Loans, and Partners' Salaries, which may all properly be added to the net profits, provided the fact that they have been added is clearly stated. There are, however, other points which are possibly more debatable, and which will now be considered.

Depreciation.-Under normal circumstances a certification as to net profits would appear to naturally assume that a reasonable amount had been written off such profits in respect of the depreciation of all assets necessary for the purpose of carrying on the business. It sometimes happens, however (especially where a large number of retail concerns are amalgamated, for the purpose of forming one large company), that the accounts which have to be investigated are incomplete, and that no reliable information can be obtained as to the actual value of the assets upon which depreciation ought properly to be charged; while it may be added that the normal depreciation would naturally to a large extent be based upon the actual cost of such assets to the present proprietors, whereas the depreciation which will have to be charged by the proposed company in the future will of necessity have to be based upon the amount which that company actually pays for the assets in question. Under these circumstances-and under all other circumstances where the same conditions apply-it is not merely difficult to assess the actual rate of depreciation, but actually misleading to deal with it, even where it can be assessed. That being so, it is thought better, where these conditions apply, to certify the amount of profits which have been earned without any provision whatever for depreciation, leaving the assessment of the amount necessary to provide for this contingency to those who may be interested in the matter.

Exceptional Losses and Profits.-It has already been indicated that the main object of any investigation is to arrive at the normal profits of an undertaking; and, that being so, it is important that any exceptional sources of profit should be excluded, while per contra it is permissible that wholly exceptional sources of loss should be excluded. It is very difficult to define exhaustively either profits or losses coming under this. category, but the following may be included.

Exceptional Losses.-Losses not covered by insurance arising through fire, accidents to employees, or defalcations; provided a sufficient charge against profits is made to cover the amount which such insurance would have cost. Losses arising through actions at law not altogether incidental to the carrying on of the business, as, for instance, through breach of contract, infringements of patent, &c. ; but, if the losses arising from these causes are included, it is essential that whatever profits may have been incurred in connection with the subject-matter of the action would be also excluded, unless the litigation resulted in favour of the proprietors of the business being investigated.

Under the heading of Exceptional Profits which ought to be excluded may be classified all such transactions as it is not reasonable in the ordinary course of events to anticipate will frequently recur in the carrying on of the existing business upon ordinary lines. It is naturally impossible to deal exhaustively with this class of item, but the following headings may be mentioned: :

(1) Any profit received from a local authority, by way of compensation for compulsory removal of the business. premises.

(2) Any profit received from an insurance company in respect of a risk covered by a policy of insurance.

(3) Any profit received in connection with the sale of a portion of the undertaking, as, for instance, the sale of a patent, or of certain limited rights to work a patent, or of any fixed assets that may have been acquired for the purpost of working any portion of the concern in question, whether that department may since have been abandoned

or not.

Cash Discounts.-Where the concern in question has hitherto been hampered by want of capital, and has therefore not been able to take full advantage of the cash discounts offered, it is permissible, where the scheme of the proposed company provides for sufficient working capital, to take credit for the maximum cash discounts that might have been obtained, had

ample working capital been employed; but advantage should never be taken of this suggestion without fully explaining the fact that credit is being taken for profits which in point of fact have not been actually realised in the past.

Generally in matters of this description there is always a temptation to emphasise the saving which may be effected in the future by more skilful management, and by the economy which might reasonably be expected to result from the amalgamation of several concerns. These, however, are matters which it is submitted ought not to form the basis of any accountant's certificate as to profits. Such certificate should be rigidly based upon facts, and although certain adjustments, as already indicated, may be desirable (and even necessary), so that a correct impression of these facts may be gathered, in view of the altered conditions which it is expected will obtain under a new company, under no circumstances whatever should the certificate as to profits degenerate into anything which could possibly be described as an estimate, or a guess of what may under certain circumstances be expected to happen in the future.

CONCLUSION. By this time the accountant will have arrived at an opinion as to the amount of profits ordinarily earned by the undertaking he is investigating, but his work does not quite end here. As Mr. J. A. MOLLESON expressed it, when giving evidence in the case already quoted, “an accountant pursuing an investigation that would be useful would wish to analyse the accounts." Not only is it thought that such a course is most desirable as a safeguard against fraud (where a regular and satisfactory audit does not practically remove this contingency from the sphere of possibilities), but it is also extremely valuable for the purpose indicated by Mr. RICHARD BROWN, in the same case, of revealing the general nature of the business under review.

The accountant will now have collected sufficient data to enable him to form a general impression of the business under review. He will have had ample opportunity to study the general mode upon which the business is conducted; and he will have formed his own opinion of the personnel of the man

agement; he will have ascertained the amount of capital required to conduct the business upon its present lines, and have formed his own opinion as to the scope it offers for an increased capital (if such a thing be contemplated); he will have ascertained how far the continued success of the undertaking depends upon : (a) successful competition; (b) the continuance of a monopoly; and (c) the caprice of public demand; and have formed his own opinion concerning their continuance. In a word, he will be able to gauge the probable success of the venture. The point now to be considered is how far, if at all, his personal opinion upon these points should influence his report.

If it be conceded that the object of the accountant's investigation is to supply the place of an independent examination by each proposed shareholder (as the object of a professional audit is to supersede and supply the place of a personal examination by each proprietor) it must be admitted that these opinions are entitled to some expression. Yet the expression of personal opinions should be cautious and not dogmatical, and should be very clearly separated-where expressed at all-from professional opinions given, as experts, in matters of account; and further, it should never degenerate into either estimates or prophecies. It is very difficult to lay down any general rules upon this point; but, so long as the question is considered upon its merits in each particular case, the accountant will probably not get far wrong.

The question may very possibly be raised that the accountant who pursues the course here advocated is not likely to enjoy a very extensive investigating practice. It is thought that this conclusion offers an injustice to company promoters as a class. The profession of a company promoter is a very mixed one, doubtless, but the black sheep-although naturally the most notorious-are decidedly in the minority, and there are very many promoters who would thoroughly appreciate a greater strictness in investigations, which could not fail to strengthen the confidence of the public in joint stock enterprise as an advantageous mode of investment.

CHAPTER XII.

INCOME TAX.

It is neither necessary nor practicable that any detailed consideration of so important a subject as income tax should be undertaken in this work; but it so frequently happens that Auditors-both of the accounts of private traders and those of public companies-are asked to assist their clients in connection with assessments and appeals, that the present work would not be complete without some reference to the law and practice relating to this subject. An outline of the incidence of income tax is therefore appended in the present edition, but those who desire a more complete exposition upon the matter would do well to consult MURRAY & CARTER's Guide to Income Tax Practice, a reference to which will be found in Appendix "E.”

CLASSES OF INCOME ASSESSABLE.-Section 2 of the Income Tax Act 1853 divides the classes of income assessable to taxation under five headings, as follows:

Schedule A, relating to property in lands and buildings. Schedule B, to the occupation of such lands and buildings by farmers and the like.

Schedule C, to interest and dividends payable out of the public funds of the United Kingdom, the Colonies, or any foreign State.

Schedule D, to profits accruing to a person in the United Kingdom from a trade, business, or other occupation, whether carried on in the United Kingdom or elsewhere.

(This schedule also includes interest on money and other annual profits, not included in any other schedule.)