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T H Fy 




Other Periodical Statements 




Xon&on : 





502 California Street 




JORDAN & SONS, LIMITED, beg to intimate 
that all Books printed and published by them 
are intended to be sold at the Full Net Price, 
and that the Discount allowed to the Book- 
selling Trade does not permit of any deduction 
being made to the Public. 








balance: shket 



^%A^ ^ 

Txi-enty-sixth Edition (1905). Price 5s. net; by Post 5s. 6d. 

A HANDY BOOK on the Formation, Management, and 
Winding Up of Joint Stock Companies. By F. gore- 

BROWXE, M.A., K.C., and WILLIAM JORDAN, Company 
Registra .on and Parliamentary Agent. 

"The convenient size, clearness of expression, and soundness of 
judgment shown in this Handy Book make it invaluable to business 
men, and most useful to practitioners." — Laiv Magazine and Review. 

Third Edition. Price 4s. 6d. net; by Post 5s. 

BOOK-KEEPING for Traders and Companies. By 

\V. R. ELWORTHY, C.A., and C. C. CAMPLLXG, Accountant. 

This v?ork has been prepared with the object of setting forth the 
principles which govern Book-keeping in a manner suited to the 
requirements of business men, and a Special Feature has been made 
of the Specimen Rulings. 

.Vev Book {1905). Price 3s. 6d. net: by Post 3s. 9d. 

TAX— What to Do, and How to Do it. By 

T. HALLETT FRY, F.S.S., Author of " Income Tax 
Anomalies " &c. 

This Book has been written in the belief that there is room for 
one professing solely careful simplicity of treatment, and being, not 
a technical treatise, but a plain Guide to Taxpayers who require 
help in a difficult subject. All technicalities have been avoided, and 
references to Acts and Cases have been omitted wherever possible. 

The Volume is intended to be helpful to Taxpayers who do not 
aspire to the knowledge of the expert, but simply wish to make for 
themselves the necessary Returns, and to be assured of their legal 
rights when they submit their claims for adjustment and repayment. 







Other Periodical Statements 




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'T^HE object of these pages, it may be broadly 
stated, is to explain without the use of 
confusing technicalities — 

1. The Constitution of the Balance Sheet. 

2. Typical Balance Sheet items. 

3. The essential difference in principle 

between the Balance Sheet and 
certain other periodical accounts 
commonly in use. 

The general public by no means thoroughly 
comprehend such documents, nor can it 
reasonably be otherwise expected ; these 
accounts are of necessity far from being of 
a simple nature, though it would seem that 
many of those who know the least of scientific 
book-keeping and accounts discourse the most 
of the simplicity of such matters. The public 
at large, however, do not in the first place 
rightly grasp the principles upon which the 


• • • • • • 

. V ::•': .... 
.". : : : .*: .*. ••• 


different accounts are constructed, whilst 
confusion is added by the pitfalls that some 
Balance Sheet items provide on sundry 
occasions for the uninitiated. To this need 
of information may in no small degree be 
ascribed the listless attitude characteristic of 
Shareholders in Limited Companies, to whom 
these explanations it is hoped will be especially 
useful. The want of confidence in one's self 
to form a reliable opinion upon a technical 
document whereby one is more or less confused 
is a serious obstacle which it is the writer's 
aim to remove. 

It will be seen that the specim.en Balance 
Sheet herewith is made out as for a Limited 
Company, for the reason that Shareholders in 
such concerns form the most numerous class 
interested in the subject. But, needless to 
say, these pages are not thereby dedicated 
to one class alone ; they are addressed to all 
who may be interested and who have no 
special acquaintance with the intricacies of 
accountancy, for the principle is always the 
same, be the Balance Sheet that of a 
Limited Company or of any other concern or 

The writer has had ample evidence of the 
difficulties presented by technical accounts to 
the therein uninstructed or popular world 
whence comes the material of which the 
average Shareholder in Limited Companies 
is made, and the many erroneous views that 
have come under his notice have been the 
means of suggesting to him that a short 
explanatory work on the lines above stated 
might supply what would appear to be a 
pressing need of the community — no treatise 
upon Book-keeping, but dealing with results as 
shown by the usual and periodical statements, 
and not with the manifold transactions that 
lead to those results ; and these designs as 
expressed in the title are treated in popular 
language between the covers. 

The reader is now particularly recommended to 

direct his attention npon the information contained 

in the two following pages, 8 and 9. 


The following is a Key to the principle of all 
the slightest knowledge of scientific book - keeping 
statements. Like other generalities it is subject to 

x. ir. !z. & so:ms. 


Debit Side. 

[Filled up with the proper particulars, 
this side of the Balance Sheet would 
show X. \ . Z. & Sons' 


of money or money's worth, but only 
those Receipts that remained 


owing, at 31st March, 1905, by 
X. Y. Z. & Sons to various persons 
indicated by the said particulars. 
The opposite side would show what 
has become of these Receipts.] 


[Inner column 
to the outer 
column, for 
adding and 

Bear in mind that the Debit side sets forth what 
Receipts it has had at various times in the past. 

Avoid the pitfall of supposing the Debit side 
single one of those Receipts. 

The Debit side shows what the concern has 
shows what the concern still has. 

By the Debit side we are informed to whom 

The reader should carefully observe the above 
wherein he will in due course be referred to the 

balance Sheets, enabling even those who possess not 
accounts to understand the construction of such 
xceptions, which are dealt with in due course. 

Slxeet SLt 3Xst IVl£ti:>c]:i., X905. 

Credit Side. 

[Filled up with the proper particulars, 
this side of the Balance Sheet 
would show X. Y. Z. & Sons' 


at 31st March, 1905, that have 
been obtained through the Receipts 
opposite. This side should show, 
therefore, what Assets the firm of 
X. Y. Z. & Sons has, to meet its 
Liabilities stated on the other side.] 




[Inner column 
to the outer 
column, for 
adding and 

£ s. d. 




owing by a concern at date of Balance Sheet for 

) state that the concern is still in possession of any 

id and still owes for. It is the Credit side that 

e Possessions, stated on the Credit side, belong, 
itline before resorting to the subsequent pages, 
pecimen Balance Sheet that brings them to a 

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O^HE BALANCE SHEET is a statement 
of one's financial position, made up as 
a rule annually, and so bringing to a close the 
financial year. Its aim is to show the position 
at the end of a period, and not the trans- 
actions for or during a period. The numerous 
transactions that take place cannot either 
conveniently or usefully be shown in detail 
in such a statement, and it is the net result 
at a given date of what has taken place 
from the time when one's financial operations 
w^ere first commenced that the Balance Sheet 
sets forth. 

A simple example may here be useful. 
At the close of igoo an imaginary Thomas 
Brown's furniture, purchased on some previous 
occasion or occasions, had cost ;^400. During 
igoi he made a further purchase of furniture 
that was to be paid for in four quarterly 

• * 

« • 
■I ■> • • ( < 

• •• •«•• ••••• • • , 


instalments of ^^8 each, commencing on 31st 
January, 1901, and the four instalments were 
punctually paid. On 4th December, igoi, he 
sold at cost price an article of the furniture 
on credit to John Jones for ^10. These were 
all the transactions that occurred on this 
account in igoi, and, ignoring any question 
of Depreciation, here follows a statement of 
them, from which it will be seen in passing 
that the effect of striking the balance is to 
deduct the ^10, proceeds of sale, from the 
total on the other side. 






Jan. I 

To Balance (brought 

Dec. 4 

By John Jones for 

forward from 

portion sold 




.. 31 

,, Balance carried 

.. 31 

,, Cash, first quar- 
terly instalment 
for further pur- 




April 30 

,, Cash, second 
quarterly instal- 
ment for further 



July 31 

,, Cash, third quar- 
terly instalment 
for further pur- 



Oct. 31 

,, Cash, fourth 
quarterly instal- 
ment for further 



Jan. I 



To Balance brought 




Thomas Brown has thus paid ;/^422 net for 
the furniture he has left. 

Now this short statement headed Furniture 
Account, after first of all showing the result 
at the end of igoo (;/^40o), affords particulars 
of the transactions for or during the period 
(the year 1901) in which they took place, and 
would not be set out in Thomas Brown's 
Balance Sheet ; whereas the heading, taken 
together with the balance only, thus : '' Furni- 
ture Account, ;^422," states the result of the 
transactions, and would appear as one of 
the items in his Balance Sheet at 31st 
December, 1901, showing the position of the 
matter at that date, the end of a period 
commenced with Thomas Brown's first trans- 
action as to furniture, whenever that may have 
been. This item would similarly appear in 
the succeeding Balance Sheets, subject to any 
further changes occasioned by such matters as 
writing off Depreciation for Wear and Tear, 
fresh purchases, and parting wholly or otherwise 
with the furniture. 

And so the items one and all in a Balance 
Sheet are the result, at the date therein stated, 
of the different accounts, which are subject to 


various changes by way of addition or deduction 
— changes that are recorded, where proper books 
of account are kept, in the manner shown by 
the foregoing " Furniture Account." This, be 
it said, is such an account as would appear 
in Thomas Brown's Ledger, wherein would be 
found not only the details here set out in respect 
of the year igoi, but also similar particulars 
of the transactions that resulted in the balance 
of ^^400 brought forward from 1900. In Thomas 
Brown's Balance Sheet at 31st December, 1900, 
this ;/,'400 would hold a place corresponding to 
that of the later balance of ;/^422 in the Balance 
Sheet at 31st December, 1901. 

As an arrangement of correctly shaped 
materials — of which, however, the settlement 
often demands careful and lengthy consideration 
— the mere formation of a Balance Sheet is a 
simple enough process, and for its accomplish- 
ment the existence of a set of financial books, 
though greatly to be desired, is by no means 
an essential. For the sake of illustration let us 
suppose that an individual, whom we will call 
John Jones, and who keeps no such books of 
account, desires at, say, 31st December, 1901, 


to draw up a statement of the position of his 
finances. With the aid of memory and of 
miscellaneous documents, such as his Bank Pass 
Book, memoranda, unpaid accounts, receipted 
accounts, &c., &c., he proceeds to make out a 
Balance Sheet in the following manner : — By 
putting down on the left-hand side of a 
sheet of paper the debts he owes, that is to 
say, his Liabilities to Creditors ; and on the 
right-hand side, all that he possesses, in other 
words, his Assets ; then filling in the difference 
between the two sides so as to make the total 
of one equal to that of the other. Now a 
surplus of Assets over Liabilities to Creditors 
represents one's Capital, but if, on the other 
hand, such Liabilities be in excess of the 
Assets, the difference would manifestly represent 
a deficiency of Assets, which means insolvency, 
the Capital and more besides having been lost. 
After this explanation we may now consider the 
Balance Sheet prepared as above described, 
and showing in this case a surplus of Assets 
over Liabilities to Creditors amounting to 
£j^S^ los., which has been inserted accordingly 
as Capital. 


Balance Sheet at 31st December, 1901. 

Capital, Liabilities, 

Creditors — 
A. B., Son & Co. 


E. F. & Co. 

G. H. & Sons . . 


£ s. d. 

15 5 4 

8 10 9 

15 6 

1 6 6 

/ s. d. 

25 18 I 
7858 10 o 

^^7884 8 I 

Property, Assets, 

Household Furni- 
ture AND Effects 

Debtor — 

B. C. (Loan) 
Cash at Bank 
Cash in Hand 



I s. d. 

600 o o 
7239 10 4 

10 o o 

30 15 6 


;^7884 8 

The meaning of this is that the combination 
of Assets presided over by John Jones, and 
amounting to ;^7884 8s. id., owes £2^ i8s. id. 
to Creditors, and ;/^7858 los. to himself; in 
other words, ^^25 i8s. id. of the Assets belong 
to Creditors, and ;^7858 los. to John Jones. 

