It is true that there are some classes of expense, such as salaries of administrative officers, salaries of office clerks, which cannot be ascribed directly to any single source of income. These expenses have one common characteristic, each is an item of expense entailed in conducting the business. They form a very broad class which may be represented by one account termed "general or miscellaneous expenses." It is both customary and advisable to separate them into ac counts which will include items of one kind only.
The obvious conclusion to this discussion is: In every business some person should prepare a system of accounts, naming all the classes of accounts to be used, and carefully defining each class and each ac count within the class that has been set up. The bookkeeper should always use these classes and these accounts exactly as defined. If new transactions arise, he should ascribe them to a particular class of accounts and then, if necessary, open up a new ac count within that class to take care of that particular transaction.
7. Kinds of accounts.—In Chapter III, we de fined assets, liabilities, revenues and expenses. These are the four main divisions of the accounts appearing on the books of a business enterprise. Accounts are themselves variously classified with the view of com bining those which have the same general purpose.
In the first place, all accounts may be divided into two main divisions : 1. Personal 2. Impersonal.
Personal accounts, as their title implies, record all dealings with persons. They may be assets, liabili ties or proprietorship accounts. The impersonal ac counts record transactions as they relate to and affect the business and not as they affect persons. These impersonal accounts may be further sub-divided into (1) economic; (2) Specific or financial.
Economic accounts relate to the economic condition of the business. They indicate whether the business is progressing or retrogressing but do not represent any tangible thing. They are the income and expense accounts, which indicate to the owner the progress he is making and the relative progress of various divi sions of his business. Salaries, rent, interest, dis count, purchases and commissions are accounts rep resentative of this class.
Specific or financial accounts, as the name implies, are the accounts which represent the capital of the business; i.e., property of all kinds, such as land, build
ings, machinery and cash.
8. Profit-and-loss accounts.—In every business the income and expense accounts are usually carried for a year. At the end of that time they are closed out by the transfer of their balances to the proprietor's ac count. This is done because, in the end, all business is transacted for the benefit of the proprietor. The income accounts show the sources of his income while the expense accounts show the cost of his income; and the excess of one over the other represents the increase or decrease of the proprietor's capital. This transfer is made yearly because the business man has become accustomed to measure his progress on a yearly basis.
However, it will frequently happen that transac tions will occur in one year, the effects of which will not all be felt until a subsequent year. Unexpected losses, guarantees or sureties which must be made good, expenses not paid for and not charged during the year in which they occurred, will come up for set tlement in the succeeding year. Items of this nature, it will be noted, do not in any way pertain to the op erations of the current year. But, if the economic ac counts are to indicate the progress being made in that year, their condition must not be disturbed by the transactions of a previous year. Consequently, sep arate accounts are set up to record transactions of this nature.
9. Proprietorship here are several forms of business organization and control the most prominent of which are sole ownerships, partnerships and corporations. It is not our purpose here to dis cuss the legal phases or the advantages and disadvan tages of any form. The reader will find a full treat ment of these topics in the Modern Business Texts on "Accounting Practice and Auditing," "Organization and Control," and "Corporation Finance." We are now interested in these forms of ownership only in so far as they affect an accounting system. The ac counts required to record a sole proprietor's, or part nership, investments are simply personal accounts with each partner or owner. These accounts would show: (1) all investments; (2) credit for share of all profits; (3) withdrawals; (4) charge for any losses.