a record of transactions. Thus transactions which have actually taken place may have been omitted from the books altogether, or they may have been recorded to the wrong accounts, or the money values attached to them may be incorrect; or, yet again, fictitious records may be entered in the ledger of transactions which have never taken place. A trial balance is thus no very adequate safeguard against fraud, nor does it bring to light mistakes in the monetary value attaching to the various transactions recorded. This last point is of especial importance, in that the monetary value of transactions may have been correctly recorded in the first instance, but owing to altered circumstances may have become inaccurate at a later date. This of course means that the altered circumstances constitute an additional “transaction” which has been omitted.
Trial Balance, 31st December 1906
| Dr. | Cr. | ||||||
| 1 | Capital account | £15,010 | 1 | 7 | |||
| 5 | Drawings | 1,500 | 0 | 0 | |||
| 20 | Trade creditors | 4,961 | 10 | 0 | |||
| 24 | Fixtures, furniture, &c. | 1,269 | 4 | 3 | |||
| 27 | Bills payable | 2,620 | 18 | 4 | |||
| 40 | Bad debts | 71 | 4 | 2 | |||
| 44 | Stock 1st Jan. 1906 | 4,078 | 16 | 4 | |||
| 50 | Discounts allowed | 975 | 3 | 3 | |||
| 53 | Trade debtors | 3,842 | 7 | 9 | |||
| 60 | Discounts received | 1,117 | 17 | 8 | |||
| 65 | Wages and salaries | 1,865 | 12 | 0 | |||
| 75 | Depreciation | 141 | 0 | 5 | |||
| 78 | Rent, rates and taxes | 1,242 | 13 | 8 | |||
| 82 | General expenses | 1,087 | 8 | 0 | |||
| 90 | Bills receivable | 7,468 | 14 | 3 | |||
| 97 | Purchases | 44,731 | 2 | 10 | |||
| 100 | Sales | 48,732 | 4 | 9 | |||
| C56 | Cash at bank | 4,169 | 5 | 5 | |||
| £72,442 | 12 | 4 | £72,442 | 12 | 4 | ||
It will be observed, therefore, that in order to complete the record of the transactions by double-entry, it has become necessary to introduce into the ledger a third class of accounts, known as impersonal or nominal accounts. These accounts record the transferences of money, or of money’s worth, which, so far from representing a mere reshuffling of assets and liabilities, involve an increase in or a reduction of the amount invested in the business, i.e. a profit or a loss. Transactions representing profits are recorded upon the Cr. side of nominal accounts, and those representing losses (including expenses) upon the Dr. side. This is consistent with the rules already laid down in connexion with real and nominal accounts, inasmuch as expenditure which does not result in the acquisition of an asset is a loss, whereas receipts which do not involve the creation of liabilities represent profits. All debit balances therefore that are not assets are losses, and per contra all credit balances that are not liabilities are profits. So that, inasmuch as double-entry provides inter alia a complete statement under suitable headings of all profits and all losses, it is possible by aggregating these results to deduce therefrom the net profit or loss of carrying on the business—and that by a method entirely distinct from that previously described in connexion with single-entry, thus constituting a valuable additional check. Taking the trial balance shown above, the following represent the trading account, profit and loss account, Balance sheet. and balance sheet compiled therefrom. The trading account may be variously regarded as the account recording the movements of goods which represent the stock-in-trade, and as a preliminary to (or a subdivision of) the profit and loss account. The balance sheet is a statement of the assets and liabilities; but—inasmuch as, by transferring the balance of the profit and loss account to the capital account, it is possible to bring the latter account up to date and to show the credit balance representing the surplus of assets over liabilities to date—the balance sheet, instead of showing a difference, or a “balance,” representing what is assumed to be the amount of the capital to date, shows an absolute agreement of assets upon the one hand and of liabilities plus capital upon the other. The two sides of the account thus balance—hence the name.
| Dr. | Trading Account for the Year ended 31st December 1906 | Cr. | |||||||
| To Stock on hand, 1st Jan. 1906 | £4,078 | 16 | 4 | By Sales | £48,732 | 4 | 9 | ||
| ” Purchases | 44,731 | 2 | 10 | ” Stock on hand 31st Dec. | |||||
| ” Gross Profit, transferred | 1906 | 5,751 | 3 | 10 | |||||
| to Profit and Loss account | 5,673 | 9 | 5 | ||||||
| £54,483 | 8 | 7 | £54,483 | 8 | 7 | ||||
| Dr. | Profit and Loss Account for the Year ended 31st December 1906 | Cr. | |||||||
| To Rent, rates and taxes £1,242 13 8 | By Gross Profit as per | ||||||||
| ” Salaries and wages1,865 12 0 | Trading Account | £5,673 | 9 | 5 | |||||
| ” General expenses 1,0878 0 | ” Discount received | 1,117 | 17 | 8 | |||||
| £4,195 | 13 | 8 | |||||||
| ” Discounts allowed | 975 | 3 | 3 | ||||||
| ” Bad debts | 71 | 4 | 2 | ||||||
| ” Deprecation | 141 | 0 | 5 | ||||||
| ” Net Profit for the year trans- | |||||||||
| ferred to Capital account | 1,408 | 5 | 7 | ||||||
| £6,791 | 7 | 1 | £6,791 | 7 | 1 | ||||
| Dr. | Balance Sheet as at 31st December 1906 | Cr. | |||||||
| To A.B., Capital account | £14,918 | 7 | 2 | By Fixtures, furniture, &c. | £1,269 | 4 | 3 | ||
| ” Trade creditors | 4,961 | 10 | 0 | ” Stock on hand | 5,751 | 3 | 10 | ||
| ” Bills payable | 2,620 | 18 | 4 | ” Trade debtors | 3,842 | 7 | 9 | ||
| ” Bills receivable | 7,468 | 14 | 3 | ||||||
| ” Cash at bank | 4,169 | 5 | 5 | ||||||
| £22,500 | 15 | 6 | £22,500 | 15 | 6 | ||||
| Dr. | A.B., Capital Account | Cr. | |||||||
| 1906. | |||||||||
| 1906. | To Drawings account | £1,500 | 0 | 0 | Jan. 1 | By balance from last account | £15,010 | 1 | 7 |
| Dec. 31 | ” Balance carried down | 14,918 | 7 | 2 | Dec. 31 | ” Profit and Loss account, being net profit for the year ended this date | 1,408 | 5 | 7 |
| £16,418 | 7 | 2 | £16,418 | 7 | 2 | ||||
| 1907. | |||||||||
| Jan. 1 | By Balance brought down | £14,918 | 7 | 2 | |||||
