The details of columnar books cannot be considered in this article, but the general theory involved does not differ from that of the use of the simple journal and ledger.
Opening a Set of To open a are usually separated from the real and nom inal accounts and further divided into cus tomers' and creditors' accounts. The custom ers' accounts are kept in a separate ledger (or if they be numerous in several ledgers), called sales or customers' ledgers, and the accounts with creditors are kept in the purchases or creditors' ledgers. The real and nominal ac counts are kept in what is called the general ledger. Some accounts of a confidential nature which reflect the really vital facts of the business are often kept in a private ledger, to which only the proprietors or the manager have access. These accounts would require very little bookkeeping work and concern the investments, profit and loss, trading and capital of the firm. • Controlling In order that the general ledger may always be in balance so that a trial balance may be taken from it alone without balancing all of the accounts in the other ledgers, a single account is substituted in the general ledger for each class of accounts which has been taken out of it and put into a separate volume. Thus, a single account, called accounts receivable account, takes the place of all the customers' accounts which have been double entry set of books a statement of the kind of business and the name of the firm, with the articles of agreement or incorpora tion, is made on the journal, followed by an entry which debits the proper accounts with the value of each asset invested, and credits an account for each liability assumed by the business and also credits the capital accounts for the difference between the total assets and the total liabilities.
Trial After all the transactions of a period have been entered in the books, it is necessary to know whether or not the postings to the ledger accounts have been correctly made; that is, whether the equality of the fun damental equation has been maintained. The test of this is called taking a trial balance. Since every transaction has been entered in the journal or other books of first entry with equal debit and credit sides, and since every debit and credit entry has been posted to the corre sponding side of its proper account in the led ger, therefore, if the postings have been made correctly, the sum of the debits of the accounts in the ledger which are not closed must equal the sum of the credits of all those accounts.
Or the total of the debit balances of the open ledger accounts must equal the total of the credit balances. A trial balance may be defined
as a list of the names of the ledger accounts, the page of each, and their debit and credit footings or balances at any specified time placed in two separate columns. (See illustration No. 3).
and expenses incurred but not yet paid, such as interest on notes payable at some future date, must be computed and the proportionate amount assigned to the period under consid eration and recorded on the books in order to show the true condition. Such items are called accruals. That part of prepaid expense items, such as taxes and insurance paid in advance, The fact that the two columns of the trial balance add up to the same amounts is not absolute proof of the accuracy of the records. The trial balance would not show that a posting had been made to the wrong account, or that a transaction had been omitted, or that the wrong figures had been entered, or any errors of prin ciple in the classification of accounts. It simply shows that the ledger is in balance; that the debits and credits of the original entries were equal and posted to the proper side of some ledger account. It is a summary of the ledger and forms the basis for the various financial statements and is a necessary preliminary to closing the books.
Closing the The process of ascer taining the total amount of the gains or losses during a given period and of determining the condition of the business, that is, the nature of the assets and liabilities and the amount of the net worth at the end of the period, is called closing the books. Facts affecting some of the assets and the amounts of some of the liabilities have not been recorded on the books and do not appear on the ledger. For example, furniture and fixtures and buildings and machinery, etc., may have depreciated and their former or book values should not be used in determining the true net worth, Entries are made in the jour nal allowing for depreciation and adjusting the values of such assets. In a trading business inventories of goods unsold must be made and placed on the books by journal entries. The inventories, sales and purchases accounts are then transferred to one account, called the trad ing account, in order to ascertain the gross profit on trading. Income which has been earned but not received because not yet due, such as interest on unmatured notes receivable, properly belonging to future periods, is entered as a deferred debit item or deferred asset. In come received in advance is similarly treated as a deferred credit or deferred liability.