Sec. 370. Bookkeeping in a small business is ordinarily not well conducted, for two reasons: First, the proprietor does not understand the principles of double-entry sufficiently well to put them into practice; and second, his time is so much occupied with other matters that he cannot give the requisite attention to keeping accounts as they should be kept. In a small real estate business personal accounts are kept as a rule by single entry; a ledger title, such as John Smith, being credited with the rents collected and debited with water rates, commissions, etc., and with the remainder when paid in cash, thus balancing the account to a certain date.
Sec. 371. It is assumed that the student has some knowledge of the elementary principles of bookkeeping and knows that assets are things belonging to a person or corporation, and that liabilities are debts owing to others by such person or corporation.
Sec. 372. The moneys expended in carrying on a business are laid out for two purposes: First, to acquire additional property, which, in the judgment of the proprietor, is necessary to the success of the business, and such expenditures on the books of account are termed "Investment Accounts;" and second, to procure things of no permanent value, such as office rent, clerk hire, etc., and such expenditures on said books are termed "Expense Accounts." Thus, the owner of the "Dennison Block" would have on his books, if properly kept, two or three accounts relating to that parcel of property, viz.: (1) "Dennison Block," a debit account, representing the first cost of the ground and building, and subsequent additions thereto. In entering this item in the ledger, a value should be placed on the land and a value on the building, and so entered in the ledger, the two amounts constituting the total cost.
(2) "Dennison Block Expense," a debit account, representing use and services, such as cost of elevator service, water rent, light, heat and supervision.
(3) "Dennison Block Earnings," a credit account, representing rentals received and other earnings, such as money coming in for steam furnished to an adjoining building, etc. These last two accounts could be included in one account, to be known as "Dennison Block Earnings and Expenses."
Sec. 373. In order that the expenditures may be properly segregated, it is necessary to consider the nature of these two accounts:
(1) Improvements or betterments are those additions to property which permanently increase its value or earning capacity; while
(2) Repairs serve merely to maintain property in a certain state of preservation or prevent it from falling into decay. The cost of adding to a building a room which will increase the rentals, would be an investment; but the changing of the construction of a room, without any increase in earning capacity, would be an expense. In both cases, the total cost would be composed of minor items of labor and materials. In most works on bookkeeping the distinction between Investment Accounts and Expense Accounts is not explained at all, and many bookkeepers do not recognize this distinction nor understand how to properly segregate the expenditures above mentioned.
Sec. 374. If all the rooms in the "Dennison Block" were rented to persons other than the owner, he naturally would credit all the rents to one account. If he occupied one room, he might overlook crediting rent account with the rent of that room and debiting same to his own expense account. If he did not do so, however, rent account would not receive credit for the full rental of the building.
Sec. 375. To elucidate the matter further: Let us suppose that the Dennison Building cost for the land, $3,500, and for the building, $6,500, a total of $10,000, and that the rentals for one year amounted to $1,500 and the expenses to $500. The net earnings for the year (nothing written off for depreciation) would be $1,000; dividing this by 1 per cent, of $10,000, or $100, gives 10 per cent as the rate per cent of earnings for the year. It will readily be seen that if the book-keeper had charged to Investment any item which should have been charged to Expense, or vice versa, no accurate results would be reached. Another object in always treating similar items in like manner is to enable the proprietor to make correct comparisons of one period of time with another, as shown by accurate statements for each of such periods.
Sec. 376. For a small business, or indeed one of considerable magnitude, columner books and the voucher system are the simplest and the best. See Forms Nos. 162, 163 and 164. Columner books provide a means of checking an aggregate of debits against an aggregate of credits, as the work progresses; lessen the number of postings in a marked degree, and thereby the liability to errors; and, where provision is made for cash columns, admit of the complete entry of any transaction being made at one time in one book, instead of at different times in two books. Columner books, with debit and credit columns together (not with debit columns on one side and credit columns on the other, as shown in form No. 164), may be obtained from stationers. In the Cash-book Journal (Form 164), accounts for which no columns are provided are entered in "Sundry Columns" and posted from there. This book can be used either with or without vouchers. No accounts are kept with parties from whom purchases are made. Where vouchers are used, the bills for purchases are inserted inside the voucher, which is then O. K'd by the person making the purchase, and, after the extensions are verified, the voucher is entered in the Cash-book Journal, debited to the accounts to be charged and credited to Voucher Account. When paid, a debit therefor is made to Voucher Account and a credit to Cash. The entered, unpaid, vouchers on hand at any time should agree with the balance of the voucher account. The vouchers secure uniformity in size for filing as well as uniformity in treatment, and are numbered and filed from one upward. In the case of payrolls, one voucher is sufficient, with as many receipts within as there are names on the payroll. The check numbers and the voucher numbers will not correspond. The vouchers are indexed for ready reference. In the Cash-book Journal (Form 164) all of the debits are on one page, the credits on the other, and more debit columns are provided for than credits, as the former exceed the latter.
Sec. 377. All monies received should be deposited in bank, and all payments made by check. A day should be fixed - say about the tenth of each month - on which to pay all bills of the preceding calendar month.
Sec. 378. A balance sheet is a statement of financial exhibits, showing, in compact form, the resources and liabilities and gains and losses of a business. Form No. 165 is both a condensed trial balance and a balance sheet. In any business, to ascertain the true loss and gain, an inventory must be taken, and so, in the real estate business, any real or personal property should be revalued at least once a year and entered on the books to account for increment or depreciation. A trial balance should be taken once a month and a balance sheet made therefrom. The difference between the resource and liability columns shows the present worth or insolvency of the business, and the difference between the gain and loss columns the net loss or gain. The difference between the present worth and the net investment, on closing the books, also shows net gain or loss. The net gain, if added to, or the net loss, if subtracted from, the net investment, on closing, will show the present worth.
Real Estate Business Self-Taught
Copyright, 1906, by W. A. Carney.