D OUBLE ENTRY A ND TH E B ALANCE S H EET

Basi s of D ouble Entry . doubl e en try is a realization

Th e basis of

that in modern busin e ss th e re are no asse ts lyin g abo ut withou t

claiman ts TO eve rything havin g valu e some one is a claim ant
. .

If in a busine ss the re is an y prop er ty or any right o r any in tangible

, ,

quality that b rin gs valu e li ke a repu tation that draws tr ade so me

, ,

on e cl aims that pro pe r t y or right o r quality If one is to have a .

statem en t of a busine ss a t any particular ti m e therefore one will , ,

n ee d t o kn ow e xactly what p ro pe rty rights an d qualitie s are in t h e

, ,

busin e ss an d wh o may claim tho se par ticular el e m en ts which go to

make up th e busin e ss as a whole We must distin guish moreove r
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, ,

o ne kind Of ass e t from an o th e r for o th e rwis e e very tim e w e con

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t emplate a particular trans action w e might n eed t o visit some part

of th e establi shm en t t o l e arn whe th er that tran saction is possible
for th e busin e ss as it n ow stan ds w e cann o t o rdin arily pay deb ts
with equipme n t n or s ell me r chan dis e if we have only raw material
, ,

nor pay di v ide n ds if w e have onl y sto cks an d b on ds S imilarly we .

must di stingui sh on e kin d Of claims to th e asse ts from o ther kin ds

o f claims fo r diff e re n t claims are e nfo rc e abl e in difl ere n t ways an d
,

may b e met at difl ere n t time s S ince howeve r as already indi

.
, ,

cat ed all valu e s ar e claim e d by s om e on e it must follow that th e

, ,

t otal value s attache d t o t h e list Of asse ts must e qual t h e total

claims whi ch are e stablishe d against th e busine ss by pe rsons in ,

cluding th e propri e tor s wh os e claims are re cognize d by it S O

, .

even t h e simpl e st stat eme n t tha t can b e drawn up fo r a busin ess

“ ”
must b e in balan ce t h e asse t S ide will e xactly e qual or
balance wha t w e may call t h e own ership claim side E quali ty
“ ” ~
.

is always th ere for if an y value is in th e busin e ss it must belong to

,

some one and that own e rship must b e re c orde d bo t h on t h e books

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and on such a stat em e n t Th ere is no way by which total asse ts

.

can incre ase with out a parall el in cre as e in claims t o asse ts ; th ere

is no way by which to tal asse ts can d e creas e with out a par allel de
crease in Claims t o ass e ts ; th e re is no way by which to tal claims to
asse ts can incre as e wi th ou t a parall el in cre ase in asse ts to b e
8 U
TH E F NDAM ENTAL S OF A CCOUNTIN G
claimed ; an d the re is n o way by which to tal claims t o as se ts can
de cr e as e wi th out a par all e l d e cre as e in t h e ass e ts t o b e claimed .

Anythin g else would me an eithe r that there were some un claimed

ass e ts or that so m e on e had a claim t o pro pe r ty which did n ot
,

e xist . E ith e r is absurd Th e asse ts de t e rmin e (

. fix a limi t t o) th e
o wn er ship claims T hi s doe s n o t m e an Of cours e that a pe rson
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.
, ,

may n ot pre se n t a claim for prop er ty wh en th e re is n o t pro pe rty

en ough t o satisfy hi s Claim as in t h e cas e Of a bankruptcy an d Often
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a pe rso n claims prop er ty which some on e e lse at th e same time

Claims In such cas e s som e Of t h e Claims are n o t en f or ce able or
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re al claims an d it is e ithe r th e task of a boo kke e pe r t o show th e

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reduction Of clai ms t o match th e asse ts or th e task of a lawye r or a ,

judge t o se ttle th e rival claims .

Balan ce S h e e t A Simple illustration Of such a statement which

.
,
“
is comm onl y called a balance S he e t is attache d b e low It is
”
, .

customary in Am e rica for all asse ts t o appe ar on th e le ft side of

s uch a stat em en t owne rship claims at th e right -
.

