If it be desired to close the ledger when it stands as above, the following is the way the accounts will stand: the lines in italics will presently be explained.
| A, Debtor. | A, Creditor. | B, Debtor. | B, Creditor. | ||||
| To B | 17 | By B | 23 | To A | 23 | By A | 17 |
| To C | 9 | By C | 19 | To C | 41 | By C | 6 |
| To D | 14 | By D | 32 | To D | 28 | By D | 11 |
| To E | 15 | By E | 4 | To E | 4 | By E | 25 |
| To Balance | 23 | By Balance | 37 | ||||
| 78 | 78 | 96 | 96 | ||||
| C, Debtor. | C, Creditor. | D, Debtor. | D, Creditor. | ||||
| To A | 19 | By A | 9 | To A | 32 | By A | 14 |
| To B | 6 | By B | 41 | To B | 11 | By B | 28 |
| To D | 16 | By D | 10 | To C | 10 | By C | 16 |
| To E | 60 | By E | 2 | To E | 1 | By E | 3 |
| By Balance | 39 | To Balance | 7 | ||||
| 101 | 101 | 61 | 61 | ||||
| E, Debtor. | E, Creditor. | Balance, Debtor. | Balance, Cred. | ||||
| To A | 4 | By A | 15 | To B | 37 | By A | 23 |
| To B | 25 | By B | 4 | To C | 39 | By D | 7 |
| To C | 2 | By C | 60 | By E | 46 | ||
| To D | 3 | By D | 1 | 76 | 76 | ||
| To Balance | 46 | ||||||
| 80 | 80 | ||||||
In all the part of the above which is printed in Roman letters we see nothing but the preceding table repeated. But when all the accounts have been completed, and no more entries are left to be made, there remains the last process, which is termed balancing the ledger. To get an idea of this, suppose a new clerk, who goes round all the accounts, collecting debts and credits, and taking them all upon himself, that he alone may be entitled to claim the debts and to be responsible for the assets of the concern. To this new clerk, whom I will call the balance-clerk, every account gives up what it has, whether the same be debt or credit. The cash-clerk gives up all the cash; the clerks of the two kinds of bills give up all their documents, whether bills receivable or entries of bills payable (remember that any entry against which there is money set down in the books counts as money when given up, that is, as money due or money owing); the clerks of the several accounts of goods give up all their unsold remainders at cost prices; the clerks of the several personal accounts give up vouchers for the sums owing to or from the several parties; and so on. But where more has been paid out than received, the balance-clerk adjusts these accounts by giving instead of receiving; in fact, he so acts as to make the debtor and creditor sides of the accounts he visits equal in amount. For instance, the A account is indebted to the concern 55, while payments or discharges to the amount of 78 have been made by it. The balance-clerk accordingly hands over 23 to that account, for which it becomes debtor, while the balance enters itself as creditor to the same amount. But in the B account there is 96 of receipt, and only 59 of payment or discharge. The balance-clerk then receives 37 from this account, which is therefore credited by balance, while the balance acknowledges as much of debt. The balance account must, of course, exactly balance itself, if the accounts be all right; for of all the equal and opposite entries of which the ledger consists, so far as they do not balance one another, one goes into one side of the balance account, and the other into the other. Thus the balance account becomes a test of the accuracy of one part of the work: if its two sides do not give the same sums, either there have been entries which have not had their corresponding balancing entries correctly made, or else there has been error in the additions.
But since the balance account must thus always give the same sum on both sides, and since balance debtor implies what is favourable to the concern, and balance creditor what is unfavourable, does it not appear as if this system could only be applied to cases in which there is neither loss nor gain? This brings us to the two accounts in which are entered all that the concern began with, and all that it gains or loses—the stock account, and the profit-and-loss account. In order to make all that there was to begin with a matter of double entry, the opening of the ledger supposes the merchant himself to put his several clerks in charge of their several departments. In the stock account, stock, which here stands for the owner of the books, is made creditor by all the property, and debtor by all the liabilities; while the several accounts are made debtors for all they take from the stock, and creditors by all the responsibilities they undertake. Suppose, for instance, there are £500 in cash at the commencement of the ledger. There will then appear that the merchant has handed over to the cash-box £500, and in the stock account will appear, “Stock creditor by cash, £500;” while in the cash account will appear, “Cash debtor to stock, £500.” Suppose that at the beginning there is a debt outstanding of £50 to Smith and Co., then there will appear in the stock account, “Stock debtor to Smith and Co. £50,” and in Smith and Co.’s account will appear “Smith and Co. creditors by stock, £50.” Thus there is double entry for all that the concern begins with by this contrivance of the stock account.
