CHAPTER XVI.

LEDGER ACCOUNTS,-THEIR FUNCTIONS

AND ENTRIES.

$135. General.

In the present chapter an effort has been made to illustrate the functions of the more important of the general ledger accounts commonly found in manufacturing or mercantile establishments. To this end the proper debits and credits of each account are given; also what is shown, or what should be shown, by the difference between the debit and credit columns, i. e. the balance of the account.

(1) CLASSIFICATION.

§ 136. Arrangement of Accounts.

Accounts should be arranged in the following order,(1) fixed assets; (2) floating assets; (3) fixed liabilities; (4) floating liabilities; (5) surplus account; (6) profit and loss account-followed by the profit and loss accounts; (7) statistical accounts. Care should be exercised in allotting sufficient space to each account-never less than a full page. It is well to have the accounts indexed alphabetically on a typewritten sheet and paste the sheet on a piece of card-board of the same size. The bookkeeper can stand this index in front of him when posting and thus avoid the use of the cumbersome index usually found in the front of general ledgers.

$137. Classification of Accounts.

The following classification of general ledger accounts illustrates the order in which they should appear in the general ledger.

(1) Fixed Assets.

ment.

(a) Land. (b) Buildings. (c) Machinery and Equip(d) Small Tools. (e) Patterns. (f) Stable Equipment. (g) Office Equipment. (h) Store Fixtures. (i) Goodwill. (j) Patent Rights. (k) Sinking Fund.

(2) Floating or Current Assets.

(a) Cash. (b) Imprest Fund. (c) Accounts Receivable. (d) Consignments. (e) Notes Receivable. (f) Finished Products (on hand). (g) Manufacturing (goods in process). (h) New Materials (on hand). (i) Factory Supplies (on hand). (j) Stable Supplies (on hand). (k) Insurance (un-' expired premiums). (1) Treasury Stock. (m) Stock of Other Companies.

(3) Fixed Liabilities.

(a) Preferred Stock. (b) Common Stock. (c) Mortgages Payable. (d) Mortgage Bonds. (e) Accumulative Bonds.

(4) Floating or Current Liabilities.

(a) Notes Payable. (b) Accounts Payable.

(c) Ac

crued Interest on Mortgages, (d) Accrued Interest on Bonds. (e) Accrued Taxes. (f) Pay Roll (accrued labor). (g)

Agents' Accounts (unearned commissions). (h) Reserve for Depreciation.

(5) Surplus.

(6) Profit and Loss Accounts.

(a) Profit and Loss. (b) Sales. (c) Income from Rentals. (d) Income from Stocks of Other Companies. (e) Miscellaneous Income. (f) Selling Expenses. (g) General and Administrative Expenses. (h) Discounts. (i) Interest on Borrowed Working Capital.

(7) Statistical Accounts.

(a) Manufacturing Expenses. (b) Dividend Account. (c) Subscriptions. (d) Subscribed Stock. (e) Cash Sales.

(2) ASSET ACCOUNTS.

§ 138. Land.

Debit With:

(1) Acquisition cost of land purchased. (2) Cost of surveying, title insurance, recording fees, etc. (3) Cost of improvements; e. g., grading, constructing roads and walks, excavating and piping for sewers, water, gas, etc. (4) Cost of carrying charges until the land becomes productive or until buildings are erected thereon; e. g., interest on mortgage covering the land, taxes on the vacant land, etc. Credit With:

(1) Cost of land sold.

Profit or loss are not entered in this account but at the time land is sold "Profit and Loss account is credited with profit, or charged with the loss, resulting from the sale.

As this account is intended to show the cost of land owned, it is never advisable to carry land on the books in excess of its cost, even though it may have increased in value very materially.

§ 139. Buildings.

Debit With:

(1) Actual cost of buildings purchased or constructed. The construction costs may include architect's plans, commission for placing a building loan, cost of material, labor, team

service, supervision, interest on building loan until buildings are completed, etc. In fact all expenses incurred as a result of constructing buildings should be charged to this account. (2) Cost of replacing buildings, or important parts thereof, destroyed by fire, or by virtue of wear and tear and passage of time.

Credit With:

(1) Cost of buildings replaced, at which time "Reserve for Depreciation of Buildings" or, if no reserve is periodically set aside, "Maintenance of Real Estate" account should be charged.

Balance:

Note:

Represents the cost of buildings owned.

In charging the cost of labor, material, or team service. used in constructing buildings, it is correct to use the exact costs and not inflated costs; e. g., a lumber company should charge the lumber used at what it actually costs them and not at their selling prices, as is sometimes done, on the ground that the cost to any one not in the lumber business would be based on retail prices. Likewise some railroad companies charge to their construction accounts the full rates for hauling their own materials. This results in increasing their apparent profits by doing work for themselves. Real profits are not made in this manner, and the principle is radically wrong.

It is advisable to allot a number to each building, and keep the construction costs of each separate. An analysis book (See § 140) should be used for this purpose and should show the complete cost of each building. When a building or an important part thereof is replaced, the cost of the old one should be taken out of its account and the cost of the new one taken in.

When a periodical reserve (say monthly) is set aside to provide for depreciation of building, the estimated life of the

buildings is the controlling factor in deciding upon the rate of reserve. If the average life is estimated at twenty-five years, four per centum of the cost should be set aside yearly, or onetwelfth of four per centum monthly. This estimate contemplates that the buildings will be kept in repair; the reserve is to meet the cost of replacements and not of repairs. Consequently when a building is replaced, the cost of it should be charged against the reserve. A clear understanding of the difference between a repair and a replacement is therefore most essential.

A replacement is either the re-erection of an entire building or the reconstruction of some specific and material portion of it. Anything less than this, designed to maintain the appearance or utilities of a building, is to be classed as a repair. Thus putting on a new roof is a replacement; putting in a new door is a repair.

Replacements are charged to "Buildings" account, at which time the actual or estimated cost of the building or portion thereof replaced, should be charged against the reserve, or, in case no reserve is provided, against the income. Repairs should never be charged to "Buildings " account but rather to "Maintenance of Real Estate," or to "Income from Rentals " in the case of rental properties.

As the words repair and replacement have so similar a meaning, it is advisable to mentally substitute the word maintenance for repair when attempting to decide whether an item is to be charged to building account or against income.

The cost of additions to buildings should be charged to Buildings" account, inasmuch as the outlay increases the value of the assets. Alterations should be charged to "Buildings" account only when they increase the original efficiency or value of the building altered; otherwise they should be charged against the income. In case of doubt, it is advisable to charge an item against the income rather than to "Buildings" account. In other words, before charging the latter