Accounting Principles - Books of Account

Financial Accounting > Books, Classification, Form and Ruling

Books of account are kept for the purpose of recording financial transactions in the order of sequence in which they occur, and classifying, summarizing and preserving such record for future reference. The information thus gathered may be of value in at least three different ways. It is frequently referred to for detailed information in connection with the transaction of current business. It is required for use in the preparation of financial statements. It is often of distinct value when, in cases of litigation, it serves to protect the interests of the proprietor.

While it is difficult to trace historically the evolution of books it is not improbable that the first records were kept upon stone or upon tablets of some composition in which stone played an important part. Parchment or papyrus presumably followed the stone age, only to be supplanted by the highly refined kinds of paper of which the present-day books are made.

Just what jurisdiction or control the government exercised over the books of the earlier periods is not known. That certain European countries have placed certain restrictions upon books and methods of bookkeeping is a well known fact. In Cuba, for example, unless such law has been recently repealed, it is necessary that all books of account be submitted to government agents who place on each page an official stamp and exact a tax for so doing.

In this country business concerns have been left largely to themselves in their choice of books and methods of bookkeeping. The form, ruling, and arrangement in general, has been optional with the concerns themselves. It was not until recently that the slightest tendency toward government supervision was noticed. The powers granted to the Interstate Commerce Commission by the Federal government and those granted to the Public Service Commission in the various states by the states themselves marks the step perhaps in the direction of an attitude similar to that assumed by certain European countries toward business concerns in the matter of books and methods of bookkeeping.

If we could trace the evolution of books we should probably find that such evolution consisted of two distinct steps. Beginning with the simplest of records, a book providing merely for receipts and disbursements, it is probable that the first step consisted in supplementing the simple cash book, for example, by a ledger, a journal and a day book, the purpose of which was to include more generally the transactions of the business as a whole rather than confining them merely to those which recorded the receipts and disbursements of cash. The development of business with its accompanying increase in the number of transactions made analysis of the transactions necessary, if anything like a comprehensive idea of results was to be obtained. Obviously an analysis of transactions after having been entered in a book of original entry in chronological order and without regard to their nature was a loss of time. To avoid this it is probable that the second step consisted in providing for the classification of transactions by substituting for the original journal and day book a series of special journals in which columnarization was the essential feature and which served to classify the transactions as they were originally entered. In all events such a provision is necessary to-day if the work which bookkeeping entails is to be successfully accomplished.

Classification
A ledger may be defined as a book of account so arranged as to provide for a summary of the financial transactions of a business organization.

A Journal may be defined as a book of account so arranged as to provide for the entry of the original records of the financial transactions of a business organization.

It is to be noted that, in principle, ledgers differ from journals, in that they summarize the transactions, whereas journals usually record the details. On this account, journals are frequently referred to as books of original entry. It is to be noted further that all books, in principle, are either ledgers or journals.

Ledgers
Ledgers may be divided into general and subsidiary. General ledgers are those which contain the general or group accounts and are sometimes separated in practice into those which contain the balance sheet accounts and those which contain the operating and profit and loss accounts. The former is usually referred to in practice as the private ledger, while the latter is frequently referred to as the operating ledger.
Subsidiary ledgers are those which contain the details of certain groups or general accounts found in the general ledger. As examples of these, the customers’ ledger and the creditors’ ledger may be mentioned.

Journals
Journals naturally divide into general and special, the general journal containing usually the details affecting accounts which are infrequently used, while special journals are used for accounts in which the details are voluminous. As an illustration of the use of general journals, mention may be made of opening and closing entries, transfers from one account in the general ledger to another and corrections or adjustments of accounts already posted.

Special journals divide into two classes, those which are simple in form, and those which are more complex. As an illustration of the simple type, the two-column debit and credit cash book may be mentioned, whereas, as illustrating the complex type, there is the purchase journal, sales journal, columnar cash, and petty cash books.

The classification and illustrations summarized, would appear as follows:
Books Of Account.
I. Ledgers

(a) General (containing the group accounts or
accounts in their most highly summarized form) sometimes divided into
(1) Capital ledger (occasionally called “private ledger “).
(2) Operating ledger (containing the operating and profit and loss account).
(b) Subsidiary (containing the details of some ac
count in the general ledger), examples of which are the
Customers’ ledger, and
Creditors’ ledger.
II. Journals
(a) General (for postings to accounts infrequently
used and for general opening and closing entries and transfers).
(b) Special (for classifying detail postings to
accounts where items are numerous), and dividing into the
(1) Simple type (such as the journal ruled cash book).
(2) Complex type (columnar in form, for the
purpose of classifying and summarizing
details, thereby reducing the posting to a
minimum) of which the following are
examples:

Purchase journal.
Sales journal.
- Columnar cash book.

Form And Ruling
Ledgers and journals are now commonly seen in both bound and loose leaf forms. The tendency perhaps is towards the latter. Like many other fads it is overdone. Some accountants will use nothing else, while on the other hand, many will not use them under any circumstances. Good judgment dictates the use of both, as a rule.’

The loose leaf ledger, when used in moderation, has distinct advantages. As a general ledger, general journal, or general cash book, it is not desirable. As a subsidiary ledger, or detail record of any kind, it is most satisfactory. Properly controlled by an account in the general ledger, a loose leaf subsidiary ledger is especially adapted to the requirements of customers’ and creditors’ accounts. It permits of expansion and contraction to conform to conditions. Thus, it overcomes the principal objection to a bound book for this purpose, namely, that space for the various accounts cannot be accurately estimated and allotted when the accounts are opened.

