Bank Credit Investigator

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The Bank Creditnvestigator

BY

RUSSELL F. PRUDDEN

New York

The Bankers Publishing Company

922



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Copyright 1922

By The Bankers Publishing Company

New York

y Google

CONTENTS

CHAPTER I

Dkvblopmkht of Bavx CuEDTt WOBX 1

Qrowth of Credit Departments. ServicesRendered. ImportaJice of Credit Train*ns. QuaUllcations of an Investigator.

CHAPTER II

Oboaxizatiov or Tbb Cudit Dbpabt-Bfcirr , ^ 17

Control of Bank Credits. DivisionalResponsibiUty. Duties of Credit Man-ager. HandUns the Daily Mail.

CHAPTER III

Credit Depabtmekt Filing Systems 28

Necessity of Systematic Filing. Descrip-tions of Filing Systems. Make up of theCredit Folder. Loan and Discount In-formation Card.

CHAPTER IV

AOBKCY RBPOBIt 44

General and Special Reporta Recording

of Reports. Character of InformationObtainable.

CHAPTER V

ELE1CBKT8 OF ACCOTJNTIKG i 52

mportance of a Knowledge of Account-ng. Partnership Accounting. Theory ofDouble Entry. Journal and LedgerEntries. Closing the Books. Inven-tory Taking. Preparation of Profit andLoss Statement and Balance Sheet.


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CHAPTER VI

Elbmbnh of Accouktuto (Continued).^.^ 76

Advantages of Corporate Form of Or-ganisation. Corporation Accounting.tocks and Bonda Dividend Payments.Value of Audited Statements.

ii

07948


CHAPTER VII

tatebiekt Akalybis 93

Bank Statement Analysis Forms. Cur-rent Ratio Explained. Internal and TypeAnalysis. Some Practical Problems.Analyzatlon of Assets.

CHAPTER VIII

tatbmbnt Analtsu (Continued) ,. -.116

Analyzatlon of Liabilities. Significanceof a Large Surplus. Value of in-

dorsements. Ck>ntlngent Liabilities.

CHAPTER IX

kizeviewino Commxbcial PafekBeokers , -.. , 180

Development of Note Brokerage. Ad-vantages and Disadvantages of usingOpen Market. Commercial Paper as aBank Investment. Selection of GoodNamea How to Question the Broker.

CHAPTER X

KTEEvnswiifo The Banker 147

Purposes and Desirability of Bank In-terviews. Important Points to be cov-ered in an interview. Bank Lines andCommensurate Balances. Foreign De-partment Facilities.

CHAPTER XI

kterviewino Trade Houses 163


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Various Methods of Making Trade In-vestigations. General Trade Conditions.List of Trade Terms. Suggested Ques-tlona Use of Trade Acceptancea Howto take Notes and Value of Sten-ography.

CHAPTER XII

UMMARIZIKO THE INVESTIGATION 185

Value of a Summary. Suggest Forms.Answering Credit Inquiries by Letter.Credit Department Ethica Need ofConstructive Criticism. Sound Judgmentand Courtesy.

Y


PREFACE

)ANKRS and business men haveong since recognized the value ofpractical credit training as a sound basisfor financial or commercial leadership.They know that success in business isbased very largely on education^ ex-perience^ and industry but that all theseessential qualities must be backed up byreal financial ability and study. No

better school for such training can befound than that offered by the creditdepartment of any good bank^ and it isnot at all surprising that so manyyoung men desiring to become sucessfulbankers and business men seek this ex-perience.

This book is therefore written for thebenefit of those who are desirous orabout to start in bank credit work. Inthe following chapters may be foundpractical information and advice as to

the steps to be taken in a credit in-vestigation and analyzation of a creditrisk. Many excellent books and ar-ticles have been written regarding the


theory of credit, credit and collections,character, capacity and so on, but most


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of such works are better adapted to per-ons who have had some credit experie-ence. Some of them are also mostlytheoretical. The purpose and aim ofthis book is to give the beginner, or theyoung man who wishes to take up creditwork, exact, definite and practical in-formation, in as concise a manner aspossible, as to what problems he mayexpect to meet in a bank credit depart-

ment. Credit investigating is intenselynteresting and broadening, its possi-bilities are unlimited, and the bank in-vestigator of today has the opportunityof becoming the credit manager or of-ficial of tomorrow.


The Bank Creditnvestigator

CHAPTER I

Development of Bank Credit Work

THE work of a bank^ it has beenaptly said^ may be divided intothree parts^ namely obtainingmoney on deposit^ putting it out at work,and watching it while working. Every

bank no matter how large or how small,has these functions although they maybe more or less divided and apparentlyconcealed in many ways. Any one whohas had banking experience either as adepositor or employee, has a generalknowledge of the first two operationsand for that reason we shall confine ourremarks to the work of a bank's creditdepartment, which has to do with thethird function, that of watching thebank's money while it is working.

Practically every commercial bank,regardless of size, has a credit depart-ment. This department may not beknown by such a name and in the case


\i '.^Aii^CClftfeDlX INVESTIGATOR


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of the smaller banks^ the credit depart-ment may be represented hj the cashierwho has a multitude of other duties toperform as welL Nevertheless no bankcan operate to the best advantage with-out complete credit informationi at leaston its own customers. As one weU-known bank president recently stated:The success or failure of a bank de-pends on how it selects its risks."

In the smaller communities^ of course^the gathering of credit information isnot of a very complex nature. Thecashier of the small bank is acquaintedwith practically everyone of importancen the town and what is more^ he usuallyknows all about their habits and busi-ness in general He can tell from hisdaily observations whether his customersare living beyond their means andwhether or not they are worthy of bankcredit. Such a cashier also knows manyof the people living in the adjacent rural

districts and on farms^ and being fa-miliar with the values of the propertyand crops he can quite accurately sizeup the net worth of such individuals.n the larger cities, however, the gath-ering of credit information assumes adifferent aspect and presents a greaterproblem. The bankers in the principalbusiness centers of the country cannothope to know personally more than^very small percentage of the popula-


BANK CREDIT INVESTIGATOR

tion, and many of the people they doknow may not happen to be customersof that particular bank. For this reasonan up-to-date credit department with allts means and methods of collecting andfiling credit information becomes a ne-cessity.

Twenty-five years ago even the lar--^gest banks were only beginning torealize the importance of a credit de-partment, so this work has been Jdeveloped almost entirely within acomparatively short time. In formerdays bank officials attempted to keep inmind practically all details regardingthe various accounts which they han-dled. Consequently, if absent from thebank, because of illness or business, im-portant matters were often obliged to


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await their return. With the shortcom-ngs of this memory method more ap-parent and with the growth of bankdeposits, there arose the necessity ofndividual and complete credit files withnformation systematically recorded.

ome bankers may claim that themaintenance of a cr^t department isvery expensive and not worth the money

and effort involved. These men howeverfail to take into consideration the factthat in all lines of business there arecertain departments which can not beclassed as money makers, yet withoutthem the actual money making depart-



ments would be unable to function. Inany commercial house^ for example^ theales department is usually the onewhich originates business and keeps theconcern going but nevertheless no onewill deny that cost and accountingystems are very necessary. A goodalesman may often receive a largeralary than an accountant yet both areessential to a business^ and a completewell-balanced organization with all itsmany departments is what tends toward

uccess.

o in bankings while the officers directthe affairs of the bank^ introduce newbusiness and plan for its future, amooth working organization is neces-ary to assist them. Nothing is moremportant in this organization than anup-to-date credit department ever readyto aid by having complete and accuratenformation available regarding anyproposition in question. It is compara-tively easy for a bank officer to make a

oan or to turn down one^ but the diffi-culty lies in making the right loan^ bywhich we mean lending an appropriateamount to a certain individual and beingatisfied that the money will be paidwhen due. Any means of ascertainingthe correct facts in connection with thetanding of a client^ or the condition ofa certain line of business^ is an economynot to be ignored by the most thrifty


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banker. He must always bear in mindthat the great share of the money he isoaning belongs to the depositors andnot to the bank^ and while there is al-

ways a risk involved this risk must be sominimized as to make the percentage ofoss but a nominal one. Should therebe no loss the bank would possibly beoperating on such a conservative basisas to retard its growth.

Credit Department Services

There are several important serviceswhich a credit department can renderts own institution as well as the bank'sclients and we shall therefore discuss

these briefly so that we may have abetter idea of the department's scopeand activities.

Probably the most important functions to keep the officers informed of thebusiness standings financial reputationand moral responsibility of the bank'sborrowing customers. This informations gathered by periodical revisions whichcover bank and trade checkings andcomparison of figures. The result ofthe revision should indicate whetherines of credit should be contintied, in-

creased^ decreased or in certain cases,discontinued altogether. Weaknessesare frequently disclosed, such as de-crease in profits^ over-buying of mer-



chandise or unduly large plant expan-ion and it may often happen that athorough and confidential review of theituation by the custcnner and his bankwill avoid trouble. During ordinarytimes revisions are usually made once ayear^ but changing conditions oftenmake necessary a closer supervision.

The second important function of thecredit department is to investigate thetanding and moral worth of prospectivecustomers. Bank officials differ as to


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the time when such an investigationhould begin^ some maintaining that ithould not be made until the account isopened and others insisting that a pre-iminary investigation should be madebefore the account is solicited. The lastmethod is believed to be the one mostgenerally in use especially by the largerbanks. While there is considerablecompetition for new accounts most

banks desire to maintain a certaintandard^ and it would be awkward, toay the leasts to accept an accountwhich was later found to be undesirable.Also^ it must be remembered that mostcommercial houses maintain bankingconnections to a great extent for borrow-ng purposes, and where a new accounts accepted there is often somewhat ofa moral obligation to loan money whenrequested and especially if satisfactorybalances have been maintained. Hence



t would be unwise to solicit or accept acommercial account which would not beatisfactory from a borrowing stand-point sometime later.

Thirdly, the credit department can be

of great service to correspondent bankswhich make inquiries on commercialpaper and miscellaneous names. Oneof a bank's most important sources ofrevenue, especially a city bank, comesfrom the use of balances carried by outof town bankers. These accounts arevery desirable as many of them borrowbut occasionally and then upon a se-cured basis. The correspondent banksappreciate good service and have theright to expect it, and it is here that thecredit department proves itself espe-

cially valuable. The result of the inves-tigation made on commercial papernames for the correspondent bank isikewise of benefit to the bank itself,for there are seasons when there areavailable surplus funds and the purchaseof good commercial paper very desir-able. However, a bank can not hope tohave a complete up-to-the-minute folderon every note in the market and thecredit manager must be familiar withthese names, and aside from direct re-quests, know which folders should be


11/148

fairly often revised. If some discrimi-nation were not made and the work



imited the expenses of the departmentwould be excessive.

A commercial bank^ as the designationmplies^ has the accounts of manufac-turers^ jobbers and wholesalers^ all ofwhich are realizing as never before thevalue of their banks' credit depart-ments. Through such departments theycan check prospective accounts learningbusiness and trade conditions and ob-taining prevailing opinions^ and in fact

obtain and exchange all kinds of infor-mation. The banks in turn receivevaluable data and opinions by consultingwith the commercial credit men.

Credit Training Desirable

A few years ago one would havehardly believed that the larger banksof this country would some day be em-ploying a large number of young mento investigate the standing of customersand other concerns^ yet today there isprobably not a city bank of any size

which does not use the services of oneor more young men for this very pur-pose. In fact, there are great oppor-tunities for gaining financial knowledgeand for general advancement by enter-ng this side of banking. One might askwhether there are not opportunities inall branches of banking as there havebeen heretofore. Surely there are, butthe banker of this generation realizes



as never before that the banking busi-ness embraces something more than aknowledge of reserves, circulation, andthe many technicalities of the businesstself. During the past few years the


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competition for new accounts has beenvery noticeable and the element ofervice is one of the biggest factors inbuilding up or making a bank.

The great majority of a bank'scustomers are business men whohave often had years of experience intheir particular lines of work. Thesemen come to their bankers for advice,

nformation, financial guidance andmore often to borrow money. They arenot interested particularly in the inter-nal workings of the bank except as theyaffect their own affairs. The bankermust therefore have a broad knowledgeof all lines of business and be posted asto present conditions and the outlookfor the future. He must be able toconverse intelligently with the meatpacker, help him with his problems, andthen turn to the silk manufacturer, thecotton broker, the exporter, and so on

as the case may be. Should he merelybe able to tell his clients of the detailsof a bank statement, the workings ofthe Federal Reserve System, or discussonly banking subjects, he would prob-ably not again be favored with theirpresence relative to business.



To illustrate this point more clearlya story recently told by a New Yorkbank credit manager may be apropos.t seems that one of the bank's cus-tomers had applied for additional creditbut before granting this^ the creditmanager with one of the bank officersdecided to call upon the client. Theofficer was one of the older generationand had been brought up in the bankfrom boyhood and had studied little but

banking in all of its details. Duringthe conversation the credit managerasked the customer for his latest state-ment^ and when told that due to rushof business^ inability to complete inven-tory and other reasons the statementwas not as yet ready^ the bank officerthrew up his hands in horror and ex-claimed "What, don't you balance yourbooks every night?" While this storymay seem a little far-fetched, it is saidto be true and well exemplifies the factthat business houses are not run on


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exactly the same basis as banks and thatthe successful banker is one who canmeet his customer more than half way.

With this idea in mind it is not diffi-cult to understand why the bank clerksof this generation are desirous of enter-ng the credit department and becomingcredit investigators. In no other de-partment can they obtain a broad and

complete knowledge of commerce and

0



ndustry so vitally linked with the hank-

ng business.

The bank credit investigator is anaide to the credit manager or creditofficer and is the one who determinesthe facts in connection with thetanding of a customer or a prospectiveone^ or gathers data regarding the con-dition of a particular line of business.As stated before it has only been inrecent years that the importance of thenvestigator's place in the banking pro-fession has become so universally recog-nized. Formerly the banks waited for

nformation to come to them^ but nowthey go after the information withoutwaiting.

Credit Department Statistics

n order to show more concretely themportance of this work a compilationof the number of people engaged incredit work in twenty representativeNew York City banks with resourcesranging from $25^0Q0^000 to $1^000,-00^000 was made a short time ago. It

was found that these banks had totalemployees of 16^395 of which 1,898were officers and department headseaving 14^997 bank clerical employees.Of this number 1,118 were actively en-gaged in credit work. The subdivisionof this figure showed that 241 of thecredit employees were investigators, 201

I


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were inside credit men whose dutieswere to give out credit information toother banks and write credit letters,and the remainder, 676, were stenogra-

phers and clerks. The total gross de-posits and resources of these twentybanks at the time were $4,289,812,347and $5,878,975,427 respectively, whilethose of all New York national andtate banks and trust companies were6,189,806,575 and $8,069,022,840. Ittherefore appears evident that the num-ber of people actively and directlyengaged in bank credit work in NewYork City alone is considerably in ex-cess of the number mentioned.

n analyzing figures such as the fore-going, however, it must be borne in mindthat there are various types of banks.ome banks have many commercialaccounts which necessitate extensivenvestigation while other banks havearge personal or trust fund accountswhich call for little investigation.Figures which have been compiled revealthat one bank having resources in theneighborhood of $800,000,000 has overthirty investigators while another bankof the same size but having an entirelydifferent class of business, employs but

five. Also a smaller bank, of but one-tenth the size, and doing a commercialbusiness is using three investigators.Bank credit figures and statistics, there-

2



fore^ depend on the character of thebanks in question^ and no one can rightlyassume that one-tenth or one-twelfth,or any set percentage^ of all bank em-ployees in any city, or in the Unitedtates^ are engaged in credit work. Wedo at least know^ however^ that thecredit departments of several New YorkCity banks have doubled^ and in somecases tripled in size^ during the pastfew years^ and it is safe to assume that


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the same conditions exists in manybanks of our other large cities.

Qualifications of an Investigator

To return to our discussion of thebank credit investigator^ the young menemployed as such are largely high schoolor college graduates who have had somebanking experience or who have been

elected for credit work for theirhrewdness^ address and common sense.A well known New York bank officialrecently described the ideal investigatorn the following manner: "The idealnvestigator is a college graduate whohas been engaged in bank work forome time^ and who has a good genera]knowledge of the theory of banking andthe routine operations of the bankingbusiness. He should have a pleasingpersonality ^the kind of a man who isable to make friends easily ^and above

all things not inclined to jump too

8



quickly at conclusions. I consider itessential under normal conditions that

every investigator should have at leastthe equivalent of a high school educa-tion^ that he should spend a year ingeneral bank work before specialisingn credits^ and that he should not hepermitted to represent a bank on thetreet without first having spent at leastix months in studying the theory ofbusiness enterprise^ analysis of state-ments^ and credit department methodsgenerally. Under certain conditions^this is often impossible but no bankhould expect its investigators to prac-

tice on the public. This is particidarlymportant when we realize the manytimes we have had to contend with in-vestigators who circulate rumors andpread gossip. They do not do thisbecause of any innate tendency to maketrouble^ but because of ignorance of theproblems involved^ and often because ofan eagerness to make good on a pieceof gossip which they would like to con-firm."

This banker has described the "ideal


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nvestigator" and it is quite certain thatall banks wish to obtain as near thattype as possible. Every young man,however, due to circumstances, cannotbe a college graduate or even a highchool graduate, and it would be unwiseto state that only men with such qualifi-

4



cations could hope to become successfulnvestigators or bank officials. A greatdeal depends on a young man's energy^desire to learn and general aptitude.Many college graduates do not have the

first idea as to the meaning of a financialtatement^ nor do they understand theelementary principles of accounting orcredit work. There are also thousandsof bank clerks who lack the same knowl-edge^ yet have the desire to learn andability to succeed if once started on theright course. It is^ therefore^ with thedea of helping such men that this bo


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morrow. An impartial and conscientiousnvestigation should always be made in-tead of endeavoring to do just what isactually necessary and no more.

To make the proper presentation offacts for an officer or as the basis of arecommendation to a customer^ a certainbasic routine of investigation must be

followed. The agency reports must betudied^ the financial statement analyzedand the banks^ broker and trade housesnterviewed^ and finally all data must bebrought together and summarized. Acomplete investigation is not alwaysnecessary or desirable^ but each phasewill be discussed in the subsequentchapters so that the beginner willhave a practical and definite idea of howto proceed.

6


CHAPTER II

Organization of the CreditDepartment

TTHE services of a bank's credit*' department and the qualifica-tions of the investigator were dis^-cussed in the last chapter^ and atthis time some idea of the organizationof the credit department and themechanical side of the work may be ofnterest as well of importance. Need-ess to say the person who is about totake up this work will not be concernedwith the formation of such an organiza-tion, but will have to know, nevertheless,ust how the woridngs of this depart-

ment are co-related and how the con-trol of possibly thousands of accounts,representing many millions of dollars,s brought about. For purposes ofllustration we shall therefore take intoconsideration the organization of a largecredit department such as may be foundn many of the banks in our largercitief. Such an organization will, ofcourse, be entirely too elaborate for themaller bank, but may be cut down pro-portionally and the more specializedduties handled by one or more people as


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the case may be.

T



Control of Bank Credits

The control of a bank's credit de-partment^ should we go to the primaryource lies of course^ with the presi-dent. While the duties of this officerare necessarily of an executive nature,and pertain to all departments of thebank, it is very seldom that a large loans made or an important credit decidedupon^ without his knowledge and sanc-

tion. He may not go into the mattern great detail as do the junior officersand may very largely take their recom-mendations, but as he is primarily re-ponsible for the successful manage-ment of the institution, his ap-proval or disapproval is essential. Im-portant credit matters are often notonly discussed by the various officersand the president, but in many casesare brought to the attention of the direc-tors at their weekly meeting. Thedirectors are usually men of prominencen their particular lines of endeavor

and in many cases have a close per-onal knowledge of the corporation orfirm to whom thp extension of a largeamount of credit may be considered.hould the majority of the directorsdisapprove of the loan under consider-ation, it is quite evident that it wouldnot be made, regardless of the presi-dent's view or those of any of the otherofficers.

8



9


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BANK CHEDIT INVESTIGATOR

The great majority of credit mattershre, however^ passed upon by the one

or more vice-presidents in charge of thiswork. In many banks we find that thiswork is divided either alphabeticallyâccording to sections of the countryôr according to the type of businessunder consideration. The advantagesand disadvantages of these classifica-tions will be discussed later^ and in anycase, the vice-presidents interview cus-tomers with whom they discuss presentday conditions and after a thoroughreview of the situation, establish linesof credit or decide upon a specific loan.

Duties of Credit Manager

Next in line after the credit vice-presidents^ come certain assistant vice-presidents and assistant cashiers whoare also engaged in credit work. Theduties of these officers are very similarto those of the senior officers, the maindifference being that smaller and lessmportant accounts are handled andmore detailed work devolves upon thesemen. In some cases an assistant cashiers actively in charge of the credit de-

partment^ but in most instances, espe-cially among the larger banks, thedepartment is under the control of acredit manager. The duties pertainingto such a position are many and theperson so engaged must have marked

0



executive ability^ must be able to organ-ze the work in an efficient mannerêmploy the proper assistants^ andco-operate with the credit departmentsof other institutions. He must also becapable of mastering infinite details^have a broad knowledge of the bank'scustomers^ and be able intelligently topass upon numerous credit letters to


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the bank's many correspondents andclients. As the personnel of manycredit departments ranges from fifty toone hundred or more people^ and as theduties of the manager are very exact-ng^ it can be seen that only a man ofability and experience can fill this posi-tion. Most credit managers have^ as aright hand man^ an assistant who is intill further touch with the workings

of the department and is personallyresponsible for the efficiency of thevarious sections into which the work iseparated. These sections are knownas the investigating^ filings analysis andtenographic^ the work of each isvery closely related^ and only by friend-y co-operation can success be attained.

Divisional Responsibility inCredit Work

To facilitate further the daily output

of the credit department^ whether it bethe revising of the bank's own accountsor the compiling of information for

1



clients^ the work is usually sub-dividedand the same classifications which werementioned in connection with theduties of a bank's vice-presidents areapplicable to the work of the creditdepartment. In the case of the smallerbanks it is usually found that there isno need for a classification of the work^and there is no particular divisionalresponsibility pertaining to credit mat-ters^ except of an alphabetical nature.This method is^ in fact^ followed byome of the larger banks but little else

can be said in its favor aside from thefact that it is an expedient by whichthe work can be easily distributed.

