Book-keeping

Book-keeping is the art of recording commercial and financial transactions in a regular and systematic manner. Its object is to preserve a distinct and accurate record of such transactions, and from a well-kept set of books a merchant should be able to ascertain at any time the state of his account with any person with whom he has dealings, and the profits or losses resulting from each venture or department of his business, his assets and liabilities, and the exact state of his affairs. The stability of a business depends to a very large extent upon the accuracy of the information thus conveyed, for without it, the trader, in ignorance or with only a vague idea of his true position, often proceeds upon wholly erroneous and inflated ideas of his resources, and is only awakened to the real state of matters by the impossibility of meeting his liabilities when they fall due. Many a bankruptcy may be traced directly to the errors and confusion arising from neglect or carelessness in this department. But these considerations are far from being universally realised and acted upon by business men. Among the class of small traders especially, the time required for keeping books in proper order is grudged as being unremunerative, and the work, if done at all, is performed in a careless and inefficient way, frequently with the disastrous results above referred to. The necessity of keeping proper books has been recognised by the legislature. The Debtors Act (Scotland), 1880, contains provisions for the punishment of bankrupts who have failed to keep satisfactory books, and the English Bankruptcy Act (1883) has a similar clause. A merchant's books frequently constitute important evidence in a court of law, and they should for this reason, if for no other, be kept as neatly and carefully as possible; the presence of blots, deletions, and erasures, or the tearing out of pages, will render them liable to suspicion, and greatly lessen their value in this respect.

It is probable that at a very early period, so soon as trading transactions became too involved to be readily borne in mind, means would be found to keep some record of them. Thus we read in the Book of Ecclesiasticus (chap. xlii. 7), 'put all in writing that thou givest out or receivest in;' and excavations in Babylon have brought to light the records of a great banking-house inscribed upon the bricks or tiles which served the purpose of books. From certain passages in Cicero and Pliny it seems evident that the Romans understood something of Debit and Credit, so far, at least, as to make entries falling under these terms upon opposite pages. As an art, however, book-keeping appears to have arisen in the great mercantile cities of Italy during the 15th century, and the principles of double entry (doppia scrittura), under the name of 'the Italian method,' gradually spread over Europe, many languages still retaining the original Italian names as technical terms. The earliest treatise, so far as known, on the subject was contained in an algebraic work by a friar named Lucas de Burgo, which was published at Venice in 1494. The great work of Edward Thomas Jones, which is still the standard work on book-keeping, and is now in its 18th edition, was first published in 1795. Jones's English System of Book-keeping, as he called it, is in reality a simplified and methodised form of the Italian double entry, and his rules, with various modifications, are now almost universally followed. Blunders and confusion frequently arise from the attempt to follow slavishly definite rules without an intelligent knowledge of their meaning, a comprehension of the general principles being much more important than a strict adherence to any particular style however excellent. It may fairly be said that a just appreciation of the terms Debtor and Creditor, which, abbreviated to Dr. and Cr., are usually placed at the top of the left and right hand respectively of every account, affords a master-key to the whole subject. A person, or his account, is regarded in book-keeping as debtor for what he receives, and creditor for what he gives. Thus the value of goods sold to a person, or cash paid to him, is placed to the debtor or left-hand side of his account, while cash or goods received from him are entered on the credit or right-hand side.

The details of book-keeping vary largely according to the nature and extent of the transactions which are to be recorded. Thus the shopkeeper's books differ from those of the great wholesale merchant, and these again from the books of banks, public companies, and government departments; but the same general principles underlie all, and when once these are well mastered, they may, with the exercise of a little intelligence and ingenuity, be applied to every emergency.

There are two kinds of book-keeping in general use—SINGLE ENTRY and DOUBLE ENTRY. In the first of these, the only accounts kept in the ledger are those of the persons with whom there are dealings, and a statement of affairs is arrived at by adding together the debts due to the trader, and those due by him. To the former is added the value of any stock-in-trade or other property he may have, and the excess of these assets, as they are called, over the liabilities, is the amount of his capital. By comparing this figure with his capital at the last balancing date, and taking into account any sums he may have paid into or withdrawn from the business, he estimates his profit or loss for the period. But this is a manifestly crude and imperfect system, and most traders, even though they may not adopt double entry in its fullest and most elaborate form, import more or less of its principles in order to have some check upon the accuracy of their balance sheet and to gain information as to the details of their business.

