Bookkeeping and accounting volume 2 by JAMES o McKINSEY

VOLUHE

II

Series

A





Digitized by the Internet Archive
in

2007 with funding from
Microsoft Corporation

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OKKEEPING AND

ACCOUNTING

ft

Bt

JAMES
Member of

the

O.

McKINSEY, A.M., C.P.A.

firm of Frazer

Assistant Professor

&

Torbet,

Certified Public Accountants;

of Accounting, University of Chicago

VOLUME

II

n

.<*

Published by

South-Western Publishing Company

CINCINNATI, OHIO

**


Copyright, 1921

SOUTH-WESTERN PUBLISHING COMPANY
Cincinnati, Ohio


PREFACE
The subject matter of this text may be divided broadly into
two parts. The first twelve chapters deal with the general principles governing the construction and use of reports, accounts and
records. In these chapters the accounts and records of a corporation and the accounts of a manufacturing business are given
particular attention.

Some

attention

is

given to the problem of

depreciation and to the technical phases of account keeping as

Chapter XLVIII
on the subject matter of Chapters XXXVI to XL VII
and a thorough review in the application of general accounting

illustrated in special types of ledger records.

affords a drill
principles.

The last twenty-four chapters deal primarily with the use of
accounting in the control of the relations which the business unit
must have with those both external and internal to its organization.
The purpose and aim of these chapters is fully set forth
in Chapter XLIX on "The Relation of Accounting to Business

Management."
Chapters

L

to

LV

deal with the construction and interpretation

which are used by business
and governmental agencies in
judging the financial condition of a business at a specific time and
Chapters LVI and
its progress during a specific period of time.
LVII explain the construction and interpretation of financial
statements other than the Balance Sheet and Statement of Profit

and Loss of an industrial or commercial firm. Chapters LVIII to
LXV treat of records and reports used in the control and management of the operations of the functional departments of a busiof the orthodox financial statements

executives, stockholders, creditors

LXVI

deals with accounting for the investments
Chapters LXV II to LXXII deal with the
accounting organization and procedure by which the information
discussed in the preceding chapters is collected, organized, classi'
fied and presented for executive use.
There is much material included in this text which is not ordiThis
narily included in a text on bookkeeping and accounting.

ness.

Chapter

in other companies.


Preface
introduced to give the student sufficient information with
management to enable him to
understand how accounting may be used in their solution.
material

is

reference to the problems of business

Throughout the text the student

taught to look at the accounting

is

records from the viewpoint of the manager, rather than from the

viewpoint of the bookkeeper.

This not only enables him to con-

struct the records so that they will be most useful to the manager,

but also gives him a training which will
a managerial position.

The text material

is

assist

him

to

advance to

divided into distinct chapters, each chapEach chapter consists of

ter dealing with one principal topic.

three parts:
1.

A

discussion of the accounting principles which

relate to the topic of the chapter.
2.

class

A

series

of questions

and short problems for
and apply the prin-

discussion which develop

ciples discussed in the chapter.
These questions are

primarily "thought" questions which develop the stu-

dents' ability to analyze and interpret business and

accounting statistics.
3. Laboratory exercises and problems which

illus-

and require the application of the principles
Although most of the
discussed in each chapter.
laboratory material consists of short exercises which
illustrate specific principles and minimize detail, there
Chapter XLVIII which
is given one complete "set"
covers a fiscal period of two months and affords the
student an acquaintance with the bookkeeping system
trate

—

—

as a whole.

The material

is

especially adapted to instruction

by the

class

been arranged so that class assignments
can be made and recitation based on these assignments conducted.
The author is indebted to many teachers, accountants and business men for assistance and helpful suggestions in connection with
the preparation of the manuscript. Among those to whom he is
especially indebted are the following: Homer N. Sweet, C. P. A.
of the firm of Lyrand, Ross Brothers, and Montgomery who
provided some of the subject matter of Chapter LXII on "Records
and Reports for the Purchasing Department"; A. O. Brungardt,
Assistant Works Manager, Boston Factory, Walworth Manufactur-

recitation method.

It has


Preface
ing

Company who

assisted in the preparation

of

Chapters

LX

and LXI on the "Records and Reports of the Production Department"; W. H. Spencer, Assistant Professor of Business Law,
University of Chicago,

who read

the chapters dealing with corpo-

ration organization and accounting; L.

S.

Lyon, Assistant Pro-

fessor of Business Organization, University of Chicago,

and

P. E.

Schenley High School, Pittsburgh, Pennsylvania,
who read all the manuscript and gave many helpful suggestions;
Glen S. Griffin, who rendered valuable assistance in the preparation of the Laboratory Material in Chapter XL VIII and Miss May
R. Freedman, the author's secretary, who rendered valuable assistance in many ways in the preparation of the manuscript.
Special acknowledgement is due to Mr. Earl W. Barnhart,
Chief of the Commercial Section, Federal Board of Vocational
Education, Washington, D. C, who is the author of Chapters

LXIX and LXX on "Mechanical Accounting."

Curry of the

;

James

New York
n-A

City,

June

1,

1921

0.

McKinsey



CONTENTS
Chapter XXXVII. Nature and Characteristics
Need for Considering the Corporate Form
The Corporation Defined
Comparison of Corporation and Partnership

of the Corporation

Advantages of the Corporate Form
Disadvantages of the Corporate Form
Working Organization of the Corporation
Relation of Accounting to the Corporate Form

Chapter XXXVIII.

Proprietorship in the Corporation

Proprietorship Vested in Stockholders
Proprietorship of Corporation Divided into Shares

Ownership Evidenced by Stock Certificates
Classification of Stock
Method of Showing Proprietorship on the Balance Sheet
Value of Stock
Chapter XXXIX. Formation and Operation of a Corporation
Formation of a Corporation
Certificate of Incorporation

Opening Entries
Changing from a Partnership to a Corporation
Operations of a Corporation

Chapter XL.

Accounts Peculiar to a Corporation

Capital Stock, Capital and Surplus
Accounts with Capital Stock
Surplus Account
Dividend Account

Treasury Stock Account
Accounts with Subscriptions. Receivable and Capital Stock Subscribed
Chapter XLI. Records Peculiar to a Corporation
Records Required by a Corporation

Minute Book
Subscription Book
Subscribers Ledger

Stock Certificate Book
Stock Ledger
Stock Transfer Book

Chapter XLII.

^orm and Content

The Balance Sheet

of the Balance Sheet

Showing Proprietorship on the Corporation Balance Sheet
Asset and Liability Items on the Corporation Balance Sheet
Fixed Assets

Intangible Assets
Long-Term or Fixed Liabilities
Effect of Manufacturing Operations on the Balance Sheet

Chapter XLIII.

The Statement

of Profit

and Loss

Relation of the Statement of Profit and Loss to the Balance Sheet
Form of the Statement of Profit and Loss
Statement of Profit and Loss for Different Types of Industries
Statement of Profit and Loss for a Manufacturing Business
Simplification of Statement of Profit and Loss by Use- of Schedules
Schedule of Cost of Goods Sold
Other Schedules

A-n

rii


Contents

viii

Chapter XLIV.

Construction and Interpretation of Particular Accounts

Accounts with Fixed Assets
Charges to Capital versus Charges to Revenue
Intangible Assets
Fixed or Long-Term Liabilities
Mortgages Payable
Bonds Payable
Long-Term Notes
Accounts Showing Cost of Goods Manufactured
Materials Account
Labor Account
Manufacturing Expense
Materials in Process

Manufacturing Account
Finished Goods Account
Cost of Sales Account
Trading Account
Chapter

XLV. Records

of Original

Entry

Relation of Records of Original Entry to Operations of the Business
Columnar General Journal

Journal Vouchers

Voucher System
Voucher Register
Relation of the Voucher System to Accounts Payable Ledger
Card Record of Vouchers Payable
Cash Records
Sales Record
Notes Receivable and Notes Payable Journals
Chapter

XL VI.

Different

Types

of Ledgers

Causes of Different Types
Relation of General Ledger to Subsidiary Ledger
Private Ledger
Relation of General and Private Ledger
Classification of Ledgers as to Ruling
Standard Ruling
Balance Ruling
Progressive Ruling
Miscellaneous Ruling
Classification of Ledgers According to Binding
Bound Ledger

Loose-Leaf Ledger
Card Ledger
Method of Classifying and Indexing Card Ledgers
Method of Filing Ledger Cards

Chapter

XL VII.

Depreciation

Nature of Depreciation
Causes of Depreciation
Method of Calculating Depreciation
Method of Showing Depreciation on Reports
Method of Recording Depreciation in the Accounts
Operation of the Reserve for Depreciation Account
Plant Ledger
Chapter XLVTJI.

A

Practice Set

A-n

The Applications

of the Principles

,

.


Contents
Chapter XLIX.
Basis of Business

ix

Relation of Accounting to Business

Management

Management

Method by which Accounting and Statistical Data is Obtained
Nature of Reports Required
Parties Interested in Accounting and Statistical Reports
Classification of Reports Used in Administration
Need for Estimates
Chapter L.

The Standard Form

of Balance Sheet

The Standard Balance Sheet
The Use of the Standard Form of the Balance Sheet

Balance Sheet Desired by Long-Time Creditors
Balance Sheet Desired by Short-Time Creditors
Balance Sheet Desired by Governmental Agencies
Balance Sheet Desired by Stockholders
Reason for General Use of Standard Type of Balance Sheet
The Standard Form of Balance Sheet
Notes and Accounts Receivable
Securities
Bills,

Notes and Accounts Pavable

Net Worth
Chapter LI.

The Standard Form

of

Statement of Profit and Loss

Standardization of the Statement of Profit and Loss
Statement of Profit and Loss Usually Condensed
The Standard Form of Statement of Profit and Loss
Standard Form of Statement of Profit and Loss Recommended by the Federal
Reserve Board

Summary
Chapter LII.

Analysis of Financial Statements

Basis for the Interpretation and Use of Financial Statements
The Balance Sheet
Current Assets
Fixed Assets

Chapter LIII.

—Continued

Analysis of Financial Statements

Notes Payable
Accounts Payable
Accrued Liabilities
Bonds Payable
Mortgages Payable
Contingent Liabilities
Capital
Reserves

The Statement

of Profit

and Loss

Sales

Cost of Goods Sold
Operating Expenses
Other Income
Other Expenses

Chapter LIV.

The Value

—Continued

Analysis of Financial Statements

of Comparisons
Classification of Possible Comparisons
Comparison of Items on a Particular Balance Sheet
Comparison of Corresponding Items and Ratios on Different Balance Sheets

A-n


Contents

x

—

Chapter LV. Analysis of Financial Statements Concluded
Comparison of Items on a Particular Statement of Profit and Loss
Comparison of Corresponding Items and Ratios on Different Statements of Profit

and Loss
Omissions
Relation of Comparative Balance Sheet to Comparative Statement of Profit
and Loss

Summary
Chapter LVI. Different Types of Financial Statements
The "Statement of Condition" of a Bank
The Standard Form of Bank Statement
Illustration of Bank Statement with Explanation of Asset and Liability Items
Discussion of Particular Items of Bank Statement
A Novel Form of Bank Statement
Chapter LVTI.

The Statement

Different

Types

of Financial

Statements

—Continued

of Affairs

Illustration of the Statement of Affairs
The Deficiency Statement

Balance Sheet for a Professional Association

The English Balance Sheet
The Statement of Earnings of a Bank
Statement of Income and Expense of a Professional Association
Statement of Income and Expense for a Professional Firm
Statistical Reports

Chapter LVIII. Records and Reports for the Sales Department
Importance of Sales Information
The Functions of the Sales Department
The Organization of the Sales Department

Data
Commodity or Departmental Analysis
Analysis by Selling Units
Analysis by Territories
Analysis by Salesmen
Analysis by Terms of Sale
Analysis by Method of Delivery
Classification of Sales

Relation of the Sales Analysis to the Accounting Records
Analysis of Sales Returns and Allowances

Chapter LIX.

Record and Reports for the Sales Department

—Continued

Different Kinds of Sales
Sales on Account
Cash Sales
C. O. D. Sales
Installment Sales
Sales on Approval
Sales for Future Delivery
Branch Sales
Planning Future Sales
Sales Reports

Chapter LX. Records and Reports for the Production Department
The Production Problem
Functions of the Production Department
Organization of the Production Department
Control of Inventories
Inventory Records
Establishment of Maximum,

Minimum and Quantities to Order
Enforcement of Minimum and Quantities to Order
Balance of Stores for

A-n

Raw

Materials

Contents
Chapter LXI.

Records and Reports for the Production Department

xi

—Continued

The Planning of Production
The Notice of Minimum
Production Order
Bill of Materials
Balance of Stores for Raw Materials
Materials Requisition
Labor Tickets
Assembling of Time Tickets
Finished Goo'ds Report
Cost Accounting Records
Manufacturing Expense
Apportionment of Manufacturing Expenses
Labor Percentage Rate
The Labor Hour Rate
Production Center Rate
Departmental Classification of Manufacturing Expenses
The Cost Entries
Methods of Cost Finding

Summary

Chapter LXII.

Records and Reports for the Purchasing Department

Relation of Purchase Procedure to Accounting
The Functions of the Purchasing Department
Organization of the Purchasing Department

Purchase Forms
The Purchase Requisition
The Purchase Order
The Purchase Invoice
Other Purchase Forms
Purchases Records
Classification of Purchases

Method

of Showing Classification of Purchases
Classification of Unfilled Orders
Planning of Purchases

Purchase Reports
Chapter LXIII.

Records and Reports for Branches

Reasons for Establishing Branches
Organization for Branch House Control
Methods of Branch Accounting Control

Cash
Purchases
Sales

Expenses
Accounts Receivable
Accounts Payable
Branch House Reports
Monthly Balance Sheet
Statement of Profit and Loss
Monthly Expense Analysis
Monthly Inventory Report
Chapter LXIV.

Records and Reports for the Credit Department

The Credit Problem
The Functions of the Credit Department
The Organization of the Credit Department
Granting of Credit
Handling of Collections
Credit Reports
A.-n


Contents

xii

Chapter LXV.

Records and Reports for the Financial Department

Relation of the Financial Department to the Other Departments
Functions of the Financial Department
Organization of the Financial Department
Handling the Cash Receipts
Handling the Cash Disbursements
Determination of Financial Requirements
Financial Reports
Reports to the Treasurer

Chapter LXVI.

Meaning and Purpose

Accounting for Investments

of Investments

Classification of Investments
Accounting for Stocks
Accounting for Bonds

Premium and Discount on Bonds Issued
Accrued Interest on Bonds
Investment in Fixed Assets

Chapter LXVII.

The

Periodical

Summary

Purpose of the Periodical SummaryPeriodical Adjustment of the Accounts
Loss on Bad Debts
Depreciation on Fixed Assets
Accrued Income
Accrued Expense
Deferred Charges to Expense
Deferred Credits to Income
Periodical Closing of the Accounts
Post-Closing Entries
Disposition of Net Profit

Chapter LXVTII.

Records of Entry

Classification of Accounting Records

Auxiliary Records
Records of Original Entry

Development of Journalization
Development of Special Columns
Loose-Leaf and Card Records
Records of Final Entry

Review and Summary

in Separate Journals

Chapter LXIX.

Mechanical Accounting

The Meaning

Why

of "Mechanical Accounting"
Machines are Used

Errors in Mechanical Accounting
are Used
Purposes for which Machines are Used

What Machines

Adding Machines
Calculating and Computing Machines
Preparation of Statements
Preparation of Accounting Records
Simple Ledger Posting
Unit Posting Media

How

Mechanical Posting Saves Time


Contents
Chapter LXX.

xiii

Mechanical Accounting

—Continued

Balance Ledger Posting
Proving Balance Ledger Posting
Control in Mechanical Posting
Summary of Accounts Receivable Control
Statistical Analysis
Equipment Necessary for Tabulating Work
Tabulating Card

The Key Punch
The Sorter
The Tabulator
Analysis for which Tabulating Machines are Used
Advantages of Tabulating Equipment

Chapter LXXI.

Organization for Accounting Control

Need for Accounting Organization
The Accounting Organization
The Duties of the Comptroller
The Staff of the Comptroller

.

.

