Various adjustments in the asset and liability ac counts will also be necessary from time to time after the double entry method has been inaugurated. The first statement of assets, liabilities and proprietorship will frequently be obtained entirely from a physical inventory with but little reference being given to the ledger account. As a consequence this initial bal ante sheet may be more or less incorrect, and may re quire change as the business goes on.
As a rule it is better to introduce an entirely new set of books and to arrange the system of accounts to meet the demands and needs of the business. In other words, it is better to build up a system of ac counting by the same method which is followed in constructing an accounting system for a firm just starting in business.
16. Reconstructing double entry records from books kept by single entry.—As indicated before, it is possible to prepare the commonly known profit-and loss statement from books which have been kept by single entry. Let us suppose that the ledger of John Green which was kept by single entry, discloses the following information on the first and the last day of the current year: An analysis of the cash books of John Green indi cates that his cash receipts and cash disbursements may be classified as follows: In preparing a balance sheet and an economic sum mary for the year the first step would be to verify the assets and liabilities, adding any new items which may be discovered, and correcting those which re quire change. Suppose that the ledger records are correct excepting that there is a balance of $3,700 cash on hand, which is recorded only in the cash book; the next step will be to prepare a comparative state ment of assets and liabilities and proprietorship. This is done as follows : The reader will note that increases and decreases are shown here in assets. This is done in order that they may be checked against the analysis of the cash book and the two combined into a profit and loss statement. The profit for the period by the balance
sheet method is $3,200. It is found that the capital has increased during the period $4,200 but that Mr. Green paid $6,000 of new capital and drew out $5,000, making a net increase of capital invested of $1,000. This amount must be deducted from the in crease in net worth in order to determine the amount of profit. The amount of profit might also be deter mined by taking into consideration the increases and decreases in individual assets. The following schedule brings the same amount of profit, namely $3,200 by grouping the increases and decreases of assets and liabilities: The information might be presented in the follow ing form: 17. Reconstructing individual accounts.—It is now possible to reconstruct the individual accounts on the double entry basis so as to arrive at the amount of purchases and sales. The accounts receivable at the end of the year were $12,000. It is found from an analysis of the cash book that $28,000 was collected from customers during the year. The comparative statement of assets and liabilities indicates that there was an increase of $10,000 in trade notes receivable. This gives a total of $50,000, charged to accounts re ceivable for the year. However, at the beginning of the year there was a balance of $10,000, hence the net increase in "accounts receivable" for that period must have been the difference between $50,000 and $10,000, or $40,000.
A schedule might be constructed which would present this information in continued form: The amount of the purchases may be arrived at in the same way by considering the balances in "ac counts payable" at the beginning and at the end of the year, and the increase or decrease in "notes pay able," as well as the amount of notes paid during the year. The schedule will take the following form: