Trial Balance 1

record, month, accounts, business, cash, system and expenses

Page: 1 2 3 4 5

This record is especially important for the follow ing reasons: ( 1 ) it furnishes a permanent record of the checking which the bookkeeper does of his own work; (2) it affords a permanent record of the changes in each account, and serves as a source of ready reference in case the condition of a particular account has to be quickly ascertained at any time; (3) it contains information that is of considerable value from the standpoint of administration.

8. Order of the accounts.—There is no standard rule by which to determine the order of accounts in a trial balance. Probably the most convenient is that in which the accounts are transferred to the monthly financial statements. In any event, the order in the trial balance should be the same order as that of the accounts in the ledger. The accounts in the ledger must therefore be arranged in the order in which they will finally appear in the financial statements. Con venience in the matter of transferring the information from the ledger to the trial balance, and from the trial balance to the financial statements, requires a uniform arrangement of items.

9. Incompleteness of the trial balance.—It has been shown that, in the development of bookkeeping, ac counts with all the classes of assets and liabilities were introduced, and later, accounts representing sources of business income and causes of business expense. It naturally follows that when books are kept by double entry, the accounts should, theoretically, contain all, or at least a large proportion of the data necessary in the preparation of the financial statements.

In practice, however, it will be found that the ac counts, as they appear on the ledger at any given time, do not contain all this information. This is because so many changes are constantly occurring in every account that it would be impractical to make a com plete adjustment of the accounts each day.

10. Two bases for operation.—There are two prac tical accounting systems. According to the first, which is known as the "receipts and expenditures" sys tem, transactions may be recorded either when they originate' or when they end in a cash movement or in a definite and complete right against others for cash, and when they record the receipt or disbursement of some tangible asset. In other words, at the end of any particular month, only such transactions as have been completed are entered in the records.

The second method of operation, which is called the "accrual" system, involves taking into the month's record all transactions that have occurred during the month, whether or not they begin or end in cash or its equivalent, and whether they are finished or un finished. It is evident that this system is the more desirable, since each month's business should be bur dened with all the costs that have been incurred in obtaining that business.

Thus, if during a given month, goods were sold for $100,000, it is very likely that not all the expenses of these sales would be recorded on the books by the end of the month. Salaries, commissions and other simi lar expenses, may have been paid up to within a few days of the end of the month, but the men worked un til the last day of the month and turned in receipts which were recorded under sales for the month in which they were received. If, against each month's business, is to be set all the expense involved in ob taining that business, a record must be made (1) of all the expenses, even tho they have not been paid, and (2) of all the liabilities of the firm for work done, but for which payment has not yet been made.

Of course, it is evident that the latter mentioned system is the one on which the books should be oper ated and it is the intention of the average bookkeeper and of the average executive to make his cash trans actions independent of accounting records of income and expense. He will record the expenses and the liabilities as soon as a bill for a part of the work that has been done for him is presented. He will record each asset received at the time he receives it, and will express the offsetting credit by means of a liability ac count indicating his debt for what has been received.

The receipts and expenditures system possesses the decided advantage of simplicity. It requires merely the recording of the receipt and the payment of cash or its equivalent. This method is usually modi fied so as to include also the recording of the receipt or out-go of other assets, such as rights and services, when any of these are evidenced by something tan gible—a bill, a contract or the like.

Page: 1 2 3 4 5