Bookkeeping is the art of making a systematic record of business transactions, so as to exhibit the resources and liabilities of the business. The system in use in a business, the business itself or more often the adaptation of the method of accounting to the requirements of the business, determine kind and number of books used. When but a single book is used, it is usually a simple book, similar in form to the common day-book, in which are set down in the order of their happening such transactions as are necessarily recorded. As it is not to advantage to bulk too many accounts in one book, the cash-book, purchase-book and sales-book are often used together. The principal book of accounts is the ledger, it showing in classified form all the records of the original books of entry.
Two systems of bookkeeping are in use, single entry and double entry.
Single entry is most commonly used by retail merchants and other similar tradesmen. It keeps no account of property, personal accounts alone being shown in the ledger, which, consequently balances only when the business is closed out. Saving in labor over double entry, it furnishes fewer checks against error. One of its fatal objections for some classes of business is the lack of detailed information shown regarding the sources of gain or loss. This information, as clearly exhibited by the double-entry balance-sheet is often an absolute essential in the determination of profit. In single entry, to determine capital at any time, the inventory of resources and liabilities is taken; the difference between the totals indicating the capital. The difference between present and former capital gives the loss or gain.
Double entry bookkeeping requires that every transaction be entered twice, first on the debtor side of one or more accounts, and second, on the creditor side, thus keeping the ledger in balance perpetually.
The first law of double entry is that every debit amount in one account must have a corresponding credit amount in some other account, and vice versa. The rule of debits and credits may be thus summarized:
(1) Debit that which into the possession of the bus-ness and costs value. (2) Credit that which goes out of the possession of the business and produces value.
Besides the above general rules the following specific ones may be given:
The proprietor is debited: (1) For withdrawals from the business for personal use; (2) for liabilities assumed by the business; (3) for net loss when the books are closed. He is credited (1) For all investments in the business; (2) for net gain when the books are closed.
Property is debited, under its given name, when it comes into possession of the business. It is credited, under its given name when the busines parts with it.
Persons are debited (1) when they get into our debt; (2) when we get out of their debt and are credited: (1) When we get into their debt and (2) when they get out of our debt.
Expense account, including rent, salaries, insurance, etc., is debited for money paid out to carry on the business and credited for the proceeds of the sale of any item previously debited to expense account.
Bills receivable are debited when received by the business and credited when the business parts with them.
Bills payable are debited when redeemed by the business and credited when issued by the business.
The taking of a trial balance frequently causes the student or bookkeeper a great deal of waste time, such mistakes commonly arising from errors in posting, though there is chance for an infinite variety of mistakes to arise. The following rules are of use in tracing errors:
Go over the additions of the trial balance.
Go over all additions of the ledger accounts. If not located, check your posting as follows: Trace each item from the journal to the ledger, and if found to be correct, place a check mark at the left of the first money column in the journal and at the left of each date column in the ledger.
Find the exact amount of error; if ten or some power of ten, the error is usually in addition.
If the amount is exactly the same as some amount in the journal, the error is probably with that amount.
If the amount of error is divisible by nine, the error is probably in transposition of figures.
If dollars have been written as cents or vice versa, dividing the difference by 9, 99, or 999, respectively, will locate a figure which has been misplaced one, two or three orders to the right or left.
Before attempting to close a set of books, a correct trial balance must be had, and a statement of the business should be made out. The statement of the business will give the figures to be used in closing the ledger accounts, and by its use all errors will be avoided. The following definition should be kept in mind:
Inventories show the value of the goods and property remaining on hand.
Non-speculative accounts are those on which we do not directly gain or lose. They are cash, personal bills, payable and bills receivable.
Speculative accounts are those whose nature it is to produce gain or loss. Merchandise, expense, and like accounts belong to this class.
If the work of closing a set of books is performed in the following order, there will never be any trouble as to the result:
1. Enter inventories, in red ink, on the credit side of the accounts to which they belong.
2. Close all speculative accounts to loss-and-gain account.
3. Close loss-and-gain account to proprietor's account.
4. Rule all accounts that balance.
5. Bring down all inventories and the balance of the proprietor's account.
The reason for taking a trial balance at this time is that we may be sure that the books are in balance before we put any new business on them. For, when we next attempt to take a trial balance, and it does not balance, we would naturally look for the error in the work of the month, when, quite likely, it would be in the closing of the accounts or in the bringing down of the balances, which a trial balance as just suggested would have brought to light and all trouble from such an error have been saved.
When a new business period is to be begun and the old books used, no opening entry is necessary, as all the accounts that would appear in such an entry are already on the books.