CONTENTS

CHAPTER   PAGE
I The Corporation  1
The Corporation
Classification and Definitions
Method of Ownership
Working Organization
Different Classes of Stock
Common Stock
Preferred Stock
Guaranteed Stock
Founders’ Stock
Debenture Stock
Stock of No Par Value
Watered Stock
Treasury Stock
Forfeited Stock
Bonus Stocks or Bonds
Accounting for Stocks
Discount on Stock
Premium on Stock
Property Exchanged for Stock
Treasury Stock Donated
Bonus Stock
Treasury Stock Purchased
Redemption of Preferred Stock
Forfeited Stock
Stock of No Par Value
Distinctive Records
Stock Ledger
Minute Book
Conclusion
 
II The Voucher System 26
Purchasing for the Manufacturing Business
Expansion of the Purchase Journal
Development of Voucher System
Definition and Description of Voucher
Operation of Voucher System
Voucher Check
Form of Voucher Register
Distribution of Vouchers
Posting of Summary Totals
Effect on Cash Book and Bank Account
Payment of Vouchers
Voucher Index of Creditors
Control of Vouchers Payable
Introduction of System
Purchase Returns and Allowances
Partial Payments
Handling of Notes Payable
Cash Discount on Purchases
Modifications of System
Summary of Operation and Advantages
 
III Factory Costs 49
Difference Between Factory and Financial Accounting
Definitions of Terms
Special Purposes of Cost Records
Nature of Raw Materials and Supplies
Accounting for Material Cost
Direct and Indirect Labor
Time-Keeping Records
Pay-Roll
Safeguarding the Pay-Roll
Distribution of Labor Charges
Expense
Summary of Manufacturing Cost
 
IV The Balance Sheet 60
Business Methods under the Microscope
The Reading of the Balance Sheet
Definition
Relation Between Balance Sheet and Trial Balance
Form of Balance Sheet
Purpose and Uses
Types of Balance Sheet
Origin of English Form of Balance Sheet
Variation of English Form
Balance Sheet Titles
Grouping and Classification
Arrangement of Groups
Report and Account Forms
Valuation Accounts
Statutory Requirements as to Frequency of
Balance Sheets
Condensation of Information in the Balance Sheet
Use of Supporting Schedules
 
V General Principles of Valuation 81
Content of the Balance Sheet
Valuations for Rate Regulation
Valuation for Sale and Purchase
Other Kinds of Valuations
Going Concern Valuation
Kinds of Value
Source of Data as to Values
Cost Value the Usual Basis
Definition of Capital and Revenue Expenditures
Organization Expenses
Definition of Replacements, Renewals, Maintenance, etc.
Treatment of Renewal of Parts
Treatment of Cost-Cutting Changes
Asset Subject to Depreciation a Deferred Charge to Operations
Authorization of Booking Capital Expenditures
Repairs on Second-Hand Plant
Construction Costs
Distinction Between Capital and Revenue Expenditures
Often Based on Opinion
Main Groups of Asset Items
Valuation of Liability Items
Over- and Under-Valuation
The Balance Sheet an Expression of Opinion
 
VI Depreciation—Aspects and Definitions of Terms 99
Aspects of Depreciation
Definitions
Authoritative Opinions
Why the Depreciation Factor Arises
Actual or Absolute Depreciation
Theoretical Depreciation
Comparison of Actual and Theoretical Depreciation
“Accounting” and “Fair” Depreciation
Complete and Incomplete Depreciation
Individual and Composite Depreciation
Physical and Functional Depreciation
Deferred Maintenance and Accrued Depreciation
Attitude of the Law
Decision of Supreme Court
Recognition of the Depreciation Factor
Distinction Between Repairs and Renewals
Depreciation and Plant Efficiency
Unit Efficiency
Depreciation and Fluctuations in Market Value
Distinction Between Depreciation and Depletion
Effect on Different Kinds of Business
 