At 31st December, 1902, a year later, having 
still refrained from keeping a set of books, he 
prepares on the same lines another Balance 
Sheet, which need not be here set out, and finds 
that Capital now amounts to ;/^79ii 15s. 4d., an 
increase of ^^53 5s. 4d. during the year. The 
difference between Capital at commencement 
and Capital at the end of a period, if an 
increase, is usually what has been saved out 


of the Income that has arisen during the period, 
though it might in whole or in part be a fresh 
importation of Capital pure and simple. For 
instance, a Legacy, or a Capital Profit, as a 
Profit on sale of an Investment, which is of 
the nature of Capital and not of Income. Had 
Capital decreased instead of increasing it would, 
needless to state, have meant a Loss made during 
the period ; or, in case of, say, a partnership 
concern, possibly Capital withdrawn from the 

There is this to be said for a Balance Sheet 
made up in such a manner : it is better than 
none at all. But if John Jones had kept 
a proper set of books he would not have had 
to depend on memory, and on papers that are 
liable to be mislaid, to supply particulars he 
required ; for each item contained in the fore- 
going Balance Sheet would have appeared in 
such books as the balance or result of the 
account, therein detailed, to which it relates. 
The books would have also afforded full 
particulars of the increase of Capital, ;^53 5s. 46.., 
and, assuming it to have been Profit of the 
nature of Income, these would be details of 
the gross Income for the year and of the 


various expenses deducted therefrom during the 
year, expenses that one customarily provides 
for out of Income, as being in the nature of 
Losses : that is, value expended without an 
Asset of any permanent worth being therewith 
purchased. In the absence, however, of a 
system of accounts, there is nothing to show 
how the increase of £^^ 5s. 4d. is made up ; 
and this is only one out of the numerous 
disadvantages that arise from the neglect to 
keep suitable accounts — a subject, however, 
that hardly comes within the scope of these 
pages to enlarge upon. 

The Balance Sheet of a Limited Company, 
a partnership, an institution, or any other 
concern, is to be looked upon as the account 
of an individual : that is to say, the concern 
must be considered as if it were one individual, 
as having a distinct personality and a separate 
existence of its own, entirely apart from the 
personality of the individuals who compose it. 
This is the commercial view, which is sufficient 
for all purposes except certain legal ones ; and, 
in fact, with regard to Limited Companies and 
other bodies that need not here be particularised^ 
the view is held by the Law itself. 


The Balance Sheet has always two sides, 
separate and distinct from one another. The 
left-hand side is called the " Debit " or 
"Debtor," and the right-hand side the "Credit" 
or "Creditor" side. This is mentioned solely 
for the sake of the convenience it affords when 
referring to the one or the other. 

Note should be taken of the headings of 
a statement that one desires to understand. 
In case of the specimicn Balance Sheet herewith 
the Debit side is headed " Capital, Liabilities, 
&c.," and the Credit side, " Property, Assets, 
&c." Modifications of these headings are to be 
found in different Balance Sheets, but without 
altering the principle in the least. This is 
a matter that need not here be dwelt upon. 
It is referred to at a later stage. 

First, with regard to Capital, Liabilities, &c. 

The reader already will have seen that 
Capital is itself a Liability — one of a peculiar 
nature it is true, but still a liability, as further 
explained on a subsequent page. In fact, all 
the items on the Debit side are liabilities of 
various natures. Notice need not at present 
be taken of the " &c." at the end of this 


In the ordinary course a liability arises 
when an individual receives money, or what 
is reckoned as money's worth, for which that 
individual has not yet given an equivalent. 

And thus the Debit items in a Balance 
Sheet are such receipts of money or money's 
worth as remained liabilities at date of Balance 
Sheet, because the individual person or individual 
concern, as the case may be, whose statement 
it is, had not yet given equal value for them 
or paid them off. It is not sought in the 
Balance Sheet to specify what proportion of 
these debits was received in actual cash, and 
how much in money's worth, though the 
substance in which a particular item came into 
the concern's hands may be indicated. But 
with this the reader will not ordinarily trouble 
himself, the material questions for him to 
consider being, to whom is the concern indebted 
for the Receipts, which the Debit side shows, 
and what has been done with them, as shown 
on the Credit side. To insure, however, a clear 
understanding, it is necessary to explain exactly 
what is meant by " money's worth." 

The Receipts that appear on the Debit side 
of a Balance Sheet have entered into the 



concern's possession, generally speaking, both 
partly in cash and partly in what has been 
considered the equivalent to cash, or money's 
worth — a term that includes property, goods, 
and other assets, and also those services whereto 
a value is attached, though no cash or other 
asset changes ownership in the rendering, all 
of these, though not actual money, being valued 
at a cash figure, and so treated in the accounts. 
Some explanation is necessary of the reference 
to services. An instance that may be given 
is the item "Workmen's Wages Unpaid," a 
debit often arising for inclusion in Balance 
Sheets. The workmen have performed services 
to the concern, that is, they have earned 
their wages, from the last settlement to date 
of Balance Sheet, but they will not be paid 
until next pay-day, which falls subsequently 
to that date ; meanwhile the concern is 
in the position of having received the 
workmen's services without having yet made 
them a return therefor. To these services, 
needless to say, is attributable a cash value 
or money's worth, the amount of which 
appears on the Debit side of the Balance 
Sheet as a receipt — a receipt of the services — 


and as a liability to the workmen. This, of 
course, is not the only instance of the kind of 
thing referred to, but it serves to illustrate the 
principle, which is that of Hiring. A workman 
hires out his labour ; an investor in Stocks and 
Shares hires out his money ; a property owner 
hires out his houses or other properties (by 
letting them to tenants for rent). And thus we 
may find recorded in the Balance Sheet the 
receipt of services that lay not in transferring 
to the concern the absolute ownership of cash or 
other asset, but in the performance of some act 
of value calculated by the concern to operate 
in the acquisition of assets. 

The foregoing remarks as to the shape in 
which Receipts come into the hands of a concern 
may obviate misapprehension, but there is no 
need, as already expressed, to go into such 
matters deeply in order to understand a Balance 
Sheet, for which purpose the all-important is 
to recognise the Debit side as showing on 
a monetary basis those Receipts, of some kind 
or another, that still are Liabilities at date of 
Balance Sheet, and the Credit side as showing 
where the said Receipts have gone to — by 
what they are represented — what the concern's 


Possessions are at date of Balance Sheet. 
It will thus be seen that the total on one side 
of the Balance Sheet must always be of the 
same amount as the total on the other side. 

The balance of the Profit and Loss Account, 
if Profit, a Receipt, naturally appears on the 
Debit side of the Balance Sheet ; and in case 
of private concerns it is, subject, of course, 
to partners' drawings, added to Capital, being 
Profit saved and thereby capitalised. Limited 
Companies, however, keep Capital and Profit 
and Loss Account entirely apart in their 
accounts, in view, for one reason, of the Law's 
requirements. The Balance Profit, available 
for dividend or other appropriation, is thus 
kept apart in the specimen Balance Sheet, as 
will be seen in due course. 

And now with regard to Property, Assets, 
&c., on the Credit side. 

For the present disregard the " &c.," 
which is explained on a subsequent page. 
Property whereto any value attaches is 
obviously an Asset. 

On first acquiring Receipts a concern 
naturally proceeds to expend them in the 
acquisition of Possessions, with a view to making 


Profits and so increasing its Receipts and, at 
the same time, Possessions, for the benefit of 
its members ; the concern, in other words, 
commences business. Profits however are, 
unfortunately, not the invariable rule. Some- 
times Losses result: that is to say. Receipts to 
a greater or less extent are lost. Losses made 
during the period from one Balance Sheet to 
another operate in reduction of a balance of 
former Profits, if there is one, that has not 
otherwise been parted with, supposing, of 
course, the Losses to be the smaller amount, 
for part of the former Profits have been lost ; 
there is thus a net balance of Profits left over 
that would appear on the Debit side of the 
Balance Sheet ; but if there are no such 
earlier Profits from which to deduct the Losses, 
or should the latter be in excess, then Capital 
has been lost, and the balance of Profit and 
Loss Account (a balance Loss) would, in case 
of a private individual or firm, be deducted 
from Capital on the Debit side of the Balance 
Sheet. But such a deduction is not permissible 
to be made by Limited Companies, in whose 
Balance Sheets the item would appear on the 
Credit side, showing the balance of Losses. 


There is no violation of the stated principle 
in any of these respects, as one can readily 
see, on reflection, that the Credit side shows 
what has become of the Receipts opposite. 

Every item on the Credit side of a Balance 
Sheet, if not an Asset, must be a Loss. There 
are Assets, however, that may be worth more 
or less than the figure at which they are stated, 
as elsewhere touched upon. 

The reader is now asked to refer to the 
specimen Balance Sheet that accompanies these 
explanations, and which has been made out on 
the lines of the form given in a Schedule to 
The Companies Act, 1862. It was thought 
desirable to frame the document as for a 
Company Limited by Shares (the class of 
Limited Companies contemplated throughout 
these pages), for a reason already mentioned ; 
but so far as accountancy is concerned there is 
no difference in principle between the Balance 
Sheet of a Limited Company and that of 
any other concern or individual. There is 
an essential difference as to detail, the 
legal feature already referred to, which is 
that a Limited Company must not reduce the 
amount of its Share Capital, or increase it 


except by the issue of further Shares within 
the Hmits originally authorised, without going 
through some more or less troublesome legal 
requirements ; whilst an ordinary partnership 
or association may add Profits saved to its 
Capital, thereby increasing the latter, or may 
reduce its Capital, subject only to the partner- 
ship agreement or the regulations governing 
the individual concern. These, however, are 
methods of procedure that do not in the least 
affect the principle of the Balance Sheet as 
a statement of account. 

Before an explanation of the items contained 
in the specimen Balance Sheet is entered 
upon, it may be stated that the figures in the 
outer columns, those that are totalled, show 
the net position of each account at date of 
Balance Sheet, whilst additional information 
appears in the inner columns. 




'T^HE various items on the Debit side headed 
" Capital, Liabilities, &c.," may be 

explained as follows :■ 

CAPITAL, £5200. 

The particulars of this item show how many 
Shares the Company is entitled to issue — viz., 
10,000 Shares. There is also shown that the 
nominal value of the Shares is £\ each. The 
nominal value is the amount of the Share as 
expressed in the Company's Memorandum of 
Association, and this usually is the figure that 
the Shareholders became liable to pay, as and 
when required, to the Company for their Shares 
at the time of its commencement. The actual 
value is generally a very different thing, being 
the amount, after the Shareholders have acquired 


their Shares, at which one Shareholder can sell 
to another or to an outsider, and this may be 
more or less than the nominal value, depending, 
of course, upon the market price of the Shares 
at the date of their changing hands. The 
nominal value, therefore, directly affects the 
Company's pocket, whilst the actual value does 
not. Subject to a certain qualification, ordinary 
applicants for Shares in a Limited Company 
cannot obtain them from the Company for less 
than the nominal value. The Law forbids it. 
Sometimes, on the other hand. Shares are issued 
at a premium — that is, an amount per Share 
over and above the nominal value. 

This item further show^s that the Company 
has issued 7000 Shares and called up or 
demanded from the Shareholders fifteen shillings 
per Share. It also shows in the inner money 
column the amount, £s^S^^ ^^at has fallen due 
to the Company from the Shareholders in respect 
of the Shares issued to them. From this figure 
is deducted the item. Calls in Arrear, £^0, 
which is an amount, part of the £s^^o, that 
some Shareholder or Shareholders have not 
yet paid, leaving the sum of ^^5200, Capital 
that has been actually received. 


The item, Capital, ^^5200, indicates, there- 
fore, that the Company has received the same 
from the Shareholders, and that it is a Liability 
due to them from the Company. 

Now it has previously been stated that 
Capital is a Liability, though one of a peculiar 
nature. The Shareholders are virtually partners 
(with limited liability) in the Company. It is 
formed of Shareholders. They are the parts 
that make up the Company as a whole. The 
Company having received the Capital from the 
Shareholders, without giving them an equivalent 
in return, therefore owes the amount of the 
Capital to them. But they cannot get it back 
unless under exceptional circumstances. If the 
Company be wound up, anything left over after 
payment of Creditors must be handed over to 
the Shareholders in the proportions in which 
they are entitled to the funds of the Company ; 
and should a Company at any time find itselt 
with too much Capital — a thing that does not 
frequently happen — it may, after observing 
certain formalities and with the necessary 
sanction, return the surplus Capital in the 
proper proportions. In this wise Capital is a 
Liability, and differs from ordinary Liabilities. 


Briefly, Capital amounts to being almost a 
nominal Liability, that is not payable under 
ordinary circumstances to the Shareholders, 
but for which the Company is liable to account 
to them, this duty being performed by means 
of the Balance Sheet. You may only pay off 
Capital under certain peculiar circumstances, 
whilst you must pay ordinary Liabilities under 
usual and ordinary circumstances, assuming, of 
course, that you have the wherewithal to do 
these things. 

