Journal of Accountancy May 1913 Vol. 15 Issue 5 (Whole Issue)

Journal of Accountancy
Volume 15 Issue 5 Article 13
5-1913
Journal of accountancy, May 1913, Vol. 15 issue 5 [whole issue]

American Association of Public Accountants
Follow this and additional works at: https://egrove.olemiss.edu/jofa
Part of the Accounting Commons
Recommended Citation
American Association of Public Accountants (1913) "Journal of accountancy, May 1913, Vol. 15 issue 5
[whole issue]," Journal of Accountancy: Vol. 15: Iss. 5, Article 13.
Available at: https://egrove.olemiss.edu/jofa/vol15/iss5/13
This Complete Issue is brought to you for free and open access by the Archival Digital Accounting Collection at
eGrove. It has been accepted for inclusion in Journal of Accountancy by an authorized editor of eGrove. For more
information, please contact [email protected].
SINGLE COPY, 30 CENTS PER ANNUM, $3.00
the JOURNAL of
ACCOUNTANCY
MAY, 1913
VOLUME 15 NUMBER 5
CONTENTS
What is Involved in the Making of a National
Budget - - - - Frederick A. Cleveland
Treatment of Interest on Manufacturing Investment:
Interest as an Element of Production Costs Edward L. Suffern
Interest should be included as Part of the Cost J. Lee Nicholson
Interest does not Enter into the Cost of
Production....................................... J. Porter Joplin
Determination of the Income Rate of Investments B. D. Kribben
The Accounting of Interest and Discount on Notes John Bauer
The Proposed Tax on Incomes
For the Good of the Profession
Department of Practical Accounting
Meeting of the Board of Trustees
Pennsylvania C. P. A. Examinations of November, 1912
New York C. P. A. Examinations of January, 1913
THE RONALD PRESS COMPANY

COOPERSTOWN, N.Y. 20 VESEYST., NEW YORK
Copyright, 1913, by The Ronald Press Company

Entered as Second Class Matter at Cooperstown, N. Y., Post Office
THE JOURNAL OF ACCOUNTANCY
RONALD ACCOUNTING SERIES
Cost Accounting for Institutions

By William Morse Cole, A. M., Assistant Professor of Accounting
in Harvard University. 1913. 263 pages. 6x9 inches. Half
Leather. $2.50 postpaid.
“Cost accounting for Institutions” (ready April The use of symbols for accounts is set forth in
15) is a clear, comprehensive statement of a detail, and tables give all the usual symbols for
modern system of cost accounts for institutions. institutional accounts. All the important forms
It is designed to further the adoption of uniform employed in accounting for institutions are pre
accounts by the institutions of the country, sented.
whether public or private. While taking the
hospital as a convenient basis for the development The book is one of the Ronald Accounting Series
of its principles, the scheme of cost accounts out and is approved by its editorial board consisting
lined is applicable to any institution or institu of Messrs. Joseph E. Sterrett and Robert H.
tional work. Montgomery. The book will be found complete,
authoritative, and an excellent presentation of the
Prof. Cole’s work is thorough and exhaustive. theory involved.
CONTENTS
CHAPTERS: I. General Principles. II. The Balance Sheet. III. Statement of Financial Transactions for the
Year. IV. Classification of Expense Accounts. V. Method of Determining Costs in Detail. VI. Forms for the Determi
nation of Costs. VII. Closing Processes. APPENDICES: A. Alphabetical Index of Symbols of Hospital Accounts and
Index of Symbols for Institutions other than Hospitals. B. Alphabetical Index of Common Items of Hospital Expense, with
Symbols of the Accounts Chargeable. C. Comparison of Accounts of the New York Plan of Accounting for Hospitals and
the Plan Advocated by the Author. D. Bookkeeping Entries for Transactions in a Hospital. E. Report of the Committee
on Uniform Accounting for Institutions.
THE RONALD PRESS CO 20 Vesey St NEW YORK
The Progress of Accountancy

¶ Like that of any other profession, it is measured by the breadth of usefullness of its members.
Accountancy cannot reach its highest development if its members possess merely a narrow tech
nical knowledge. ¶ The most hopeful sign of the present is the tendency on the part of
accountants toward broader knowledge of all matters connected with business and finance. It is
making for sound judgment and adv ice on their part. It is making them not the undertakers but
the physicians of the business community. ¶ If it is your intention to become an accountant
of this higher class, you will be interested in examining the courses offered by the
New York University School of