An adaptation of the loose leaf books exists in the form of a card file. As a detail record, it is well adapted to use in connection with materials and supplies. It has also been used to some extent for customers’ and creditors’ accounts.

The objection to loose leaf books or cards, is that sheets or cards may be removed without being easily missed. If a sheet in a bound book were torn out, the ragged stub would immediately attract attention. If a sheet were removed from a loose leaf binder or card file, it might not be missed until some one had occasion to refer to it specifically, which might be considerably subsequent to its removal.
From the arguments for, and against it, the conclusion will probably be reached, that, as a detail record, and when properly controlled, the loose leaf book, especially the ledger, has certain decided advantages over the bound book.

With regard to their ruling all books are either ledger or journal ruled, or elaborations thereof. In the case of both ledgers and journals, the original, or standard, or what might be called the “stock” ruling, has been changed from time to time, in order to meet changed conditions. Unfortunately, in some instances, the change has been brought about by the over-enterprising vendor of loose leaf systems.

Originally, the ledger ruling was so arranged as to divide the page in the center with a double vertical line, running downward from a double horizontal line extending across the page about an eighth of an inch from the top of the page. The vertical division was for the purpose of separating the account into debits and credits, and within each side vertical rules provided columns for the date, explanation, posting reference and money values.

In the majority of cases the general ledger remains the same to-day. The subsidiary ledger has undergone the greatest change. Such changes have been made in most cases to meet special conditions, but the most prominent ruling among them is the three column, or balance ledger. This book, instead of dividing the account into two vertical parts, has the columns arranged together on the right hand side; one for debits, one for credits, and one for the balance, which it is contemplated will be adjusted every time an entry in either of the two columns is made.

In principle, all ledgers are the same and the adaptation of the principle to the requirements of special cases, through some peculiar or unusual ruling, should not cause it to be overlooked.
The general journal has undergone no great change with regard to its original ruling. Originally it was ruled vertically, so as to provide in the order named, from left to right, columns for the date, explanation, posting reference, and money values, both debit and credit. To-day the sundry journals, which have been detached from the original, in order that classification of items at time of entry, leading to a quick determination of aggregates at the end of the month, may be permitted, have had the number of their columns so increased as to practically obscure the fact that they are journals. Columnarization, as the above is called, and of which the columnar cash, purchase journal, sales journal and voucher register are examples, has been brought about by the extensive classification of accounts, which is considered essential to the financial records of the modern business concern.

The simple cash book consisted in a separation of debit and credit columns of the journal and the employment of a separate page for each class of transactions. This was necessitated by the frequency with which the cash transactions occurred. The development of the more highly specialized classification of accounts brought with it the need for a more detailed classification of receipts and disbursements of cash. To fulfill this need the columns providing for a classification of such receipts and disbursements were added to the respective sides of the cash book. The extent to which this columnarization may be carried is now limited only by the size of the cash book which it is convenient to use. In certain instances it has been found advantageous, in order that sufficient columnarization may be obtained without resulting in a book too cumbersome to handle, to separate the cash receipts from the cash disbursements, using a separate book for each purpose. In cases where the detail work is voluminous, cash books have been alternated by days; one being used by the bookkeeper for posting purposes, while the other is being used by the cashier in recording the receipts and disbursements.

With the passing of the merchandise account which contained a mixture of financial transactions, the purchase journal came into use as the result of a demand primarily for a book which would permit of the classification of the purchases. The advantage thus obtained was so evident that an opportunity to classify expenses as well as purchases was immediately seen. The purchase journal has the added advantage of showing at the end of the period the liability to creditors for purchases and expenses. The book is ordinarily so arranged as to show in columnar form, from left to right, the date of the invoice, number of invoice, name of the creditor, and the amount of the invoice. Following these there are columns permitting of classification among such accounts as trading goods, materials and supplies, freight and cartage, heat, light and power, factory expenses, stable expenses, selling expenses, office expenses, general expenses, etc. It is to be borne in mind that the classification may be as extensive as circumstances require, and in many lines of business this classification is very exhaustive. The return of goods purchased and allowances, both on account of purchases and expenses, has resulted in what is known as the return purchase journal. The form and ruling of this book does not differ in any way from the purchase journal.

The voucher register is an elaboration of the purchase journal, and, while almost identical in design, is intended to do away with the ledger for creditors’ accounts. In lieu of a column for invoices there has been substituted one for voucher numbers. Depending upon circumstances, invoices may be vouchered separately and given a separate voucher number, or they may be assembled at the end of the month on one voucher, which is then entered. Where payments are made on account, the voucher register cannot be used to advantage. In such a case the somewhat antiquated purchase journal when used in connection with the creditors’ ledger serves the purpose better than the voucher register.

The sales journal is similar in design to the purchase journal. Its arrangement in columnar form is to show the date of the invoice, number of the invoice, customer, and the amount of the sale. It also provides columns for the classification of sales, where a classification is desired. The matter of classifying sales has become more important of late, on account of the frequency with which cost systems are used, and where it is desirable to obtain information as to the gross profits on the various lines of goods which are manufactured or sold. It has also its advantages where consigned goods are sold frequently through the same invoice on which manufactured or trading goods are billed. A sales return journal, similar in design to the sales journal, is ordinarily used for credits.

In connection with columnarization it is to be observed that the use of journals so designed supplies totals at the end of the accounting period, which are vital to the establishment and maintenance of controlling accounts.

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