The following information may be derived 
from this the first item in the Balance Sheet : — 

That under its existing regulations the 

Company is entitled to issue 10,000 £1 Shares 

That the Company has actually issued .. 7,000 

Leaving unissued . . . . 3,000 

That the Company, having issued 7,000 
Shares of £1 each, has called up 15s. 
per Share . . . . . . . . . . ;^5.25o o o 

That some of the Shareholders (or one of 
them) have not paid in full the amount 
of Calls made on them, and still owe to 
the Company the sum of 50 o o 

That by deducting this /50, Calls Unpaid, 
from the full amount, /5,250, of Calls 
made, we arrive at the amount of Capital 
actually received from the Shareholders 

by means of these Calls ^^5,200 o o 


The Company is of course entitled to demand payment 
from Shareholders whose Calls are in arrear ; in default 
of payment their Shares may be forfeited to the Company 
where the power of forfeiture is provided for. 

That there having been issued 7,000 Shares, 

of /i each, at par ;^ o o 

And there having been called up only 15s. 

per Share 5,250 o o 

The Company is entitled to call up the 

difference, the 5s. per Share yet uncalled £i,'j^o o o 

The term "at par," as used above, means that these 
£1 Shares were issued at £1, and not at a premium. 

Shares are said to stand at — to be worth — par, when 
their actual or market value is of the same amount as the 
sum paid up on them. 

With regard to Calls, provision may be found that so 
much per Share will not be called up before a fixed 
date ; and there are Companies whose regulations make 
it obligatory for a certain amount per Share to remain 
uncalled in the ordinary course of events, so as to provide 
a fund to fall back upon in the emergency of Liquidation. 

That (taking for granted that applicants for 
the Shares would readily come forward), 
were the Company to issue at par those 
3,000 Shares yet unissued as shown 
above, and call them up in full . . . . ;^3,ooo o o 

As well as making the further Call of 5s. per 
Share on the 7,000 Shares that already 
have been issued, as shown above .. i-75o o o 

Further Capital would come into the 

Company's possession, amounting to . . £i,75o o o 

Where Shares are issued as fully or partly 
paid in consideration of some value, other 


than cash, handed over to the Company by 
the Shareholders concerned, the position is 
in principle as if the Company had received 
actual cash and purchased therewith the said 
value, which in either event naturally appears 
on the Assets side of the Balance Sheet, with 
of course Capital on the Debit side. 

The Capital shown in the specimen Balance 
Sheet is, it will have been seen, all in one 
class of Shares, but, as the reader is no doubt 
aware, there are several varieties of Shares 
issued by Limited Companies, an explanation 
of which is hardly within our present scope. 
All, however, are Capital, and the distinctions 
between them, so far as accounts are concerned, 
may be said to affect nothing more than the 
proportions and priorities to be observed as to 
dividends out of profits, and, in the event of 
a Winding-up or Liquidation, as to Capital. 
With some Companies the Capital is under 
the classification of " Stock," which must not 
be confused with the Asset, Stock on Hand, 
dealt with in due course, that appears on the 
Credit side, and consists of the stores in hand 
of goods used in the business. 


Besides the Shares issued, as shown in the 
particulars of the preceding item, Capital, there 
were some other Shares issued at the same 
time and in the ordmary course to certain 
Shareholders (or, as the case may be, to one 
Shareholder) who, it since turned out, could 
not or would not pay up all the Calls made on 
them in respect of these Shares, and who paid 
only a part — this (^2^. Under such circum- 
stances these particular Shares, as well as the 
sum of £2^ paid on them, were forfeited, after 
certain formalities had been gone through ; 
whereupon the Shares themselves became 
unissued, and now form part of the unissued 
Share Capital of the Company ; the £2^ became 
forfeited to the Company and ceased to 
represent Share Capital ; and the Shareholders 
who paid the ^^25 ceased to be Shareholders 
and lost all their rights to that sum, together 
with all other appurtenant interest or rights in 
the Company. 

This item, in fact, has ceased to be a 
Liability to the individuals who, prior to the 
forfeiture, were Shareholders, and from whom 



the Company received the amount, £2^^ ; it 
has become a LiabiHty to the Shareholders 
generally, though, like Capital, it cannot be 
paid to them unless under exceptional circum- 
stances. It may be used as a Reserve, 
applicable for anything in the nature of 
Capital expenditure, but not for payment of 
dividena or of expenses strictly chargeable 
against the Income. 

The number of Shares forfeited should 
appear in the first Balance Sheet after forfeiture, 
but not necessarily in the succeeding Balance 


As already stated, Shareholders, with the 
provision that their liability is limited, are the 
partners in a Limited Company, and share the 
Profits ; if there are no Profits the Shareholders 
get no dividend. Mortgage Debenture Holders 
are not partners in the Company, in any shape 
or form, nor do they share the Profits, but, in 
priority to Shareholders, they get for the use of 
their money a fixed rate of interest, which the 
Company must pay, even where there are no 
Profits, if there are Capital funds available. 


They are, in fact, Creditors who have lent 
money to the Company, receiving in exchange 
the documents called Mortgage Debentures, 
which, together as a rule, constitute a Mort- 
gage of the whole or part of the Company's 
Possessions, each Mortgage Debenture Holder, 
in return for the money he has lent, having 
thus a share of a Mortgage on Assets of the 
Company, and taking a fixed rate of interest 
on his loan — a very different position from that 
of the Shareholder. 

The term "Debenture" is also applied 
to a document which is not in any degree 
a Mortgage, but merely amounts to being 
a promise to repay, bearing interest, and issued 
by the Company to the lender. The Mortgage 
Debenture is naturally the more satisfactory 
and the more usual. 

All Debenture Holders, whether of 
Mortgage Debentures or otherwise, are 
Creditors and not Shareholders. 

Unlike Shares, Debentures may be issued 
to the public below the face value : that is, 
at a discount. 

We may gather from this item, " First 
Mortgage Debentures, ^4000," of which the 


issue is taken as made at face value, that loans 
have been received to the extent of that amount, 
and, if the Company go to the wall, the 
Debenture Holders would be entitled to 
repayment in full out of the Assets covered 
by the Debentures before any Mortgages of 
a lower standing and the general body of 
Creditors, Shareholders coming last of all. 
The footing upon which such charges are 
situated as between themselves depends on 
the conditions of issue and their legal 
significance. There are cases where charges 
can be created over the heads of the holders 
of existing ones. 

From the particulars given it appears that 
forty of the documents, of £ioo each, have been 
issued to the Debenture Holders, and that the 
latter are entitled to be paid interest at a fixed 
rate of four per cent, per annum. 

The item we are dealing with thus indicates 
the persons to whom the Liability is due, but, 
though a Liability due from the Company to the 
Debenture Holders, it is not payable to them 
until such time — perhaps several years hence — 
as may have been fixed by the terms of the 
Debentures ; or until a specified notice is given ; 


or the terms may provide that the moneys 
are not repayable except in the event of the 
Company's failing to duly pay the interest, or 
going into Liquidation. 

Loans received on Debentures of any 
description are Loan Capital of the 

MORTGAGE, £1000. 

This item, simiilar in principle to the 
preceding one, records a loan of ^^looo, for 
which the lender has been given an ordinary 
Mortgage on Possessions of the Company. 

It shows there is a Liability of that amount 
due from the Company, and indicates the 
Creditor to whom it is due : viz., the Mortgagee 
who lent the ;/^iooo to the concern. This 
Liability, as in the case of the last item, 
is not a debt payable at any time, but is 
governed by the conditions attaching to the 

Like Mortgage Debenture Holders, a Mort- 
gagee is a secured Creditor, holding a charge 
on property of the concern and so enjoying 
prior rights as to repayment. The item 
appears in the specimen Balance Sheet as 


a charge not in precedence to the Debentures 
but either in the same rank or subordinate. 

Loans received by the Company on Mort- 
gage are Loan Capital. 

SUNDRY CREDITORS, £682 5s. 6d. 

From this item it appears that something 
has been received by the Company from 
various quarters, say goods for the most part, 
required in a business. This "something 
received " is stated at a monetary figure, 
^682 4s. 6d., the aggregate amount charged 
for the goods or other value by those who 
supplied the Company therewith, and who are 
unpaid, i.e., Creditors at date of Balance 
Sheet. The item consists, like other Liabilities, 
of receipts of some kind that the concern has 
had, and for which, at date of Balance Sheet, 
it has not so far paid or given an equivalent ; 
but in this case ordinary business debts, 
unsecured, payable in the general course. 


This simply means Creditors for £1^^^ to 
whom, instead of paying money, the Company 
has given Bills for that amount, payable by 
the Company at some future date as stated 


in the Bills. These Creditors, at date of 
Balance Sheet, are still unpaid, having received 
not cash but only the Bills — written documents 
which convey the Company's promise to pay 
the money at a future time ; but it is proper 
to show distinctly in the Balance Sheet the 
Creditors to whom such documents have been 
given entirely separate from Creditors who are 
not holders of Bills, and this is shown in the 
manner stated. The title, " Bills Payable," is 
thus a shorter form of saying " Creditors holding 
Bills Payable." 

This item, needless to say, is in addition to the 
preceding one, Sundry Creditors, £^^2 4s. 6d., 
and (ignoring any question of interest which 
might tend to confuse), had the Bills Payable 
not been given, the ;^i50, if still unpaid, would 
be added to and form part of that item, which 
would thus be increased to £'^^2 4s. 6d., unless, 
of course, the holders of these Bills are in 
respect of debts that should be shown separately 
in any event. 


As previously stated, the Debenture Holders 
have made a loan to the Company, of which 
loan the amount is entered in the Balance Sheet 


as received from and as a Liability to the 
Debenture Holders. But the inducement for 
them to lend the money to the Company was 
the fact that they were to receive interest 
thereon, at the fixed rate stated in the Deben- 
tures, in return for the services to be rendered 
to the Company by means of this loan. 

And so, though the amount of the loan 
itself appears, as we have seen, in the Balance 
Sheet, there is something more that, if unpaid, 
must also appear : viz.. Debenture Interest. 
This item then, ^75 6s. 8d., is the amount of 
the Debenture Interest fallen due but unpaid 
at date of Balance Sheet, and is the value 
at which those services received from the 
Debenture Holders, and below explained, 
are placed. 

In principle, services of two distinct kinds 
have been performed, though the first is of 
no use without the second. The first service 
lies in the Debenture Holders placing the 
amount of the loan, ^4000, in the possession 
of the Company, whereupon that sum at once 
becomes a receipt of the Company's and a 
Liability to the Debenture Holders, and so it 
is entered in the Balance Sheet. The second 


service lies in the Debenture Holders allowing 
the loan to remain in the Company's possession, 
for the Company's use, during the length of 
time embraced by the Mortgage Debentures, 
and this service is re-paid by the Company's 
paying to the Debenture Holders interest at 
the rate, in this instance, of four per cent, per 
annum on the amount of their loan. 

Debenture Interest is usually paid half- 
yearly at dates that are fixed by the terms of 
the Debentures. In making out the specimen 
Balance Sheet, the periods during which the 
Debenture Interest becomes due have been 
taken to be the half-years ending 30th June 
and 31st December ; and the dates on v/hich it 
is payable, ist July and ist January, in each 
year. The item. Debenture Interest Unpaid, 
;^75 6s. 8d., is the half-year's interest to 
31st December, 1901, that is payable the 
next day, ist January, 1902, and so, at date 
of Balance Sheet, it is not yet paid. 

We may thus gather from this item that 
services, valued at £^^ 6s. 8d., have been 
received by the Company from the Debenture 
Holders, in that the amount of their loan con- 
tinued in the Company's use for the half-year 


ending 31st December, 1901, services that, 
at date of Balance Sheet, the Company had 
not yet paid for, and of which the amount, 
;^75 6s. 8d., is therefore a Liability. 

It is clear from the Balance Sheet that 
there are no arrears of Debenture Interest. If, 
for example, the interest for the previous half- 
year, to 30th June, 1901, were still owing, it 
would of course be added to and form part of 
this item. Debenture Interest Unpaid, which, 
instead of being {^"j^ 6s. 8d., would naturally 
be about doubled. 

As it is, the item is arrived at as follows : — 

I s. d. 
Mortgage Debentures, ;^400o @ 4 /^ per annum . . . . 160 o o 

One half year's interest is therefore one half of £1^0 . . 80 o o 
Deduct Income Tax at is. 2d. in the £ .. .. .. 4 13 4 

Leaving the amount due to Debenture Holders . . . . £75 6 8 

The Company should always deduct Income 
Tax, for it is the Company that will be called 
upon to pay it to the Income Tax Collector. 