The account to which everything is placed for which an actual equivalent is not seen in the books is the profit-and-loss account. This profit-and-loss account, or the clerk who keeps it, is made answerable for every loss, and the supposed cause of every gain. This account, then, becomes debtor for every loss, and creditor by every gain. If goods be damaged to the amount of £20 by accident, and a loss to that amount occur in their sale, say they cost £80 and sell for £60 cash, it is clear that there is an entry “Cash debtor to goods £60,” and “Goods creditor by cash £60.” Now, there is an entry of £80 somewhere to the debit of the goods for cash laid out, or bills given, for the whole of the goods. It would affect the accuracy of the accounts to take no notice of this; for when the balance-clerk comes to adjust this account, he would find he receives £20 less than he might have reckoned upon, without any explanation of the reason; and there would be a failure of the principle of double-entry. Since it is convenient that the balance account of the goods should merely represent the stock in hand at the close, the account of goods therefore lays the responsibility of £20 upon the profit-and-loss account, or there is the entry “Goods creditor by profit-and-loss, £20,” and also “Profit-and-loss debtor to goods, £20.” Again, in all payments which are not to bring in a specific return, such as house and trade expenses, wages, &c. these several accounts are supposed to adjust matters with the profit-and-loss account before the balance begins. Thus, suppose the outgoings from the mere premises occupied exceed anything those premises yield by £200, or the debits of the house account exceed its credits by £200, the account should be balanced by transferring the responsibility to the profit-and-loss account, under the entries “House expenses creditor by profit-and-loss, £200”, “Profit-and-loss debtor to house expenses, £200.” In this way the profit-and-loss account steps in from time to time before the balance account commences its operations, in order that that same balance account may consist of nothing but the necessary matters of account for the next year’s ledger.
This transference of accounts, or transfusion of one account into another, requires attentive consideration. The receiving account becomes creditor for the credits, and debtor for the debits, of the transmitting account. The rule, therefore, is: Make the transmitting account balance itself, and, on whichever side it is necessary to enter a balancing sum, make the account debtor or creditor, as the case may be, to the receiving account, and the latter creditor or debtor to the former. Thus, suppose account A is to be transferred to account B, and the latter is to arrange with the balance account. If the two stand as in Roman letters, the processes in Italic letters will occur before the final close.
| A, Debtor. | A, Creditor. | B, Debtor. | B, Creditor. | ||||
| To sundries | £100 | By sundries | £500 | To sundries | £600 | By sundries | £400 |
| To B | 400 | To Balance | 200 | By A | 400 | ||
| £500 | £500 | £800 | £800 | ||||
And the entry in the balance account will be, “Creditor by B, £200,” shewing that, on these two accounts, the credits exceed the debits by £200.
Still, before the balance account is made up, it is desirable that the profit-and-loss account should be transferred to the stock account; for the profit and loss of this year is of no moment as a part of next year’s ledger, except in so far as it affects the stock at the commencement of the latter. Let this be done, and the balance account may then be made in the form required.
The stock account and the profit-and-loss account, the latter being the only direct channel of alteration for the former, differ in a peculiar manner[60] from the other preliminary accounts, and the balance account is a species of umpire. They represent the merchant: their interests are his interests; he is solvent upon the excess of their credits over their debits, insolvent upon the excess of their debits over their credits. It is exactly the reverse in all the other accounts. If a malicious person were to get at the ledger, and put on a cipher to the pounds in various items, with a view of making the concern appear worse than it really is, he would make his alterations on the debtor sides of the stock and profit-and-loss accounts, and on the creditor sides of all the others. Accordingly, in the balance account, the net stock, after the incorporation of the profit-and-loss account, appears on the creditor side (if not, it should be called amount of insolvency, not stock), and the debts of the concern appear on the same side. But on the debit side of the balance account appear all the assets of the concern (for which the balance-clerk is debtor to the clerks from whom he has taken them).