Commerce, Accounts and Finance
AFTERNOON AND EVENING SESSIONS
¶ From the beginning of this School, twelve years ago, its constant aim has been to provide not
merely the theoretical and practical knowledge of accounting and law that is absolutely essential
for the practitioner, but the broad general knowledge of finance, commerce, English and allied
subjects that are requisite for the professional man. ¶ The demand for this sort of training is
indicated concretely by the growth of the School’s enrollment to its present thirteen hundred
students. ¶ That the practical ideal has not been sacrificed is indicated by the fact that of the
accounting department seven members are C. P. A.’sof the State of New York Instruction in
this field is given in eleven distinct courses. These include Principles of Accounting, Accounting
Practice, Cost Accounts, Executors’ Accounts, Corporation Accounts, Theory of Accounts, Invest
ment Accounts, Auditing, Accounting Problems, Accounting Systems. ¶ The complete bulletin of
the School gives a full description of each course, and detailed information about fees, entrance
requirements and the like. The Secretary will gladly send a copy to any address upon request.
New York University School of Commerce, Accounts and Finance
JOSEPH FRENCH JOHNSON, Dean Washington Square East, New York City
When writing to advertisers kindly mention The Journal of Accountancy.

UNIVERSAL ANALYSIS PAPER
Made in 7-14-28 Columns. The Most Popular and Extensively Used Analysis Paper in the World.
FOR
Analyzing Accounts, Preparing Balance Sheets, Reports and Schedules, Tabulating Comparative
Figures and Classifying Expenses, Profits, Sales, etc.
7 Col. 14 Col. 28 Col. Made of Strong White Ledger Paper, ruled one side, and put into pads of 50 sheets each.
8½ x14 17 x 14 34 X 14 All prices a r e F. O. B. New York. Unless otherwise instructed all goods are shipped by

Express. Beware of im itations. None genuine unless our nam e appears in
5 0 Sheets.. $ .30 $ .60 $1.20 Every Sheet.
100 “ .. .50 1.00 2.00 M a d e a n d S o ld
500 “ .. 2.00 4.00 8.00 ARTHUR G. DEATLY & CO.
E x c lu s iv e ly b y
1000 “ .. 3.50 7.00 14.00 HOTEL AND CLUB STATIONERS
24 GOLD STREET NEW YORK
I
II THE JOURNAL OF ACCOUNTANCY
National Business Institute Checking Pen

Instruction in all branches of Bookkeeping, for the
Advanced Bookkeeping, Accounting Theory
and Practice, Auditing and Business Law.
Preparation for Auditor
C. P. A. EXAMINATIONS
Business careers and professional practice of A Definite Check—
accounting. Mail and resident courses. A Check that Informs
Address the
Operated like a Pen and adjustable
Secretary, NATIONAL BUSINESS INSTITUTE
to any position, touching surface flat,
with clear, clean, and non-blotting
45 West 34th Street, New York City impression. Only light pressure,
(not stroke) needed. More accurate
and rapid than pencil check. Type
easily arranged for "Code” work.
C. P. A. Examinations Just the device you have been look
ing for. Recommended by many of
the leading Accountants.
Persons desiring special preparation for the C.
P. A. Examinations In any State are asked to
write for information and outlines of our Complete outfit, consisting of Pen, two
type holders, eight set of type, pocket ink
Mail Courses Pad and full instructions in “Code” check
in Accounting. Auditing, Law, Cost Accounting ing for $1.00 postpaid. $9.00 per dozen.
and Advanced Bookkeeping. Established 1907.
Successful students everywhere and best of refer
ences. Personal attention of R. J. Bennett. B. S.,
C. A., C. P. A., Dean Philadelphia School of CHAS. G. HARRIS TICKING PEN CO.
Commerce, Accounts and Finance.
Office 402 Union Nat. Bank Bldg.
Bennett Accountancy Institute, LOUISVILLE, KY
261 Farragut St., Philadelphia, Pa.
A Practical Mill Accountant

who has worked and studied under several
BROADWAY
of the best steam, chemical and efficiency
engineers and accountants, desires a posi CENTRAL HOTEL
Cor. Third Street
tion where his 20 years of practical mill
work from yard hand to mill superintendent In the Heart of New York
will be of value to an accounting firm or
corporation wanting prompt, reliable and Special attention given to
Ladies unescorted
usable data and reports.
SPECIAL RATES
ADDRESS M 52
% JOURNAL OF ACCOUNTANCY
FOR SUMMER
OUR TABLE
is the foundation of our enormous business
Senior Accountant Wanted American Plan, $2.50 upwards