This £y^ 6s. 8d. has been charged on the 
expenses side of the (detailed) Profit and Loss 
Account in the Ledger, being thus deducted 
from the Profits of which the balance for the 
year, £yoo, appears in the specimen Balance 
Sheet after such deduction, which, however, 


though without affecting the result, is commonly 
shown ; for this expenditure, being interest on 
Capital, is in the nature of a distribution of 
Profit, if Profit there be. If the concern were 
making Losses instead of Profits, it need hardly 
be said that the effect of charging: the item 
against Profit and Loss Account would be to 
increase the Losses ; whilst. Debenture Holders 
being Creditors and not Shareholders, the 
services would none the less be owed for, the 
item, Debenture Interest Unpaid, consequently 
appearing in the Balance Sheet just as it 
does now. 

On a former page it is stated that this class 
of item records the receipt of services rendered 
by way of hiring out something to the concern, 
the "something hired" in the present instance 
being money. It depends upon the concern 
and its opportunities as to whether or not the 
services of hiring are attended by the acquisition 
of Assets to represent the value attached to 


Such an item has already been dealt with. 
It may, however, here be stated that services 
valued at £t'^ i6s. 8d. have been received by 


the Company from the Workmen, for the latter 
have to this extent earned their wages from the 
day up to which they were last paid to date of 
Balance Sheet, and — the Company at that date 
having not yet paid them off — the item remains 
a Liability, due, as it states, to the Workmen. 
It is, however, to be discharged on the next 
pay day, after date of Balance Sheet. 

Just as in case of the preceding item we 
have seen that the amount of Debenture Interest 
Unpaid is what is owing by the Company for 
"hire" of the Debenture Holders' money, so 
the item now under consideration informs us 
of the liability due to the employees for their 
personal hire as Workmen. 


For the sake of convenience these two items 
will be dealt with after treatment of the next 
item. Profit and Loss Account. 


The first portion of the details of this item, 
down to and including the figure, ^^53 los., 
is sometimes headed " Revenue Account," and 


the remainder '' Profit and Loss x\ccount." 
Sometimes the whole of it is headed " Revenue 
Account." But it does not much matter what 
the heading is, so long as the details show 
plainly enough the balance of Profits at the 
beginning of the period, and the net Profits for 
the period, together with their disposal. 

The ;/^507 iis. 8d., net balance of Profit 
and Loss Account at 31st December, 1901, is 
Profit ; this is clear from the fact of the item 
being on the Debit side of the Balance Sheet — 
the side that shows the concern's Receipts of 
some kind or other — and Profits are, of course, 
receipts of cash or other asset. Should, how- 
ever, the net balance of Profit and Loss Account 
appear in a Balance Sheet on the Credit, or 
Expenditure side, instead of on the Debit, or 
Receipt side, it would, as already explained, 
mean a Loss. For if at date of Balance Sheet 
there be a balance Profit, the concern must 
have received it in some shape or form, and, 
on the other hand, should there be a balance 
Loss, the concern must have expended the 
amount thereof and lost it. 

The item, £s^7 ^^s. 8d., a receipt of the 
Company's, is the balance Profit remaining 


undisposed of at date of Balance Sheet. Its 
particulars show that — 

1. The Balance Profit undisposed of at the 

end of the previous year, 31st Decem- 
ber, 1900, and carried forward to the 
Balance Sheet we are now dealing 
with, was ;/^300 los., a sum that would 
occupy the same place in the Balance 
Sheet at 31st December, igoo, as the 
■£^0"] IIS. 8d. occupies in the Balance 
Sheet at 31st December, igoi. 

2. A dividend, amounting to £2J^y^ was paid 

to the Shareholders on ist February, 
1901 ; this dividend, being paid on 
account of the previous year, disposed 
of part of the balance Profits brought 
forward, ;^300 los., and we therefore 
deduct the one from the other, the 
balance of Profits left undisposed of 
at this point being ;/^53 los., as the 
figures show. 

3. To this £^^ los. is now added ;^700, 

the net Profit for the year ending 
31st December, 1901, the balance left 
after deduction from the gross Profit of 


all expenses and charges payable out 
of Income in the usual course, includinsr 
Debenture and Mortgage interest. 

4. The balance Profits, ;/^753 los., resulting 
from the said addition, is reduced by 
a further dividend — an intermediate one 
— paid, on account of the current year, 
to the Shareholders on 3rd August, 
1901, to the extent of ^^245 i8s. 4d., 
which leaves the sum of £^0^ iis. 8d. 
undisposed of at the end of the year. 

But it does not by any means follow that, 
because there has been a net receipt of Profit, 
^507 IIS. 8d., the Company at date of Balance 
Sheet has it in cash. These Receipts of the 
Company's, as already explained, are not in 
cash alone, but are partly in money and partly 
in what has been esteemed as money's worth ; 
and moreover, some of the Profits may, for 
sound financial reasons, have been used in the 
business. If there is not sufficient cash at 
Bank and in hand at date of Balance Sheet 
to equal the balance Profits at that date, it 
necessarily follows that (at least) any shortage 


is represented somewhere on the Credit side 
amongst the items other than cash at Bank 
or in hand. 

This may be made more clear in the 
following manner : — 

On the Debit side of the Balance 

Sheet is a balance Profit of .. £5^7 n 8 

On he Credit side are: — 

Cash balance at Bank . . . . ^388 16 6 

Cash balance in hand . . . . 24 o 10 

Which added together make a Cash 

total of .. .. .. .. 412 17 4 

By deducting from the balance Profit 

the total Cash, a balance Profit 

is left amounting to . . . . £94. 14 4 

Now as the totals of both sides of the 
Balance Sheet are of the same amount, (at least) 
this sum, ;/^g4 14s. 4d., not being in cash, 
must of necessity be represented somewhere or 
other amongst the remaining items on the 
Credit side. This is merely to illustrate the 
idea, but it must be remembered that, strictly 
speaking, one must not as a rule pick out 
an item in the Balance Sheet and assume as 
a matter of course that it is represented by 
one or more selected items or part thereof 
on the other side ; for the debit items, as a 
whole, are represented by the credit items. 


as a whole, and it is impossible without 
keeping them all in view to judge which 
represents which. There are exceptional cases 
where this can clearly be done, and an item 
on one side "ear-marked" or identified as 
representing an item on the other. This 
happens, to give a familiar instance, in case 
of a Reserve Fund invested in Securities 
outside the business, when the Reserve 
appearing on the Debit side of the Balance 
Sheet would be represented by the Investment 
Account on the Credit side. 

The particulars contained in a Balance 
Sheet may of course be reduced, for one's 
personal information, into a smaller compass by 
summarising items of the same class on either 
side, when the resulting items, forming a con- 
densed Balance Sheet, may be taken judiciously 
against one another, debits against credits. 

This item. Profit and Loss Account, 
l^o^ IIS. 8d., being on the Debit side of 
the Balance Sheet, is, of course, a Liability, 
though another instance exhibiting peculiar 
features. Now there has been Capital received 
from the Shareholders — a transaction that 
is recorded in the first entry on the Debit 



side of the Balance Sheet. The Company 
has also received a second service from the 
Shareholders by the latter having allowed 
their Capital to remain in the Company's 
use with a view to the production of Profits, 
and for the performance of this second service 
the Shareholders' inducement was the expecta- 
tion of having Profits at their disposal, but 
with the risk of going unrewarded if there 
are no Profits. Whilst Profits are absent 
the said further service has proved of no 
value, and Profit and Loss Account is not 
afforded a place as a Receipt on the Debit side 
of the Balance Sheet. In the case, however, 
under our notice, this account, presenting an 
available balance of £^oy iis. 8d., records the 
receipt of such further service. Profits being 
received on the Shareholders' account and by 
virtue of the use of their Capital ; and so, in 
whatever shape Profits enter the Company's 
possession, whether in cash or its deemed 
equivalent, they are derived from the second 
service of the Shareholders as above described. 

The balance of Profit and Loss Account, 
^507 IIS. 8d., besides being a receipt of the 
Company's, is thus a Liability due to the 


Shareholders, but of this pecuHar nature : that 
it is not as a matter of course actually payable 
to them. Under such conditions as may be 
imposed by the x\rticles of Association they 
may direct that the whole or part of these 
Profits be paid to themselves in dividend, or 
kept in hand, or used in meeting expenditure 
such as would not otherwise be provided for 
out of Income : in short, a Company's net 
Profits are at the Shareholders' disposal. As 
already stated, w^e have proceeded on the basis 
of one class of Shares only; the destination of 
a concern's Profits, where there are priorities," 
as Preference Shares, is naturally affected by 
the rights attaching thereto. The Articles 
contain, as a rule, provision with regard to the 
Shareholders' General Meeting, which must be 
held at least once in the twelve months; and at 
such Annual Meeting — taking place after the 
close of the financial year — the balance Profit 
is disposed of. The Directors, however, may 
be found empowered to declare during the year 
an interim or intermediate dividend, should 
circumstances so warrant, without having to 
obtain the sanction of a General Meeting of 


The amounts of the two dividends deducted 
from the Profits in the specimen Balance Sheet — 
;/^247 and ;/|'245 i8s. 4d. — are arrived at in the 
following manner : — Ten per cent, per annum on 
the Capital received, ^5200, is the sum of £^20 ; 
one half of this, £2^0^ is therefore the gross 
amount of dividend for the half-year ; and ^260 
less Income Tax at one shilling in the pound 
in the first, and one shilling and a penny in 
the second case (the rates of Tax prevailing 
in the respective periods), affords the above 


There may be thought to exist some sort 
of contradiction regarding this item in the 
Balance Sheet. Under the heading, Profit 
and Loss Account, is shown that two dividends 
were paid during 1901, and partly, let us say, 
in the one and partly also in the other, is 
included the (j^ gs. yd. which the Balance 
Sheet elsewhere states to be the amount of 
Unclaimed, z.^.. Unpaid Dividends at the end 
of the year. But the explanation is this : — 
The two sums, ;^247 and ;^245 i8s. 4d., were 
set aside out of Profits for payment of 


dividends which, to all intents and purposes, 
were paid as stated on ist February and 
3rd August, 1901, respectively, for on those 
dates the Company sent out to the Shareholders 
all the dividend warrants, that is, cheques on 
the Company's Bankers for the various amounts, 
due to the Shareholders on their respective 
holdings of Shares, that in total make up those 
two dividends of £2^"] and ;^245 i8s. 4d. But 
at 31st December, igoi, a portion of the 
dividend warrants, amounting to ;^9 gs. yd., 
had not been presented by the Shareholder 
(or Shareholders, as the case may be) entitled 
to do so to the Company's Bankers for 
payment; such dividends are consequently 
unclaimed and unpaid at that date, thus 
remaining Liabilities as shown in the Balance 
Sheet. The position is that the amounts, 
Liabilities to the Shareholders, set aside out of 
Profits for dividend, have not been subjected 
to deduction so far as this ;^9 gs. yd. is 
concerned ; nor has the Cash at Bank. The 
same result, arithmetically, would be arrived 
at by striking out of the Balance Sheet the 
item " Unclaimed Dividends, ;^g gs. yd.," and, 
instead of stating the dividends in full at ;^24y 


and ;/^245 i8s. 4d., by substituting for those 
figures the dividend totals actually paid by 
the Company's Bankers up to and including 
31st December, 1901. For this purpose, how- 
ever, it will simplify matters, without affecting 
the result, to consider these Unclaimed 
Dividends, £(^ gs. yd., to be wholly in respect 
of the second dividend of ;^245 i8s. 4d. ; 
and so : — 

Full amount of dividend warrants sent out on 

3rd August, 1901 . . . . . . . . /245 18 4 

Less Unclaimed Dividends at 31st December, 1901 9 9 7 

Leaving the amount actually paid by Company's 

Bankers . . . . . . . . . . . . ^236 8 9 

On this basis,' instead of ;/|^245 i8s. 4d., 
^236 8s. gd. would be the figure to be deducted 
from the £"J^Z los. shown under the heading 
of Profit and Loss Account in the Balance 

And so, from the amount £']S^ 10 o 

Deduct the above figure . . 236 8 9 
Leaving the net balance of 

Profit and Loss Account /517 i 3 instead of ;^507 11 8 

But it can readily be shown that this would 
be quite wrong in principle. What we have 
done has had the effect of taking out the 
/g gs. 7d. in the one place and putting it in 


asfain in another. Although we have struck 
it out as Unclaimed Dividends it has become 
added to the net balance of Profit and Loss 
Account, for : — 