VII Depreciation—Its Causes 120
Analysis of Causes
Age as a Cause of Depreciation
Wear and Tear of Use
Functional Depreciation
Inadequacy as a Factor
Inadequacy Through Change of Policy
Inadequacy Through Motives of Economy
Inadequacy Due to Unforeseen Development
Inadequacy Imposed from Without
Obsolescence as a Cause
Treatment of Obsolescence
Contingent Depreciation
Terminable Rights
Effective Depreciation
 
VIII Depreciation—Factors of Rate Determination 136
Fundamental Purpose of Depreciation
Depreciation a Cost of Operation
Complication of Short Fiscal Periods
The Factor of Idle Time
Depreciation a Means of Financing
Danger of the Financing Viewpoint
The Standardization of Depreciation Rates
Effect of Local Conditions
Factors in Determining Depreciation Rate
Bases of Normal Rate
Policies as to Repairs
Depreciation Rate an Engineering Problem
Attitude of Regulatory Bodies
Methods of Handling Repairs
 
IX Depreciation—Methods of Calculating 150
Methods of Calculation
Factors of Calculation
Symbols to be Used
1. Proportional Methods
(a) Straight Line Method
(b) Working Hours Method
(c) Composite Life Method
(d) Service Output Method
2. Variable Percentage Methods
(a) Fixed Percentage of Diminishing Value Method
(b) Changing Percentage of Cost Less Scrap Method
(c, d) Arbitrary Methods
3. Compound Interest Methods
(a) Sinking Fund Method
(b) Annuity Method
(c) Unit Cost Method
4. Miscellaneous Methods
(a) Maintenance Method
(b) Replacement Method
(c) The Fifty Per Cent Method
(d) Appraisal Method
(e) Insurance Method
(f) Gross Earnings Method
Condition Per Cent
 
X Depreciation—Appraisement of the various Methods 173
General Considerations
Ideal Basis for Distribution of Depreciation Charge
1. Proportional Methods
(a) Straight Line Method
(b) Working Hours Method
(c) Composite Life Method
(d) Service Output Method
2. Variable Percentage Methods
(a) Fixed Per Cent of Diminishing Value Method
(b) Sum of Expected Life-Periods Method
(c, d) Arbitrary Methods
3. Compound Interest Methods
General Considerations
(a) Sinking Fund Method
(b) Annuity Method
(c) Unit Cost Method
4. Miscellaneous Methods
(a) Maintenance Method
(b) Replacement Method
(c) Fifty Per Cent Method
(d) Appraisal Method
(e) Insurance Method
(f) Percentage of Gross Earnings Method
Effect on Return on Investment
 
XI Recording Depreciation on the Books 187
Methods Commonly Employed
Renewals and Replacements
Subsidiary Records
Grouping and Classification of Plant Assets
Form of Plant Ledger
Asset Record
Periodic Revision of Rates
Frequency of Revision of Rates
Test of Condition Per Cent
Composite and Group Rates
The Reserve as an Index of Financial Condition
The Reserve in Relation to Expanding Plant
Reserve as Related to Efficiency
Reserve Not Based on Cost of Replacement
The Financing of Replacements
Secret Reserve
Insufficient Charge
Appreciation as an Offset to Depreciation
Appreciation Due to Physical Changes
Appreciation Due to Adaptation to Use
Unearned Increment
Depreciation Policy and Stockholders
 
XII Cash and Mercantile Credits 210
Introduction
What Cash Includes
Stamps Remitted as Cash
Temporary Cash Disbursements
Disposition of Cash Funds
Cash Held Abroad
Accounts and Notes Receivable
Objection to the Title, Accounts Receivable
Risk for Credit Losses
Risk and Length of Credit Period
Analysis of Customers’ Accounts as the Basis
for Estimate of Bad Debts
Basis of Estimate of Bad Debts
Discounts and Collection Costs
Valuation of Other Receivable Items on Open Account
Loss on Notes Receivable
Interest on Notes Receivable
Balance Sheet Titles for Notes Receivable
 
