In double entry each transaction or exchange has a double aspect, viz., personal and impersonal. Therefore, this twofold effect is recorded by having for each debit a complement—a credit. As a result of such records, the system—double entry— affords the following advantages over single entry. First, the arithmetical accuracy of the books can be tested by means of the trial balance. So long as there is a corresponding credit to each debit entry and vice versa, the totals of this arithmetical test, the trial balance, will be equal. Second, such impersonal accounts representing profit made or loss sustained, during a given period, can be collected, in classified form, into a summary known as the profit and loss account. One can always tell in what manner the profit or loss has been arrived at by means of a profit and loss statement. Third, the final result shown on the profit and loss account can be verified by the balance sheet, which again is another test of the accuracy of the accounts. Fourth, due to the fact that the books are subject to arithmetical tests, the chance of overlooking fraud is considerably reduced.
In the early days of double entry bookkeeping, people imagined that each business transaction or exchange should be recorded twice and that this was the reason it was called double entry. They furthermore imagined that double entry required double the amount of labor of single entry. It is, therefore, important to emphasize the following points: (a) Double entry does not involve double the amount of labor demanded by single entry, (b) Double entry does not depend on keeping a journal, invoice book or the like, neither does it exclude the use of them, nor does the use of these books imply that they are kept by single entry, (c) Double entry does not mean keeping other people’s accounts as well as your own.
Briefly summarized, we may say that while single entry records some facts it does not show results; whereas double entry bookkeeping records all the facts as well as their results.
The reader may ask why, if single entry bookkeeping is so incomplete and imperfect, intelligent business men keep their accounts by this method? The answer lies in the fact that these men are probably not familiar with the advantages offered by the double entry system and simply keep on in the old path, although none of them has the satisfaction of saying, “My accounts are correct; I have proven them to be so.” Many times such people wake up too late and find their misfortune in not being able to tell precisely how their accounts stand, nor why they have not made much profit in a given year, although their sales were larger than in the year before.
Professor Hardcastle in an article which appeared in The Journal of Accountancy, Vol. II, No. 3, says:
In spite of this it—single entry—must have considerable merit, especially in certain businesses, or it would have gone out of existence long ago. It is generally used by the small retailer and very often by business carried on on a most extensive scale.
There is hardly a justification for this commendation. Many evils continue to exist although we know them to be such. Single entry is certainly an evil in modern accountancy and accountants greatly discourage its use. No well-conducted business house of to-day keeps its accounts by the single entry plan. The disadvantages of the system are not lessened if it is used by a small rather than by a large concern.
31. Definition of proprietorship.—The proprietorship of a firm is the term employed to signify the excess of assets over liabilities at a given date. It is obvious that if the proprietorship at the close of a certain period exceeds proprietorship as stated at the beginning of that period, the excess will represent profits made during that period. On the other hand, if the proprietorship at the end of the period is less than that given at the beginning, it will show a loss. This principle is the base for the ascertainment of profit or loss, when the books are kept by the single entry method. The procedure in such cases is best illustrated by the following problem:
The ascertainment of profits under single entry. —On January 2, 1908, John Brown possesses the following assets: Cash in bank, $1,800.00; securities consisting of stocks and bonds amounting to $2,000.00; notes given to him by customers amounting to $1,500.00; merchandise on hand valued at $15,000.00. He has outstanding accounts to be collected, amounting to $2,000.00.
These assets are subject to the following liabilities: He owes to the trade for goods bought on notes, $1,900.00; on open accounts, $2,000.00. His books have been kept by single entry and at the end of the year he desires to find out whether he has made any profit or not. On December 31, 1908, he presents to us a list of all his assets as well as his liabilities and asks us to find out the progress or retrogression of the business for that year. The following is the list of his assets and liabilities: Assets: cash in bank, $2,000.00, cash on hand, $50.00. He has in his possession notes amounting to $3,500.00; his stock of goods on hand at this date is valued at $21,000.00 and the customers’ accounts due to him amount to $2,500.00. Securities in the shape of stocks and bonds, $2,400.00. Liabilities: He owes on notes $2,500.00 and on accounts, $2,150.00. He withdrew during the year, for his personal use, $2,000.00.
The problem presented by Mr. Brown is solved as follows:
Our first step is the preparation of a statement showing assets and liabilities on January 2, 1908. By this statement, as given on page 118, the proprietorship is shown to be $18,400.
We then prepare a statement of assets and liabilities as of December 31, 1908 (page 118), and this shows Brown’s capital to be $26,800, an increase of $8,400 over last year’s capital. If we add to this amount the withdrawals made by Brown during the year ($2,000) there is left a net profit of $10,400 for the year. If we desire to verify the facts a comparative statement of assets and liabilities can be prepared as shown on page 33. Procedure in connection ‘with a change from single entry to double entry bookkeeping.—If it is desired to convert a set of books from single entry to the double entry method, first of all prepare a statement showing the condition of affairs at that particular time. It has already been shown that by the single entry method we deal, or at least should deal, with personal accounts only, and therefore in order to convert such a system to double entry it will be necessary to raise the additional impersonal accounts which are required by this latter system. The various adjustments in the personal accounts must also be made. Generally where the single entry method is used the books as a whole are found in a chaotic condition. They are in all stages of incompleteness. The results, therefore, can only be estimated and consequently the first balance sheet after such conversion is not very satisfactory.
It is preferable to introduce an entirely new set of books and arrange the system of accounts to meet the demands and needs of the business. If this is done, the business accounts appearing in the old ledger after proper adjustment, will be transferred to the new ledger, and in addition the other accounts showing assets or liabilities as well as proprietorship will be raised. This is done by means of a journal entry, in order to bring the ledger into equilibrium.
It will be noticed that beside certain accounts the word “posted” is entered in parenthesis. As already stated in some previous chapter, where a single entry system is in use, the only accounts that should be operated are the personal accounts. This firm followed this method, but in addition had also the capital accounts of the partners. It is obvious that as the same ledger is to be used the accounts that appear there as already posted need not be repeated. Alongside of these accounts is placed the word “posted.” This indicates that, in posting this journal entry to the ledger, only the new accounts are to be entered, omitting entirely those already posted.
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