The amount to be accumulated as a reserve should be the difference between the actual cost of the asset and the estimated break-up value when discarded, which sum is thereupon spread over the years of life of the asset. There are several methods of arriving at the annual charge, each of which will be described.

The first method is to charge depreciation each year in equal installments, which has been called the "Fixed Proportion Method." On this plan each year is assessed in equal percentages, based on original values. This method is frequently pursued, and proves the most satisfactory in many instances.

The second plan is to charge depreciation each year in fixed percentages on the diminishing value, and is commonly termed the "Fixed Percentage Method." The percentages in this case are applied to the annual reducing values of the assets, and are consequently heavier than on the installment basis. This is the method most generally used, and produces satisfactory results in a majority of cases when intelligently applied.

When the matter of depreciation is given but hasty consideration, as is often the case, it may be reasoned when estimating the life of an asset at twenty years, that 5 per cent. should be written off annually, and this percentage will then erroneously be applied to the residual value. Instead of extinguishing the value of the asset in twenty years, it will be found that but 64.15 per cent. has been written off, leaving 35.85 per cent. remaining on the books; and further calculation will develop the fact that at forty years there would remain 12.85 per cent., and that after a lapse of one hundred years there would still remain nearly 6/10 of 1 per cent. to be carried over to another century.

When the fixed percentage method is utilized, therefore, the results should be carefully calculated, and the percentage should obviously be heavy enough to reduce the asset to its realizable value when discarded.

The advantages of this method of calculating depreciation are twofold: First, the heavy charges appear against the early years of the life of the asset, which serves to equalize the increases which are bound to occur in the later years in the maintenance expenses, thus distributing the combined cost of depreciation and repairs with some degree of uniformity. Second, as certain classes of assets become older, their earning capacity as a rule becomes

less and less, which again makes it advantageous to place the heavy charges against the early years.

A third method is to create a Sinking Fund to provide for the replacement of assets at the expiration of their estimated life. When this plan is pursued, Revenue is debited with the annual installments of the Sinking Fund, the latter being invested in securities. This method is not commonly used, because, as a general rule, a business can earn a larger percentage of interest than can be obtained by investments in securities.

However, the "Sinking Fund Method" may be employed as supplemental to either of the other plans proposed, if desired, the amount of the reserve being invested, in order that the sum may be available when needed. When the amount reserved is carried in floating assets and not specially allocated, it may not be possible to realize upon such assets at a critical time.

When the Sinking Fund basis is established, the compound interest is calculated in providing for the yearly installments, in order to produce the required amount at the termination of the period.

A fourth arrangement, which is made use of to some extent in England, is the Annuity System. When this method is pursued, interest is charged against assets and a sufficient amount is accumulated annually, in regular installments, to reduce to the residual value of the assets. On this basis the charges to revenue steadily increase as the interest credits decrease, the justification for which is found in the fact that the installments remain as working capital in the business.

The actual cost of maintenance is sometimes added to the annual installments on either the fixed proportion or fixed percentage methods, while another plan provides for the addition of the estimated cost of maintenance and repairs during the life of an asset, in equal installments. While these plans may meet with favor in England, it is considered far more satisfactory in this country to treat maintenance and repairs separately, a special reserve being created, when deemed expedient, to meet such expenditures.

Tables are presented herewith showing results of the various methods of calculating depreciation covering a period of ten years, upon an article costing $1,000, the realizable value at the close of the period being placed at $100:

The application of depreciation to various classes of assets may now be considered, the first group consisting of fixed assets. Allusion has already been made to the impropriety of increasing real estate values; on the other hand, provision for depreciation of land itself is not ordinarily made. While there may be wide fluctuations in value, for the purpose of a "going concern," land may ordinarily be carried at cost price, appreciation or depreciation being considered only when the property is disposed of or in case of reorganization, in which event an appraisement becomes necessary. Should land have been purchased during a period of inflation, or should conditions arise which permanently render the property less valuable than when purchased, due provision should, of course, be made.