Double entry is the true art of book-keeping, and it completely fulfils the requirements of clearness, completeness, and accuracy. Its theory is founded upon the obvious fact that every commercial transaction has two sides: if it is a giving by one person, it must be a receiving by another. Thus every sale involves a purchase, every debtor must have a corresponding creditor, and every creditor a debtor, and the double-entry system derives its name from recording both sides of each transaction. If an entry is made to the credit of any account in the ledger, there must be a corresponding entry to the debit of some other account. In this way the two sides of the ledger must always agree, or balance one another, and their failure to do so discloses the presence of an error—e.g. if a merchant buy a quantity of calico of the value of £50 from the manufacturers, A. B. & Co., he will place £50 to the credit of A. B. & Co.'s account, and the same sum to the debit of 'calico' account, which represents himself as the receiver. In the same way, if the calico is afterwards sold to C. D. & Co. for £60, that sum will be placed to the debit of C. D. & Co.'s account, and to the credit of 'calico' account. Many are deterred from adopting the double-entry system by an exaggerated idea of its complexity and laboriousness; and it would no doubt be most unwise for a tradesman with a small business to plunge into the most elaborate form of the system. But if his books are accurately kept by single entry it is possible to convert them yearly or periodically into double entry with very little trouble. This is done by casting up the purchases, sales, and expenses for the period, from which a goods account and profit and loss account can be constructed. Thus the principle of double entry is carried out, though roughly, and its check taken advantage of without multiplication of books, accounts, or labour.

The same books are used in both systems except the journal, which is peculiar to double entry, and a brief description of the most important books which would be kept by an ordinary merchant will serve to exemplify the general principles of book-keeping.

Day-book, or Sales-book.—This book contains a daily record of all goods sold. Under each day's date should be stated the name of the purchaser, and a full description of the goods—their quality, quantity, and the rate. If several items are sold to the same person on the same day, the various items are usually stated in an inner column, and the total amount extended to a second column.

Where this is done, a test of the accuracy of these additions is obtained by adding up both columns, the total of which ought of course to be the same. Cash sales—that is, goods paid for at the time of purchase—may be entered in one sum at the close of each day.

The Invoice-book, or Purchase-book, keeps a similar record of all purchases. It is written up from the invoices or accounts sent along with all goods received, and the invoices themselves are preserved either in files or by pasting them into a book called a Guard Invoice-book.

Cash-book.—In this very important book, all receipts and payments of cash are recorded from day to day. The two opposite pages of the book are used concurrently, the receipts being entered on the left-hand or debtor side, and the payments on the right-hand or creditor side. It is thus in form simply an account current between the cashier and his employers, all money received by him being placed to his debit, and all disbursements to his credit. On the two sides being summed up, the excess of the total receipts over the disbursements, called the cash balance, is the sum for which the cashier is accountable, and should agree with the cash actually in his till. This test should invariably be applied every day, as an error or omission becomes more difficult of detection the longer its discovery is delayed. Payments by means of cheques on the banking account, though they do not affect the actual cash on hand, are usually entered as disbursements on the creditor side, while a corresponding entry for the same amount, as if received from the banker, is made on the debtor side. It is also usual to have a separate column in which the discounts or abatements on each account paid or received are noted. The cash-book is also sometimes provided with several cash-columns on either side, so that transactions of the same kind may be collected together and added up separately. Thus the debtor side may be divided into bank entries, bills receivable, &c., and the creditor side into bank, bills payable, wages, charges, &c., the total in each case being extended into the last column.

Bill-book.—This book is a record, in the order of their date, of all bills receivable or payable by the firm, a separate book being usually kept for each. It should contain appropriate space for such particulars as—number of bill, date, name of drawer, indorser, and acceptor, currency and due date, amount, when and how paid or disposed of. See article BILLS OF EXCHANGE.

