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The Principles of Double Entry

Editor, The Journal of Accountancy:

Sir: In replying to my letter on page 457 of the June number of THE JOURNAL the editor of The Students' Department says that he thinks that he was misquoted, in that I said that he personified the business and that he called net asset a liability. To misquote another is a grave offense, and I certainly had no intention of committing it, and regret that I should have appeared to do so. In the April number Mr. Walton says that it is necessary to discriminate between the business and the proprietor who owns it, and speaks of debts owed to and by the business. From that I inferred that he personified the business, since only a person can owe or be owed. When I said that he called net asset a liability I did not know that anyone had ever attempted to draw a distinction between net asset and net worth or net capital. I supposed that the terms were synonymous.

But in any case these things do not affect the real point at issue; whether the accountant regards himself as personifying the business or not, or whether he makes a distinction between net asset and net worth or not, the fact remains that the theory of equal assets and liabilities involves a reversal in the use of words and therefore violates the laws of rational speech. There is no escaping that fact. The accounts payable are a liability of the proprietor, while the net worth, it if is liability at all, is liability to the proprietor, and liability of the proprietor and liability to the proprietor are opposites. Liability of the proprietor is liability ; liability to the proprietor is asset. If the word liability is used to mean both liability of the proprietor and liability to the proprietor, then sometimes it means liability and sometimes it means asset.

In this country most accountants accept, at least tacitly, the theory advocated by Mr. Walton, since it is the only possible excuse that can be offered for the practice of making statements in a form showing assets and liabilities equal, and yet they all know that relative terms like asset and liability should be used from a single standpoint. Where they make their mistake is in thinking that the standpoint of the business is such a standpoint, whereas in reality it is a double standpoint. In the theory of equal assets and liabilities the business occupies a position midway between the proprietor and the outside world and faces both ways. To use the words asset and liability from such a standpoint is just as absurd as it would be to use the words right and left from the standpoint of a party that faces both ways. What is on the right looking one way is on the left looking the other way; and in the case of the business what is asset looking one way is liability looking the other way. The amount of the accounts receivable, for example, is an asset of the business because outside parties owe it to the business, but it is also a liability of the business because the business owes it to the proprietor. The standpoint of the business is a reversible standpoint. The only fixed standpoint in accounting is that of the proprietor (or proprietors collectively). As viewed from the standpoint of the busi

ness any given item may be called an asset or it may be called a liability; it all depends upon the way one happens to look at it. As viewed from the standpoint of the proprietor asset is asset and liability is liability and they cannot be reversed.

Owing to the false training to which they have been subjected accountants are so accustomed to using relative terms from a double standpoint that they reverse themselves without being conscious of it. When they call an item surplus and enter it as a liability they are using the word surplus from one standpoint and the word liability from the opposite standpoint; they mean surplus from the standpoint of the proprietor and liability from the standpoint of the business. When they call an item deficit and enter it as an asset they are using the word deficit from one standpoint and the word asset from the opposite standpoint; they mean deficit from the standpoint of the proprietor and asset from the standpoint of the business. And the strange part of it all is that they are totally unconscious of the absurdity of such a use of words. An item cannot possibly represent liability from the same standpoint from which it represents surplus; therefore to call surplus a liability is a contradiction in terms. An item cannot possibly represent asset from the same standpoint from which it represents deficit; therefore to call deficit an asset is a contradiction in terms.

It is the misfortune of accountants that from their school-days they have been taught to believe that in double-entry bookkeeping assets and liabilities must be counted from the standpoint of an intermediate party and therefore it is exceedingly difficult for them to get rid of that idea, although as a matter of fact it is quite as easy to count assets and liabilities from the standpoint of the proprietor (or proprietors collectively) in double-entry bookkeeping as it is in single-entry bookkeeping. When the accounts are closed and the balances are brought down to new account every balance brought down as a credit must represent either liability or net capital and every balance brought down as a debit must represent either asset or negative net capital. In most cases all balances brought down as debits represent asset; there are no balances representing negative net capital except under abnormal conditions. Now of course every accountant worthy of the name knows what his accounts mean and can readily distinguish between credit balances which represent liabilities of the proprietors and those which do not, and therefore he can make his statement in proper form without any difficulty whatsoever. He enters on the left-hand side all the assets and the total and on the right-hand side all the liabilities and the total, and also the balance, which represents the net capital. He carries the balance down on the left-hand side and then enters on the right-hand side all the remaining items, those which compose the net capital, giving the totals to show that the two sides are equal.

It is just as easy to make the statement in that form as in the present form; it does not involve any change in the routine of bookkeeping and does not add one iota to the accountant's work. Yet simple as it is that change in the form of the statement would free the practice of accounting from the reproach of using irrational language and would give it its proper place among the recognized professions. In the proposed form we have a statement that avoids all the incongruities of the present form, a statement that uses words their proper sense, that says asset when it means asset, liability when it means liability, and net capital when it means net capital. If accountants are intelligent enough and progressive enough to adopt it they will find that they have made a wonderful gain in the ability to think clearly and speak clearly. Their language will automatically correct itself; instead of the jumble of self-contradictions which it is at present it will become one of the best and most accurate of technical languages.