XIII Merchandise Stock-in-Trade 225
Definition and Scope of Term
Valuation at Market or Cost Price
Objections to Valuation at Less than Cost
Anticipation of Profits or Losses Undesirable
Method of Treatment and Summary
Depreciation of Stock-in-Trade
Full Costs of Stock-in-Trade
The Distribution of Costs Over Stock-in-Trade
The Pricing of the Inventory
Valuation of Manufacturing Inventory
Contracts and Length of Cost Period
Valuation of Scrap
Inventory-Taking
Perpetual Inventory
 
XIV Temporary Investments; Accrued and Deferred Items 241
 
Temporary Investments
Nature of Temporary Investments
Valuation of Temporary Investments
Reserve for Investment Fluctuations
“Stock Rights” on Investments
Cost of Investments
Valuation of Bonds
Valuation of Unissued Stock
Valuation of Treasury Stock
Summary of Valuation Formula
 
Accrued and Deferred Items
Nature of Accrued Income
Inadequacy of Cash Method of Handling Accruals
Correct Method of Handling Accruals
Showing of Accrued Items on Balance Sheet
Valuation of Accrued Items
Accounting for Accrued Income
Illustration of Different Methods of Recording Accrued Items
Prepaid Items—Definitions and Kinds
Valuation of Prepaid Items
Danger of Overvaluation
Accounting for Deferred Debit and Other Items
 
XV Permanent Investments 258
Nature of Permanent Investments
Permanent Investments as an Aid to Operation
Valuation of Permanent Investments
Holding Company and Subsidiary Enterprises
Controlling Investments
Advances to Subsidiary Concerns
Rules for Valuation
Investments in Partial Holdings
Investments Producing No Income
Bond Values and Market Interest Rates
Nature of Bond Discount or Premium
Record of Bond Investments
Amortization of Bond Discount and Premium
Formulas for Compound Interest
Formulas for Annuities
Formulas for Bond Valuation
Valuation of Sinking Funds
Valuation of Investments in Land
 
XVI Machinery and Tools, Furniture and Fixtures,  
 and Other Equipment 279
General Considerations
Distinction between Personalty and Real Property
Machinery and Tools
Accounting Records
Operation of Machine Accounts
Valuation of Machinery and Tools
Estimate of Depreciation
History of Machine
Standards of Operation
Abnormal Operation
Map of Machine Location
Methods of Application of Depreciation
Basis of Valuation
Scrap Material
Accounting for Tools
Depreciation on Hand Tools
Valuation of Home-Made Machinery and Tools
Expenditure for Rearrangement of Machinery
Definition of Furniture and Fixtures
Valuation of Furniture and Fixtures
Delivery Equipment—Definition and Valuation
Carriers and Containers—Valuation
Patterns, Molds, etc.—Valuation
Disposal of Assets
 
XVII Buildings, Land, and Wasting Assets 297
Definition of Real Property
Cost of Buildings
Valuation of Buildings
Betterments on Leased Buildings
Application of Depreciation
Accounting for Land
Valuation of Land
Depreciation or Appreciation of Land
Appreciation of Land Values
Depreciation in Land Values
Valuation of Land Investments
Mortgages on Land
Donated Land
Land as Stock-in-Trade
Wasting Assets—Definition and Characteristics
Dividends May Include Return of Capital
Basis of Depletion Charge
Application of Income Tax to Wasting Assets
Depreciation on Buildings and Machinery of a Wasting Asset
Unusual Risks
Water Rights
Leaseholds
 
XVIII Intangible Assets—Patents, Franchises, Good-Will 316
General Considerations
Patents a Monopoly Grant
Purchase of Patents
Patents Developed Within the Plant
Patents Purchased and Not Used
Elements of Depreciation on Patents
Service Life of Patents
Booking Depreciation on Patents
Accounting Classification of Depreciation on Patents
Royalties
Relation of Depreciation Rate to Cost of Manufacture
Sale Price of Patents
Copyrights
Trade Secrets
Trade-Marks
Franchises—Definition and Kinds
Depreciation on Franchises
Organization Expenses
Good-Will—Definition and Nature
Local and Personal Character of Good-Will
Difficulty of Valuing Good-Will
Creation of Good-Will by Advertising
Valuation of Good-Will Based on Normal Profits
Valuation of Good-Will Based on Excess Profits
Valuation of Good-Will Based on Capitalization of Profits
False Good-Will to Cover Capital Deficiency
Periodic Revaluation of Good-Will
 