European Plan, $1.00 upwards
An experienced and able senior who can
handle audits without supervision and pre Send for Large Colored Map and Guide of
pare comprehensive reports. Must have a New York, FREE
clean record and be able to satisfy us as to TILLEY HAYNES, Proprietor
his ability, habits and responsibility. A good DANIEL C. WEBB, Manager
opportunity is offered. Reply by mail only, Formerly of Charleston, S. C.
stating age, nationality, education, experience
and salary, in confidence. Interview by
appointment only. THE ONLY NEW YORK HOTEL
FEATURING AMERICAN PLAN
WRIGHT, SCHOOLEY & MORSE,
Accountants—Auditors—Engineers, Moderate Prices
Woolworth Building, New York Excellent Food Good Service
THE JOURNAL OF ACCOUNTANCY III
The Journal of Accountancy
CONTENTS FOR MAY, 1913

PAGE
What is Involved in the Making of a National budget
By Frederick A. Cleveland . . . . 313
Treatment of Interest on Manufacturing Investment
Interest as an Element of Production Costs
By Edward L. Suffern . 329
Interest should be Included as Part of the Cost
By J.Lee Nicholson - . . . .... . 330
Interest does not Enter into the Cost of Production
By J. Porter Joplin .... . 334
Determination of the Income Rate of Investments
By B. D. Kribben............................................................................... . 336
The Accounting of Interest and Discount on Notes (Concluded)
By John Bauer ...... . . 341
Editorial
The Proposed Tax on Incomes ..... . 351
For the Good of the Profession ..... . 355
Conducted by John R. Wildman ...... . 357
Meeting of the Board of Trustees ...... . 365
Commercial Law
By Walter D. Stewart ........ . 370
By Paul-Joseph Esquerre ....... . 377
Correspondence ......... . 391
Announcements ......... . 393

Book Department ......... . 395
THE JOURNAL OF ACCOUNTANCY is the organ of the professional accountants of the United
States. In its articles and editorial columns it treats, from the accountant’s point of view, of business
problems and conditions.
The editor will be glad to receive and to consider for publication articles from well-informed persons,
and will welcome especially contributions from public accountants. The manuscripts of articles not available
for publication will be returned on request.
THE RONALD PRESS COMPANY

COOPERSTOWN, NEW YORK 20 VESEY ST., NEW YORK CITY

IV THE JOURNAL OF ACCOUNTANCY
Wanted An A-1 auditor and account

ant. thoroughly familiar with
public service work and corporation finance.
No one need apply who has not had wide
experience and who is not thoroughly quali
fied to take full charge of this work for sev
eral properties. Address
M12, Journal of Accountancy.
as assistant ac
Position Desired countant with a
C. P. A. auditing and accounting concern
that can offer advancement to an ambitious
and capable young man. Clean cut and ener
getic. Can furnish bond and A-1 references.
E. D., 1427 Brittain St., Berwick, Pa.
Wanted Accountants
We want to increase our permanent staff of
accountants provided we can secure those hold
ing either the degree of C. P. A. or Chartered
Accountant.
In answering, please give full particulars as to
experience, etc., as well as salary expected, and
also as to how soon you will be available.
Address
CORPORATION AUDIT COMPANY
Accountant’s Juanita Building Dallas, Texas
Portfolios
Why Not Record Your Auditing Work
Systematically in the First Place ?
Cooley’s Audit Records

