RELATION OF THE PERSONAL AND PROPERTY COUNTS TO THE FINANCIAL STATEMENTS 1. first class of accounts to be con sidered here are the asset accounts. They may be divided into three main classes, namely: (1) cash and cash items; (2) promised but uncollected income: (3) instruments with which to obtain income in the future.
The first account in the Trial Balance ( Chapter X) is that of cash with a balance of $87,500. A debit balance in this account represents money, checks and bank credits. This debit balance indicates the amount of cash supposed to be on hand. We say "supposed" because it must be verified by a check against the actual balance on hand. Similar remarks apply to all the other accounts. Hence, in our dis cussion, supposition will always be understood, and verification will be supposed to have been made wher ever possible. Assuming this balance to have been found correct, there is an asset of $87,500 which is to be extended to the balance sheet column of our work ing sheet.
2. Notes account includes promis sory notes, title to which comes into the possession of our business. A promissory note is a written prom ise to pay a definite sum of money at some determin able future time. A draft, or as it is sometimes called, a bill of exchange, is an order drawn by one person called the drawer on a second person called the drawee or payer, requesting him to pay a definite sum of money to a third person called the payee.
A draft or bill of exchange may be drawn payable either on sight, that is payable immediately upon presentation to the drawee or, it may be payable a certain number of days after date or after sight—in other words it may be a time draft. A draft has no value until accepted by the drawee. This acceptance is indicated when the drawee writes his name across the face of it, after which he becomes known as the acceptor.
After the drawee has accepted the draft it becomes known as an acceptance. Consequently, as the act of accepting the bill constitutes the promise of the acceptor to pay the same on a due date, the ac cepted bill of exchange becomes, for all practical purposes, a promissory note of the acceptor and should be so treated in the accounts.
3. Notes of officers, employes and stockholders.— The notes-receivable or notes-payable account should be reserved for notes receivable taken from customers or for notes given to creditors, respectively, in the ordinary course of business. Notes to or from officers, employes or stockholders should be treated separately in the records; first, because to show them as notes taken or given in the ordinary course of trade would be misleading; and secondly, because of the fact that these instruments are not, as a rule, likely to be paid promptly. This may also be true in the case of notes payable to officers, employes or stockholders for the reason that such notes might be paid at the expense of other creditors.
4. Notes receivable discounted.—Most business houses do not retain their notes receivable until they fall due, but discount them at their bank. Of course, they allow the banker a certain discount or interest on the money which the banker gives up prior to the time that the notes become due.
While a firm has received cash, less the discount for the face value of all notes discounted at the bank, the firm's interest in these notes does not entirely cease until the makers pay them when they fall due. Be fore depositing a note with the banker, it must be in dorsed to the bank and, the indorsement makes the indorser liable for the face value of the note in case the maker does not pay it.
In order that this contingent liability may be ex pressed in the accounts the deposit of the note at the bank is recorded by a charge to cash and a credit to the notes-receivable discounted account. When the time for which the note was drawn has expired, and it has been paid, we charge the notes-receivable dis counted account and credit notes receivable, thus tak ing the entire transaction off our books.