Relation of the Comptroller to the General Auditor
The General Auditor
General Office Accounting Section
Branch and Intercompany Accounting Section
Cost Accounting Section
Tabulating Section
The Payroll Section
Accounts Payable Section
Accounts Receivable Section
Billing Section
The Interrelation of Sections

Chapter LXXII.
Relation of Auditing to Accounting

The Purpose of an Audit
Kinds of Audits
Responsibility for Auditing
The Professional Auditor and Accountant
The Certified Public Accountant
Auditing Procedure

The Auditor's Report
The Auditor's

A-n

Certificate

Auditing



CHAPTER XXXVII
THE NATURE AND CHARACTERISTICS OF THE
CORPORATION
Need for Consideration

From
counting

Form

of the Corporate

the viewpoint of this text the primary purpose of acis to

provide information which will serve as a basis for
The management of a business is dependent

business management.

on

owners or those to whom they have delegated their authorThe ownership of a business may be vested in a sole proprietor-

its

ity.

ship,

a partnership,

or a corporation.

In previous chapters the

nature and characteristics of the sole proprietorship and of the
partnership have been explained.
It is now necessary to consider the nature

and characteristics of a corporation and

the additional information which
this

is

to see

necessary for control under

type of organization.

During the past few years the study of the corporate form of
organization has become of increasing importance because of the
rapidly increasing number of businesses which are owned and
controlled by the corporate form of proprietorship. "With the enlargement of the scale upon which business is conducted, there has
come a demand for such a quantity of capital as can be obtained
only by securing contributions from many investors. In order to
obtain the desired number of investors, it is necessary to secure
the investment of many who have accumulated savings.
These
investors desire to secure an income from the use of their savings,
but desire to avoid being burdened with the active duties of management and to limit their liability for loss at least to the amount
of their investment.
The corporate form of business organization
satisfies these

demands, and, as a

result,

has secured for

itself

a

and industrial enterprises.
The corporation marks a decided improvement over the

partnership as an agency for furthering large-scale industry. Consequently, today it represents the most advanced stage of business
organization.
It is quite important and necessary, therefore, for

firm footing in the conduct of commercial

the student of accounting to acquaint himself with

its

character505


Bookkeeping and Accounting

506
istics

and working

purpose

of

the

plans.

present

To explain and illustrate these is the
chapter and the chapters immediately

following.

The Corporation Defined
Chief Justice Marshall in the well-known Dartmouth College
decision defines a corporation as

"an

artificial being, invisible, in-

and existing only in contemplation of law." More concretely and comprehensively, it may be defined as "an artificial
person, separate from its members, authorized by law, created by
charter, and having, in addition to the powers expressed in its
charter, the implied powers of a natural person."
The foregoing
tangible,

definitions emphasize
1.

2.

That the corporation
That it is a distinct

individuals

who

is

an

artificial being.

entity, separate

are responsible for

its

from the

creation and

operation.
3. That it is created by law and exists only in contemplation of law.
4. That its powers are defined in the charter by
which it is created, but that it possesses the implied
powers of a natural person.

It will

tion
tion

be explained subsequently that the charter of a corpora-

the written permission granted

is

by the

state for its organiza-

and operation.

Since the corporation possesses the implied powers of a natural

can perform business transactions in its own name; it
carry on any form of
industrial or commercial activity. The possession of these powers
imposes on it certain liabilities. Consequently it can be held responsible for its debts and for contribution to the support of the
state through taxation.

person,

can

it

own and exchange property and can

Comparison of Corporation and Partnership
Those features which particularly differentiate the corporation
from the partnership form of organization are

1.

Restrictions

upon the authority

of

act for the company.
2.

3.

Limited liability of members.
Length of life of the organization.

members

to


Nature and Characteristics of Corporation

member may

In a partnership each

obligations so incurred are binding

507

act for the firm,

upon the firm

and the

so long as they

may reasonably expect the partnership
In a corporation no member can transact business for
the company unless given specific right to do so as an agent or
officer.
This provision of corporation law has two desirable results
are such as an outsider
to incur.

it

(1)

protects the corporation from the possible unwise acts of

members who might assume authority to act for it (2) it relieves
from the burdens of management those members who do not desire
;

to

assume such obligations.

In a partnership each

firm to the extent,

member

tion the liability of each
is

limited to the

and in some
company.