Journal.—The journal may be called the master-book of the double-entry system. It contains an abstract or synopsis of all the other books, the whole of the transactions being here digested under proper heads so as to facilitate their transfer to the appropriate accounts in the ledger. By the old Italian system, debit and credit entries were made in the same column of the journal, but the modern journal has two columns in each page, the first for debit and the second for credit entries, corresponding to the Dr. and Cr. sides of the ledger accounts. As the ledger contains precisely the same entries as the journal, though differently arranged, the summation of the columns of the latter for a given period should, unless a mistake has occurred, exactly agree with the aggregate of either side of the former. The subsidiary books are usually journalised, or abstracted into the journal, monthly. The strict rules of double entry require that no entry should be made in the ledger except from the journal, but to save time and labour the cash-book is often posted direct, the monthly totals only being passed through the journal, and some follow the same plan with the day-book and invoice-book. All sorts of cross entries, or transfers from one account to another, must be made by means of the journal, which shows clearly where the corresponding entries are, and how the equilibrium of debtor and creditor is preserved.

Ledger.—The ledger (called in Fr. grand livre) is the most important of all the books. It exhibits under distinct headings the accounts of all persons with whom the merchant has dealings. It also contains accounts for every description of property and for outlay, such as wages and general expenses not chargeable to particular accounts. Here will ultimately be found, in a tabulated form, the contents of all the other books, the debits being on the left and the credits on the right hand side of the account. It has been already explained that in double entry all these entries should be posted from the journal, and that no entry can be made on either side of any account without a corresponding one being made on the opposite side of some other account. To balance a ledger, accordingly, the book-keeper must take down on a sheet of paper, or book for the purpose, the total sums on the debtor and creditor sides respectively of all the accounts. This is called a Trial Balance, and if the two sides agree, the accuracy of the work is demonstrated; if not, he must examine the transfers and additions till the error is discovered. This done, the balances of the various accounts instructing the gains and losses or expenses of the business are transferred by journal entry to profit and loss account, and the balance of that account in turn is carried to capital account or divided among the partners if there be more than one. The remaining accounts are then closed by transferring their balances to balance account; and the books are reopened for another period by a reversing entry bringing down the balances thus transferred to start a new account. A Balance Sheet is a statement of the merchant's affairs, and exhibits on the one side his whole assets, stock-in-trade, debts outstanding, property and furniture, and cash in bank or on hand. On the other side are his liabilities and his capital, which is just the excess of the assets over the liabilities. The following is a specimen of a balance sheet of the simplest description:

Balance Sheet of George White, Grocer, London,
as at 31st December 1887.

Besides the books enumerated, others of a subsidiary kind are kept by most merchants, as a Return Book for goods returned by or to him, an Order Book where all orders are promptly noted, a Warehouse Book to keep account of all stock entering or leaving the warehouse, a Package or Case Book for barrels, cases, &c. to be returned, and Account Sales Book, showing the net proceeds of each cargo or consignment of goods, a Letter Book, and many others. The ledger is frequently, for convenience, kept as two or three separate books—Sales Ledger, Purchase Ledger, and Private Ledger—but they must, for balancing purposes, be considered as forming parts of one whole. In extensive businesses, each branch or department may have separate books of its own, the whole being brought to a general balance at periodic times.

While the principles of book-keeping are thus demonstrably unerring, it must be borne in mind that no system, however perfect, will make up for slovenliness or carelessness on the part of the book-keeper, or for want of due oversight on that of the employer. The utmost regularity, vigilance, and honesty are required to avoid snares and fallacies, and there are some errors which the most elaborate book-keeping will not detect, but in some cases, even help to conceal. Many a company, for example, has paid its shareholders a dividend out of apparent but delusive profits, resulting from over-valuation of property, or from reckoning bad debts as if they were good. Hence in taking stock, which should be done at least annually, great care must be exercised against over-valuation. In no case should stock be valued at more than it cost; if it has deteriorated, it should be entered at a correspondingly reduced figure. A deduction should also be made to cover depreciation in value of machinery, plant, and furniture, new additions being at the same time added.

Book-keeping is taught in our schools as one of the branches of a commercial education; but of no subject can it be said with greater truth, that a pinch of practice is worth a peck of theory. There are, however, several good books on the subject, and among them may be mentioned, besides the work of Jones already referred to, Practical Book-keeping, by F. H. Carter, C.A. (Edin.); and Book-keeping by Single and Double Entry, by William Inglis (Edin.), a convenient and reliable handbook on the subject. There are also several manuals of book-keeping specially suited to the requirements of the government Civil Service.