kept upon loose leaves properly bound, upon which each entity may receive the proper entries.

The natural wear and tear is composed of two elements:

First, that obvious deterioration which is made good by repairs; second, that invisible deterioration which is above and beyond the maintenance in working order.

The following table is carefully worked out to show the percentage that it is necessary to write off from each successive year's value to provide for the second of these two elements:

A further percentage must be added to provide for the first element, and this can be deduced from the past experience as to the amount of repairs necessary to maintain the property in a going condition.

As I shall endeavor to show later, it makes little difference whether these percentages are exactly accurate or not; in fact they may be quite wide of the mark and yet in the last analysis the differences will be automatically adjusted to accord with the facts.

In adjusting the accounts, the Repair Account (A) should contain nothing except charges making good the obvious wear and tear (1): Replacements, or extraordinary repairs (B), should be limited to the amount necessary to make good the loss in accidental breakages or unusual destruction (2): Improvements, or additions (C), comprise all amounts bettering property or overcome obsolescence (3): Scrap, or selling values (D), need to be carefully allotted to the property from which they are derived so that proper credits may be made.

In this case it is quite evident that the depreciation percentage was a trifle too high, but the final clearing of the account transfers the excess to the debit side and the error corrects itself. It might have been assumed that the locomotive had been wrecked so that it was worth only scrap value, then the depreciation would not have been nearly sufficient and a deduction from asset value would have resulted just as certainly.

Assuming that the North and South Railroad had by inventory, either by physical examination or depreciation of cost method, $21,000,000 in locomotives; that its experience determined fifteen years as the average life; that their ordinary repairs averaged 15 per cent.; then the following might be illustrative of their depreciation account:

Here it is evident that the depreciation plus receipts from scrap and equipment sold very closely approximates all charges to locomotive equipment. To know if the assumed depreciation is substantially correct it is only necessary to know as to the balance on those items which have completed their term of useful life and have been disposed of; if the average of those are substantially equal then the percentage is justified; if considerable variation is discovered the percentage may be changed; there may be some uncertainty regarding the assumed losses by deterioration and wrecks upon the going equipment, but as the balances during a term of years are continually correcting these assumptions and as the experience of railroads tends to uniformity, there can be no very wide discrepancy between the figures and the facts without its becoming apparent.

This exemplification is made upon the locomotive equipment as that lends itself to a simpler exposition, but the method is applicable to every kind of property and to every kind of business, for as fast as the individual units complete their term of useful life the depreciation is automatically adjusted to the facts.

The Philosophy of Accounts.

BY CHARLES EZRA SPRAGUE,* A. M., PH. D., C. P. A. Author of the "Accountancy of Investment" and "Extended Bond Tables."

MONOGRAPH B.

THE MERCHANDISE ACCOUNT.

406. The reader has been cautioned (Article 200) against mixt accounts; that is, accounts partly specific and partly economic. These will, however, sometimes occur thru the imperfections of current accounting: an account which is normally economic will prove to have a residue of the specific when it comes to the nicer adjustment of the balance sheet; and vice versa. This has been toucht upon in the cases of Coal (Article 174-181) and Interest (Article 185-194).

407. There are accounts, as sometimes kept, where it cannot be said that either the specific or economic character predominates; where each phase is important and essential, and where, if practicable, the course of wisdom would be to create two accounts, one representing the specific and the other the economic side of the transactions.

408. A good example of such an account is the Merchandise Account in the form still prevalent but gradually falling into disuse. It is not recommended for adoption, but its structure should be understood, in order that, when encountered in the course of examination of accounts, it may be readily disentangled.

409. Merchandise is something bought at a certain cost-price for the purpose of selling at a higher price. The latter price consists of two parts-one equal to the cost, which it repays, the other the Merchandise-Profit, which is earned by services in bringing the goods near the customer, in selecting them with reference to their desirable qualities, in providing a convenient place where they may be inspected and in holding enough in stock to meet all reasonable demands.

410. Viewed in this light, every sale is properly creditable to two accounts, one part to the asset Merchandise parted with, the other to the income account for the profit.

* Copyright, 1907, by Charles E. Sprague.

411. But it seems to be considered in retail business, even on a large scale, impracticable to separate each sale into its two elements, and to know at each transaction how much goes to replace the goods, and how much to repay the merchant for services, risk, and expense. One would suppose it feasible, and some merchants find it so, to record in a column of the salesbook the original cost of each article. But more usually the sale-price is undivided.

412. The Merchandise Account, therefore, becomes a mixt account. On the debit side, it contains entries at cost-price, and on the credit side at selling-price. No correlation is revealed between the two sets of values, any more than if one were in rupees and the other in reichsmarks.

Hence some writers, in their zeal for classification, have considered the Merchandise Account as purely an Outlay and Income account. The merchandise is considered not as property but rather as a mere form of cash expenditure to be recoupt ultimately by receipts of a greater amount, the resultant being profit. A difficulty arises when we reflect that the merchandise on hand is property of too great value to be ignored. The way to get over this difficulty is to consider the merchandise on hand as an adjustment—an offset to the purchases.

413. Other authors again would classify this account as strictly a specific account-an asset. The difficulty here is that if we attempt to balance such an account we get a meaningless balance, corresponding to nothing. Hence the assumption is made that there is an increment of value to the extent of the profit; that the merchandise, so far as sold, has appreciated to that extent.

414. But whether the Merchandise Account be regarded as specific, or economic, or, as I contend, mixt, the calculation and the recording of the result are substantially the same. Let us take as an example, the following facts: