of the ledger, and thus was evolved the Dr. and Cr. account as at present in general use. In this form of account all transactions creating indebtedness due from the person named therein to the business—that is to say, all benefits received by that person from the business—are re corded upon the left-hand or Dr. side, and per contra all trans actions representing benefits imparted by him, giving rise to a liability on the part of the business, are recorded upon the Cr. side. The account may run on indefinitely but for convenience it is usually ruled off each time all indebtedness is extinguished.

It is also ruled off at certain periodical intervals, so that the state of the account may then be evident.

Single Entry Accounts.

A mere collection of personal ac counts is, however, obviously a very incomplete record of the transactions of any business, and does not suffice to enable a state ment of its financial position to be prepared. So at an early date other accounts were added to the ledger, recording the acquisition of and disposal of different classes of property, such accounts be ing generally known as real accounts. These accounts are kept upon the same principle as personal accounts, in that all expend iture upon the part of the business is recorded upon the Dr. side, and all receipts upon the Cr. side ; the excess of the debit entries over the credit entries thus showing the value placed upon those assets that still remain the property of the business. With the aid of personal and real accounts properly written up to date, it is possible at any time to prepare a statement of assets and lia bilities showing the financial position of a business, and the fol lowing is an example of such a statement, which shows also how the profit made by the business may be thus ascertained.

The method of accounting hitherto described represents single entry, which—albeit manifestly incomplete—is still very often used by small business houses, and particularly by retail traders. Its essential weakness is that it provides no automatic check upon the clerical accuracy of the record, and, should any mistake be made in the keeping of the books, or in the extraction therefrom of the lists of assets and liabilities, the statement of assets and liabilities and the profit or loss of the current financial period will be incorrect to an equal extent. It was to avoid this obvious weak ness of single entry that the system of double entry was evolved.

Double Entry.

The essential principle of double entry is that it constitutes a complete record of every business transaction it handles, and as these transactions are invariably cross-dealings, involving simultaneously the receipt of a benefit by someone and the imparting of a benefit by someone else, a complete record of transactions from both points of view necessitates an entry of equal amount upon both debit and credit sides of the ledger. Hence it follows that, if the clerical work be correctly performed, the aggregate amount entered up on the debit side of the ledger must at all times equal the aggregate amount entered up on the credit side; and thus a complete list of all ledger balances should show an agreement of the total debit balances with the total credit balances. Such a list is called a trial balance, an example of which is given below. It should be observed, however, that the test supplied by the trial balance is a purely mechanical one, and does not prove the absolute accuracy of the ledger as a record of transactions. Thus, transactions which have actually taken place may have been omitted from the books altogether, or they may have been recorded to the wrong accounts, or the money values attached to them may be incorrect ; or, yet again, fictitious rec ords may be entered of transactions which have never taken place.

acquisition of an asset is a loss, whereas receipts which do not involve the creation of liabilities represent profits. All debit bal ances therefore that are not assets are losses, and per contra all credit balances that are not liabilities are profits. Thus, inasmuch as double entry provides inter alia a complete statement under suitable headings of all profits and all losses, it is possible by ag gregating these results to deduce therefrom the net profit or loss of carrying on the business—and that by a method entirely dis tinct from that previously described in connection with single entry, thus constituting a valuable additional check. Taking the trial balance previously shown, the following represent the trad ing account, profit and loss account, and balance sheet compiled therefrom. The trading account may be variously regarded as the account recording the movements of goods which represent the stock-in-trade, and as a preliminary to (or a subdivision of) the profit and loss account.

In American practice the trading account, profit and loss ac count is superseded to a large extent by the statement of income, profit and loss. The purpose of this type of statement is to dis play in running form the various accounts which have influenced the final profit figure for the period and also to tie up this final profit figure with the capital changes during the period so that the final account will agree with the capital account as set forth in the balance sheet of the enterprise. The following statement of in come, profit and loss is based upon the preceding trial balance with the English money converted into American money at the rate of $4.86 a pound.

A trial balance is thus no very adequate safeguard against fraud, nor does it bring to light mistakes in the monetary value attach ing to the various transactions recorded. This last point is of espe cial importance, in that the monetary value of transactions may have been correctly recorded in the first instance, but owing to altered circumstances may have become inaccurate at a later date. This of course means that the altered circumstances constitute an additional "transaction" which has been omitted.