Net balance of Profit and Loss Account per 

Balance Sheet .. .. .. .. .. £5^1 n 8 

AM Unclaimed Dividends . . . . . . . . 9 9 7 

Leaving the figure arrived at as above shown . . ;^5i7 i 3 

And this is where it would be wrong. 
Unclaimed Dividends are a Liability to a 
limited number, to one or to a few of the 
Shareholders, whilst the net balance of Profit 
and Loss Account is a Liability to the general 
body of Shareholders and at their disposal. 
It should therefore not be confused in any 
way with Unclaimed Dividends, which are not 
at their disposal, and will not revert to the 
Company — at all events until after a consider- 
able lapse of time. It would thus be inaccurate 
and misleading to include these two items in 
one amount ; they must be stated separately 
and distinctly as in the specimen Balance 

The particulars as to Unclaimed Dividends 
and Profit and Loss Account might, it is true, 
but without any necessity, be set forth in the 


Balance Sheet with the following additions and 
modifications, the result, as will be observed, 
remaining exactly the same : — 

Unclaimed Dividends — 

Amount set aside out of Profits, as below stated, for 
Dividend : 

For the half year ending 

31st December, 1900 . . ;^247 o o 
For the half year ending 

30th June, 1901 .. .. ^245 18 4 

A92 18 4 
Less total amounts of Dividend 
Warrants presented to the 
Bankers for payment and cashed 
by them . . . . . . . . ;^483 8 9 

/9 9 7 

Profit and Loss Account — 

Balance at 31st December, 1900, as 
per last Balance Sheet . . . . /300 10 o 

Less amount set aside for Dividend 
@ 10 % per annum for the half 
year ending 31st December, 1900 ^247 o o 

;^53 10 o 
Add Balance Profit for the year 

ending 31st December, 1901 .. ;^7oo o o 

£753 10 o 
Less amount set aside for Dividend 
@ 10 % per annum for the half 
year ending 30th June, 1901 . . ;^245 18 4 

; ^507 II 8 


The title " Reserve Fund," as used on the 
Debit side of the Balance Sheet, may be taken 
to be the same thing as "Reserve Account" 
or " Reserve," these being interchangeable 


terms so far as need concern the novice. The 
item we are now considering is Profit set apart 
in one or more years and has thus once formed 
portion of the balance of Profit and Loss 
Account. That is to say, if this £ioo had not 
been transferred or set aside out of Profits, 
the latter, the net balance of Profit and Loss 
Account, would have appeared as so much the 
larger in amount. It has therefore been 
received in the same shape as the Profits 
themselves — in cash or other asset deemed 
the equivalent to cash. 

The purpose for which the Reserve is created 
should, as a rule, be stated in the Balance 
Sheet. It is not so in the specimen Balance 
Sheet, because the item we are dealing with has 
therein been given as a general illustration ; 
for all true Reserves are alike in principle 
though formed for different requirements, 
and their object is always the provision 
against some expenditure or loss that may 
— or will — befall to be coped or dealt with 
in the future. 

A Reserve Fund may be found to have been 
invested outside the business, when the Invest- 
ments representing it will appear on the Credit 


side of the Balance Sheet. If not invested 
outside the business the amount must neces- 
sarily have been employed therein, the Reserve 
thus being represented somewhere amongst the 
items on the Credit side. 

The Reserve is a Liability to the Shareholders, 
but of this peculiar nature : that having been 
laid aside out of Profits it is not intended as 
a sum due to be paid to the Shareholders, but 
to fulfil the purposes for which they created 
it ; these purposes, as we may presume, being 
for the Company's benefit, and therefore for 
benefit of the Shareholders. In case, however, 
of a Reserve Fund created in good times for 
the purpose of keeping up the dividends should 
less favourable times appear, it is contemplated 
that the whole or part of the Reserve may at 
some time or other be paid to them. 

So much at the present for Reserves that 
have their origin in Income ; there are some that 
originate from Capital. Profit may accrue to a 
Company, not an Income Profit, but a Capital 
Profit, in the nature of an increase of Capital. 
As Limited Companies cannot, by a stroke of 
the pen, increase their Capital, even though in 
principle it has grown larger than the amount of 


Capital stated in the Balance Sheet, such an 
increase should be treated as a Reserve. An 
item of this kind in the Balance Sheet is not 
always stated in direct terms to be a Reserve, 
it being considered that the title showing the 
origin of the item is a sufficient indication of 
its nature. Instances of Capital Profits are : — 
Forfeited Shares, Premium on Shares, Profit 
on sale of business premises, land, patents, or 
other Assets of which purchasing to sell again 
was not in the course of the Company's ordinary 
business. Reserve Funds of a Capital origin 
are properly available for any purpose to 
which Capital itself may be devoted, and, be 
it only for discretion's sake, not for payment 
of dividends. 

In view of the misleading way in which 
Reserve Accounts have at times been treated, 
let the reader particularly note : — Whilst the 
Reserve appearing on the Debit side may be 
viewed as having formerly been received in 
some shape or other, the questions are : Has it 
been retained ? What is the position now ? And 
even if it appears as represented by specific 
Investments, the Reserve itself may in efi"ect 
have ceased to exist ; for should an item on the 


Assets side be worth less than the figure at 
which in the outer column it is stated, to the 
extent, say, of the same amount as that of 
the Reserve opposite, such Reserve may in 
prudence be considered no longer existent, 
any value, that on the Credit side had 
represented it, taking the place made vacant 
by the said shrinkage in the Credit item. 

Here closes the explanation of the Debit 
side of the Balance Sheet whereon are set 
forth the Receipts that the concern has had 
without having yet given an equivalent, and 
that are therefore Liabilities, at date of Balance 
Sheet, thus showing to whom the Possessions, 
stated on the other side, belong. 




"T^HE various items on the Credit side of 
the Balance Sheet, headed " Property, 
Assets, &c.," are now to be considered, premising 
that a concern may be looked upon as a kind 
of trustee holding the Possessions shown on the 
Credit side in trust for the persons indicated on 
the Debit side. And, be it remembered, credits 
as well as debits are stated in the position at 
which they stood on the date of Balance Sheet. 


The value stated, in this case ;^i5oo, is 
usually the amount that the Company paid for 
the property, and in consequence the Asset may 
be worth more or less than the figure at which 
it is stated in a Balance Sheet ; for it has 
possibly gone up in value or appreciated ; it may 


have gone down in value or depreciated. This 
subject is one of many that cannot conveniently 
be dealt with in all their bearings within the 
restricted space and aims of a work of this 
description, but the following remarks should 
not be omitted. If an Asset is worth more than 
the amount shown in the Balance Sheet the 
concern is at least on the safe side ; and on the 
other hand, when a fall in value of Freehold Land 
does take place, it may be entirely in the nature 
of a fluctuation ; differing from the Depreciation 
in respect of a purchase of Leasehold Land — an 
Asset that wastes away or depreciates year by 
year until the Lease has run out — when it is 
worth nothing to the Lessee because of its 
reverting to the owner of the Land who granted 
the Lease ; differing also from the Depreciation 
of Machinery, for Machinery wears out, and, 
apart from Wear and Tear, may depreciate 
through becoming out of date. 

The wasting of Leasehold Property, the 
Wear and Tear of Plant and Machinery, and 
the like, are anticipated when the Assets are 
purchased, and so can be regularly provided 
for year by year, whilst Freehold Land may 
never depreciate. 


Considerable inconvenience would be caused 

were fluctuations in the value of Freehold Land, 

or of other fixed Assets, to be continually given 

effect to in the Balance Sheet and accounts ; 

but any fall in value of a serious nature should, 

assuming it has not been written off out of 

Profits or Reserve, be so pointed out on the 

face of the Balance Sheet as not to conceal 

the diminished worth of the Assets. Fixed or 

permanent Assets, it may be mentioned, are 

such as are acquired to keep for the purpose 

of carrying on the business ; whilst the 

composition of floating or circulating Assets 

is continually changing ; and, broadly speaking, 

provision for Depreciation, essential in case of 

the latter class, has been considered as not 

obligatory, though highly desirable, with regard 

to the former. 

;^ s. d. £ s. d. 


Less Depreciation ... 150 


These are Buildings that stand on the 
Freehold Land. The figure at which they 
appear in a Balance Sheet is usually the amount 
paid for them, subject to deduction from year 
to year of Depreciation. The instance before 


US shows the balance of this account at the end 
of last year, ^^3000, less the amount written off 
for 1901, ;/^i5o, leaving the balance at the end 
of this year, £2S^o. 

Buildings naturally "wear out" in a lapse 
of years. The rate to be deducted each year 
to cover this "wearing out" or Depreciation 
depends on circumstances — as the quality of 
building, and the purposes for which the 
premises are used — and is thus an Estimate. 
Sometimes the Buildings, stated in the Balance 
Sheet at cost price without any deduction for 
Depreciation, are claimed to be maintained 
at that value by means of the Repairs and 
Renewals expended out of Profits. 

Enquiry is of course invited where there 
appears to be no provision for Depreciation 
of this or any other Asset with a similar 

;^ s. d. £ s. d. 

Less Depreciation ... 327 5 6 

3272 14 6 

These are Buildings, together with the land 
on which they are erected, whereof a Lease 
has been purchased. 


Like Freehold Buildings, they are shown 
in the Balance Sheet usually at cost price, 
subject to reduction by annual Depreciation, 
based in this case on the length of the Lease. 
Let us now suppose that the Leasehold is 
found stated in the Balance Sheet without any 
deduction for Depreciation having been made, 
whilst on the Debit side appears that class of 
Reserve called Sinking Fund, formed out of 
Profits by setting aside an amount on exact 
lines each year so that when the Lease expires 
the Fund, wherein interest has been taken into 
account, will amount to the sum for which 
that Asset was purchased ; the Sinking Fund 
should generally be invested outside the 
business, the investments representing it 
appearing amongst the Assets on the Credit 
side of the Balance Sheet. The object of 
this is, of course, to reserve out of Profits 
a precisely computed amount, and to put it 
away in a safe place from time to time, so 
that when the Lease has run out the Company 
will have realisable investments worth the sum 
paid for it ; a replacement out of Income of 
the lost Capital, in an available form. But the 
question of non-existent Reserves is involved 



in this connection ; and the proper course is 
to deduct the Sinking Fund as Depreciation 
from the wasting Asset on the Credit side, 
and not under such conditions to place it as 
a Reserve on the Debit. 

The same objection would manifestly apply 
if, Depreciation having, as in the foregoing 
instance, already occurred (whether of Lease- 
hold or other Asset), a simple Reserve were 
shown on the Debit side of the Balance Sheet, 
the credit item not being subjected to the 
deduction of Depreciation. 

;^ s. d. £ s. d. 


Less Depreciation ... 112 


This item usually appears at cost price 
subject to reduction from year to year by 
Depreciation, the appropriate rate of which 
depends on circumstances, and is an Estimate. 

Here may be stated with regard to Depre- 
ciation in general that, instead of deducting 
year by year from the Asset the annual 
amounts reserved out of Profits for Depre- 
ciation, a similar result, so far as regards 
arithmetical correctness, would be arrived at 


by stating them in total, on the Debit side, 
thus in fact forming a '' Reserve " of the 
character referred to under the previous 
heading. Leasehold Buildings. 

Had we before us the Profit and Loss 
Account for the year ending 31st December, 
1901, and containing the details that result 
in the balance Profit of £joo which appears 
as the balance for that year in the specimen 
Balance Sheet, we should find, amongst the 
items of expenditure, Depreciation, perhaps 
in one sum, £^"^9 5s. 6d., perhaps in the three 
items, ;/^i5o, £^^2^ 5s. 6d., and £112^ that have 
just passed under our notice and together 
amount to that figure. Depreciation being 
charged amongst expenditure in the Profit and 
Loss Account means, needless to say, deducting 
it from Profits ; and here is an example of 
the two-fold aspect of all transactions that 
double-entry book-keeping so strongly manifests. 
By the fact of Depreciation being deducted from 
an Asset we learn that so much is treated as 
lost, whilst in the account designed to include 
a record of Losses — Profit and Loss Account — 
the Depreciation must also be entered, on the 
Expenses side. It is thus recorded in the 


accounts as a Loss that, reducing the value of 
an Asset, at the same time reduces a Liability 
to the Shareholders — viz., the Profits. 


This figure is arrived at by the valuation 
known as Stock-taking, made at the date of 
the Balance Sheet. The Stock should, to 
state a rule, be valued at either cost price 
or the market price of the day, in this case 
31st December, 1901, when it is taken, which- 
ever should happen to be the lower. This 
has the effect of providing for Depreciation 
if the value has fallen below cost ; and, on 
the other hand, is to avoid anticipating Profit 
where the value has risen. 