Leaseholds are subject to depreciation to cover premium or bonus paid on obtaining a lease, and permanent improvements placed on leased property, providing the latter have been capitalized. When there is an agreement in a lease relative to restoration of premises to the original condition, at the termination of a lease, the estimated expense should also be accumulated. Repairs

are also frequently considered, but there are objections to pursuing this plan.

It is in connection with leaseholds that the annuity system is applied in England; the interest on the investment being charged thereto each year on the diminishing value of the lease. The amount of depreciation is fixed, but as the reserve grows the interest charge decreases, being applied to the remainder. The matter is carried even further by the English, a sinking fund being created and charged against the asset, in addition to interest. In this country we do not resort to these heroic and rather complicated measures.

Buildings of brick and steel depreciate slowly unless subjected to hard usage, through vibration of heavy machinery. From I to 11⁄2 per cent. annually on the diminishing value should suffice for buildings of solid construction, while frame structures will require from 4 to 10 per cent., according to solidity of the buildings, frequency of painting, usage, and climate. Speaking broadly, however, a general charge of 12 or 2 per cent. on all buildings will answer. The latter rate will reduce to 36.42 per cent. in fifty years and to 13.26 per cent. in one hundred years.

In a manufacturing concern it is desirable to have separate accounts for different classes of machinery, such as engines, boilers, generators, shafting, general machinery, special machinery, etc. In the case of the first two items the steam pressure is of importance in determining the rate to be provided, and with boilers the kind of water used becomes quite a factor. From 10 to 15 per cent. on the residual value may be applied to engines, while boilers will stand a charge of from 122 to 20 per cent.

Generators and other electrical machinery can safely be written off at the rate of from 15 to 20 per cent., and shafting may be charged at from 10 to 15 per cent. General machinery of ordinary patterns should bear a burden of from 7% to 15 per cent., while special machinery, which may be superseded by improved machinery at intervals and which is not readily salable, should be subjected to a heavy charge of, say, from 25 to 50 per

cent.

Should there be no separation of machinery accounts, a general average of about 15 per cent. on the diminishing value would meet ordinary requirements. Of course, the rate is dependent upon the class of business and burden imposed, and in some

instances the rate could, with propriety, be made more conservative, while with others a higher rate should prevail. In the event machinery is in use at night as well as during the day, this fact should materially increase the provision for depreciation on the equipment.

Patterns, molds, and drawings, if capitalized, should be written off at the rate of at least 25 per cent. of the residual value, and a charge of 33% per cent. would not be considered too heavy. Assets of this nature, while necessary to the equipment of a plant, are constantly being changed and improved to meet new conditions, which render the supplanted assets of practically no value. When a business has reached a healthy condition, it is desirable to treat these as expense instead of asset accounts.

It is also the part of wisdom to charge loose tools to expense, but if capitalized, during the early years of the existence of a plant, the account may be closed out within a few years by writing off at a high percentage, the renewal of tools in the meantime being charged to expense.

Before leaving the subject of factory accounts, reference may be made to the fact that in some lines of business where the production of large units necessitates cost keeping on individual jobs, it is often the practice to make a distribution of depreciation charges, each job being assessed, in addition to the productive and a proportion of the non-productive labor, value of material used, machine cost, etc., with its share of depreciation on machines used in the process of manufacture, together with a proportion of general factory depreciation charges. Where such a plan is not pursued, however, the various charges for depreciation are held intact and charged to the proper department of the business.

There is another group of assets upon which depreciation charges should be made, which do not apply to factory costs but to the general business. An administration building and its equipment would come under this head, as would also patents, franchises, and good will.

Patents run for a limited number of years, and depreciation to cover cost can be spread over the life of a patent, though it is well to reduce the length of time. Patents in some instances yield the owners splendid returns for years after expiration, but it is nevertheless desirable to extinguish the capital expenditure in connection therewith.

K