3. Sold Addington Bruce 100 bushels of wheat on his 30-day note for $100.
Analysis: The business receives a right against Addington Bruce to receive from him on his note of 30 days, the sum of $100. This right is evidenced by a formal written promise signed by him. This formal evidence of debt represents a different relation than does a mere credit allowance ; we therefore put this and similar items into a separate class, term it "notes receivable" and open an account of that name. Con sequently, this notes receivable account is to be debited. The grain account should be credited.
4. My sales clerks have been working for me under salary and wage contracts, whereby I owe them $500.
Analysis: The business received these clerks' serv ices during the month. The accounting class that includes these services probably would be named "sales clerks' salaries." Therefore, the account "sales clerks' salaries" is to be debited. On the other hand, the clerks receive the right to collect $500 from us. If we wish to show evidence of this debt but do not pay it at this time, we record the right of these clerks to the money due them, by crediting either their per sonal accounts or the general pay-roll account.
5. Paid my rent for the ensuing month, amounting to $150.
Analysis: The business receives the right to use the premises during the ensuing month. This right may be included in a narrow class, which we may name "rent" or in a broad class which we may name "ex pense." The rent or expense account is debited ac cordingly. Money goes out. Money is included in the class, "cash." Accordingly the cash account is to be credited. Note that strictly speaking the right to use the premises during the ensuing month is an asset and might be included in a different class. As the month progresses the use of the premises—a ser vice—is received and the right to use gradually ex pires. Thus, indirectly the money paid for the right to use becomes the cost of the service received and an expense. For practical purposes we debit the ex pense account immediately.
It will be seen that a debit entry must represent one of five things: (1) An increase in assets.
(2) An expense or loss.
(3) A decrease of an existing liability.
(4) A decrease in income.
(5) A decrease in amount of proprietorship.
A credit entry must represent one of the following five results: (1) An increase in liabilities.
(2) Income.
(3) A decrease in an existing asset.
(4) A downward revision of a previous recorded expense or loss.
(5) An increase in amount of proprietorship.
11. Sub-divisions of merchandise account.—We re ferred, in a previous section, to the peculiar nature of the merchandise account, in that the debits to this ac count were made on the cost basis while the credits were on a sales basis. The components of the mer chandise account are somewhat as follows: In this form, the merchandise account meant little to the shopkeeper until after he had analyzed it and segregated the various charges or credits into classifi cations containing like items. It will be noted also, that, frequently there will be found still other kinds of charges or credits than we have given in our ex ample above. Consequently, instead of analyzing this account at the end of every month or year, or what ever other period for which the account was examined, separate accounts were set up. For instance, we would have as our debit accounts, "merchandise pur chased," "inventory of merchandise on hand," "re turned sales" and the like. Our credit account would be "merchandise sold," "returns of merchandise pur chased" (by us), etc.
12. Advantages of the double entry system.— Double entry bookkeeping provides a well-rounded system which contains accounts for every item of wealth possessed by the business, for every debt owed by the business and for the proprietor's investment in the business. Separate accounts are provided for his expenses, thus classifying these expenses as minutely as he finds necessary. In the same way, his income is classified into various accounts, which will show the different sources from which this income is obtained.
How detailed these subdivisions of income and ex penses will be, depends upon the kind of business and the needs of the owner. We will consider this phase of our subject later on; for the present we need only remember that no account should contain several dif ferent items since the effect of changes in one item must be offset by opposite changes in another. For instance "expenses" is too general a term. The items making up our expenses should be classified into "sal aries," "rent," etc.
As compared with single entry, double entry book keeping is obviously immeasurably superior. It re cords all the facts and results, whereas single entry records only some facts and no results. It analyzes the business transactions in such a form that a com plete record of causes of expense and sources of profit is available. At the same time the principle of equal ity between debits and credits offers a partial proof of the accuracy of the work.