Less Debts considered 

Doubtful and Bad ... 50 

£590 10 

These Debtors owe £^A^ los. to the 
Company for, let us say, goods the Company 
has supplied them with, this figure including 
such as are deemed to be Doubtful and Bad, 
together with Good Debts ; Debts considered 
Doubtful and Bad, £^0, being deducted, the 
result, ;^590 los., is naturally the amount of 


Debts to be considered Good. On taking up 
a Balance Sheet it may, however, be found 
that the amount of Good Debts only appears ; 
without showing, for instance, the £^^^0 los. 
and the £s^j the particulars given might be 
" Sundry Debtors after making provision for 
Debts considered Doubtful and Bad, £s^^ los.," 
or even " Sundry Debtors, ^"590 los.," the outer 
money column, the one that is totalled, 
remaining unchanged. 

The sum of £'^0, besides reducing the 
amount of Sundry Debtors, has also been 
deducted from Profits. Here again is strongly 
pointed out that in double-entry book-keeping 
every transaction is shown to be of a two-fold 
nature. The worth of the Asset has fallen, 
as estimated, to the extent of ^^50, the amount 
provided against Bad and Doubtful Debts, 
which is therefore deducted so as to show the 
Debtors at a fair value. This apprehended 
decrease is thus dealt with as a Loss which 
must be placed amongst the Losses or Expenses, 
in the (detailed) Profit and Loss Account, as 
a deduction from the Profits. 

Instead of being treated in the manner 
shown by the item now under our consideration, 


the amount, ;^50, seeing that it is, in this 
instance, anticipatory, and not in respect of 
Debts proved to be bad, could be placed 
without impropriety as a Reserve for Bad and 
Doubtful Debts in the outer column on the 
Debit side of the Balance Sheet, whilst Sundry 
Debtors, ;^640 los., would appear in the outer 
column on the Credit side. The crossing of 
items in this way is also referred to on 
a subsequent page. As already alluded to, 
the items of Depreciation and the Assets they 
are deducted from in the specimen Balance 
Sheet might be similarly, though in their 
case erroneously, treated, and still leave an 
arithmetically correct statement. 


The meaning of this item is that certain 
Sundry Debtors, not included amongst those 
shown by the last item, instead of paying 
their debts, have given Bills (a term comprising 
both Bills of Exchange and Promissory Notes) 
payable to the Company in cash at some future 
date, and that the Company had these documents 
in hand and unpaid at date of Balance Sheet. 


If they had been discounted, i.e.j cashed at 
a discount, by the Bankers, Bills Receivable 
would not appear in the Balance Sheet, whilst 
the proceeds would have increased Cash at 
Bank, leaving the Company with a Contingent 
Liability ; for, should a debtor fail to pay off 
his Bill on its falling due, the Bank must not 
be the loser, but would look to the Company 
for repayment, and the Company in its turn 
would have to take whatever course against 
the Debtor that might be thought fit. If not 
already covered by an appropriate Reserve this 
Contingent Liability, assuming there is fear of 
loss, should be suitably provided for out of 
Profits, the amount so to be reserved depending 
on the merits of the case. 

Had these Bills not been given to the 
Company, this item, ;^I30 los., if still unpaid, 
and eliminating any question of interest, would 
form part of the last item. Sundry Debtors, 
increasing it to £721, the two amounts added 

The palpable object of this item is to show 
separately in the Balance Sheet the Debtors 
who have given such documents to the 


INVESTMENTS, £95 17s. 3d. 

These are usually shown at cost price, 
in respect of which, however, any serious 
depreciation should at least be revealed. 

The item, consisting of investments entirely 
outside the Company, is, in the present 
instance, intended to convey the meaning 
that ;^95 17s. 3d. out of the ;/^ioo Reserve, 
that appears on the Debit side, is thus 

CASH AT BANK, £388 16s. 6d. 
CASH IN HAND, £25 Os. lOd. 

These items speak for themselves. It may 
however be mentioned that a Bank balance 
on the Debit side would mean a loan or over- 
draft received from the Bankers and owing to 
them at date of Balance Sheet. 

This concludes the explanation of the Credit 
side of the Balance Sheet, whereon appears 
a statement of what the Company has done 
with the Receipts shown on the Debit side — 
a statement of the Possessions that by virtue 
of those Receipts the Company has acquired, 


and retained at date of Balance Sheet — 
Possessions that it holds as in trust for the 
persons, indicated on the Debit side, to whom 
the Receipts are attributed. And, as previously 
explained, should Losses have unfortunately 
occurred, they too appear, in case of Limited 
Companies, as an item on the Assets side of 
the Balance Sheet, representing a portion of 
the Receipts set forth on the Debit side that 
might have been used in acquiring Possessions 
but has been lost instead. 




^T^HE Balance Sheet, being a concentration, 
or, to use an expressive term, a '' boiling 
down " of the double-entry books, is thus a 
statement of the result, at a particular date, of fl 

the numerous changes that have taken place, / 

since the concern's very commencement, in 
the different accounts contained in the books, <• 

and that are occasioned by the manifold 
transactions, large and small, involved in the 
carrying on of a business ; and so, be it 
repeated, the Balance Sheet is an account of 
a concern's position at a given date, showing 
the Liabilities and the Assets. 

The detailed statement entitled Profit and 
Loss Account is of a very different nature. 
In the specimen Balance Sheet we have 


already met with the item, *' Balance Profit 
for the year ending 31st December, 1901, 
£700.'^ This figure is the balance or net result 
of the detailed Profit and Loss Account for 
the year 7907, which account, were it before 
us, would be found to set forth the gross Profits 
on one side and the various Expenses on the 
other, the excess of the former over the latter 
being this £yoo, the Balance for the year. 

The Profit and Loss Account is therefore 
a statement showing in detail the Income, and 
the Expenditure chargeable against Income, 
of a concern for a definite period, usually 
one year. 

Where the books are kept by double-entry, 
the Balance Sheet is a summary of all the 
Ledger Accounts, whilst the Profit and Loss 
Account is one of those Ledger Accounts. 

Limited Companies, from motives of policy, 
do not, in many cases, publish a detailed Profit 
and Loss Account with the periodical Balance 
Sheet, and it has been thought unnecessary 
to supply a specimen herewith ; moreover, the 
typical items need little or no explanation 
further than such as already has been 
incidentally given ; suffice it to explain the 


nature of the statement and the essential 
difference in principle between it and the 
Balance Sheet. 

There should be mentioned that although 
in the Balance Sheet Receipts appear on the 
Debit side and Expenditure on the Credit, 
the reverse is the case with the Profit and Loss 
Account, as usually set forth, showing on the 
Debit side the Expenses and on the Credit 
side the gross Income. This method is now 
used, it may be presumed, as a matter of 
custom ; but when a detailed Profit and Loss 
Account is submitted to those interested it 
would certainly be clearer, at the least, for the 
sides to be reversed so as to state Income 
on the Debit side and Expenditure on the 
Credit — a basis uniform with that of the 
Balance Sheet. 

But in any case a perusal of an item or so 
will satisfy one as to which side shows Income 
and which shows Expenses, and the point is 
referred to solely with the object of guarding 
the novice against confusion should he find 
a Profit and Loss Account accompanying the 
Balance Sheet but not on the same footing in 
the respect mentioned. 


The Income and Expenses in Profit and 
Loss x\ccount are not only those received and 
paid in actual cash ; all Income earned during 
the period appears, whether received in cash 
or still owing to the Company ; and all Expenses 
incurred during the period, that are a charge 
against Income, appear, whether paid in cash 
or still owing from the Company. This, 
needless to say, is the indispensable principle 
for accurately determining the Profit or Loss 
made during the period. 

But on perusing a detailed Profit and Loss 
Account one may, if one so desires, consider 
the Expenses as having been paid, and the 
Income as having been received, in cash ; they 
are all expressed in money, and the Account 
itself cannot reveal what proportion has been 
in cash and what has not. The error must, 
however, be avoided of assuming that at the 
end of the period the concern necessarily has 
in cash the balance Profit, the result of Profit 
and Loss Account for that period. It is 
requisite to consult the Balance Sheet to see 
if there is a sufficient cash balance on the Credit 
side to represent the balance of Profits on the 
Debit ; and even then it must be borne in mind 


that ordinarily we are not entitled to assume 
any one item to be specially represented by 
any one item opposite, for, as previously stated, 
the items on the Debit side of a Balance Sheet 
are collectively represented by the items on the 

The detailed Profit and Loss Account 
may be found shown in three parts — (i) The 
Trading Account, comprising Sales and Working 
Expenses ; (2) the portion to which the balance 
of Trading Account is carried, here also 
appearing the Expenses of Management and 
any Income not strictly a Trading Profit ; 
(3) this shows the balance of Part No. 2 
brought down, together with items recording 
disposal of the Profit. Where such a method 
is followed it is merely for the sake of the 
greater information the analysis affords, and 
the final balance, of net Profit or Loss, is, of 
course, quite unaltered in the process. 

Bearing in mind that the balance of 
Profit and Loss Account is in effect the result 
of deducting the total of the items on one 
side from that of the items on the other : — 

The Profit and Loss Account may be 
found to state, on the Expenditure side, Stock 


on Hand at commencement of period, and 
Purchases during period ; and on the Income 
side, Sales during period, and Stock on Hand 
at end of period. It is puzzling for the 
novice to find Stock, an Asset, in an account 
that he is told contains Profit and Loss only. 
This, however, is only a mode of bringing in 
the gross Profit or Loss on Sales ; for Stock 
at commencement added to Purchases of Stock 
during period, less Stock at end of period, 
leaves Stock used during period, whereof the 
figure (the exactitude of which, be it stated, 
is dependent on Stock-taking valuations) 
deducted from the amount of Sales, gives us 
the gross Profit on Sales. Of course, if the 
amount of Stock used be greater than that of 
the actual Sales, the latter deducted from the 
former would leave the gross Loss on Sales. 

Should the reader find such particulars 
in a Profit and Loss Account he may be able 
to follow this explanation the more readily by 
tracing the items out on paper. 

The Income and Expenditure Account is 
another periodical statement. It takes the 
place of Profit and Loss Account in case of 
Associations, Institutions, and the like, that 


are carried on not for the purpose of paying 
dividends but with the object of paying their 
way in some non-trading pursuit. The differ- 
ence between the Profit and Loss Account 
and the Income and Expenditure Account Ues 
in the title, for both Accounts are composed 
of items of an Income nature, and of an 
Income nature only. 

Another periodical statement is the Cash 
Account or Receipts and Payments Account. 
It is merely a summary of the Cash Book, 
and, unaccompanied by a Balance Sheet, is 
used in case of many Charitable Institutions 
and other organisations, where it is thought 
sufficient to show only the actual cash receipts 
and payments that have occurred during a 
period. This Account may be found to show 
Receipts on the Debit side and Payments on 
the Credit, but in any case there can be no 
difficulty in finding, by a glance at the items, 
which side is which. 

To make now a comparison of the four 
statements upon which our attention has been 
directed : — 

The Balance Sheet records transactions as 
to both Capital and Income. 


The Profit and Loss Account records 
Income transactions only. 

The Income and Expenditure Account 
records Income transactions only. 

The Receipts and Payments Account 
records transactions as to both Capital 
and Income. 

There is, however, the widest difference 
between a Balance Sheet and a Receipts and 
Payments Account ; they are of entirely diverse 
natures, the former being a statement of the 
Liabilities and Assets at a given date, whilst 
the latter of the two shows merely the actual 
cash transactions during a given period, 
including any that relate to Capital as well 
as those of an Income character, but without 
setting forth the position of the Liabilities and 
Assets. The purchase of an Asset, for instance, 
w^ould be shown in the Receipts and Payments 
Account for the period in which it was paid 
for, but the Asset would not be carried forward 
and appear in succeeding Accounts as it would 
in consecutive Balance Sheets. 

The fact is that the three statements, Profit 

and Loss Account, Income and Expenditure 



Account, and Receipts and Payments Account, 
are subsidiary to the Balance Sheet. As already 
stated, Profit and Loss Account and Income 
and Expenditure Account are different names 
applied to, in principle, the same statement. 

The balance Profit, or Loss, appears as an 
item in the Balance Sheet, and the Profit and 
Loss Account shows the details by means of 
which that balance is arrived at. 