Where the classification or distribu-tion of credit work is handled accordingto territory which may cover either oneor more states or a Federal ReserveDistrict^ we find that all matters per-taining to such territory are cared forby certain specified officers and mem-bers of the credit department. Theadvantages of this form of divisional


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responsibility are quite pronounced andt is very evident that tiie persons thusassigned to the work of a particularterritory have a better knowledge of theprevailing conditions in that localityand the needs of such clients than werethey endeavoring to keep in touch withall sections of the country. They be-come very familiar with the accounts so



ocated^ and they are also able to keepwell informed regarding general condi-tions prevailing in that particular partof the United States. Local newspa-pers and magazines are followed and

by this method the bank is able to knowat all times just what the real situations in nearly every place. In view ofthis intimate knowledge of prevailingconditions^ it is felt that such men canfar better size up a credit risk than iftheir knowledge were more general.

Other bankers^ however^ contendthat greater success and more efficiencycan be attained by confining one's effortsto a particular line of business^ such asthe woolen^ silk^ importing and export-ng^ motor or iron and steel industry;

and feel that persons trained alonguch lines are well fitted to analyzedata peculiar to these particularndustries and can thus pass uponcredits in a more intelligent manner.Bankers who favor this method of divi-ional responsibility argue that a de-tailed knowledge of prevailing condi-tions in a certain territory is not asvaluable as a highly specialized knowl-edge of a particular industry. In otherwords^ it is claimed that anyone intouch with the times knows that condi-

tions in the South are now unfavorableand that all business in that locality ismore or less affected^ while few persons



on the other hand^ have a thorough


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knowledge of the manner in which thecotton crop is financed. It wouldtherefore seem that this system of creditwork classification would prove to bean ideal arrangement^ especially as itwould afford an opportunity to attain amore highly specialized knowledge ofthe accounts under one's control thancould otherwise be the case. Either ofthe methods outlined are^ of course^ only

applicable to the larger banks andcould not be adopted to any advantageby smaller banks where officers and cus-tomers are less numerous.

Returning again to the organizationof the credit department^ we find thatthe manager and his assistant areusually aided by a number of divisionheads. The men holding such positionshave^ of course, had considerable inves-tigating training and are in full chargeof all investigating and revision work

pertaining to their division. The dutiesof these men are much the same,whether the alphabetical, territorial orndustry scheme of responsibility isfollowed, and include the assignment ofwork to the investigators, the inspec-tion of investigations, the answering ofverbal and mail inquiries and the fullanalysis of credit risks for the loaningofficers. The nature of these duties isnecessarily very exacting and requires

4



considerable experience and ability.tatement analysis is also sometimeshandled by the (^vision men^ althoughn certain of the larger banks this works carried on by a separate section of the

credit department. The analysis oftatements will be discussed at someength in subsequent chapters^ and it isneedless to say that a thorough knowl-edge of this phase of credit work is ofthe utmost importance.

Handling the Daily Mail

As the credit department of a largebank receives a great number of inquir-es each day^ it is quite necessary thatthe work of handling these letters be


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arranged in a systematic manner. Theetters which are received each day aretherefore immediately divided intogroups^ according to the organizationof the department^ and are then hand-ed to the various division heads. Nota-tions regarding these letters as toname^ date of receipt and reply, aremade on a special form prepared forthat purpose. In case it is found that

there is sufficient information alreadyon hand to answer a letter^ the replycan be sent out on the same day thatthe letter is received. In some cases^however^ the bank may have little orno information of value and in suchnstances the letter must be acknowl-

ff



edged and the name turned over by thediTision head to the investigator whowill make the necessary investigation.The investigator is usually furnishedwith a printed form filled in to outlinethe purpose and scope of the investiga-tion^ and in the case of the less experi-enced investigators rather full direc-tions can thus be set forth as to how

to proceed. An investigation may con-ume a few houts or one or more daysdepending on the nature of the nameand the experience of the investigator;and when finished is turned over tothe division head for inspection. Aetter of reply to the inquirer is there-upon prepared by the division head^ thenvestigator^ or in smaller banks by theofficial to whom the letter is addressed.hould any of the letters received inthe daily mail require particular atten-tion, they are placed where they will

have first consideration. By the sys-tem as outlined, a thorough check ismaintained, and every division headknows at all times how many inquiriesare unanswered and the number of in-vestigations which are pending. Thesemen familiarize themselves with theituation constantly, and in the case ofpecial matters it is their duty to soadjust the work that the investigator'stime is effectively utilized. If someuch method were not followed, and


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6



the mail were answered in the ordinaryway, it would be possible for a specialmatter to go mmoticed for severalhours. The matter of caring for the re-visicm of the credit folders pertainingto a bank's own customers is more ofa routine nature and is carried on reg-ularly by certain investigators who areittle affected by the daily inquirieswhich so often need special attention.AU credit investigators, whether theyreport directly to a chief investigator,the assistant credit manager, or to a

division head as the case may be, workhand in hand with the division men andikewise the duties of the analysis andtenographic sections are closely re-ated. The duties of the latter are self-evident although it might be mentionedthat the dictaphone has come to playan important part in many large creditdepartments, especially in the transcrib-ng of the investigators' interviewswhich are often quite lengthy.


CHAPTER III

Credit Department Filing Systems

A MOST essential part of credit^^^ work is that of filings and while thefiling section of any organization or de-partment is not in itself particularly in-teresting^ its importance is not to

be overlooked. No credit departments complete or possible without agood filing system and in fact it mightbe stated that there could be no realcredit department without the files. Asoon as the filing system gets out oforder the work of the department lagsand becomes inefficient. If the neces-ary folder can not be had when needed^time is lost, and if such a case be mul-tiplied many times in a day the depart-ment's operations soon come to atandstill.


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When a young man begins bank cred-t work he very often enters the filingdepartment and if the right method isfollowed he remains there for sometime. The amount of valuable informa-tion which can be acquired from hand-ings sorting or making up credit fold-ers is very great. This work may seemroutine at first and merely of a clerical

nature^ but for the person who reallywishes to learn credit work there is no



yGoOgfe


better way to get a firm footing. Sev-eral bank (Credit managers and prom-nent bank officials of today were for-tunate enough when starting their bank-ng work to be placed in the credit filingdepartment of their institution^ and theyno doubt owe part of their success tothat very fact.

As everyone with any kind of bus-ness experience is somewhat familiarwith the various kinds of filing systems^t will not be necessary to go into muchdetail. Suffice it to say^ i^e files mostadapted to and conmionly used by bankcredit departments are the high-gradeteel filing cabinets^ built in sectionscontaining three or four sliding drawers.These drawers are adapted to the reg-ular letter si^ed folders and hold fromfifty to one hundred depending upon

the bulk of the folders.