It will be observed that, in order to complete the record of the transactions by double entry, it has become necessary to introduce into the ledger a third class of accounts, known as impersonal or nominal accounts. These accounts record the transferences of money, or of money's worth, which, so far from representing a mere reshuffling of assets and liabilities, involve an increase in or a reduction of the amount invested in the business, i.e., a profit or a loss. Transactions representing profits are recorded upon the Cr. side of nominal accounts, and those representing losses (in cluding expenses) upon the Dr. side. This is consistent with the rule already laid down in connection with real and nominal accounts, inasmuch as expenditure which does not result in the to bring the latter account up to date and show the credit bal ance representing the surplus of assets over liabilities to date) the balance sheet, instead of showing a difference, or a "balance" representing what is assumed to be the amount of the capital to date, shows an absolute agreement of assets upon the one hand and of liabilities plus capital upon the other.

In the foregoing example the customary method has been fol lowed of deducting withdrawals of capital from the capital account and of adding profits thereto. Sometimes, however, the balance of the capital account remains constant, and the drawings and journal, and for many years represented the only book of first entry employed in bookkeeping. In modern times, however, with the growth of business it was soon found impracticable to keep one book of first entry for all transactions, and accordingly it became necessary either to treat the journal as an intermediate book, in which the transactions might be brought together and focused as a preliminary to being recorded in the ledger, or to split up the journal into numerous books of first entry, each of which might in that case be employed for the record of a par ticular class of transaction. The first method has been generally net profits are transferred to a separate account called current account. This plan is not very often observed in the case of undertakings owned by individuals, or private firms, but is in variably adopted in connection with joint-stock companies, although in such cases the name appropriation of profits account is generally employed.

Outside of Great Britain it is customary to place the assets on the left hand side of the balance sheet and the liabilities and capital on the right hand side. The following balance sheet accords with the American practice and is based upon the trial balance which precedes with conversions computed on the basis of $4.86 to the pound.

It will be observed in the above balance sheet that the terminol ogy is somewhat different from that used in the trial balance, e.g., accounts receivable (q.v.) replaces the account trade debtors, notes receivable replaces the account bills receivable, merchandise inventory replaces the account stock, etc.

Books of First Entry.

Although it is now usual to employ several books of first entry, in the case of small businesses one such book is sufficient for all purposes, in that it is practicable for one person to record all the transactions that take place as and when they occur. A book of this description is called the adopted in the Continental countries of Europe, whereas in Great Britain and in North America the latter method is more general.

Sub-division of Ledgers.

With a view still further to split up the work, thus enabling a large staff to be simultaneously engaged, the ledger itself is now generally kept in sections. Thus the cash account and the bank account are frequently bound to gether in one separate book called the cash book, showing in parallel money columns the movements of office cash and of cash at the bank, and by the addition of a third column for discounts the necessity of keeping an additional book of first entry as a discount journal may also be avoided. Of late years, however, most businesses pay all moneys received into their banks without deduction, and pay all accounts by cheque ; the necessity of an account for office cash thus no longer exists, save in connection with petty payments, which are recorded in a separate book called the petty cash book. With regard to the remaining ledger accounts, personal accounts (which are the most numerous) are frequently separated from the real and nominal accounts, and are further subdivided so that customers' accounts are kept separate from the accounts of trade creditors. The customers' accounts are kept in a ledger (or, if need be, in several ledgers) called sales ledgers, sold ledgers or accounts receivable ledgers (q.v.) ; while the accounts of trade creditors are similarly kept in purchases ledg ers, bought ledgers or accounts payable ledgers (q.v.). The nom inal and real accounts, if together, are kept in what is called the general ledger; but this may be further subdivided into a nominal ledger and a private ledger. By the employment of adjustment or balancing accounts, which complete the double entry record in each separate ledger, these various ledgers may readily be made self-balancing, thus enabling clerical errors to be localized.