The balance of Cash in Hand also appears 
in the Balance Sheet, and by summarising the 
contents for the year of the Cash Book so as to 
classify the items, we should arrive at a Receipts 
and Payments Account for such period, showing 
the details by means of which that balance is 
arrived at. 

The aim having been to give the uninitiated 
a conception as to the essence of these subsidiary 
statements, our consideration of the subject 
may now be drawn to a close. To deal with 
the immense variety of items that occur in 
accounts were, needless to say, an interminable 
task. But after the reader has carefully 
considered the remarks upon the Balance 
Sheet and typical items thereof, and formed 
a clear notion of the construction of the 


different subsidiary accounts referred to, he 
will find that the rest is a matter of reflection 
and perhaps a judicious enquiry. Regarding 
our subject in the main, the many debatable 
points, variations in form, and exceptions to 
be met with, render it a difficult one to 
generalise upon ; a case is to be considered 
on its merits. 

Some explanation may now be given of 
certain Balance Sheet items in addition to 
those already dealt with ; it being deemed 
preferable to introduce them at the present 
stage, they were not included in the specimen 
Balance Sheet. Consideration of these items 
is entered upon in the next Chapter. 






npHIS appears on the Debit side of the 
Balance Sheet. Supposing 10,000 Shares 
of the nominal value of £1 each in a Limited 
Company are issued to the public at l^i 2S. per 
Share, each Shareholder is liable for £1 2s. 
in respect of every ^i Share allotted to him, 
the extra 2s. being the Premium. There is 
thus a Profit to the Company, but a Profit 
of the nature of Capital, an increase which, 
for a reason already mentioned, must not be 
added to the Capital in the Balance Sheet ; 
it should be treated as a Reserve Fund for 
Capital purposes, and, if simply from a politic 
view, not paid away in dividend. 


An item in suspense may appear on Debit 
or Credit side, according to its nature. It 
records some transaction that has taken place 



prior to the end of the period, but which 
then remains in abeyance, awaiting final treat- 
ment in due course. 


This appears on the Credit side. It is 
the value attached to a business over and 
above the valuation of the tangible Assets, 
and is generally calculated on so many years' 
purchase of average Profits, the number of 
years depending on the circumstances. 

Goodwill is thus an Asset whose value 
is bound up with the concern's welfare ; and, 
being usually stated in the Balance Sheet 
on the basis of cost, its amount cannot be 
assumed as a criterion of its worth. 

There are opposing views as to the pro- 
priety of writing off this item against the 
Profits over a number of years ; to do so 
would mean paying for it eventually out of 
Income instead of out of Capital ; and the 
much debated question of Secret Reserves 
may here be touched upon : where the value 
of an Asset is not fully stated in the Balance 
Sheet, the amount that is absent represents 
an undisclosed Reserve — the merits of other 
Assets being of course kept in due regard. 



A credit item, paid for out of Capital. It 
is not really an Asset, consisting as it does of 
expenses incurred in bringing the Company into 
existence ; still there would be unfairness in 
charging the whole amount against the first 
year's Pr)fits, for these expenses are preliminary, 
and will not occur as an annual expenditure ; 
they ought, however, to be written off against 
Profits over a prudent term of years, showing 
in the Balance Sheet at a lower figure each 
year until the whole amount is written off, 
when the item disappears from the Balance 
Sheet, having thus been eventually paid for 
out of Profits. 


This also appears on the Credit side. An 
Insurance premium frequently covers part of 
the year in which it was paid, and, to an 
appreciable degree, part of the next year as 
well. The portion attributable to the latter 
period is not chargeable against the Profits of 
the former year, at the end of which it is an 
Asset that should appear in the Balance Sheet, 
though it is of course a charge, when the time 
comes, against next year's Profits. In fact 


this item amounts to treating the Insurance 
Company at date of Balance Sheet as a debtor 
to the concern for the unexpired portion of the 
premium ; for next year the said Insurance 
Company will pay to the concern this debt, not 
in cash, it is true, but in an equivalent to cash, 
that is to say, in the benefit of Insurance. 

Another credit item, involving the same 
principle, is Rates Unexpired, or some such 

The ensuing have been dealt with here 
instead of at an earlier point, for the reason 
that as their form is not an accustomed one 
they were considered inappropriate for the 
specimen statement. 

The form of Balance Sheet given with 
The Companies Act, 1862, is supplemented 
at the foot on the Debit side with these 
particulars : — 


Claims against the Company not Acknow- 
ledged AS Debts. — Moneys for which the 
Company is Contingently Liable. 

This would be by way of a foot-note, a 
supplement to the Balance Sheet, showing 


how the position of affairs may be modified 
at some future date ; such information might 
have its effect on a distribution of Profits 
and be valuable to possess. Ordinarily, how- 
ever, if a Contingent Liability has arisen, it 
should be reserved for, the Reserve naturally 
forming part of the Balance Sheet, and so 
obviating the use of a foot-note. 

Regarding " Claims against the Company 
not Acknowledged as Debts," it of course 
does not follow there will be anything to 
pay ; that remains to be seen, and is thus 
unascertained at date of Balance Sheet. 

And so, too, in respect of '' Moneys for 
which the Company is Contingently Liable ; " 
there being apprehended that some event may 
take place after the date of the Balance 
Sheet and bring forth a liability. 





T "X 7HERE one figure is deducted from 
another in the inner column on either 
side of the Balance Sheet, and the result 
extended into the outer column, the one that 
is totalled, on the same side, an effect arithme- 
tically equal is to be arrived at in all cases 
by a re-arrangement of the figures, removing 
the larger amount to the outer column, still 
on the same side, without any deduction, and 
the smaller figure to the outer column on the 
other side : the Balance Sheet would neverthe- 
less balance, its totals being increased each by 
the same amount. It would be arithmetically 
correct in either way, though whether in either 
alternative a correct statement would be afforded 
or not is another matter, depending on the 
nature of the items themselves. 


The experiment may be tried with items 
in the specimen Balance Sheet. For instance, 
Capital, ;^5250, which is of course a Debit, 
less Calls in Arrear, £^0^ which, being deducted 
from a Debit, is in principle a Credit, and the 
result extended into the outer column, ^^5200, 
a net Debit. Now strike out this last figure, 
;/|'5200, and insert in its place the £S'^S^ 5 remove 
Calls in Arrear, £s^^ from the inner column 
on the Debit side to the outer column on the 
Credit side of the Balance Sheet, which will 
still balance, its totals being each augmented 
by the sum of £^0 ; but the information it is 
desired to show in this instance is more clearly 
and properly conveyed by the particulars as 
they stand in the specimen Balance Sheet. 

The reader will remember that this kind 
of thing has been referred to elsewhere in 
connection with Bad and Doubtful Debts, and 

It is no doubt recognised that the converse 
process, that of deducting in the inner column 
a Debit from a Credit item, or vice versa, and 
extending the result into the outer column, 
will reduce the totals of the outer columns each 


to the same extent, without, therefore, impairing 
the arithmetical correctness of the Balance 

Such crossings for one's personal information 
may sometimes be useful, but must be judi- 
ciously made lest they lead to confusion. 

And now with regard to headings : in the 
form of Balance Sheet set out in connection 
with The Companies Act, 1862, the two sides 
which are respectively headed, " Capital and 
Liabilities," and " Property and Assets." The 
Balance Sheets of some concerns will be found 
headed simply " Liabilities " on the one side, 
and " Assets " on the other. There are those 
who prefer the headings, " Capital, Liabilities, 
&c.," and " Property, Assets, &c.," of which 
the former emphasises the distinction betw^een 
Capital and other debts, the " &c." being 
intended to cover items that might almost be 
styled " Nominal " Liabilities, as, similar to 
Capital, not in the ordinary course actually 
payable ; whilst under the latter heading of 
the two are covered Property and other 
Assets, the "&c." in this case being meant to 
include any Losses, and any Nominal Assets, 


which, in fact, amount to the same thing as 
Losses, for there is no real value in them. 
Preliminary Expenses is a Nominal Asset ; 
Goodwill may be, depending on the circum- 
stances — any Asset that has suffered a shrinkage 
in the value stated in the Balance Sheet, 
without Depreciation being suitably provided 
for, is partly a Nominal Asset : these instances 
will illustrate the meaning of the term. 

The periodical Balance Sheet certified by 
the Auditors, the Directors' Report, &c., that 
are, as a rule, printed, and sent to the 
Shareholders each year, should be carefully 
considered by those interested instead of 
receiving, as they very often do, a mere 
hasty glance. It may be mentioned that, 
under The Companies Act, igoo. Auditors are 
required, in addition to signing a Certificate, 
to make a Report on the Balance Sheet, and 
this the Directors are not obliged to send out 
to the Shareholders, though it must be read 
to them at their General Meeting. So that 
if the Auditor's Report does not appear as 
incorporated with the Certificate, or otherwise 
published, a Shareholder to make certain of 
its contents should attend the General Meeting. 


In conclusion, the writer trusts that a 
perusal of these pages will materially aid the 
generality of Shareholders in Limited Com- 
panies, as well as others ; that it will enable 
and dispose them to take a more lively interest 
than has formerly been evinced in the concerns 
with which their Capital — sometimes their all — 
has been entrusted. 


£ s. d. 

3,000 o o 
150 o o 

3,600 o o 
327 5 6 

1,600 o o 

112 O O 

640 10 O 
50 O O 


£ s. d. 

1,500 o o 

2,850 o o 

3,272 14 6 

1,488 o o 

1,475 o o 

590 10 o 

130 10 o 

95 17 3 

388 16 6 

24 o 10 

;^ii,8i5 9 I 


Account, books of, 14, 15, 17, 18, 74, 75, 82. 
Actual value of Shares, 27, 28, 31. 
Appreciation of Assets, 61, 62. 

Assets, 9, 16, 18, 21, 23, 25, 35, 36, 43, 49, 50, 57, 61-73, 
74, 81, 85, 86, 92. 
See also " Possessions." 

Cost price of, 61, 62, 63, 64, 65, 66, 68, 72, 85. 
Fictitious or nominal, 91, 92. 
Fixed (or Permanent), 62, 63. 
Fixed, fluctuation in value of, 62, 63. 
Floating (or Circulating), 63. 

Value of, 25, 60, 61, 62, 63, 64, 65, 66, 67, 68, 

69, 72, 85, 92. 
Wasting, 62, 66. 

Associations not for monetary gain, 79. 
Auditors, 92. 

Bad and Doubtful Debts, 68, 69, 70. 
Balance Sheet, Columns of, 8, 9, 16, 26, 60, 69, 70, 89, 90. 
Credit side of, 8, 9, 16, 19, 20, 22, 23, 24, 25, 45, 48, 

49. 57> 58' 60, 61-73, 76, 77> §4' S5, 86, 87, 90. 
Credits represent debits, 22, 23, 43, 48, 49, 57, 58, 
59, 60, 72, 77, 78. 

Crossing or manipulating items in, 53, 54, 55, 56, 66, 

70, 89, 90. 

Debit side of, 8, 9, 16, 19, 20, 21, 22, 23, 24, 27-60, 
61, 66, 67, 70, 72, 73, 76, 77, 78, 84, 87, 90. 

Headings of, 19, 23, 91. 

Key to the, 8, 9. 

Nature of the, 8, 9, 11, 13, 14, 15, 16, 17, 18, 19, 20, 
21, 22, 23, 25, 26, 61, 74, 75, 80, 81. 


Balance Sheet (continued) — 

Preparation of, 15, 16, 17, 18. 

Prepared without a set of books, 15. 

Specimen, g4A. 

Totals, 23, 48, 69, 89, 90. 
Balance Sheets all alike in principle, 6, 25, 26. 
Bank, 16, 48, 53, 54, 56, 71, 72. 

Overdraft, 72. 
Bills discounted, 71. 

Payable, 38, 39. 

Receivable, 70, 71. 
Books of Account, 14, 15, 17, 18, 74, 75, 82. 
Buildings, Freehold, 63, 64. 

Leasehold, 64, 65, 66. 

Calls in Arrear, 28, 30, 31. 

On Shares, 28, 30, 31. 
Capital, 15, 16, 23, 24, 26, 27-32, 33, 49, 91. 

Decrease of, 17, 24, 25, 26. 

Expenditure recouped out of Profits, 51, 65, 85, 86. 

Increase of, 16, 17, 18, 23, 25, 26, 58, 84. 

A Liability, 19, 29, 30. 

Liabilities, &c., 15, 19, 20, 27-60, 91. 

Loan, 37, 38. 

Profit of the nature of, 16, 17, 58, 59, 84. 

Reserves arising from, 34, 58, 59, 84. 