Necessity of Systematic Filingand Accurate Records

There are probably no two bankcredit departments having exactly theame kind of filing system^ each bankadopting a system best adapted to itsown needs. The ability to locate afolder quickly when needed is the primeessential^ and no matter how good aystem is regarded as beings it is not


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atisfactory unless such is the case.Nothing is more annoying or exasperat-

9



ng than for an officer or the credit man-ager to call for a certain folder^ inorder to talk with a client or to answeran inquiry, and to learn that the foldercannot be found. The time of one ortwo people for sereral hours is some-times consumed in trying to locate themissing article, and when found it maybe no longer needed for the particularoccasion. In order to obviate any such

difficulty, it is, of course, necessary thata slip, bearing the person's name desir-ng a folder, be put in its place at thetime of removal from the files. Thedate should also be included as well asthe name of the folder. This systemwill not give the desired result, how-ever, unless adhered to very strictly.An annoying habit of one officer or in-vestigator passing a folder from one toanother, without first returning it to thefiles or at least without having the nameon the slip changed, is often the great-est cause for delays in locating folders.

ome managers do not feel willing tocall the officers to account for suchactions and consequently inquiries fromother banks, either by personal call orby telephone, may sometimes go unan-wered for hours, or for days in thecase of the larger banks.

n order to obviate this difficulty somebanks require the use of transfer slipsand these have been found especially

0



helpful in the case of officers or thosewho are located at some distancefrom the credit department. ByUiis system^ should an officer have a


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folder which he wishes to transfer hemakes out a new slip covering the factsand immediately despatches this to thecredit department where it is placed onfile in place of the original one. Whenthis method is adhered to closely thecredit department has little difficulty inkeeping track of its countless foldersand the problem of missing folders isreduced to a minimum. Another safe-

guard which has proven quite beneficials that of having someone make a listof all folders found on each o&ctr'sdesk every morning. Should a loss bereported later in the day the missingfolder can then be traced quite easily.

ome Filing Systems Now In Use

No attempt will be made to outlinean ideal filing system as such systemsusually prove satisfactory in theory butnot in practice. As stated before, the

filing system must be fitted to the bankand not the bank to the system^ anddepends largely on the size and typeof business handled. For this reasona somewhat brief description of variousystems in use in a few of the largerNew York City banks will be given.

The first one is that of a large trust

1



company having over forty thousandfolders in its credit department. Thisystem has three main divisions^ the firstcontaining only the expansion press-board folders and covering active namesof three kinds ^first, deposit and loanaccounts; secondly^ commercial paper

or bills purchased names; and lastly^active names in other departments al-though not regular accounts. All ofthese folders are filed together alpha-betically in the allotted section of thefiles but the different types of namescan be instantly told by the color of thendex tab on the folder.^ Folders of thefirst type have blue tabs^ the secondtype yellow tabs, and the third white.

The second division of this systemcontains press-board folders covering all


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banking correspondents. These fold-ers are arranged geographically by city,and the index tabs are also blue.

The third division comprises inactivefolders which are of the plain manilatype and cover miscellaneous names andnvestigations of all kinds, made largelyfor the bank's customers. These fold-ers have a white tab and are filed

alphabetically.

All three divisions of this system offiling are governed by an alphabeticalcard index so that in case it is notknown, one can immediately learn inwhich division a folder may be found.



This index also acts as a check on thefiles and gives definite infonnation asto whether or not there is a folder onthe name in question. An excellentupplement to this index would be atrade index whereby all names in a cer-tain trade or business would be groupedtogether. Such an index is especiallyTaluable when, due to conditions^ itbecomes necessary to revise all names ina particular line.

The second system to be outlined isthat in use in one of the largest na-tional banks, whose credit files containnearly one hundred thousand folders.Here we find four main divisions. Thefirst includes all of the bank's commer-cial accounts and the folders have indextabs of a certain color and are filedalphabetically. There is no card indexof these names^ but one would be desir-able. In fact, an up-to-date card indexwith frequent cross references is a time

aver not to be ignored by even themaller credit departments.

The next division of this system con-tains commercial non-accounts, thearge press-board folders or the cheapermanila ones being used as the case mayrequire. It is in this division that thebank's great collection of informationon miscellaneous names arising fromnquiries is filed. These folders arealso filed alphabetically and bear col-ds


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ored index tabs. In connection with

this type of names we find that there isa classified index hj business and in-dustry but this is used largely forolicitation purposes*

The third part of the filing systemunder consideration covers bank ac-counts^ and the fourth contains foldersof banks which are non-accounts. Allbank folders are filed geographically,this being due to the great similarityn names.

The last method of filing whidb wiUbe discussed is one used in anotherarge national bank^ and in this casethere are three divisions. The firstcontains the bank's commercial accountscovering deposit and loan names* Theheavy press-board folders are used andthe index tabs are white. A specialLibrary Bureau" filing system, knownas the "Automatic Index" is used forthese names and it is not strictly alpha-betical. The second division coversonly commercial paper names^ and theseheavy press-board folders bearing pink

tabs are filed alphabetically. The tiiirdpart covers miscellaneous names, thefolders being the lighter manila typedue to the fact that they are often butittle used. This bank has a generalcard index system covering all folders.The cards are arranged alphabeticallyand by consulting this index the person

4



can immediately learn whether there isa file on the desired name^ and if ao, inwhat division it may be found* Allfiles and folders covering bank accountsand names are kept in another depart-ment of this bank and are not regardedas belonging to the credit department.


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The filing systems which have beenoutlined are but a few of the many inuse by the various New York bankis atthis time. They are all operated forthe same purpose, but, of course, withvarying degrees of success. There is nodoubt but what these systems could bemproved in certain ways but manycredit departments have reached suchproportions that the work involved in

making any material changes, as wellas the necessary delay might not beworth the result. As mentioned before,no so-called "ideal" system is offered,as the purpose of these remarks ismerely to present to the reader somedea of the various methods and systemswhich are more generally known tocredit men.

Duties of File Clerks

The duties of the file clerks are many

and, of course, vary with differentbanks. They range however fromopening the mail, placing letters of in-quiry with proper folders, making upnew folders from data collected by in-

6



vestigators^ ordering and accauntingfor agency reports of all kinds^ to theclipping of newspaper and magazinearticles^ and many other duties as thecase may be. The training and infor-mation to be obtained in the filing sec-tion of any bank credit department ismost valuable^ and some bankers insistthat new investigators spend at least sixmonths at this work before commencingto make active credit investigations..

Description of the Credit Folder

A brief discussion of the make-up andarrangement of the credit folder mayalso be of interest and value to the be-ginner at this time. Nearly all bankshave adopted the letter-sized expansionpress-board folders^ at least for themore important names. The manilafolders which are lighter and less ex-pensive are usually reserved for lesspopular names or ones about which


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comparatively little information hasbeen gathered.

As there is a great mass of detailednformation^ often collected over aperiod of years, pertaining to any com-mercial or borrowing name of import-ance, it is necessary to have thisnformation arranged in the folder inome orderly and convenient manner.

Here again, as in the case of the vari-ous filing systems, each bank has worked

6



out some uniform system on which allfolders are built up^ and probably dueto the great number which have beencollected do not find it feasible to makeany material change. In this instance,therefore as before, no attempt will bemade to present an "ideal" folder butmerely to give some idea of those ingeneral use.

There seem to be two principaltyles of credit folder, as far as NewYork City banks are concerned. Thefirst type is arranged on the order of a

book with index sheets forming divi-ions in which the various kinds of datacovering interviews, statements, agencyreports, letters, et cetera, are placed.As nearly all of the forms and specialdata will be more fully discussed inater articles, they are at present men-tioned only in relation to their positionn the folder. Five index sheets areusually used in the first type of folder,and these cover statements, interviewsand investigations, agency reports, cor-respondence and miscellaneous data.

n the first section thus formed, thats, between the outside cover of folderand the index sheet marked "State-ments/' is placed the Comparison oftatements sheet. This is a specialbank form on which is copied the annualtatements received from the companydirect or from some other source. Fol-

T


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owing the "Interviews and Investiga-tions" index are placed sheets whichhave been written up to cover the resnltof interviews with banks^ brokers and

trade houses regarding the subject^ aswell as direct interviews between bankofficers and the concern's officials orpartners* If the name in question is acommercial paper one^ that is^ if thecompany's note is sold in the "openmarket" by a commercial paper brokerwhose operations and services will befully explained in a subsequent chap-ter)^ a memorandum sheet covering thebank's purchases of any of this paperfollows the interview sheets. Thismemorandum sheet merely covers such

tems as date of purchase^ amount^ duedate^ rate^ name of broker^ and remarks.n case the company in questioncarries an account at the bank^ aprinted form is filled out and next in-erted^ covering all details in connec-tion with the opening of the account.uch details are rather numerous andnclude the name of the company orfirm, address, date^ by whom intro-duced, officers or partners^ other bankaccounts, affiliations, amount and formof initial deposit, line of credit to begranted if any, and remarks. The

opening sheet is sometimes placed inthe very front of the folder but thiss largely a matter of choice. The



fourth division of this folder is devoted

to agency reports which will be dis-cussed in some detail later on in thischapter. The fifth section covers corre-pondence and letters regarding theconcern in question^ both to and fromother interested banks and businesshouses^ located in other cities; and inthe last division are filed miscellaneoustems such as newspaper clippings, andalso in most cases an inquiry sheet onwhich is noted names of banks whichhave made inquiry concerning the com-pany. Copies of letters written by the


33/148

credit department in reply to such in-quiries are also filed in ijiis section.

The second type of bank credit folderwhich is used by a few of the largerbanks and considered by them to bevery desirable, contains two distinctdivisions. AU information receiveddirectly from the concern is clipped onone side of the folder and all indirect

nformation on the other side. Insteadof having the make-up of the folderimilar to that of a book, as in the firsttype> the information sheets and formsare fastened and held at the top.

The direct information side of thefolder^ should it be an account, includesthe Opening Sheet as well as a Borrow-ng Sheet covering date, amount ofborrowings^ maturities, rate and method.Then comes a Memorandum of Pur-ad


BANK CREDFr INVESTIGATOR

chased Paper showing bank porchases^as well as the high and low and presentborrowings of the concern through itscommercial paper broker. Following thiscomes a Total Borrowings Sheet cov-

ering details of all borrowings throughall banks and all brokers. The Com-parison of Statements form is placednext, followed by the interviews withbrokers (which is looked upon in theight of direct information), all inter-views with the officers or partners ofthe concern, all direct correspondencewith the company, actual statementsfrom the company, and lastly the com-plete report from a certified publicaccountant if one is obtained.

The indirect information side ordivision of this type of credit folder isheaded by a general information sheetcovering the exact business in whichthe concern is engaged, a list of all ofts bank accounts, names of other bankswhich are in touch with the name, tradereferences, outside interests and notebroker. Next follows a Memorandumof Inquiries, newspaper clippings, un-favorable information gathered fromndirect sources during previous investi-gations and typed on a red-colored


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heet of paper, interviews with banksand trade houses, and lastly agencyreports.

All information regarding subsidiary

0



companies is placed in light manila cov-ers and these are pnt in the largerfolder of the parent company. In thefirst general type of folder discussedhowever^ information regarding a sub-idiary is often placed in an additionaldivision of the file^ and where this is

done a heavy card-board index is usednstead of the usual paper index sheet.t has already been mentioned thatn the double-faced type of creditfolder^ the second described^ all infor-mation regarding bank loans to theconcern in question is placed on thedirect side. This makes it possiblefor the officer or investigator to im-mediately learn of the concern's bor-rowing status. This method^ however^necessitates additional woric to someextent as each time that a loan is madethe credit folder must be obtained and

the Borrowing Sheet removed andwritten up. Where a bank has severalthousand borrowing accounts the timeand effort involved in making such post-ngs is considerable^ especially shouldthe work be done by typewriter.

Loan and Discount Information Card

n the case of the folder resemblinga book as to make-up^ all informationregarding the concern's borrowingrecord is usually placed on a heavy yel-

ow card^ known as the Loan and Dis-count Card. Such cards are filed alpha-

1




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8



betically and are generally kept in doseproximity to the credit manager or thedivision men. They contain monthlyaverage figures as to balances and bor-rowings; detailed list of loans and dis-counts covering date^ maturity^ rate^ andamount; line of credit which has beenet ; and sometimes other figures such asthe ratio of current assets to current lia-bilities and also the bank's opinion ofthe name such as good^ fair or poor^

this rating being placed on the card atthe time of revision. The amount of in-formation which one can secure fromthese cards is often sufficient to answera telephone inquiry^ especially if one isat all familiar with the name and gen-eral contents of the credit folder, ^so^hould the folder be mislaid or tempo-rarily in use by some officer^ the infor-mation obtained from the card is some-times enough to fill the need of the mo-ment.

An attempt has been made to make

plain, in the foregoing pages, in asbrief a manner as possible, the mechan-cal make-up of certain credit formsand especially the credit folders whichhouse the great mass of informationwhich is constantly being amassed by abank's credit department. Both typesof folders which have been discussedhave their advantages and disadvan-tages, and it is largely a matter ofpreference as to which is the better.8


CHAPTER IVAgency Reports

T NASMUCH as the beginner has now received a general idea of the organ-zation of a bank credit department aswell as the importance and methods of


36/148

ystematic filings the preliminary stepsn making an investigation can be setforth. When a letter of inquiry is re-ceived regarding a concern and it isfound that there is no information onfile^ the first thing to be done afteracknowledging the letter is to send foran agency report. This is likewise thefirst step in the case of a revision^ orwhere the last agency report on file is

a year or more old. The principal rea-on for obtaining an agency reportmmediately^ especially in the firstmentioned case^ is for the valuableleads" it may contain. We shalltherefore discuss some of the manytypes of reports which are at leastcommonly known to the New York Citybanks. It is hardly necessary to men-tion that when sending for a report.its quite obvious that the investigator isimited to the agency reports for whichhis particular bank may subscribe.



General and Special ReporU

Reporting agencies furnish reports oftwo kinds ^general and special. Thepecial reports are usually limited to

certain lines of business or to certaintypes of names^ and the agencies fur-nishing such reports do not attempt togo further. The general agency re-ports^ on the other hand^ cover a mucharger field and are universally used.They are issued by the two large com-mercial agencies known as Bradstreet'sand R. G. Dun ft Co. These compa-nies have been in business for well overfifty years and the entire country iserved by their many branch offices andthey are in a position to give reports on

practically any business house in theUnited States. Their services havealso been extended to many other coun-tries. Reporting agencies^ such asthese^ obtain their information throughtheir branch offices and from travellingreporters and special correspondents,and their organizations are necessarilyextensive and complicated.

Recording of Reports

The mechanical side of the handling


37/148

and use of agency reports is an impor-tant part of the work of a bank creditdepartment, and many credit men havegrown to believe that keeping tab of

5



the number of reports received, orpossibly not received, is more or less ofa burden. Most contracts with report-ng agencies call for the furnishing ofa stipulated amount of reports, monthlyor yearly, and the fact that ijie bank'srecords and those of the agency regard-ng the number of reports furnished

disagree is not uncommon. For thisreason it is quite evident that someystem to record accurately the receiptof these reports should be adopted.One of the large New York banks hastherefore put into use a recordingmethod which involves the use of twoimilarly printed forms, with the excep-tion of color. One form is for record-ng Bradstreet reports and the otherthose received from R. G. Dun & Co.These sheets are ruled into colunmswhich cover the date the report is or-dered, name, location and business, the

party for whom ordered, and the dateof receipt. The person in charge ofthis work then checks these formsvery carefully as to the receipt of everyreport ordered. By following thismethod the bank knows exactly thenumber of reports received and cantake up the matter of delayed reportswithout any hesitancy as to a possiblemistake. As the human element entersnto the work of a reporting agency its not uncommon for them to fail to or

6



forget to send out all reports whiehhave been ordered^ but hj adopting andiving up to a good system^ such as the


38/148

one outlined^ tiie bank will find thatthere will be fewer disputes at the endof the montib.

The information obtainable from aDun or Bradstreiet report is usuallyquite extensive and as a rule covers thefollowing points: antecedents or pastrecord of the concern^ latest statement^total assets and liabilities from previous

tatements^ character and capacity ofbusiness covering location of property^trade opinions^ business outlook^ firerecord and general credit standing. Asboth Dun's and Bradstreet's reports areof a similar nature it is hardly neces-ary to order from more than one ofthese concerns. In certain cases^ how-ever, where one report does not containthe desired data, the report from theother agency may be more complete.As a rule a report can be obtained onthe same day as ordered, thus making

t possible for the investigator to re-ceive quickly at least some general in-formation on the concern, especially itsfinancial condition.

Most reports give quite complete dataregarding the partners or officers, cov-ering previous connections and pastrecord. Some business houses are veryconservative or old fashioned, however,

7



and do not believe in giving reportingagencies any information of importance^uch as a financial statement. Suchhouses are now growing to be the excep-tion and most of them realise that apolicy of secrecy is not in keeping with

the times or present day businessmethods.

f a full report is received^ the in-vestigator can obtain a comprehensivedea and working knowledge of the con-cern in question^ and is in a betterposition to intelligently interview tradehouses and banks. Should the report^however^ be old or not particularlycomplete it is often advisable to sendfor a special agency report. Such re-ports are confined to a certain trade or


39/148

business and the special agencies claimthat they are in a better position toreport the trade to which they caterthan the regular agencies which coverall lines of business.

As most of the larger cities haveocal special reporting agencies cover-ng local houses and names we shallherewith attempt to enumerate but a

few of the New York City ones whichare used by many of the banks andfinancial institutions.The National Credit Office Reports on

many kinds of larger business houses

as well as on commercial paper

names.

8



The Commission Credit Bureau Myers & Browning Division Re-ports on dry goods and textile names.

Wood's Dry Goods Commercial Agency Reports on dry goods names.

The major portion of a dry goodsreport is devoted to trade checkings,covering high credit extended,amount owing, terms and method ofpaying bills, and the investigatorcan sometimes obtain from such areport the names of trade houses ac-tively selling the concern in question.

Retailer's Commercial Agency Re-ports on individuals as to retailcredit.

The Bankers' and Manufacturers' Mer-cantile Agency Reports on leathernames and also commercial papernames. The latter reports include in-formation regarding personnel, ante-cedents, statement, bank accounts,name of broker, as well as a sum-mary of the investigation and opin-on of the note.

Bishop's Service; Proudfoot's Commer-cial Agency; Frederick O. Brown's


40/148

ervice Special reports on individ-uals and concerns and particularlyon those engaged along financial,brokerage or promotion Unes.

Drug and Chemical Mercantile Agency,nc. Reports on drug, chemical andallied trade names.

9



Graphic Art's Board of Trade andTypo Mercantile Agency Reportson paper^ printings publishing, sta-tionery and paper box names.

Moody's Investors Service; Poor'sPublishing Co. Special reports indetters on all kinds of investments.These well-known services can hard-y be classed in the category of cred-t agencies but are mentioned as theyare a source of information on thenvestment side of credit problems.There are a number of other specialreporting agencies as well as variouscredit exchange bureaus used largely bycommercial houses, and it is a matterfor each bank to decide upon which ofthe various services it will find most

helpful.

t can be seen from the foregoingthat an up-to-date and complete agencyreport is very essential and a necessarypart of a bank credit folder. The be-ginner may therefore wonder why it isnecessary to investigate further afterreceiving such a report. In fact, somebusiness men have this same mistakendea and often take pleasure in advis-ng the investigator to consult Dunor Bradstreet instead of making per-

onal inquiries. While nearly all banlb-ers recognize the value of agency re-ports, most of them are cognizant ofthe fact that such reports are not in-

0



41/148


fallible. Also much of the informationtherein comes more or less directly fromthe concern being reported whereas its the aim of bankers to get impartialand competitive reports and opinionsfrom many sources. When one consid-ers the risks which banks incur in loan-ng funds it is not difficult to understand

why they insist on complete personalnvestigations by their own men, ratherthan taking as final the opinion of anagency reporter whom they have nevereen. The agency report has its placen a bank credit folder and performs aneeded service, but it must be judgedaccording to fullness and in the lightof other information and past expe-rience.

The bank credit investigator of to-day has many sources of information,

consults all of them, weighs and con-iders the data carefully, and thenforms the best opinion possible.

1


CHAPTER VElements of Accounting

T/ARIOUS methods of indexing and filing credit information havebeen discussed and some idea hasalso been given as to the differ-ent kinds of agency reports common-y used and the valuable informationwhich is often thus obtainable. Beforeuch data can be efficiently employed inthe making of a thorough investigation^however, or at least before the credit

risk can be properly passed upon, it isvery important for the investigator tounderstand how to analyze a financialtatement in an intelligent manner.ome remarks along this line with par-ticular emphasis on a knowledge of ac-counting will therefore be made at thistime.

Where a name under consideration isone of the bank's own borrowing ac-counts, the company itself undoubtedlywill furnish the bank with its latest


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43/148

records. Should he have no idea what-ever of accounting methods and themeaning of the various terms in use^ hewould be placed in an awkward posi-tion and his visit would probably re-ult in the gathering of but little orno information of value.

The so-called "ideal" investigator^as described in the first chapter^ was

found to be one having a high schoolor college education. Such an educa-tion sometimes covers accounting andfinancial subjects^ but quite often thegraduate is proficient merely alongclassical lines. This classical train-ng has given him breadth as wellas the ability to think and reason^ andfrom that view point is indeed mostvaluable. However^ more specific andpractical knowledge along financialines is very essential and the graduateor bank clerk who is about to take up

bank credit work should as soon aspossible obtain at least an elementaryknowledge of accounting.

This chapter is written therefore forthe benefit of such young men^ and isnot intended to cover the theory andpractice of accounting to any extent;nor would it be of particular interestto any one having had practical experi-ence. The field of accounting is avery broad one and many years oftudy and experience are necessary to

4



acquire a thorough knowledge of tibeubject; and^ in a short treatise one canonly touch upon accounting princi-

ples in a most elementary man-ner. The man who is beginningcredit work without a knowledge ofthis very essential phase of the sub-ect is therefore strongly urged to takeup at least a short course of study ofaccounting methods. Nearly everycity of any size has a business schooland in many of our larger cities theocal universities and colleges offer ex-cellent day and evening courses alongaccounting lines. Should such a coursebe unavailable, however, some of the


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correspondence schools provide verygood opportunities for the acquiring ofa knowledge of this subject. In thepresent chapter an attempt will be mademerely to show the various steps neces-ary to the preparation of a financialtatement, or so-called Balance Sheet,with special emphasis on the Profit andLoss Statement. For the purposes ofllustration the following practical

problem will be discussed.

Partnership Accounting

A, B. Jones and C. D. Brown onJanuary 1, 1919 decide to form a part-nership and manufacture clothing, thebusiness to be operated under the firmname of Jones & Brown. A firm or

5



partnership hat been defined as a "jointundertaking by individuals/' or in otherwords it is a "relation created by con-tract between two or more persons toplace their money^ effects, credit, labor,or skill, in lawful business, and todivide the profits between them." Part-

nerships are most common in mercan-tile undertakings of moderate size,mall manufacturing establishmentsand in the professions. As such a rela-tionship can be formed only by con-tract, it is always well to have anagreement in writing, covering the fullterms of the partnership, such as lengthof existence, division of profits and therights and obligations of the partners.Mr. Brown has been in the clothingmanufacturing business for the pastten years and will turn over to the firm

of Jones & Brown certain assets whichhe has on hand, while Mr. Jones willcontribute an equal amount of cash andLiberty bonds. The partners are tohare equally in the profits and losses.