—contain space for notes of four periods or
examinations
—meet the demands for all cases
—save an immense amount of duplication
and error
—are the designs of a practical accountant
—keep all notes easily accessible
—save their cost many times over on a
single audit
We sell direct to accountants at whole
sale prices. 48 different numbers to select 72 pages. 4 1-4 x 8 1-4 inches.
from.
Single copies.......................... $ .50
$3.00 and up Lots of 10............................... 4.50
Let us send you one on approval. Lots of 25............................... 10.00
Charges prepaid. If not satisfactory
Lots of 50............................... 17 50
return at our expense. Catalogue No. 9
free. For sale by
LEATHER PORTFOLIO MFG. CO. THE RONALD PRESS COMPANY
5 CEDAR STREET NEW YORK CITY
Phone, John 3124 198 Broadway New York
Official Organ of the American
Association of Public Accountants
Vol. 15 MAY, 1913 No. 5
What is Involved in the Making of a National

Budget*
By Frederick A. Cleveland
It is difficult even to suggest the importance to the American

people of a budget. The fact that we have gone on for one hun
dred and twenty-three years without an annual statement of af
fairs which may be readily understood, and without a definite pro
gramme as a guide to future work, would not excite any con
siderable comment were it not for the disappointment which we
feel with the results. We have come to realize that the energies
of our greatest welfare institution, the national government, have
been misdirected. Lately we have come to realize that we have
departed from principles that have been considered by us as
fundamental to constitutional government. Finally, the American
people have decided that something must be done, and that this
something must carry with it a definite governmental plan or
programme which the average citizen can understand and will
support. It is in this relation that the question, as to what a
budget may mean, finds its broadest significance.
Definition of a Budget
First let us make sure that we understand each other. In

this country the word budget has been very loosely used to
signify at least five different ideas, viz., (1) departmental esti-
* This paper was prepared for the annual meeting of the Efficiency Society at
New York, January 28, 1913. As Mr. Cleveland could not be present the paper
was ordered printed as a part of the proceedings.
313
mates, (2) a summary of departmental estimates for expenditure

and an estimate of revenues prepared by a finance officer, such
as a comptroller, (3) a statement of financial conditions, opera
tions, and estimates by the executive to the legislature, (4) bills
prepared by legislative committees, (5) acts of appropriation.
I am using the term in the sense in which it is understood in
England, in France, in Germany, in other countries where a true
budget system obtains. For this purpose, therefore, I will define
a budget to be a summary statement submitted by the responsible
head of the executive branch of the government to the representa
tive branch—a statement which reflects present business condi
tions and operative results; one which carries also definite
recommendations with respect to the future, including a pro
posed method of financing estimated expenditures.
The budget as an instrument of control:
Originally a budget was adopted as a means whereby the
executive might be compelled to submit to the representative
body and to the country an account of revenues and expenditures
before further supplies would be granted. Later the practice was
expanded to include the submission of a definite plan or list of
proposals for future revenues and expenditures which the head
of the administration was expected to explain and defend. The
fundamental constitutional purpose of a budget is to provide the
means whereby officers of government may be made responsive
and responsible to the electorate, and to this end the executive
and the legislature are required clearly to define the issues which
are to be discussed. In this particular a budget procedure is to
the electorate what a judicial procedure is to a court.
The budget as a means of developing cooperation and avoiding

conflict:
Without a budget the usual attitude of the legislative and
executive branches toward each other is one of suspicion, hos
tility, and conflict of powers as between these two branches of
the service. A budget as it has developed in use is an instrument
of precision which enables the legislative and executive officers
to cooperate in the management and control of its business. This
result obtains as a result of requiring each to take his fair share
of responsibility for mistakes in policy or results of mismanage
ment.
314
What is Involved in the Making of a National Budget
An Appeal to Business Experience
The best way to approach a business problem is through the

experience of business men. As business men most Americans
are more or less familiar with corporate organization and man
agement. Although we have been operating without a budget
there is nothing new in the principles to be discussed.
An example in corporate organization:

