In presenting the above problems the monetary system was changed in order to render the solution more easily comprehensive by American readers.

As pointed out in last month's JOURNAL, the problems in the Final Examination are gotten up in the same haphazard style as the problems of the Intermediate Examination. If the examination is supposed to be in Practical Accounting the questions, surely, ought to be practical. The first question, while rather a good test problem, is lacking the finishing touch which would make it as though it were taken from actual practice. There is no item of rent included, which is rather strange. Whether the Mill owns Real Estate or not, there surely ought to be a charge for rental.

Another unpractical arrangement we can observe in the item "yarn (used)". The question begins: "The following figures are taken from the books of the A. B. Mills, etc.," and the first item is certainly not shown directly on the books, but arrived at after taking into consideration various elements, such as Purchases, Returns, Inventory, etc. It would be better to give all the accounts that result in the figures, showing how much yarn was used. For the preparation of a Balance Sheet, as required in the problem, we necessarily desire to know the inventory of goods on hand. A going concern, such as this is supposed to be, surely has some

stock on hand.

There are no comments to be made regarding the make up of the second problem. What attracts our particular attention in the make up of the paper of this examination is, that the problems are of a general character, as they should be, and not very specialized.

The accounts in the Trial Balance are arranged in the following order: Real, Nominal, Personal, and Capital. The respective debits or credits of each of the accounts was arrived at by an analysis of the nature of each account.

Proper division of the nominal accounts into the various sections of the Profit and Loss Account was made, with the exception of Insurance, Taxes, and Depreciation, which were not charged to Manufacturing, but to the Profit and Loss section. The wording of the problem is not clear enough for an apportionment of these items, hence they are shown as of a general nature.

In solving the second problem it was inferred from the phrasing of the question that Eusebius Robinson was the manager of the adventure hence the reason why a full record of the adventure is kept in his books, from the time of shipment until the final remittance is received, while such is not the case in Brown's books.

The time that the Society allowed for answering six questions, the above two being representatives, was three hours. No matter how much knowledge an accountant may possess, and no matter how experienced he may be, he cannot, if his answers are to have any form or style, solve the above problems in one hour. It is time for examining bodies to recognize the unfairness to candidates in allowing so little time

228

The Journal of Accountancy

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

Vol. 6

AUGUST, 1908

No. 4

Depreciation in Railway Accounting.

BY J. F. CALVERT, C. P. A.

We have read with interest the address of Mr. M. P. Blauvelt, Comptroller of the Erie Railroad, delivered before the Association of American Railway Accounting Officers, and reprinted in the June issue of THE JOURNAL OF ACCOUNTANCY. It will be gratifying to all accountants to learn that substantial progress is being made toward the production and installation of a uniform method of railway accounting, and the best results can undoubtedly be obtained by the hearty coöperation of the railway accountants and government experts. However, while reading Mr. Blauvelt's views upon the subject of depreciation, and his report of the difficulties that have arisen over the "innovation " of charging this item as part of the operating cost, we could not but feel that some of the opinions expressed by him were so repugnant to true accounting principles that they should not be allowed to pass unchallenged when appearing in a journal devoted to the promulgation of those principles.

Mr. Blauvelt states that "the question as to whether or not there should be included in the operating expenses of a carrier an estimated amount which lessens or brings down the value of its equipment is a principle." It undoubtedly is a principle,one of the cardinal principles of accounting which is instilled into an accountant at the very beginning of his career, and the importance of which grows upon him during every year of his business

life. The depreciation of the equipment, however, is a fact that cannot be overlooked and must be provided for, whether in prosperous years only or equalized yearly, if the railroad is to survive. Mr. Blauvelt says that "to depreciate is to lessen the value " and objects to lessening values in hard times. It is the use that lessens the value and the depreciation charge shows the loss in value due to operation, i. e. operating expenses.

It is stated in the address that the railroads of the country have provided for depreciation in the same way that any prudent business man would provide for it in his manufacturing establishment; that is, during times of prosperity and unusual business activity he would, from the profits of such period, renew his plant and machinery which might have been impaired during times of depression but which he was unable during such periods to properly maintain, and make such improvements that during future times of depression he would be in a position to weather the storm by being able to continue his operations at a low cost (the italics are ours) by reason of the expenditures made during times of prosperity. To this statement we must take exception. From our experience we find that the most earnest desire of every prudent business man is to know the actual cost of conducting his business each year, so that he may not only have an intelligent basis upon which to fix his selling prices, but also to compare the year's operations with those of preceding years. Such comparisons are invaluable to the business man, but if made upon the basis suggested by Mr. Blauvelt would be absolutely worthless. The business man of to-day realizes that he cannot produce anything without some loss in the value of the machinery of production, and he realizes that such loss in value is unquestionably one of the items of cost of production. This loss in value (or depreciation) must be included in each year's operating expenses if it is to figure as one of the items of cost of production, and his experience enables him to calculate the proper amount chargeable each year. The apparent result of the methods heretofore employed by the railroads, as stated above, would be that in periods of depression the operating cost would be low, while in prosperous times and periods of unusual business activity the cost of operation would be abnormally high, owing to the large amount of replacement during such periods. This would make it almost impossible to obtain a stable basis for the cost of opera

tion, as even the average of several years' costs could hardly be relied upon owing to changing business conditions, fluctuations in prices of labor, steel, etc.

A very able argument sustaining the necessity for railway scientific charge for depreciation on wasting assets of a railroad is contained in the Encyclopedia of Accounting, Vol. 5, pages 453 et seq. being contributed by A. F. Dodd, F. C. A., well known as a man eminent in railway accounting.

From Mr. Blauvelt's paper it would seem that the railway accountants are somewhat confused between the provision for depreciation and the actual expenditures for replacements. The yearly provision for depreciation would not affect in the slightest the prudence of actually making the replacements during the prosperous years. That is the time when replacements would naturally be made, as the railroads then have the cash available for such purposes. If a regular provision for depreciation has been made each year the expenditures for such replacements would be charged to the depreciation account, and the operating cost for that period would not suffer, but would be on the same basis as those of preceding years. We cannot conceive how the interests of the owners and managers of a property can be in direct conflict with the wishes of the government in this respect, for the government, as stated by Mr. Blauvelt, desires only to know the actual cost of operating year by year, and surely the owners and managers of a property, if they desire a prudent and businesslike management, should most earnestly wish for the same information. Careful management cannot prevent the depreciation that necessarily occurs and careful management should certainly recognize this item of cost as it accrues and not postpone its consideration until depreciation has reached the point where the asset is worthless and replacement becomes necessary. Depreciation may be to most railroads an "innovation" and "in many cases a wholly additional amount," but if so, it means only that the stated cost of operating in prior years was not the true cost but depended wholly upon whether times were good or bad. It is not the item of depreciation which should be severely criticised, but those who ignored it.

Mr. Blauvelt seems to fear that the government may compel the railroads to set aside actual funds to represent the depreciation or replacement provision. There would seem to be no