Yours very truly,

C. M. VAN CLEVE. Brooklyn, N. Y.

(Mr. Van Cleve's letter does not seem to call for any further reply from the editor of The Students' Department. His protest is against a prevailing practice rather than against any one accountant. Possibly some of the readers of this magazine have ideas on the subject which would be interesting. If so, expressions of their opinions will be welcome.-EDITOR, THE JOURNAL OF ACCOUNTANCY.]

Institute of Chartered Accountants of Manitoba

The twenty-eighth annual meeting of the Institute of Chartered Accountants of Manitoba was held at Lower Fort Garry on June 27, 1914. The treasurer's report, covering a period of seventeen months to June 30th, showed the finances to be in a satisfactory condition notwithstanding the heavy expenditure incurred in connection with the amended act of incorporation. Under the new by-laws, the number of the council was increased from seven to twelve. W. A. Henderson and H. M. Cherry were reappointed representatives of the institute on the council of the Dominion Association. At a meeting of the new council W. A. Henderson and Hubert T. Reade were re-elected president and vice-president respectively for the current year.

Edwin A. Barber, Jr.

We regret to announce the death of Edwin A. Barber, Jr., C. P. A., a fellow of the American Association of Public Accountants through the Virginia Society of Public Accountants.

Mr. Barber was a charter member of the Virginia Society and at the time of his death was its vice-president.

The Virginia Society of Public Accountants adopted resolutions of respect to the memory of Mr. Barber and published copies of the resolutions in the daily papers of Richmond.

Harvard Bureau of Business Research

A study of the retail grocery trade, in cooperation with the grocers themselves, has been undertaken by the bureau of business research of Harvard University. A preliminary study has already been made in Massachusetts and Rhode Island. This investigation will follow the same general lines as the university's successful study of the retail shoe trade which has been in progress since the fall of 1911 and for which detailed information has already been obtained from over six hundred and fifty retail shoe stores in twenty-six states and Canada. The object is to collect facts about business, the actual costs of retailing, and the policies adopted by retailers in handling their problems.

For establishing standards a uniform system of accounts is essential. Hence such a system, similar to the Harvard system of accounts for shoe retailers, is being prepared for the grocery trade. In its preparation the advice of successful grocers will be followed. The cumulative experience of the bureau of business research in its exhaustive study of the shoe trade and in its preliminary investigations of several other commodities will be utilized. The system will be practical and sufficiently simple for any retailer to use. It will be adapted for stores of all sizes.

Agents will be sent out to gather information directly from the retail grocers. When sufficient progress has been made, a summary of the results will be published, as has been done for the shoe trade. Thus the experience of many grocers of varying degrees of ability will be summarized on a comparable basis and standards set up for the practical assistance of each individual grocer.

The work will be conducted with utter impartiality, as scientific. cooperative research; and the specific information obtained from each store will be treated as strictly confidential. The figures which will later be furnished to the trade for the benefit of all the trade will not in any way reveal the identity of the source of the figures. For doing this work the university has a particularly strategic position as a noncompeting and trusted third party. The system of accounts and the published results of the research will be furnished absolutely free to all grocers who cooperate by giving the bureau their own figures.

Frank A. Willison, C.P. A., has been appointed a member of the board of examiners of certified public accountants of West Virginia.

Herbert M. Trowbridge, public accountant, announces that he has removed his offices from suite 808 to suite 616 Ferguson Building, Los Angeles, Cal.

John H. Brown, C. P. A., announces that he has taken into partnership Frederick J. Knoeppel, C. P. A., and that the practice will be continued under the firm name of Brown, Knoeppel & Co., at 1329 Wells Building, Milwaukee, Wisconsin.

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The ownership by one corporation of the stocks or securities of another corporation is a very common incident of modern business. Such ownership may, broadly speaking, be of three kinds : (a) Incidental ownership, for purposes of investment of

surplus funds; as a matter of trade policy; or, as not infrequently happens, as the result of the acceptance of securities in settlement or part payment of an account receivable. Securities so held are usually

of the nature of ordinary current assets. (6) Ownership by an investment corporation, by a bank or

trust company, or by a corporation formed to deal or speculate in securities. In such cases the securi

ties are almost of the nature of stock-in-trade. (c) Ownership which gives one company the control of an

other, so that in effect the company owning the securities is operating through the medium of the second. The control may be through the ownership of all the stocks and securities outstanding of the second company, or by ownership in lesser degree, down to the holding of a bare majority of that class of stock, out of several classes outstanding, which votes for the election of directors and the determination of the policy of the company.

An investment in such securities is, generally speaking, almost of the nature of a fixed asset.

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