Knowing the use made of those data in the compilation of financial and profit and loss summaries, knowing the goal, the purpose in the gathering of complete information about the business, we will trace the progress of that information, in exactly reverse order; first, through the ledger, where it is grouped and summarized and made ready for the preparation of statements; then into the books of first entry, where the information is sorted and classified with a view always to fit it ultimately into the final statements of financial and business condition; and finally, to the transaction itself which gives rise to the business papers, the basis or first source of all accounting records.
The Ledger Account Defined
We come first, then, to the ledger account. An account may be defined as a record of one or more items, either similar or dissimilar, relating to the same person or thing, kept under an appropriate heading or title. Accounts are kept both with persons, as the accounts receivable and payable already mentioned, and with things such as land, buildings, machinery, merchandise, cash, and the like. They are usually composed of both similar and dissimilar items; e.g., the cash account is composed of both cash received and cash paid out items; the accounts receivable record both the items for which the person is in debt to the business and those which show the cancellation or settlement of the debt, in pari or fully; and the accounts payable record the items for which the business is in debt to the person and those which show its cancellation or settlement by the business. Accounts may comprise only similar items, as where we record all sales of merchandise under one head or account and all purchases under another account.
The Account Title
The title given the account is important. It should indicate clearly the content of the account. Exact truth is a basic principle in accounting. Correct titles are therefore essential. A title which does not clearly and truthfully indicate the nature of the account, or one which is chosen so that under it may be recorded items of various and doubtful kinds, gives prima facie evidence of an imperfect knowledge of accounting principles or of a desire to hide data which will not bear close scrutiny. Therefore, great care should be exercised in the selection of titles.
The Two Sections of the Account
To make a separation of similar from dissimilar items, the account is divided into two sections, a left and a right as we shall call them for the present, and is shown somewhat as in the standard form on page 58.
The account head or title is placed in the center over the division line. At the extreme left of each section are the date columns—year, month, and day. Note particularly where the “year” is shown. The next space is for explanatory matter; the next column, left blank in the illustration, is a reference column whose use will be explained later; and the last in each section is the money column, where the dollar subsection column is further divided into columns for each decimal of the amount, and care must be exercised to observe such rulings when writing in the amounts. The account with Cash, in the illustration, shows on the left a receipt from J. B. Givens of $150.25, and, on the right, a payment for stationery of $5.50, items entirely dissimilar. Another receipt on January 3 from Cash Sales, of $72.69, is shown on the same side of the account as the previous receipt item and directly under it. Note that the name of the month is not repeated.
The Mechanism of the Account
Thus the mechanism of the account is designed not only for the purpose of giving a brief history of each item entered therein, but primarily in order to bring together all items of the same kind relating to that account, so that they may be summarized. It should be thoroughly understood that all items on each side of the account are similar items, though the two sides themselves are of exactly opposite kinds. Where the account has entries on both sides, i.e., is composed of dissimilar items, a comparison of the totals of each group shows the condition of the account. In the Cash account above, the total of the left side, $222.94, showing receipts, compared with the right, $5.50, showing disbursements, indicates that there is $217.44 cash now on hand. It is evident, therefore, that the account is a mathematical device by means of which all items to be added are placed on one side and all items to be subtracted are placed on the other side. Only in this way can the process of addition and subtraction be accomplished within the account.
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