PROPRIETARY ACCOUNTS 1. Proprietorship defined.—The excess of assets over liabilities constitutes proprietorship, or owner ship. The ledger accounts that represent and meas ure this excess are Down as the proprietary accounts. Broadly speaking, there are two general classes of undertakings. The first class consists of those un dertakings in which the prime purpose is to increase the proprietary interest film profits resulting from the employment of wealth in business enterprise. The second class consists of those undertakings in which the principal object is not to make a profit, but to render service, either to the members of the par ticular organization or to the community at large.
The legal phases of the various classes of under takings, together with the legal rights and duties of the members composing them, have been fully dis cussed in the volume on "Organization and Control." 2. Proprietary accounts under sole ownership.— When a sole trader begins business operations, the amount of his investment, represented by the differ ence between his assets and his liabilities at that time, should be credited to his capital account. If this is done, the effect is the same as that which would have resulted from crediting the proprietor's account with the sum total of his assets, and debiting it with his liabilities. The proprietor's investment will include only those assets that are actually employed in the business; that is, he will not merge his purely personal assets with those that are used in the business. His liabilities should include only those debts which are created in carrying on the business. His capital ac count will thus represent his net investment. This distinction is important because, while it is proper for a sole proprietor, in furnishing a statement of his assets and liabilities for credit purposes, to include as sets and liabilities which do not belong to the business, such procedure would not be proper if the proprie tor were merely making a statement of the accounts of his business.
In comparing the profitableness of different busi ness operations, the proprietor must take into con sideration only the assets which have been employed in securing such profits. If he includes other as sets, not employed in the business, he will reduce the ratio of earnings on,the invested assets which are used in the business.
During the year, the proprietor will perhaps with draw for his personal use either funds or merchan dise. In order that a proper record may be kept of the withdrawal of such values, and in order that the proprietor may be able to determine accurately the profits which result from his business, he must charge to a special drawing account the amounts withdrawn in cash as well as the cost of the merchandise which he may have consumed for his personal use. At the end of the period, the balance of this account should be transferred to the debit of his investment or capital account. The change in the proprietorship during the period, measured by the net loss or the net profit from business operations, at the end of the period un der review, will be carried to the credit or to the debit of his capital account, according to whether they have resulted in a gain or in a loss. In order that the true profit resulting from business operations may be reflected in his accounts, the proprietor may prop erly charge, as an expense of the business, the rea sonable value of his personal services.
A sole trader should also provide for the adequate depreciation of his fixed property during the period, by charging the amount thereof against the profits of the period. The amount of depreciation sustained will be credited either to the asset account direct or to an appropriately ear-marked reserve account. The latter method is preferable, and if followed, the reserve account should always be considered as an offset to the relevant asset. It should not be shown as a part of the proprietorship.