94 w as
Re al Es tate Proprietor
Fi xt
ur es Accounts Payable
A ccoun ts Receivab le
M e rchan dise

A s se s t A
ll items on t h e asse s S ide
. t
ab ove excep t accoun ts re
ceiv ab le rep re se n t ass e ts wh ich can b e valu ed or coun ted by Ob
se rvation A ccoun ts re ce ivabl e doe s n o t r e pre se n t tan gible prop
.

e rt y in t h e o rdi n ar y s e n se but re pr e s e n ts claims Of this busin ess

,

again st o utside pe o pl e for m e rchan dis e pu r chas e d from t h e busi

n e ss in s om e past pe ri od Th e se may b e re po rt e d e i th e r individu
.

ally by nam e 01 in a group as above Th e statem en t is n o t a com

, .

p le t e balan c e S h e e t un l e ss it c ov e r s all t h e it e ms Of valu e b e l o n gin g

t o th e busin ess .

Owne r s h ip Claims Even though th e busin e ss is own ed by one

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man t h e proprie to r h e is n ot n e ce ssa rily th e o wn e r o f all th e prop

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crt y sh own on th e l e ft han d side o f t h e stat em en t ; for usually a man

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con ducts busin e ss with o th e r capi tal th an his own In that case .
,

though th e people who h ave len t him money canno t wi thout spe cial
 U
DO B LE ENTRY A ND TH E B ALA N CE SH EET 9
le gal provis ion ste p in and carry Ofi any of th e asse ts on th e groun d
that a part Of th e busine ss be lon gs t o them it is n ever th eless true ,

that the y have a claim again st t hose asse ts indepen den t Of th e

prop rie tor s own ershi p In o rde r t o in dicate th e fact that a pro
’
.

rie t or is n o t t h e so le an d unhampe re d o wn e r o f t h e p ro pe rty on

p
t h e l eft han d side Of th e sh e e t it is n e ce ssary e ith e r t o S h ow th e
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n ame s o f o th e r peo pl e wh o have claims agains t th e p ro pe rty o r t o ,

S h ow th e to tal claim o f all such pe r son s in a gr oup o r in se ve ral ,

groups accordi ng t o th e na ture Of th e ir claims an d this mus t b e ,

don e for t w o re asons first t o S how h ow much Of th e owne rship

,

actually b e l on gs t o t h e pro pri e to r an d se con d t o S h ow h ow much

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Of th e ass e ts must soo n e r o r lat e r b e turn ed o ve r t o th e cr e di to r s Of

t h e busin e ss in o rde r t o satisfy th e ir claims In t h e case Of th e .

balan ce S h e e t ab ove th e accoun ts payabl e b ein g just t h e reve rse Of

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th e accoun ts r e ce ivabl e on t h e o th er side re pre se n ts sums payabl e

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by th e busin e ss t o o utside rs wh o have furn ishe d me r chan dise I t .

may in d eed happen that th e s e outside rs cann o t imm ediate ly claim

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paym en t of t h e sums which ar e owe d th em it may b e that th e mer .

ch and ise was bo ught un d e r t e rms Of cr edi t

— specifi cally that t h e ,

debts must b e paid In t en o r thirty o r Sixty days On ly through

, ,
.

le gal proc e ss can th e holde rs Of th e accoun ts payable force a dis tri

b ution Of t h e ass e ts t o th e m if t h e pro pri e to r withholds paym e n t .

Te mporary V alidity of Bal an ce S h e e t A n importan t thing t o .

no te ab o ut a balan ce sh ee t is that it will n o rmally ho ld tru e for

o nl y a ve ry b ri e f m om e n t Of tim e If th e busin e ss is co n tinuing

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,

t h e ve ry first h ou r Of t h e n e xt day it is p ro babl e that some thin g will

happe n t o chan ge som e Of t h e figure s gi ven h e re If any paymen t .