A

amount

states,

partnership

is

member

is

liable for the debts of the

necessary, of his entire estate; in a corpora-

if

for the debts of the corporation

double the amount of his investment in the
automatically dissolved by the death, with-

drawal, bankruptcy or mental incapacity of one of
the

life

Banks

of his investment or, in National

of a corporation

is

its

members;

practically unlimited because

tinues as a perpetual body throughout the life of

its

it

charter,

con-

and

may

be renewed without difficulty. As the following
quotation very well states, "A corporation is an artificial person,
created for preserving in perpetual succession certain rights which,
the charter

being conferred on natural persons only, would

fail in the process

of time."

Advantages of the Corporate Form

The advantages of the corporate form have been indicated
the definition of the corporation and
nership form of organization.

be stated as follows:

i.

Limited Liability of Members

The private estates of the stockholders can not be
held for the debts of the corporation. If the corporation fails, stockholders may lose a portion or all of

more than
amount or an additional amount equal thereto

their investment, but they will not lose

that

when

the double liability applies.

corporation law

is

invest small

This provision of

of decided importance in the financ-

ing of a corporation.

amounts

in

comparison with the partTo summarize, these advantages may
its

Investors are encouraged to
in a corporation because of the


Bookkeeping and Accounting

508

possibility of larger profits

liabil-

invested.

Legal Entity of the Corporation

2.

As
•

and the absence of a

amount

ity in excess of the

stated in the definition, a corporation

is

an

arti-

ficial person, an entity separate and distinct from its
members. In the capacity of a distinct legal entity,
It may secure,
it may act under a corpoiate n^me.
hold, and dispose of property in its corporate capacity.
It may enter into contracts with outsiders or with
its

own

by

suit, if

stockholders.

action which
3.

is

It

may

enforce these contracts

It has, therefore, a

necessary.

freedom of

lacking in the partnership.

Holding of Stock Evidenced by Transferable Shares

One
tion

is

of the most attractive advantages of a corpora-

the transferable shares issued to

as evidence of ownership of stock.
sible the sale of the

member's

its

members

This makes pos-

interest at his pleasure

-without interfering with the operations of the corporation.

It also affords the

member

the opportunity to

use his stock as collateral for a loan in case he desires

borrow funds.

to
4.

Centralization of Control

Through the working organization usually employed by the corporation, the responsibility of management may, if desired, be delegated to one head,
which makes possible centralized and unified control

.

and management.
5.

Accumulation of Capital

The number of members in a corporation is not
under centralization of control a
large membership does not become unwieldy, the membership often totals many thousands. This makes it
possible to secure a large mass of capital, and this,
in turn, makes possible the development of largelimited, and, since

.

scale industry.

Disadvantages of the Corporate

Form

There are certain disadvantages which may arise in connecSome of these are
tion with the corporate form of organization.


Nature and Characteristics of Corporation
inherent in the

corporate form,

particular circumstances.

Some

while

others

may

arise

Onerous Taxation

As an
tion

At

artificial

being created by law, the corpora-

subject to taxation by a law-making body.

is

the present time, corporations are subject to taxa-

by both the state and national governments. In

some cases the taxes imposed on corporations are
heavier than those imposed on individuals and partnerships.
The excess profits tax of the National
Revenue Law of 1918, which is imposed on corporations fcid not on individuals and partnerships, is
thought by many to inflict an unfair burden on the
tion

corporation.
2.

Filing of

Numerous Reports

As

a basis of taxation and for purposes of super-

vision,

both state and national governments require

reports to be filed by corporations giving information

with reference to their operations.
quire so

many

Some

states re-

detailed reports that their preparation

and burdensome.

If, however, the corporaproper
accounting
and statistical
tion maintains
records, the preparation of these reports is usually
not difficult.

is

3.

costly

Publicity of Corporate Affairs

Through the reports which must be made to the
governmental authorities, matters of importance may
be made known to the public.
Such information,
when secured by competitors, may be used to the
detriment of the corporation.
4.

Stockholders' Limited Liability

Although the limited liability of the stockholders is
advantageous to those investing in the stock of the
corporation, it may work as a handicap to the corpora1

tion

when

it

seeks to borrow funds, since the security

of the creditors

is

limited to the assets of the corpora-

In the case of the sole proprietorship and the
partnership, on the other hand, the private resources
tion.

under

of the most important of these

disadvantages are:
i.

509