Theory of Double Entry

As a busmess organization has nowbeen formed it will be necessary for thepartners to establish and maintain aystematic set of records. The keep-ng of such records is commonly known


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as bookkeeping, and the principal pur-poses are to set forth all transactions

6



o as to disclose the position of thebusiness at any time and to measure itsprogress. Before mentioning the vari-ous book entries necessitated by thecontributions of the partners to theirnew enterprise^ a short discussion ofome of the elementary principles ofbookkeeping or accounting proceduremay be of interest at this time. Thebooks and records of nearly every busi-

ness concern, except those of the verymallest ones or those of certain pro-fessional men and individuals, aremaintained by what is known as thedouble entry system. The theory ofdouble entry is that there shall be adebit for every credit, and if this rules strictly adhered to, the total of thedebit entries will at all times equal thatof the credit entries. In other words,omewhat of a check on the correctnessof the books from the standpoint of aproper balance is thus maintained.Although there are many subdivisions

to and various kinds of books of rec-ord, depending on the size and natureof the business, the most commonlyknown book of original record is theournal or day book, and it is from thisbook that the various original entriesare posted or transferred later to whatare called the individual ledger ac-counts, which are kept in a book knownas the ledger.

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Original or Journal Entries

The making of proper and accurateournal entries requires some little ex-perience and trainings but a very well


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known rule used by accountants^ whichs quite infallible and well worth re-membering, is the following: "Debitwhat comes into the business or coststhe business value; credit what goesout of the business or produces value.*'This rule may sound somewhat com-plicated and contradictory at first read-ng but it is nevertheless true that theres hardly a transaction which will arise

that can not be properly entered on thebooks by the application of the rule.As an illustration, let us consider theproper entry covering the purchase ofa bill of merchandise which has beenpaid for in cash. By following therule, the merchandise which comes intothe business is debited and the cashwhich goes out is credited. The termmerchandise, however, is a broadly usedone and covers botli purchases andales of merchandise, and in generalbusiness practice the use of the cap-

tions "Purchases" and "Sales," as sep-arate accounts, is more commonly em-ployed. Should some of this mer-chandise later be sold for cash theentry would be just the reverse, name-y, the cash account would then bedebited and the merchandise, or more

8



properly the sales account^ credited.As a further illustration^ let us considerthe matter of wages or similar ex-penses. By following the above rule,wages would be debited as they costthe business value^ and the cash whichgoes out of the business would becredited.

Returning to tibe problem which isunder consideration, we are informedthat the partners' ccmtributions are asfollows :

Mr. Brown

Land and buildings., $10,000

Machinery and equipment 7,000

Raw material 20,000


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Finished goods 8,000

Furniture and fixtures 1,000

46,000

Mr. Jones

Cash .$40,000

Liberty bonds, face value 6,000

46,000

Following the rule of debit andcredit, every item furnished by thepartners is to be debited, as it is thesetems which are coming into the busi-ness and are to be its assets, and each

partner is to be credited with the totalamount of his investment. On thebasis of these figures, the total partner-hip net worth, by which is meant theactual net asset position of a business,s $92,000. This amount is owing to

9



tibe partners by the business and ishence credited to the partners' ac-counts. In other words^ the net worths a liability owing by the business tocertain persons and these persons arethe partners who have invested theirproperty and cai^ in the business.

The journal entries which would benecessary to set forth the transactions

n question would be as follows:January 1, 1919

Debit Credit

Land and buildings $10,000

Machinery and equipments 7,000

Raw material 20,000

Finished goods 8,000


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Furniture and fixtures 1,000

C. D. Brown, presentworth 46,000

Cash 40,000

Liberty bonds 6,000

A. B. Jones, present

worth 46,000

Posting to Ledger Accounts

The foregoing entries would later beposted or transferred to the individualedger accounts.

The business of Jones & Brown wascarried on during the year 1919 andthe following is a summary of the busi-ness transactions. The numerous and

detailed journal entries are not setforth^ but merely the totals of the manytransactions are mentioned:

0



Cloth purchased $240,000

Wages paid 250,000

Miscellaneous supplies and factory

expenses 5,000

nsurance 1,000

nterest paid on loan 4,000

Partners' salaries 10,000

elling expense, including advertis-ng, conunissions, etc 85,000

General office expenses 1,500

Money borrowed at bank March 1st,

919, and still owing. 80,000

ales for year 5580,000

Of this amount $100,000 remains


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due, as follows:

Accounts receivable $95,000

Notes receivable 5,000

Accounts payable 26,000

nterest on Liberty bonds 240

t will of course be understood thatall of the above figures^ that is^ theoriginal entries^ have been currentlyposted during the year to the ledger inthe respective ledger accounts. As anllustration of a ledger account, Ex-hibit No. 1 represents the various cashtransactions which have occurred andbeen posted during the year:

Preparation of Trial Balance

When it is desired to close a set of

books either at tihe end of the year orat any given time^ the first step in theprocess is to take a trial balance of theconcern's books. A trial balance maybe described as merely a list of therespective debit or credit balances, asthe case may be, of all the various led-

1


BANK CttEDiT INVESTIGATOR

a cer-tain lack of confidence or attitude of

uspicion may sometimes be aroused^especially in trade circles. Also^ a com-mercial paper borrower must practicallymake public all details in connectionwith his business and the privacy of re-ations Ijetween banker and client is noonger apparent. By using the addi-tional credit facilities thus placed at theborrower's disposal when employing abroker^ a certain tendency toward over-expansion may be created and shouldthe line of credit be withdrawn later^ .failure might result. As an illustra-tion of this pointy it is sometimes diffi-

cult for a broker to distribute any pa-per where an approximate current ratioof two for one is not in evidence.hould a borrowing concern^ therefore^due to unfavorable conditions find that

88





ts latest statement did not reflect thedesired ratio^ the broker would very


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probably decline to take further paper,which action might place the borrowern a somewhat embarrassing position.For this reason, except in cases wheret is necessary to buy a great deal ofmaterial in a short period, it is alwaysessential for a borrower to have suffi-cient bank lines open to care for out-tanding commercial paper loans. Pro-tecti(m against money stringency re-

ulting in an unsatisfactory open mar-ket is thus obtainable.

An Attractive Bank Investment

Commercial paper is a particularlyattractive form of investment for banksas it can be considered an excellentecondary reserve. Due to the natureof a bank's business it is not only neces-ary to have a certain cash reserveavailable but also a line of investmentsthat can be easily converted into cash.

easonal demands on a bank such ascrop moving often require all availablefunds during several weeks or monthsof the year, and the payment of Christ-mas Club funds is also sometimes adrain on a bank's cash resources for afew days. To meet these needs com-mercial paper of various short maturi-ties can be purchased. As this type ofnvestment can also be rediscounted at

89



the Federal Reserve Banks it is par-ticularly attractive. Short term bondsare sometimes purchased by banks butthese are always subject to change inprice and at times^ due to adverse mar-ket conditions^ must be sold at a sacri-

fice. Commercial paper, conversely, hastability, is paid at par, and there is noobligation to renew as is sometimes ex-pedient in the case of a direct loan to acustomer. The notes may be purchasedn practically any denomination desired,from $2,500 to $100,000, and attractiverates are often obtainable. Brokersusually grant a ten-day option duringwhich time the name can be investigatedby the bank, and if checkings are un-favorable, the banker has the privilegeof returning the note. The discount


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pertaining to the time for which thenote is held is of course taken by thebank in question.

The Selection of Good Paper Namei

When purchasing conunercial paperthere are certain fundamental princi-ples which must be considered ver

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