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Premiums and Discounts.

BY GEORGE O. MAY, C. P. A., A. C. A. The comments of Mr. Chas. E. Sprague on my article in the July number seem to call rather for acknowledgment of his appreciative attitude than for reply to his specific criticisms, and I should not, therefore, have again asked the courtesy of your columns but for the fact that Mr. Sprague's letter raises a question of far greater moment to accountants than that of the treatment of premiums and discounts.

In so far as Mr. Sprague aims to show that cases will arise where a refusal to credit a life tenant with any part of a discount would work unjustly, it is sufficient to point out that the existence of such cases is fully recognized in my article, and a suggestion offered for dealing therewith; and as regards his broader contention that absolutely no distinction should be made in practice between the treatment of premiums, and the treatment of discounts, I can only refer to the arguments and the statement of practical difficulties given in my paper which appeared to me to make such a distinction necessary. It is true that making a distinction involves some inconsistency, but accountancy is full of similar inconsistencies. But when Mr. Sprague states that

“ The qualifications usually' and 'seldom' will not do in mathematics and accounts. Principles are principles, and deviation can only be excused by the minuteness of the deviation in a particular case"; and again, when he rejects the argument that as a rule the refusal to apportion discounts involves no real injustice to the life tenant as being all very well for a lawyer but not for an accountant, he puts forward a theory of the accountant's proper attitude, with which I venture to take issue. The accountant, I would urge, should always have in mind the possibility of there being exceptions to even the best established rules. Accountancy is essentially a profession of common sense and good business judgment, which should be exercised, of course, with constant regard to accounting principles and sound financial and legal theories, but which should also look to practical difficulties, and should never attach to theories so much weight as to enforce them at the sacrifice of substantial justice. The tendency of the specialist is to place theories which he has satisfied himself are sound before all other considerations, but it is just this danger that the accountant should always be careful to avoid.

Reverting, for instance, to the subject of my paper, the present legal position in regard to premiums (which alone have been before the courts) is admittedly unsatisfactory, but the hope of changing it lies, as it seems to me, in proving to the courts not merely that their position is theoretically unsound, but also that it is unjust, and that the more theoretically correct method is likewise the more equitable one.

The expression “more theoretically correct” is used advisedly because the method advocated in my paper is not claimed to be ideally correct in theory. From a purely theoretical standpoint, all interest represents in part return for the use of capital and in part compensation for the risk of loss, and it may well be argued that only the first portion should be disbursed immediately to the life tenant, and that the rest should be accumulated as an insurance fund and not distributed until, on a final settlement, it has been determined how much thereof is required to meet losses. In practice, of course, such a method would not be considered for a moment.

The fact is that, in this as in other matters in commercial life, the methods adopted are necessarily a compromise between theoretical exactitude and practicability, and the accountant who loses sight of the one through looking too closely to the other at once impairs his usefulness and the value of his judgment.

The Journal of Accountancy

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


Dean of the New York University School of Commerce and Finance

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The Columbus Convention. The annual meeting of the American Association of Public Accountants, at Columbus, October 23, 24 and 25, was a gathering of great interest and of importance to the profession. The believers in accountancy as a rising profession have a right to feel greatly encouraged by the character of the men in attendance from all parts of the country and by the high quality of the work which was accomplished. We doubt if any meeting of professional men in this country was ever more dominated by that genuine professional spirit which, forgetting self-interest, aims to bring about such conditions as will benefit clients and practitioners alike.

The prevalence of this spirit was clearly manifest throughout the proceedings. No time was wasted in mere self-laudation or self-congratulation, nor was much time devoted to the discussion of topics in which accountants alone are interested. Very properly the reports of the special committees of the association, dealing with questions which concern the public quite as much as the accountant, received the greatest attention. No man, we are sure, can read these reports, which are printed on another page, without being convinced that this association of accountants is fully justifying its existence, nor without feeling that the public itself, as well as the individual accountant, is destined to reap great benefit from the investigations which the association originates.

The report of the Special Committee on Schedules for Uniform Reports for Municipal Industries and Public Corporations was received with particular interest. The work of the gentlemen of this committee shows unusual ability in providing classifications and in arranging and simplifying accounts. This subject is most important, and at the present time very much alive. It is well to bear in mind that the experts on the committee did the hard work incident to the preparation of this report without expectation or thought of a fee. Though it is yet scarcely aware of the benefit it derives from such gratuitous service, the public is unconsciously the client of these gentlemen.

Of similar character is the report of the Special Committee on Department Methods of the Government, which was appointed by the association to co-operate with the Keep Committee in reorganizing and improving the accounting methods of the United States Government. Another committee, indicative of the public spirit actuating the association, has conferred with the Interstate Commerce Commission and is prepared to assist in devising a proper system of accounting for railways.

An interesting feature of the convention was the series of excellent reports from the presidents of the various state societies, which showed a rapid growth of interest in organizations of accountants throughout the country. The marked development of the profession in the western states was observed with especial pleasure. The delegates were also greatly pleased with the reports of educational progress in different sections, especially in Illinois, where it is expected that a school of accounting, similar to those maintained by the University of Pennsylvania and New York University, will soon be in successful operation.

THE JOURNAL OF ACCOUNTANCY extends its congratulations and best wishes to the new officers of the association. The new president, Mr. E. W. Sells, made a strong plea in his inaugural address for education as a basis for the expansion of the profession of public accountancy and for reciprocity among the various states in recognizing the professional degree of Certified Public Accountant. His remarks, which are reprinted elsewhere, are worth the careful attention of every accountant. It is gratifying to note the hearty appreciation shown of Mr. T. Cullen Roberts' years of service to the association and his unanimous reelection to the secretaryship; and the same remark applies to the efficient treasurer, Mr. Guy H. Kennedy. The association is indeed fortunate in the high character of its governing officials.

Too much praise cannot be given to the members of the Ohio State Society for the delightful social program which they arranged, and which was carried out to the last detail. From the moment of their arrival in Columbus the delegates were made to feel at home. They were formally welcomed by the Mayor and the Secretary of State and were received everywhere with generous hospitality. The enviable reputation as a host for gatherings of this character, which Columbus enjoys, was ably sustained by the Ohio Society.

Uniformity in Railway Accounting. The Railway Age is worried over that part of the new Interstate Commerce law which makes it “ unlawful for .... carriers to keep any other accounts, records or memoranda than those prescribed or approved by the Commission." The effect, in the opinion of the railroad organ, will be to prevent an intelligent adaptation of accounts to the needs of each line and to check healthy progress in railway accounting methods.

If the Railway Age is right, the Hepburn Act has in truth struck a serious blow both at American railroads and at accountancy. We all know how effective the accounting departments of most large systems have proven themselves in locating defects and in keying up all divisions to the same high standard of efficiency. Probably no other form of business statistics is more highly developed and more useful than railroad statistics. The general manager of an up-to-date road, by means of the records of ton mileage, train mileage, engine mileage, fuel costs, and so on, which are laid before him, is able at once to put his finger on the man who is not getting things done with proper economy and despatch. It is hard to imagine how much crude guesswork would persist in present-day railroad methods were it not for

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