The surplus of Assets over Liabilities to Creditors, 15. 
Capitalised or saved Profits, 16, 17, 23, 26, 51, 65, 85, 86. 

Cash Account, or Receipts and Payments Account, 80, 

81, 82. 

At Bank, 16, 47, 48, 53, 71, 72, 77. 

In Hand, 16, 47, 48, 72, 77, 82. 
Charge by way of Mortgage, 34, 35, 36, 37, 38. 
Charitable Institutions, 80. 


Circulating Assets, 63. 

Columns of Balance Sheet, 8, 9, 16, 26, 60, 69, 70, 89, 90. 

Companies, Limited, and increase or decrease of Capital, 

23» 24, 25, 58, 84. 
Contingent Liabilities, 71, 87, 88. 

Cost price of Assets, 61, 62, 63, 64, 65, 66, 68, 72, 85. 
Credit side of Balance Sheet, 8, 9, 16, 19, 20, 22, 23, 24, 

25, 45, 48, 49, 57, 58, 60, 61-73, 76, 77, 84, 85, 

86, 87, 90. 

Creditors, 15, 16, 35, 36, 37, 38, 39, 43. 

Credits in Balance Sheet represent debits, 22, 23 -q.3, 48, 

49. 57» 58* 59. 60, 72, 77, 78. 
Crossing or manipulating Balance Sheet items, 53, 54, 

55, 56, 66, 70, 89, 90. 

Debenture Holders are Creditors, 35, 43. 

Interest, 34, 35, 39-43, 44, 47. 
Debentures, 34-37. 

Issue of, at a Discount, 35. 
Debit side of Balance Sheet, 8, 9, 16, 19, 20, 21, 22, 23, 
24, 27-60, 61, 66, 67, 70, 72, 73, 76, 77, 78, 84, 

87, 90. 

Debits in Balance Sheet, represented by credits, 22, 23, 

43» 4S' 49> 57^ 5S, 59, 60, 72, 77, 78. 
Debtors, 16, 68, 69, 70, 71, 87. 
Debts, Doubtful and Bad, 68, 69, 70. 
Decrease of Capital, 17, 24, 25, 26. 

Depreciation, 13, 62, 63, 64, 65, 66, 67, 68, 69, 70, 72, 92. 
Discounted Bills, 71. 

Dividends, 34, 46, 51, 52, 53, 54, 55, 56, 58, 84. 
Unclaimed, 52-56. 

Equivalent or money's worth, 8, 20, 21, 22, 29, 38, 47, 

57, 60, 87. 
Expenses against Income (Profit and Loss Account), 18, 

34, 42, 43, 47, 63, 64, 66, 67, 68, 69, 75, 76, 77, 

78, 85, 86. 7 


Expenses (continued) — 
Management, 78. 
Preliminary, 86, 92. 
Working, 78. 

First Mortgage Debentures, 34-37. 

Fixed Assets, fluctuation in value of, 62, 63. 

Or permanent Assets, 62, 63. 
Floating or Circulating Assets, 63. 
Forfeited Shares, 31, 33, 34, 59. 
Freehold Buildings, 63, 64. 

Land, 61-63. 
Furniture, &c., 12, 16. 

General Meeting of Shareholders, 51, 92. 
Good Debts, 68, 69. 
Goodwill, 85, 92. 

Headings, 19, 23, 91. 

Hiring, services involving principle of, 21, 22, 40, 41, 43, 

44' 50, 51- 
Household Furniture and Effects, 16. 

Income, 17, 18, 58, 75, 76, 77, 78, 79, 80. 

See also " Profit and Loss Account," and " Profits." 

And Expenditure Account, 79, 80, 81. 

Capitalised or saved, 16, 17, 23, 26, 51, 65, 85, 86. 

Tax, 42, 52. 
Increase of Capital, 16, 17, 18, 23, 25, 26, 58, 84. 
Individuality of concerns, 18, 20. 

Inner columns of Balance Sheet, 8, 9, 16, 26, 89, 90. 
Insurance unexpired, 86, 87. 
Interest, Debenture, 34, 35, 39-43^ 44^ 47- 

On Mortgage, 47. 
Invested Reserves, 49, 57, 59, 65, 72. 
Investments, 16, 17, 49, 57, 59, 65, 72. 
Issued Share Capital, 28, 30, 31, 33, 84. 


Key to the Balance Sheet, 8, 9. 

Land, Freehold, 61-63. 

Leasehold, 62, 64. 
Leaseholds, 62, 64, 65. 
Ledger Accounts, 12, 13, 14, 74, 75. 
Liabilities, 8, 9, 15, 16, 19, 22, 27-60, 68, 74, 81, gi. 

Contingent, 71, 87, 88. 

Nominal, 30, 91. 

Peculiar nature of certain, 19, 29, 34, 36, 37, 49, 

50, 5I5 58. 91- 
Liability, origination of, 20, 21, 22. 

Limited Companies, and increase or decrease of Capital, 

23j 24, 25, 58, 84. 

Liquidation or Winding-up, 29, 31, 32, 36, 37. 

Loan Capital, 37, 38. 

Loans, 34, 35, 36, 37, 38, 39, 40, 41, 72. 

Losses, 15, 17, 24, 25, 42, 43, 45, 57, 63, 67, 68, 69, 

73' 77. 78. 79> 82, 91, 92. 

Machinery, 62, 66. 

Management Expenses, 78. 

Meeting of Shareholders, 51, 92. 

Money's worth or equivalent, 8, 20, 21, 22, 29, 38, 47, 

57, 60, 87. 
Mortgage, 35, 36, 37. 

Debentures, 34-37. 

Debentures, issue of, at a discount, 35. 

Interest, 47. 

Nominal and par value of Shares, 27, 28, 31, 84. 
Liabilities, 30, 91. 
Or fictitious Assets, 91, 92. 

Outer columns of Balance Sheet, 8, 9, 16, 26, 60, 69, 

70, 89, 90. 
Overdraft, Bank, 72. 


Par and nominal value of Shares, 27, 28, 31, 84. 
Peculiar nature of certain Liabilities, ig, 29, 34, 36, 37, 

49» 5o» 51. 58, 91- 
Permanent Assets, 62, 63. 
Plant and Machinery, 62, 66. 
Possessions, 9, 23, 24, 35, 37, 60, 61-73. 

See " Assets " and " Property, Assets, &c." 
Preliminary Expenses, 86, 92. 
Premium on Shares, 28, 59, 84. 
Profit and Loss Account, 23, 24, 42, 43, 44-52, 54, 55, 

56, 57> 67, 69, 74, 75, 76, 77, 78, 79, 80, 

81, 82. 
See also ''Income" and "Profits." 
On Credit side of Balance Sheet, 24, 25, 45. 
Profits (Income), 16, 17, 23, 24, 26, 34, 42, 44-52, 53, 

55^ 56, 57, 58» 65, 66, 67, 68, 69, 71, 74, 75, 

76, 77, 78, 79, 80, 81, 82, 85, 86. 

And Goodwill, 85. 

Capitalised or saved, 16, 17, 23, 26, 51, 65, 85, 86. 

Eventually paying for Capital expenditure, 51, 65, 
85, 86. 

Invested or used in the business, 47. 

Of Capital nature, 16, 17, 58, 59, 84. 

Writing off Goodwill against, 85. 

Writing off Preliminary Expenses against, 86. 
Property, Assets, &c., 16, 19, 21, 23, 61-73, 91, 92. 

See "Assets" and "Possessions." 
Purchases of Stock in Profit and Loss Account, 79. 

Rates unexpired, 87. 

Receipts and Payments Account, 80, 81, 82. 

In Balance Sheet, 8, 9, 20, 21, 22, 23, 24, 27-60, 

72, 73, 76. 
In Profit and Loss Account, 75, 76, 77, 78. 
See also " Profit and Loss Account." 

■> 1 ■> 

> ',» ' ' ' 

\,' , ■' • 

. ' - > 1 1 ,1 


Repairs and Renewals, 64. 

Report, Auditor's, 92. 

Representation in Balance Sheet of debits by credits, 22, 

23» 43» 48, 49, 57> 5^, 59» 60, 72, 77, 78. 
Reserve Fund or Reserve, 49, 56-60, 65, 66, 70, 71, 
72, 88. 

See " Reserves of Capital origin." 
Reserves invested, 49, 57, 59, 65, 72. 

Non-existent or fictitious, 59, 60, 65, 66, 70. 

Of Capital origin, 34, 58, 59, 84. 

Undisclosed, 85. 
Revenue Account, 44. 

Sales in Profit and Loss Account, 78, 79. 

Secret Reserves, 85. 

Services involving principle of Hiring, 21, 22, 40, 41, 43, 

44» 50, 51- 
Shareholders as partners in Limited Company, 29, 34. 

Meeting of, 51, 92. 
Shares, actual value of, 27, 28, 31. 

Calls on, 28, 30, 31. 

Different classes of, 32, 51. 

Forfeited, 31, 33, 34, 59. 

In Limited Company, 27-32, 34, 84. 

Issued, 28, 30, 31, 33, 84. 

Nominal and par value of, 27, 28, 31, 84. 

Premium on, 28, 59, 84. 

Unissued, 30, 31, 33. 
Sinking Fund, 65, 66. 
Specimen Balance Sheet, 94A. 
Stock (Capital), 32. 

In Profit and Loss Account, 78, 79. 

In Trade or on Hand, 32, 68. 

Used, 79. 


Stock-taking, 68. 

Subsidiary Statements, 82, 83. 

Sundry Creditors, 38, 39. 

Debtors, 68, 69, 70, 71. 
Suspense Account, 84, 85. 

Totals of Balance Sheet, 23, 48, 69, 89, 90. 

Trading Account, 78. 

Twofold nature of all Transactions, 67, 69. 

Unclaimed Dividends, 52-56. 
Unexpired Insurance, 86, 87. 
Unissued Share Capital, 30, 31, 33. 

Value of Assets, 25, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 

72, 85, 92. 
Value of Shares, actual, 27, 28, 31. 
Nominal and par, 27, 28, 31, 84. 

Wages, workmen's, 21, 22, 43, 44. 
Wasting Assets, 62, 66. 
Wear and Tear, 13, 62. 

See " Depreciation." 
Winding up or Liquidation, 29, 31, 32, 36, 37. 
Working Expenses, 78. 
Writing off Goodwill, 85. 

Preliminary Expenses, 86. 


SPECIAL Systems of Book-keeping, with Special Books, have 
been published for minimising labour and attaining perfection 
in Accounting in connection with almost every kind of commercial 
undertaking, but the Private Investor and the Trustee have been 
left very much to their own devices in the matter. 

The person of private means is often not a business man, 
whilst the Trustee is perhaps more generally appointed in con- 
sideration of his character and of his reputation for integrity, or 
his relationship to the beneficiary, than for his business capacity. 

It therefore results that those most in need of guidance have 
hitherto been most neglected, and probably but few Investors have 
anything like an accurate record of their dealings in and the actual 
returns upon the Shares or Stocks they have bought and sold. 

The Private Investor has given up all hope of keeping proper 
" track " of his transactions, and the conscientious Trustee is still 
groaning over troublesome Accounts which a little knowledge and 
method would render quite easy. 

The Investors' Account Book has been prepared to meet all 
the requirements of persons who are in possession of Incomes 
derived from Investments, and also of those persons who as 
Trustees, Solicitors, Accountants, Business Agents, or otherwise, 
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Mr. James Tinling, who has designed this Book, is a Member of 
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The Books are stocked in the following sizes : — 


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3. General Ledger = ■ - = -15 

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V 6. Address Boolt and Index - . • -10 

Size 1. 

Price "\ 
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Size 2. 

Price i 
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1. Cash Book = = - - =80 

2. Investment Ledger and Register of Dividends Received 80 

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4. Annual Summary of Investments = - -20 

5. Memoranda = - ■ - -20 
V 6. Address Book and Index - - ■ - 20 

The foregoing Books are suitable for use by Solicitors, Trustees, 
and persons who have a large number of Investments, but as a 

demand has arisen for a smaller Book the Publishers have prepared 

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should be kept. 


1. Cash Book = = = . =26 

2. Investment Ledger and Register of Dividends Received 26 

3. General Ledger = = = = =12 

4. Annual Summary ol Investments = = =12 

5. Memoranda = = - = =15 

6. Address Book and Index = = = =15 

Size 3. 

10s. 6d. 


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THE COMPANIES ACT, 1900.— An Epitome of the 
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Law and Practice relating thereto. By DAVID 

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