In thinking about national business what I would have each
of you do is to picture yourself as a member of a corporation
with a hundred million shareholders—a corporation which is
officered by a board of five hundred trustees on the one hand
and by a president on the other. The question at issue is whether
responsibility for the details of management should be in this
unwieldy board or in the president; whether judgment about
matters of current business should be exercised by committees
appointed by the board or by officers responsible to the chief
executive.
The issue may be better understood when it is said that this
corporation transacts nearly every kind of business that is known
to man. It employs 500,000 men in the regular performance of
its activities; it has over 70,000 different offices; they are under
the direction of 1,000 different operating chiefs who are organ
ized under nine different executive department heads—these heads
being appointed by the president. For the purpose of effectively
relating the official responsibility for the management of this great
corporation to the shareholders, the five hundred members of the
board of trustees are elected to represent particular interests of
localities, while the president, as the head of the executive branch,
is elected by the shareholders at large. The volume of the busi
ness to which responsibility is to be attached may be suggested
by the fact that the money transactions aggregate more than
$5,000,000,000 a year or $16,000,000 each day, of which vast
amount nearly $2,000,000,000 is in the nature of receipts and
disbursements for the current expenditures of the government,
while more than $3,000,000,000 is in the nature of trust receipts
and disbursements, including currency trusts, Indian trusts, and
sacred obligations of the government that have been undertaken
for the welfare of those who have been specifically designated
as legal beneficiaries.
315
In this institution of which you are a member, the legal or

charter relations of the board to the executive are practically
the same as in the other corporations with which you may be
connected—the same as those to which business men are accus
tomed, except that the board is larger, the business is more
complex and the shareholders are more widely scattered. There
is a further difference, also, in that each shareholder has only
one vote, so that each member is on a plane of equality with
every other member. Under the articles of incorporation the
board is required to meet once a year; it may meet more fre
quently on call of the president. The purpose of this meeting,
as with other boards, is to determine questions of policy; that
is, it is called upon to decide what the corporation shall do and
how much it will authorize executive officers to spend on each
undertaking.
Administrative problems to be solved:

The administrative problems are also similar to those of a
private corporation doing similar business. The president as
the head of the corporation is charged with the same responsi
bility for carrying out policies of the board as the president
would be in any corporation with which you may be acquainted.
He is responsible for selecting and directing the heads of de
partments. He is responsible for every act of every subordinate
in the same manner as is the chief executive of any business
organization. He is responsible not only for developing efficiency
in the organization but also for the economy with which ex
penditures are made. There are the same responsibilities, the
same technical requirements in the construction of a ship, whether
built by public or private agency. Questions of management are
similar whether in operating a private or a public canal, school,
hospital, or other undertaking. In other words, every problem
which relates to the expenditure side of the business is common
to all executives. It is in the policy-determining and revenue
raising or financial side that the principal differences are to be
found.
A question of board or executive control over administrative

details:
The foregoing is descriptive of the plan as originally con-
316
ceived by those who framed the charter of this great corporation.

Now let us catch a glimpse of the institution at work.
As required by charter the board of five hundred members
gets together; at its annual meeting it organizes itself and in the
regular course of business prescribes the ordinances and by-laws
which shall govern the administrative’s offices and departments.
In doing so, however, instead of requiring that the president shall
submit to them each year an account of stewardship—a balance
sheet and an operation account—instead of requiring that the
president as chief executive shall lay before them a definite
proposal as to what in his opinion should be undertaken during
the next fiscal period, based on experience and the best judgment
of managers, it makes a by-law which requires that each of the
chiefs of the 1,000 offices in the several departments or estab
lishments shall come personally before committees of the board
and answer their questions; and preparatory to such an inquisition
it also requires that each such officer shall submit a statement
of his plans, with estimates for expenditures; moreover, that
this statement shall be submitted through the head of the de
partment or establishment directly, without review or revision
by the president as chief executive.
Is a weak board desirable?

On the one hand, imagine yourself sitting as a member of a
committee of this board of five hundred trustees interviewing
the chiefs of as many of the 1,000 different divisions in the
service as would be possible within the period of a session;
imagine yourself by this method trying to get from these chiefs
statements which would enable you to think intelligently about
the many technical details of many kinds of business transacted,
with all of which you are unfamiliar; and with this smattering
of knowledge attempting to do what no administrator would at
tempt to do, namely, to decide administrative questions a year
in advance. Then again, imagine yourself sitting with the whole
board at the end of a session, attempting to take intelligent action
on matters reported by one or the other of some thirty different
committees which have submitted for your consideration a long
list of decisions about administrative details without first having
before them a definite plan. Let it also be understood that the
persons who have been drawn before these committees are fearful
317
lest the information which they give will be used against them to
limit their powers and to circumscribe their actions, and that
these committees are so organized that they are without the
means of coordinating their efforts—and you have a picture of
board management that I would get before you as a basis for
judgment as to whether or not this is the best way to control the
broad policies of a large business. Is this what you would expect
if you were a member of a board of a business corporation?
Is a weak executive desirable?

On the other hand, imagine yourself chosen by the stock
holders as chief executive. Imagine yourself in complete isola
tion, selecting heads of departments who are asked to confer
with you about matters of current business, but who in fact are
helpless because the board, through its committees, insists on
directing the heads of bureaus and divisions what to do—how
to do it—insists upon placing upon each chief such limitations
and restrictions as to make effective executive direction and con
trol impossible. Imagine yourself responsible to your electors
for everything that goes wrong, but with no staff for ascertaining
what is being done—with no means provided for having state
ments of operating conditions and results brought currently to
your attention, with every little bureau chief an autocrat within
the limitations prescribed by the board. Imagine yourself a weak
sovereign with a nominal kingship over a thousand feudal lords
each well fortified behind his own walls, and you have the pic
ture of the chief executive of your corporation.
The Constitution of the United States in Theory and in

Practice
But you may say: Why this appeal to the imagination? If

by reference to the every-day experience of the average man
a clear picture has been drawn, the end of this introduc
tion has been served. This description is not fiction, neither is
there anything in it that is new or far-fetched. It may seem
strange, but it is true to life.
A century of institutional decay:

Governor Wilson in his work on Congressional Government
318
has pointed to some very interesting facts about the development

of the activities of our federal government. In this, he describes
the evolution of powers under the constitution, as a gradual in
vasion of the executive by the congress. He speaks of the
constitution as an idol that we have worshipped in form, rather
than as an organic principle which we have followed.
In this relation he says:* “The constitution of 1787 is still
our constitution; it is now our form of government in name
rather than in reality * * * the actual form of our present
government is a scheme of congressional supremacy.” (page 10)
Speaking of the presidency as it is, as distinguished from the
presidency as it was contemplated by the constitution, Governor
Wilson says: “That high office has fallen from its original first
estate of dignity because its power has waned; and its power has
waned because the power of congress has become predominant.”
(page 43)
And again speaking about the congress, he says: “Congress
* * * very early divided itself into standing committees * * *
and set itself through these to administer the government (page
44) * * * ; it has entered more and more into the details of
administration until it has virtually taken into its own hands all
the substantial powers of government. * * * it (congress)
does not domineer over the president himself, but makes his
secretaries its humble servants; not that it would hesitate to
deal with the chief magistrate, but because our latter presidents
have lived by proxy; they are the executives in theory and the
secretaries are the executives in fact * * *.” (page 45)
Nor have the powers of the heads of departments been de
veloped at the expense of the president, as is set forth in the same
text: “It cannot be said that this change has raised the cabinet
in dignity and in power; it has only altered their relation to the
scheme of government; * * * but although the heads of de
partments are thus no longer simple counselors of the president,
having become in a very real sense parts of the executives, their
guiding power in the conduct of affairs instead of advancing
has steadily diminished because while they were being made in
directly parts of the machinery of the administration, congress
has extended its own sphere of administration so that it is get
ting into the habit * * * of managing everything.”
* See Congressional Government, 15th edition (Boston, 1900).
319
A concluding characterization by the same authority is also

in point: “We have had no great administrators * * *. The
presidency is too silent and inactive, too little like a premiership
and too much like a superintendency.” (page 204)
It is evident to everyone who has come into close contact with
the government of the United States as it is that, even with our
hard and fast written constitution, it is not what the fathers
intended, but what four generations of the children who have
lived in ignorance of what the government is doing have made it.
Constitutional principles impaired:

The principle which is fundamental to constitutional govern
ment is responsibility. This is the principle which democracy
forced upon a predatory hierarchy that exercised its powers as
a result of conquest. The evident purpose of our constitution
was to provide the means for determining and enforcing official
responsibility. Since its adoption, however, every step has been
away from this purpose. A few brief references will suffice to
make clear the initial concept.
Article I begins with the statement, “All legislative powers
herein granted shall be vested in the congress of the United
States.” This broad statement of principle was not left to stand
alone, but was made more specific as bearing on responsibility
for management. Section 8 of article I provides that “Congress
shall have power to lay and collect taxes, duties, imposts and ex
cises, and to borrow money on the credit of the United States,”
while section 9 requires that “no money shall be drawn from the
treasury but in consequence of appropriations made by law.”
Thus to congress is given the power and responsibility for deter
mining all matters of legislative policy and for deciding what
revenues shall be provided and what amount shall be expended.
Provision made for a strong executive:

