3. Early is probable that the first purpose of double-entry bookkeeping was to furnish an accurate record, and the second, to afford a means of ascertaining profits and losses. The bookkeeper probably furnished the owner with an abstract of the profit-and-loss account, or possibly, at first, only with the balance in the profit-and-loss account.
As the number of entries in this account increased, the abstract, or transcript, became bulky and cumber some and the mass of details obscured the single items or classes of items, so that a reconstruction of the form of the transcript became necessary. It is likely that the owner himself first made this reconstruction, by classifying the charges and credits under the va rious heads, that suggested themselves to him. Later on he probably required his bookkeeper to make this classification for him, in order that his own time might be saved. Still later, the preparation of regular profit-and-loss statements became an established cus tom, and the form in which the information was pre sented became more or less standardized.
4. Nature of an income statement or economic sum mary.—An economic summary may be compared to a cabinet full of compartments in which the informa tion already minutely classified is grouped in larger classes. Various names have been given to this sum mary, among which are the following: "profit-and loss statement," "loss-and-gain statement," "trading account," "outlay-and-income statement," "revenue statement," and "manufacturing, trading and profit and-loss statement." None of these terms is abso lutely accurate. The last one, however, "manufac turing, trading and profit-and-loss statement," prob ably expresses the true nature of an economic sum mary for a manufacturing concern. This statement shows, first, the manufacturing cost; secondly, the trading expenses and revenues; and thirdly, the gen eral administrative expenses and the distribution of the net profit or loss.
The term "profit-and-loss" implies that the so-called expenses are losses. While they will result in a loss if they exceed the income, they are not losses in any proper sense of the word; they simply represent a necessary investment that is made with the idea that it will bring a return greater than the investment itself.
From this point of view "outlay and income" would seem to be an appropriate title, for the economic sum mary since, first, it indicates exactly what some of the accounts in the economic summary express, and sec ondly, it implies the true time relation between out lay and income—that is, it implies that outlay must be incurred before there can be any income. But in cluded with the outlay accounts will be other ac counts, which will represent either deductions from income or actual loss. Because the term, outlay and income, does not in any way refer to these ac counts, it is seldom used.
In so far as the account is intended to show, and does show, either profits or losses, we may say that the title, "profit-and-loss account" is justified. It certainly has the sanction of business custom. If, however, one wishes to prepare a highly technical state ment and to indicate by the title the exact nature of its contents, the term, "trading and profit-and-loss statement" should be used if one is dealing with a trading concern, or the title "manufacturing, trading and profit-and-loss statement," if one is dealing with a manufacturing concern.
5. Illustrations of chief cause of the variety of forms used in presenting classified informa tion thru economic summaries, is the difference of opinion among managers, as to how each class of in formation may best be set forth separately. There is no standard form. One manager may believe that he can best state his business affairs by adopting one ar rangement, while another will prefer a different one. The form on page 208 illustrates one kind of state ment for a profit-and-loss account.
It shows a simple listing of expenses and income, with such classifications as pertain to the particular business. For example, the first section of the state ment includes the sales and the cost of sales. This section indicates the gross profit on sales; if the amount is large, the owner will know that either his purchase costs or his selling expenses are too high.