To illustrate the entries required on selling a piece of property, assume the case of property sold to Richard Haines for $1,200, the cost price being $1,000. There are four distinct methods of payment, viz.: (1) cash sale; (2) mortgage as part payment; (3) payment by cash, note, and mortgage - building to be erected by vendor; (4) sale on contract.

1. If a cash sale is made, the amount of $1,200 will be posted from the cash book to the credit of Property account in the general ledger, and to the credit of the account of this particular lot in the property ledger. This will cause the latter to show a credit balance of $200, which may be allowed to remain until the books are closed and a balance sheet prepared. This amount, with other similar amounts, is then carried to the Gain on Sales account. Or the balance of $200 might be carried at once to Gain on Sales account without passing through the Property account. The Gain on Sales account is eventually closed into Profit and Loss account, as will be described in Chapters XIII to XV inclusive.

2. Suppose that instead of paying $1,200 in cash, Haines makes a cash payment of $500 and gives a mortgage for $700. The cash would be credited as in the above instance, and the journal entry might be formulated as follows:

Mortgage Receivable..................................................

$700

To Property Account..........................

$500

" Gain on Sales..........................

200

For mortgage receivable No......made by Richard

Haines as part payment for property No......

The postings are made to the general ledger, and a new account showing all particulars of the mortgage is opened in the mortgages receivable ledger.

3. Again, suppose that Haines bought the same lot, the concern agreeing to erect thereon a building estimated to cost $600, for all of which Haines is to pay $2,000, made up of a cash payment of $500, a note for $200 payable on completion of the building, and a mortgage for $1,300. The cash entries would be the same as before, and the journal entry would be as follows:

Mortgages Receivable...........................

$1,300

Bills Receivable................................

200

To Property Account....................

$500

" Building - Richard Haines.................

600

" Gain on Sales...............................

400

In addition to the entries made in the last case, a new account is opened in the general ledger, entitled "Building - Richard Haines," which is credited with $600, the estimated cost of the building. This account will be debited with expenditures on account of the building as they are made.*

Care should be taken to see that the estimated cost of the building is for an amount sufficient to cover the entire cost of the building, for there is sometimes a tendency to make the estimate too small for the sake of increasing the apparent profit on the sale. This will be considered further when we take up the accounts appearing on the trial balance. (See Chapters XXV, XXVI.)

•The transaction mentioned under (3) might be criticized from a business point of view. However, such sales do occur frequently and in various localities, and this case is discussed here simply to show how to deal with the problem whenever it arises.

Another point to be considered is the note given by Haines, which is payable on completion of the house. This note should be drawn to fall due on a fixed day, which should be set sufficiently far ahead to insure ample time for the completion of the building.

4. Suppose the property were sold on "contract," Haines buying the property for $1,200; $200 in cash and a contract for the balance. The transaction is entered in the journal as follows:

Contracts..................................

$1,200

To Property Account.................

$1,200

For contract No........ made with Richard

Haines on property No...................

After posting to the general ledger, a new account would be opened in the contracts sub-ledger, and all particulars entered therein as shown above. The cash payment in this case is credited to "Contracts."

It will be noted that in the case of a contract the journal entry is for the total amount of the purchase, the first cash payment being credited to Contracts (not to Property account); while, in the case of a mortgage, the journal entry is for that part of the purchase price remaining unpaid. Although this appears simple, the writer has found a number of bookkeepers who have difficulty in keeping this distinction clearly before them, and who are therefore always in some doubt as to what account should be credited with the cash payment when a portion of the purchase price is represented by some form of deferred payments.

To emphasize this matter, if cash and a mortgage are given by a purchaser, this first cash payment (which added to the amount of the mortgage, makes the total price) is to be credited to Property account. In the event of a sale with part cash under a contract, the amount of the first payment is shown on that contract, which is not the case with a mortgage. As the contract shows on its face the total amount of the principal, this amount is debited to the account of the contract, and all payments, from first to last, must be credited to the contract.