It will be seen that the general contracts ledger shown in Form 11 (Section20) provides for one account only for each contract, this account receiving all entries relating to principal, interest, and other charges.

This is more convenient than an attempt to separate the two kinds of entries, as provided for on the mortgages receivable ledger (Form 8, Section 18). The reason is that in most cases the contract provides for a minimum payment each month, or other fixed period, and for the calculation of interest periodically. Under such conditions, each payment might be regarded as being composed of principal and interest, as in the case of building and loan mortgages described in Section 117.

Such contracts, however, have been construed by some courts to mean, under the above conditions, that the payments made in any six months are to be applied first to the liquidation of the interest calculated at the end of that six months on balance remaining, and then to carry any other charges, such as taxes, etc., the final balance to be applied against the principal. It will be seen that the keeping of an account in such form is complicated and consists of the following steps:

1. Charging the Principal account with principal amount at the time the sale is made.

2. Crediting the Income account with monthly payments.

3. Charging the Income account with charges paid during the six months.

4. Charging the Income account with interest for six months.

5. Closing the Income account every six months; and if the balance is a credit, transferring it to the credit of the Principal account, but if a debit. carrying it forward to the Income account for the next period.

The following example will illustrate these entries where the balance of Income account is a credit:

Principal

Income

Dr.

Cr.

Dr.

Cr.

Jan.

1

Principal..............

$1,000.00

............

..........

..............

Feb.

1

Cash........................

..................

............

............

$20.00

Mar.

1

"......................................

......

..........

...............

20.00

Apr.

1

"..........................

..........

.........

...........

20.00

"

10

Insurance Paid..............

................

.............

$45.00

............

May

I

Cash.......................

............

............

.....

20.00

June

I

"...............................

.........

............

.............

20.00

"

30

"............................

.............

..........

..............

20.00

Interest.....................

................

..........

27.90

...........

"

30

Balance of Income account transferred to Principal account

.............

$47.10

47.10

............

$120.00

$120.00

Such details greatly add to the labor of bookkeeping where a large number of accounts are involved, and, as a matter of fact, in practice the purchaser usually wishes to know merely the total balance remaining unpaid.

Let it be assumed that the above pro forma account complies with strict legal requirements, and is such as would be called for in the event of legal proceedings being brought to cancel the contract. But such contracts are made for the purpose of effecting sales, and not for the promotion of litigation; and the number of contracts taken to court forms a very small proportion of the number issued. Under these circumstances, it is best to keep the entire account as provided in the general contracts ledger of Form 11 (Section20), and, when litigation ensues, to make up the account in the second and more detailed manner.

Little attention need be given to the argument that, under such practice, the account as rendered in court would differ from the ledger account, for the reason that the ledger is not a book of original entry, but merely a convenient method of collecting and arranging entries originating in other books. In such a case the contract itself would form the basis of any argument, and the cash book would show all receipts thereon.

The general subject of interest on contracts is discussed in Chapter XIX (Interest. Section 134. Mortgage Interest).