Private Books
Purpose and Content
Private books are sometimes kept when it is not desirable for employees to know certain important data relative to the business. Secrecy then is the main purpose in their use in a great many businesses. The general knowledge of certain facts about the business or certain processes or methods of procedure which belong peculiarly to the business might be harmful. Where competition is particularly keen between two or more concerns, instances have been known of the employees of one concern being the paid agents of the other, thus securing information essential to underbidding on contracts. It is desirable at times to keep the employees of a partnership or a corporation in ignorance of the earning capacity of the business or of any secret contracts covering price agreements that may be in effect according to which larger rebates are to be allowed one concern than another. Other items about which it may be necessary to maintain secrecy are: the valuations at which patents, franchises, and other intangible assets are carried; partner’s capitals, drawings, and salaries; manufacturing costs; the method and rate at which the overhead expense is apportioned over the product; the policy as to the creation of reserves of various sorts; the profit and loss account; the methods of financing as indicated by notes payable; and so on.
Operation of Private Books
No particular difficulty is experienced in the keeping of private books. A full set of records composed of journal, cash book, and ledger, may be maintained, though there is often no need for a cash book. These records, while containing essential information about the business, are usually spoken of as being subsidiary to the general books in the sense that the general books are operated by an employee who maintains a controlling account for the private books. In order to gather the material for the controlling account the books of original entry of the general records must be provided with additional columns for the private ledger. Any item about which it is desirable to keep employees in ignorance is simply charged or credited to private ledger with no explanation on the general books as to its ultimate disposition. The same item as taken into the private books is, by means of a journal entry, given its proper disposition, with the offset as a charge or credit, as the case may be, to a general ledger controlling account which is carried on the private ledger. These two controlling accounts—the one on the general ledger with the private ledger, and the one on the private ledger with the general ledger—are complementary to each other, thus making both ledgers self-balancing. A consolidation of the two trial balances, the one from the general ledger and the other from the private ledger, with both controlling accounts eliminated or treated as canceled items, is necessary in order to present the full statement of the business.
To illustrate the way in which secrecy covering certain types of transactions may be maintained, it may be well to trace a few transactions through the books. Suppose it is desired to make a cash rebate to a favored customer. The check is drawn payable to private ledger account and run through the cash book as a charge in the private ledger column, to be posted ultimately to the private ledger controlling account on the general ledger. The check is entered as a cash receipt on the private cash book with the credit to general ledger. A check is then drawn on the private ledger cash payable to the favored customer, with the proper charge to Sales Rebates and Allowances or other similarly named account, and posted to that account on the private ledger. In a similar way checks for dividends, salaries, etc., can be drawn to the order of private ledger and their proper distribution be shown only on the private books.
At the time of closing the books, if some temporary proprietorship accounts are carried on the general ledger and some on the private ledger, those carried on the general ledger are closed off by transfer to the Private Ledger Controlling account instead of, as usually, to the summary Profit and Loss account. The adjustment of the books is usually made both on the general ledger and on the private ledger. If certain fixed assets subject to depreciation are carried on the general ledger, the adjustment of their values will have to be made by debit as usual to Depreciation account, with a credit to the suitable Depreciation Reserve account. This Depreciation account, of course, is in closing charged to Private Ledger instead of to Profit and Loss. If the Merchandise Inventory account and the Sales and Purchases accounts are carried on the general ledger, the cost of goods sold will be developed as usual on the general ledger and then transferred to the Private Ledger account. More often, however, most of these adjustments on account of depreciation reserves and reserve for doubtful accounts and the merchandise inventories are handled only on the private ledger. The Profit and Loss account as carried on the private ledger shows the net profit and usually all appropriations of that profit. The result is that the dividend accounts, the various reservations of profits, and Surplus account are handled only on the private books.
The private books are usually kept by the general auditor, the secretary, or general manager of a corporation, and by one of the partners or a trusted employee in the case of a partnership.