Of de bt is mad e cash will b e l e ss than be fo re an d accoun ts payable

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will b e le ss than b e fore If an y me r chan dise is s old t h e mer

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,

ch andis e will b e l e ss an d t h e acco un ts re ce ivable wi ll b e more or ,

t h e cash will b e mo re ; an d if as is o f co ur s e usual m e rchandise

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is sold at a profit t h e n e w figure Of cash o r accoun ts rec eivable

,

will b e large r than th e figure for th e m e rchandise surrendere d for

it In o th e r wo rds t h e change in th e characte r of th e as se ts from
.
,

merchandi se t o acco un ts re ce ivable or cash brin gs no t an exact

e quival e n t in e xchan ge but in ad di tion a n ew o r e xc e ss ass e t aris
, ,

ing from profit an d that pro fit in turn c onstitute s in cr e ased pro

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p rie t o rship or o wn e rshi p claim -

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 TH E FUND AM ENTAL S OF A C COUNTING
Balance S h ee t al ways in Balance . Our n ext fun dam ental ma tte r
to no e t abo ut accoun ts is that just as our balan ce S h e e t sh owe d
,

ass e ts an d what w e may call o wn e r shi p claims t o b e e qual n o -

chan ge that can lat e r o ccu r in an y part Of th e busin e ss or from an y

cause can de stroy that e quality an d it e xist e d from t h e be gin

ni n g of t h e busine ss . It is inh eren t in t h e con stitution Of busin e ss .

Le t us examin e this .

Kin d s of Ch ang e s in As se t s .Th ere ar e four and only fou r types

of sources from whi ch a busine ss can ge t asse ts :
()
1 I n v e stm e n t b y t h e o w n er o f t h e business
()
2 L o a n s mad e t o t h e busi n ess

(3) E xcha n gi n g a n O ld as se t f or a n ew

(4 ) P r o fi t acc rui n g t o t h e bus in e ss

This is on e Of t h e axi omatic c ommon s en s e thi ngs that one mus t
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se e e arly in his study of acc oun tin g Obvi ously an asse t must
.

come ei th e r f rom in side th e busine ss o r from outsid e for th e re

are n o o th e r plac e s : if t h e n ew ass e t c om e s fr om o utsid e t h e busi

n e ss it must co m e e ith e r fr om an o wn e r o f t h e busin e ss o r from on e

,

wh o is n o t an o wn e r for th e re are no o th e r s ; if it com e s from an

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owne r th e cas e is that Of t h e first type liste d abo ve (inve stm en t) ;

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if from on e wh o is no t an own e r t h e cas e is Of th e s e con d type (loan

,

t o t h e busin e ss) ; if it c om e s from in sid e th e busin e ss it must come ,

e i th e r from what was th ere b e fo re or from what was n o t th ere b e

fore ; ii th e n ew ass e t is de rive d from an asse t that was in th e busi

n e ss b e for e it com e s by e xchan g e whi ch is t h e thir d type n am ed
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above ; if it come s from in side th e busin e ss but from some t hing not
th ere be fore it must have b e en cr e ate d in side an d is Of th e fourth
,

type (an d that is just what w e mean by profits) This give s us our .

four source s S imilarly th e re are onl y four cause s Of re duction of

.

asse ts : (1 ) withdrawal of inve s tm en t by an own e r Of th e business ,

(2 ) re payme n t t o a l e n de r (3) givin g on e as se t in e xchan ge for an

,

o th e r an d (
, 4 ) l o ss suffe re d by th e busin e ss Th e in t er e stin g thin g .

abo ut th e se four so urce s of ass e ts an d ab out th e s e con trar y causes

,

Of reducti on of ass e ts is t hat any pro p e r accou n tin g must no t only

,

rec ord th em but r e cord the m as dis tin ct from e ach o th er We

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must distin gui sh propri e tor s claim from l en der s claim Of course
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for th e proprie tor is e n ti tl e d to all growth in ass e ts ( as well as re

quired to suffer, if possible all S hrinkage) , whereas the lender has a
,