Accounting theory and practice, Volume 1 (of 3)

by Roy B. Kester

Accounts Payable

(Name of Creditor)
Debit:	Credit:
(1) For money we pay him on account.	(a) For amount we owe him at beginning.
(2) For notes we give him on account.	(b) For goods he sells us on account.
(3) For goods we return to him.
(4) For discounts he gives us.
(5) For claims he allows us.

As will be noted by reference to the customer’s account, the entries to the creditor’s account, being viewed from the opposite standpoint, are exactly the reverse of the entries to the customer’s account.

Other Liability Accounts.—Accounts with other liabilities, such as Mortgages, Bonds, Expenses Payable, and the like, follow in the main the general principles laid down ([pages 81 to 83]). Specific treatment will be given them as they are met in the discussion. In the case of long-time notes payable supported by mortgages, record should be made under the title “Mortgages Payable” rather than “Notes Payable.”

CHAPTER XII
DEBIT AND CREDIT AS APPLIED
TO PROPRIETORSHIP ACCOUNTS

Proprietorship Accounts Defined.—Proprietorship accounts are the accounts which record the effects, both temporary and ultimate, of business transactions upon proprietorship. The study of the two preceding chapters has made clear the fact that transactions which involve the receipt of income or the payment of expenses result respectively in an increase or decrease of proprietorship, and that these increases or decreases are temporarily recorded in suitable income and expense accounts until the close of the fiscal period, at which time the accounts are summarized to determine the net effect of all transactions upon proprietorship or the capital invested in the business. Therefore, the proprietorship accounts are of two general kinds: temporary and vested. Temporary proprietorship accounts make temporary and immediate record of the results of the agencies or forces at work within the business to produce a profit. They set forth the efforts to increase the net worth of the business. They record the costs of the effort and its yield in earnings, the record being made under appropriate titles to show the kind of cost and the source of the yield. Vested proprietorship accounts record the ultimate or summarized results of business transactions. They therefore record the original investment and its subsequent net increases and decreases.

Fundamental Consideration of Proprietorship Debits and Credits.—Income and expenses comprise the temporary proprietorship items which, after being summarized, show their ultimate effect upon vested proprietorship. In other words, they are proprietorship items set up temporarily to furnish detailed information for aiding in efficient management and control and are later transferred to the ultimate or vested proprietorship records. Since, from the mathematical necessity of the proprietorship equation, proprietorship items normally have credit balances, it is evident that all income, or earnings, must be placed on the credit side of their appropriate accounts. Cost of management and all expenses of operation are deductions from that income and must therefore be recorded on the left or debit side of appropriately named accounts.

Income Debits and Credits.—With regard to their debits and credits, income accounts follow this rule:

Income (under appropriate titles)
Debit:	Credit:
(1) For all deductions from the	(a) For the yield.
yield shown contra.

Income accounts normally have entries only on the credit side. They are debited, however, for the purpose of deducting from the yield shown on the credit side, (1) because of overstatement of the amount of the yield in the first place; (2) because of error in the original placing of the item of income, which is now transferred to its proper account; and (3) for the purpose of summarizing when it becomes necessary to transfer all income and expense items to one summary account. The entries made for the purposes of transfer and summarization are sometimes called “adjusting” and “closing” entries.