Accounts: Their Construction and Interpretation for Business Men and Students of Affairs

By William Morse Cole | Go to book overview

CHAPTER SEVEN THE DISTINCTION BETWEEN CAPITAL AND REVENUE

PERHAPS the easiest way of stating the difference between bookkeeping and accounting is to say that the purpose of bookkeeping is to show debts, both those due by the owner of a business and those due to him, and the purpose of accounting is to show profits, losses, and valuations. Nobody is likely to think that he now has what he never had, but a business man is constantly likely to confound what his business once had, but no longer has, with what it still has. The fundamental purpose of all accounting processes is to provide against such confusion; and just here, more than anywhere else, does the average business man fail to get from his books what he thinks he is getting. As a part of the same confusion, though the connection is not always obvious, is the ignorance of costs and returns. Good accounting will show as nearly as possible the cost and the return from every application of force and from every change of methods-- in service, as in mercantile affairs, and in transportation, or in production, as in a factory.

In Chapter IV of Part I, two sorts of internal accounts were described, the real and the nominal, or, as they are sometimes called, property accounts and explanation accounts; and in Chapter V emphasis was laid on the fact that in determining profit for the year it is of vital importance to distinguish between these two sorts. This was shown by carrying out the six-column statement so that figures of the one sort were extended into the columns devoted to resource and liability, and those of the other into the columns devoted to loss and gain. These are mere bookkeeping expressions with which the average business man has little occasion to deal, but every man engaged in business affairs must, at some time or other, deal with these things whether he calls them by any name or not. For example, most corporations report their business under the head of two statements, the first of which is commonly called the "balance sheet,"

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