Expenses are outlays made to carry on the busi ness or, rather, they are the costs of income. Ex penses are incurred because the owner believes that the resulting income will exceed these expenses. The ex penditure of the money does not necessarily precede the obtaining of the income, indeed it often follows it. For instance, during the month sales will be made by clerks who will not be paid for the services which they have rendered until the tenth of the following month. Yet the cost of these services is a part of the cost of this income, and must be so counted on the basis of the contractual right obtained by them in the very act of rendering their services. The same is true of the merchandise itself, for which payment may not yet have been made. The dealer cannot justly say that his profit for the month is the difference between his sales and his cash expenses plus the cost of his mer chandise. He must consider the unpaid costs incurred in making his sales. • Gain or profit results when the total income exceeds the total expenses. Loss results when expenses ex ceed income. It follows, therefore, that the income and expense accounts measure the profitableness of a business, while the assets and liabilities indicate its financial condition.
We have one other class of accounts to consider. The shopkeeper or other business man contributes funds to his business from time to time, either be cause of his original investment or to provide addi tional funds at subsequent dates. Also, he will prob ably withdraw a part of his profits each year and leave a part in the business. The profits which are not withdrawn become an increase in his investment.
An account must be kept with the proprietor's with drawals, his investments and his reinvestments of profits. These are not assets or liabilities of the owner, as no one can owe himself. They are simply the accounts which measure the net worth of the busi ness. Their total must be the difference between the true assets and liabilities.
8. Universal rules of debiting and crediting.—The following are the universal principles in the science of accounts which govern all business transactions to which debits and credits apply : (a) Debit the account with that which comes into the business or costs the business value.
(b) Credit the account with that which goes out of the business or produces value for it.
Many special rules applying to particular accounts have been devised, but all are but special applications of the above stated general principle.
Reference to the evolution of double from single entry gives a rational derivation of this rule. The cashier got into debt to the business when money came into the business because this money was placed in his custody. He got out of debt to the business when
money went out, for it was obtained from him and he thereby discharged his responsibility for it. The oc casion on which the supposed custodian of merchandise became indebted to the business was that on which merchandise came in, and the occasion on which he dis charged his indebtedness was when merchandise was obtained from his custody and passed out. This is true of any other custodian. When these accounts ceased to be custodianship and became accounts with property, the basis of debts and credits changed from that of creating and discharging indebtedness to that of inflow and outflow of valuable rights and services.
Since, as we have already seen, every business trans action is an exchange, that which comes into the business costs that which goes out, and that which goes out may be said to produce that which comes in.
9. Application of the general rule.—The applica tion of the general principle in assigning the debits and credits which result from a given transaction or operation, involves three steps for each, namely: (a) In assigning the debits: 1. Determine specifically what comes into the business or costs it value, reducing this item or items to concrete things, such as a piece of land, wagon, laborer's services and the like.
2. Determine what accounting class on your records is intended to include this item or items.
3. Debit that account.
(b) In determining the credit: 1. Determine specifically what goes out of the business.
2. Determine what accounting class includes this item.
3. Credit that account.
Of course, many transactions and operations will involve more than one debit or credit.
10. Examples.—Bought 1,000 bushels of oats for $400 cash.
Analysis: 1,000 bushels of oats came into the busi ness. The accounting class which includes oats is, say, "grain." Therefore, we will debit that account with $400. As four hundred dollars of money goes out of the business and money is included in the class "cash," the cash account should be credited with the $400.
2. Bought of S. P. Jones on 30 days' account, 1,000 bushels of wheat for $800.
Analysis: 1,000 bushels of wheat came into the business. Wheat belongs to the accounting class, "Grain." Therefore, debit the grain account. A right to collect $800 goes out to S. P. Jones. This right is included in an accounting class which, for obvious reasons, we call, "S. P. Jones." Therefore, we credit the account, "S. P. Jones." This transac tion involves an exchange of a personal right in favor. of S. P. Jones for a property right in the merchandise.