XIX Liabilities on the Balance Sheet; Current and  
Contingent Liabilities 339
Form and Valuation
Arrangement on Balance Sheet
Items Within Groups
Cancellation of Liabilities Against Assets
Inventory of Liabilities
Contingent Liabilities
 
Current Liabilities
Loans from Bank
General Classification of Notes
Accounts Payable
Accrued Expenses
Booking of Accrued Expenses
Deferred Credits
 
Nature of Contingent Liabilities
Statement of Contingent Liabilities
Notes and Drafts Transferred
Guarantees as a Contingent Liability
Long-Term Leases
Purchases for Future Delivery
Pending Lawsuits
Stock Not Fully Paid
Accumulated Dividends on Preferred Stock
Signature to Surety Bond
 
XX Fixed Liabilities—Bonds and Mortgages 356
Nature of Fixed Liabilities
Purpose of Fixed Liabilities
Corporation Bonds
Nature of Bonds
Difference Between Bond and Real Estate Mortgages
Kinds of Corporation Bonds
Authority for the Issue of Bonds
Financial Considerations Involved in Issue
Bonds versus Stock Issues
Accounting for Bond Issue
Entry of Issue on Books
Entry of Premium or Discount on Books
Entry of Interest Payments on Books
Relation of Bond Interest to Premium or Discount
Example of True Interest Cost
Presentation on Balance Sheet
Other Fixed Liabilities
 
XXI Capital Stock and its Valuation 372
Problems in Valuation
Kinds of Stock
Par, Real, and Market Values
Value Dependent upon Earning Capacity
Increase of Book Capitalization
Capitalization on Cost
The Law and Stock Issues
Treatment of Discount or Premium
Valuation of Stock Issued for Property
Valuation of Treasury Stock
Redemption and Reduction of Capital Stock
Dividend Stock
Stock Issued as a Bonus
Unissued and Treasury Stock on the Balance Sheet
Preferred Stock Covered by Redemption Contract
 
XXII Profits 387
Difficulty of Determining Profits
Economic Definition
Legal Definition
Accounting Definition
Methods of Determining Profits
The Problem a Question of Valuation
Effect of Asset Losses on Future Profits
Legal Decisions as to Asset Losses
Loss Charged Against Current Profits
Loss Treated as Deferred Expense Charge
Loss Charged to Capital
Profit on Work in Progress
Goods Made for Stock but Not Sold
Goods Made to Order
Profits on Long-Term Contracts
Profit on Goods Awaiting Delivery
Interdepartment Profits
Profits Due to Appreciation of Assets
Capital Profits
 
XXIII Surplus and Reserves 407
Definition
Creation of Margin
Disposition of Profits
Reserves
Different Meanings of Reserves
Reserve for Bad Debts
Under- and Over-Estimate of Reserves
Depletion Reserves
Operating Reserves for Accrued Costs
Collection Costs Not under Contract
Sales Discounts on the Balance Sheet
Distinction Between Reserves and Accrued Items
Contingent Reserves
Deferred Income—Misuse of Term
Proprietorship Reserves
Secret Reserves
Argument for Secret Reserve
Argument Against Secret Reserve
Earmarking of Reserves
Continuity of Reserve Policy
Covered Reserves
Classification of Reserves
Legitimate Use of Surplus Account
Statement of Surplus
 
XXIV Dividends 428
Introduction
Disposition of Corporation Profits
Shareholders’ Rights as to Profits
Directors’ Control over Profits
Provisos as to Declaration of Dividends
Stockholders’ Rights to Dividends
Declaration of Dividends
Liability of Director
Revocation of Dividends
Payment of Dividends
Dividends Paid as Salaries
Methods of Paying Dividends
Borrowing to Pay Dividends
Dividends Paid in Property, or by Borrowing on Property
Bond and Scrip Dividends
Stock Dividends
Dividends Proportional to Holdings
To Whom Payable
Accounting Record
Relation of Capital Losses to Dividends
Liquidating Dividends
 
XXV The Sinking Fund 447
Origin and Use
Definitions
Mathematical Principles on which Based
Accumulation Based on Agreement
Effect of Settlement of Debt
Relation of Fund to Profits
Accounting for Sinking Fund
The Sinking Fund on the Balance Sheet
Entries to Sinking Fund
Booking the Trustee’s Report
Treatment of Income and Expense
Final Disposition of Fund
Treatment of Sinking Fund Reserve
Relation Between Depreciation and Sinking Fund
 
XXVI Problems in Connection with the  
Profit and Loss Summary 466
Interrelation of Profit and Loss and Balance Sheet
Periodic Adjustments
Interest as a Cost of Manufacture
Arguments Against the Inclusion of Interest
Problem of Charging Interest on Books
Unrealized Profits
Corporation Dividends
Discount on Bonds
Sinking Funds
Working Capital
The Correction of Closing Errors
 
XXVII The Profit and Loss Summary—Form and Content 477
Standardization of Form
Synonymous Terms
Cost of Goods Sold—Manufacturing Concern
Cost of Goods Sold—Trading Concern
Further Differentiation of Terms
Desirability of Uniformity in Terms Used
Profit and Method of Showing
Form of Presentation—Account Form
Non-Technical or Report Form
Examples of Forms of Presentation
Form for Manufacturers and Merchants
Content and Manner of Showing
Supporting Schedules
Adjustment of Inventories
Selling Expense and Administrative Schedules
Schedules for Special Needs
 
XXVIII Liquidation of a Corporation 493
Reasons for Liquidating—Partial and Complete Liquidation
Current Assets Transferred into Fixed Assets
Tying up Cash in Stocks of Material
Unwise Use of Cash for Paying Dividends
Inability to Secure Cash for Refunding Operations
Excessive Borrowing on Short-Term Securities
Losses in Conducting the Business
Loss Through Fraud, Theft, or Unavoidable Causes
Methods of Liquidation
Liquidation under Bankruptcy
Liquidation under Voluntary Dissolution
Liquidation under Receivership
Status of Creditors in Liquidation
Accounting for Liquidation
 
XXIX Combinations and Consolidations 507
Reason for Combination
Types of Consolidation
Accounting for the Holding Company
Distinction between Consolidation and Merger
Formation of Consolidation and Merger
Principles of Valuation of the Constituent Companies
Fundamental Principle of Equalization of Conditions
Valuation of Partnership
Earning Capacity
Good-Will
Capitalization of a Consolidation or a Merger
Payment of Amalgamated Interests
Closing the Books of the Merged Concerns
Opening the Books of the Merger
 
XXX Branch House Accounting 521
Advantages of Branch and Agency System
Agency and Branch Differentiated
Degree of Control Desired
Factors of Successful Management
Main Principles of Branch Accounting
Agency Accounts
Branch Accounting Records
Illustration of Simple Branch Accounts
Illustration of More Complex Branch Accounts
Purchases
Sales
Adjustments on Branch and Head Office Books
Example of Adjusting Entries
Reports from the Branch
Examples of Reports
 
XXXI Branch House Accounting (Continued) 542
Foreign Exchange
The Accounting Problem of the Foreign Branch
Accounts Opened on Books
Handling Fluctuations in Foreign Exchange
Conversion of Branch Results
Illustrative Bookkeeping Problems
Local Supervision of the Foreign Branch
The Foreign Sales Agency
Method of Conversion of Results
The Foreign Purchasing Agency
 
XXXII Suspense Accounts; Numbered Accounts;  
Adjustment of Fire Losses 556
 
Suspense Accounts
Definition of Suspense Accounts—General Purpose
Reserve for Doubtful Accounts as a Suspense Account
Use of Suspense Ledger
Accounts Receivable Hypothecated
Accounting for Accounts Receivable Discounted
 
Numbered Accounts
Allotment of Numbers to Accounts
 
Adjustment of Fire Losses
The Insurance Contract
Requirements in Case of Loss
Determination of Value of Loss
Adjustment of Differences
Effect of Coinsurance Clause
Method of Record-Keeping to Facilitate Ready Adjustment
Adjusting Entries for Fire Losses
 
XXXIII Statistics in Business; Private Books; Journal  
Vouchers; Building Expenses and Income 581
 
Statistics in Business
Value of Business Statistics
Railroad Statistics
Manufacturing Statistics
Mercantile Statistics
Use of Graphs in the Presentation of Statistics
Advantages of the Use of Graphs
Principles of Graph Construction
 
Private Books
Purpose and Content
Operation of Private Books
 
Journal Vouchers
Need for the Journal Voucher
Index to Journal Vouchers
Content of Voucher
Other Methods of Authorizing Entries
 
Building Expenses and Income
Allocation of Building Expense
 
XXXIV The Consolidated Balance Sheet and  
Profit and Loss Summary 600
Purpose and Function
Problem of Partial Ownership
Conditions under which Used
The Setting Up of the Consolidated Balance Sheet
Showing of Intercompany Accounts
Showing of Notes Discounted
Reconcilement of Current Accounts
Valuation of Inventory
Reserve for Intercompany Profits
Valuation of Inventory—Minority Interests
Valuation of Liabilities
Showing of Capital Stock
Showing of Surplus
Showing of Deficit
Showing of Profit and Loss Summary
The Consolidated Profit and Loss Summary
Illustration of Consolidated Balance Sheet
 
XXXV Accounts and Reports of Receivers and Trustees 620
Appointment of Assignee or Receiver
Appointment of Trustee
Accounts and Reports of a Receiver in Equity
Reports to the Court
 
Accounts and Reports in Bankruptcy Proceedings
Initial Statements Presented to the Court
Reports and Accounts of Receiver or Trustee
Liquidating Dividends
Relative Standing of the Creditors
Statement of Affairs
Basis of Valuations in Statement of Affairs
Deficiency Account
Illustration of Statement of Affairs and Deficiency Account
 
Realization and Liquidation Account
Evolution of the Realization and Liquidation Account
Supporting Schedules
The Question of Cash
The Handling of Valuation Reserves
Illustration of Realization and Liquidation Statement
Uses to which Realization and Liquidation Statement May be Put
 
Liquidation of a Partnership by Instalments
Nature of the Problem
Illustration of Liquidation by Instalments
 
Appendix A—Practice Work for Student—First Half-Year 655
B—Practice Work for Student—Second Half-Year 694
C—Miscellaneous Problems for Supplementary Work 727
D—Review Questions 755

FORMS AND CHARTS

  Page
Stock Book or Stock Ledger 22
Stock Book to be Kept by Brokers  
(New York Form Prescribed by Comptroller) 23
Stock Book to be Kept by Corporations and Transfer Agents  
(New York Form Prescribed by Comptroller) 23
Voucher 30, 31
Voucher Check—Double 33
Voucher Check—Single 34
Voucher Register 35
Chart Showing Actual and Theoretical Depreciation 105
Chart Showing Progress of Uniform Depreciation  
and of Diminishing Efficiency 115
Graphic Chart—Straight Line Method 153
Graphic Chart—Working Hours Method 155
Graphic Chart—Fixed Percentage of Diminishing Value Method 158
Graphic Chart—Sinking Fund Method 162
Graphic Chart—Annuity Method 166
Plant Ledger 193
Branch Report to Head Office 541
Head Office Ledger Account—Summary of Branch Expenses 541
Chart Showing Comparison of Sales with Cost of Advertising 585
Chart Showing Comparison of Sales with Gross Profits 586
Chart Showing Comparison of Sales, Purchases,  
and Sales Salaries 587
Chart Showing Comparison of Sales with Cost of Sales 588
Journal Voucher 593
Card Index for Journal Vouchers 594, 595