Tabular Bookkeeping.—Of recent years considerable atten tion has been devoted to further modifications of bookkeeping methods with a view to reducing clerical work, increasing the speed with which results are available, and enabling them to be handled more quickly and with greater certainty. Tabular book keeping is a device to achieve one or more of these ends by the substitution of books ruled with numerous columns for the more usual form. The system may be applied either to books of first entry or to ledgers. As applied to books of first entry, it enables the same book to deal conveniently with more than one class of transaction; thus, if the trading of a business is divided into several departments, by providing a separate column for the sales of each department, it is possible readily to arrive at separate totals for the aggregate sales of each, thus simplifying the prepara tion of departmental trading accounts. As applied to ledgers, the application of the system may be best described by the aid of the following example (the headings of the columns only being given), which shows how a very large number of personal ac counts may be recorded upon a single opening of a ledger, provided the number of entries to be made against each individual be few.

Slip System.

Another important application of modern methods consists of what may be described as the slip system, which is in many respects a reversion to the method of keeping records upon movable slabs or tablets, as in the Babylonian ac counts referred to at the beginning of this article. This system may be applied to books of first entry, or to ledgers, or to both. As applied to books of first entry it aims at so modifying the original record of the transaction (whether it represents an invoice for goods sold or an acknowledgment given for money received) that a facsimile copy may be taken of the original entry by the aid of a carbon sheet, which instead of being immovably bound up in a book is capable of being handled separately and placed in any desired order or position, and thus more readily recorded in the ledger. Additional carbon copies prepared at the same time may serve any other desired purpose, e.g., as delivery notes, stock control sheets, etc. Postings are thus made direct from the original slips, which have been first sorted out into an order con venient for that purpose and afterwards re-sorted so that the total sales of each department may be readily computed; after which they are filed away in a form convenient for reference. Sometimes the process is carried a step farther, and the original slips, filed away with suitable guide-cards indicating the nature of the account, themselves constitute the ledger record—which in such cases is to be found scattered over a number of sheets, one for each transaction, instead of, as in the case of the ordinary book ledger, a considerable number of transactions being recorded upon a single page. This adaptation of the slip system is imprac ticable except in cases where the transactions with each individual are few in number, and is not worth adoption unless the exceed ingly large number of personal accounts makes it important as far as possible to avoid all duplication of clerical work. The more usual adaptation of the slip system to ledgers is to be found in the employment of card ledgers or loose-leaf ledgers. With card ledgers each ledger account is upon an independent sheet of card board suitably arranged in drawers or cabinets. The loose-leaf ledger may be described as midway between card and bound ledgers. It consists of a number of sheets in book form, so bound as to be capable of being readily separated when desired. These modern types of ledgers lend themselves to the employment of bookkeeping machines (see OFFICE APPLIANCES).

Education.—Apart from the organizations of professional ac countants, there is none of note devoted to the scientific study of bookkeeping other than purely educational institutions. Among the universities, those in the United States were the first to include accounting as part of their curriculum; while in Great Britain all the universities except Oxford and Cambridge have recognized its importance. More recently Japan has been mak ing a movement in the same direction, and other countries will doubtless follow suit. In England there have for a number of years past been various bodies (such for instance as the Royal Society of Arts, the London Chamber of Commerce, and Owens college, Manchester) which hold examinations in bookkeeping and grant diplomas to successful candidates, while most of the polytechnic and technical schools give instruction in bookkeep ing; these latter, however, for the most part regard it as a "craft" merely. The Accountant Lecturers' Association provides a means of communication between lecturers in accountancy subjects.

BIBLIOGRAPHY.-Those

interested in the bibliography of bookkeeping Bibliography.-Those interested in the bibliography of bookkeeping are referred to the catalogue of the library of the Institute of Char tered Accountants in England and Wales, which probably contains the most complete collection in existence of ancient and modern works on accounting, both British and foreign. The following short list com prises those most likely to be found of general interest: The Account ant's Library (Igo') ; G. Lisle, Encyclopaedia of Accounting (Dgo3) ; L. R. Dicksee, A.B.C. of Bookkeeping (19o8) ; Bookkeeping (8th ed., 1921) ; Advanced Accounting (6th ed., 1921) ; P. Crivelli, Translation of Pacioli's Treatise on Double Entry Bookkeeping (1924) Hatfield, Accounting; Kester, Accounting Theory and Practice, vol. Koopman & Kester, Fundamentals of Accounting ; Paton & Stevenson, Principles of Accounting. (See ACCOUNTANCY AND ACCOUNTANTS.) (L. R. D.)