assertion that the commercial enterprises are in their infancy and they cannot grow without the assistance of an attorney, for he is to-day employed to prevent trouble rather than to contend with it, and he is absolutely powerless to guide this great ship of commercial enterprises without your help.

Our Guests.

BY THEO. F. SMITH,

President of Consolidated Publicity Bureau of St. Paul.

I am sure all will agree with me that the Public Accountant is the most useful and necessary individual in the business world. To his genius and system, more than to anything else, is due the accuracy of transacting business, and the success of all our large mercantile, manufacturing and financial institutions. He is in close touch with the largest affairs of the nation and is constantly solving the most complex problems of commerce. His advice and counsel are absolutely necessary to and are sought by the banker and merchant, the manufacturer and the large insurance companies and railroads, and all the great corporations and trusts. He is a student and a scholar, and a highly influential citizen who is held in the highest esteem by the community. Such is the Public Accountant as I have found him in Minnesota.

The clear head and steady hand of the accountant have done much to rear the stately fortunes of commerce and finance, and it is quite natural and proper that you should share in their prosperity, and having enjoyed the acquaintance and friendship of one of your most brilliant members from Minnesota, I am convinced that you must find some outlet for the proper circulation of your accumulated surplus, and I extend to you a most cordial invitation to spend the remainder of your summers in St. Paul.

We are delighted to greet such a body of men in St. Paul, and fully appreciate your good judgment in selecting St. Paul as the place for your annual gathering, for St. Paul is an ideal Convention City. This locality was first known to the world as a famous resort for recreation and pleasure.

In 1880 the population of St. Paul was 40,000. It has made tremendous strides since then, and during the last ten years has been growing at the rate of 5 per cent. a year, the past year having shown a gain of 8 per cent. On July 1, 1907, the estimated population was 216,048.

St. Paul takes a high position among western cities as a manufacturing center, and almost everything made in America is manufactured in St. Paul.

The banking facilities are ample, there being eighteen national, State and savings banks, with an aggregate capital of $10,000,000.

The assessed valuation of taxable property in St. Paul is $98,000,000, and the tax rate is thirty mills.

No city in America enjoys better or more extensive transportation facilities. Our line of railways radiate like spokes from the hub of a wheel to every nook and corner of the world. Three great transcontinental lines have their general offices in this city. There are several lines to Chicago, three to Lake Superior, three to Canada and the Northwest, five to the Pacific Coast, three to the Southwest, and four to the South.

St. Paul is a wealthy, prosperous city. Her outlook for the future is flattering in the highest sense, and every stranger who sets foot within her boundaries unites in praising her beautifully lighted, paved streets, and her magnificent business enterprises.

The Journal of Accountancy

Published Monthly under the auspices of the
American Association of Public Accountants

Depreciation and Other Reserves.*

BY ALFRED KNIGHT,

General Auditor of The Fleischmann Company.

No. 3

The truth in regard to affairs is sought by the accountant. In arriving at the truth, however, difficulties are often encountered through speculative elements which enter into the work. Depreciation or deterioration of assets is largely speculative, and as it deals with Capital Accounts, the subject is one of great importance. It is a lamentable fact, however, that the principles of depreciation are little understood.

To those who are engaged in enterprises in which capital outlays are large, a knowledge of depreciation is essential for the purpose of developing correct and conservative statements of gains and losses and assets and liabilities from year to year; to those who are engaged in banking, an understanding of the subject is valuable when called upon to look into the statements of customers seeking loans.

While there are perhaps no laws which compel an undertaking to provide for depreciation before distributing profits, the question will doubtless be the subject of judicial opinion at some no distant date; and it may be ventured that a decision of this nature will stamp depreciation as a charge against profits. It is conceded that failure to realize the necessity for depreciation and to make adequate provision therefor has led to many cases of insolvency.

• A paper read before the Cincinnati College of Finance, Commerce and Accounts.

Capital Accounts are charged with the cost of equipping an undertaking on a permanent basis, not with an idea of the assets being disposed of at a profit, but with a view to realizing trading profits through the medium of such assets. While every endeavor may be made to maintain the efficiency of the assets, there is bound to be a deterioration in value through wear and tear, lapse of time, supersession, and other causes.

This is an age of marvelous development, and new inventions are constantly revolutionizing methods. Competition is keen, and the alert business man of the present day must take advantage of improvements in order to keep pace with his rivals in the struggle for commercial supremacy. The rapidity with which changes take place in the construction of mechanical devices becomes an important factor when considering the subject of depreciation.

Objections are sometimes raised against making charges for depreciation, especially by those who are endeavoring to make a profitable showing and pay large dividends. The plea is commonly offered that if maintenance is charged with all necessary repairs and a plant is kept in good operating condition, its cost value is effectively maintained. However, time is bound to develop the fallacy of this argument, as assets will eventually wear out, and if there is no provision made for this replacement, additional capital must necessarily be expended. Should there be no surplus to draw upon, it becomes necessary to increase the issue of capital stock, borrow funds by means of a bond issue, or devote current earnings to purposes of replacement, the latter course interfering with the payment of dividends and perhaps creating dissatisfaction among the shareholders.

There are, of course, instances where assets enhance in value, though this is seldom the case with anything but real estate. To the manufacturer, appreciation in the value of real estate cannot be of benefit unless the property is disposed of. Assets purchased and used for purpose of producing an income and not for purpose of sale should not, therefore, under circumstances other than sale, be subject to increase in value on the books. To those who consider this proposition unfair in view of the fact that the depreciation of property is to be considered, it may be pointed out that real estate and improvements thereon are just as liable to slumps in market value, the latter often being carried, from causes which may arise in a night, far below the original cost figures.

The cost of replacing a brick building erected ten years ago would perhaps be 50 per cent. in excess of the original cost, owing to the present high cost of material and labor. Existing conditions in this respect may be altered at any time, however, and were the assets to be written up to conform to current values, it might prove necessary at a later period to reduce the figures. It should be understood, therefore, that fluctuations in value should have no bearing whatever in dealing with fixed assets on the books unless a disposition is made of such assets.

Depreciation is the writing down of the value of assets in a philosophical manner, by means of a charge to Revenue. It was formerly customary to credit the asset account with the amount written off, and some English authors still maintain that this method is preferable to creating a reserve. The best authorities of both England and the United States, however, are agreed that depreciation can best be handled through the accumulation of adequate reserves, the values (except when assets are disposed of) not being molested. On the Balance Sheet, therefore, the reserve account, which appears as a liability, becomes an offset to the book value of assets carried.

No matter what plan is adopted in providing for depreciation, it should be followed with regularity from year to year, no omission of charges occurring because profits happen to run exceptionally low. It is the methodical preparation for the replacement of assets which produces a satisfactory condition of the Balance Sheet.

In dealing with fixed assets a yearly appraisal of their value fails to accomplish the purpose on a systematic basis, as an appraisement can hardly be made without bringing the fluctuation of market values of material and labor into the question. A readjustment of book accounts based on appraisal figures would be likely, therefore, to have a very disturbing effect on the Profit and Loss Account. It is not claimed, however, that appraisements made with extreme care by persons trained for this work are not desirable from time to time-say once every five years. The information obtained is invaluable for insurance purposes, and also serves as a barometer for the percentage of reserve which is being accumulated for the replacement of assets. Palpable errors should, of course, be made the subject of adjustment, and, if necessary, the rates of depreciation should be revised.