But it is also clearly evident that the power given congress
was not intended to be used in a manner to deprive the executive
of the exercise of discretion or to interfere with the location
and enforcement of responsibility for efficiency in management or
for the economy with which funds are expended. Article II
begins with the statement that “The executive power shall be in
a president of the United States.” In the very same paragraph
320
which gives to congress control over appropriations is found

the constitutional requirement corresponding to the initial con
cept of a budget, viz., that the administration shall publish “a
regular statement and account of the receipts and expenditures of
all public money.” This idea is further developed in a subsequent
clause which makes it the duty of the president to lay before
congress and the country a definite constructive statement or
proposal. The constitution specifically states that the president
“shall from time to time * * * recommend for their consid
eration such measures as he shall judge necessary and expedient.”
In these clauses of the constitution are to be found almost an
exact definition of modern budget procedure, and this prescribed
procedure too is brought into definite relation with those prescrip
tions of powers, duties, and limitations that are to be interpreted
in terms of official responsibility.
Provision made for a strong legislature:

On the one hand, it is clear that the intent of the framers of
the constitution was to make the congress a representative board
which would give attention to broad questions of policy; on
the other it is quite as evident that it was not intended that the
congress should take action within the field of administration.
Congress was made responsible for determining how, under the
constitution, the government shall be organized, for directing and
controlling what service shall be rendered, for deciding what
amount of funds shall be raised by revenue measures, and what
amount shall be borrowed in order to meet prospective expendi
tures. There is nothing in this instrument or in the discussion
prior to its adoption to indicate that it was contemplated that,
when the government had expanded its activities to such an
extent that it had 500,000 people on its pay roll, the congress
would attempt to decide whether the salary of a particular janitor
should be $600 or $700 a year. There is nothing to suggest that
the congress should turn over to irresponsible committees or sub
committees of its own members the determination of how many
clerks shall be used in each of one thousand different offices and
subdivisions of administrative work and what shall be the salary
paid to each clerk. There is nothing in the constitution to suggest
that the congress should finally develop into a political employ
ment bureau and pass on the promotion and demotion of indi-
321
vidual employees. There is nothing to suggest that it should

attempt to administer all the details, thereby breaking up execu
tive discipline and reducing chiefs of divisions to subservience
to the chairmen of its committees. On the other hand there is
every reason to think that the very purpose of the constitutional
prescriptions quoted was to enable congress to confine its activities
to questions of policy; to enable its members to give their thought
to a well considered plan or programme of work and to the
determination of the amounts that would be necessary to carry
on the work of the government as well as the methods of financing
these expenditures. This without doubt was the intention of
those broad-minded men who framed the constitution.
But what has happened is this: Although the government
is at the present time employing thousands of technically trained
administrative officers, it has, through its congressional com
mittees, proceeded to handicap and limit these men in such man
ner as to deprive the people of the benefits of an efficient service.
Congress itself has gone over into the field of administration—
has attempted to decide practically every question involving ad
ministrative discretion, has restricted the use of the judgment
and training of experts who have been employed to manage the
technical details of public business, with the result that public
funds are wasted and the people are thoroughly dissatisfied with
the public service. And not a little of this dissatisfaction is due
to the manner in which each branch of the service has sought
to discredit the other in the eyes of the people.
Inefficiency and waste the result of irresponsibility:

Not only has administrative efficiency been impaired, but
members of congress have also been handicapped by being so
overwhelmed with details that congress has been forced both to
abandon its real work and also to turn over the administrative
details to its committees. Thus at present the administration is
controlled by irresponsible committees and subcommittees who
determine what shall be done by irresponsible bureau heads. The
government is operated at a high cost. Matters of policy and
finance are neglected. All the particular functions for which
each branch of the government was established have been sub
verted. Instead of developing the powers of government along
such lines as effectively to establish and enforce responsibility
322
for each action taken, instead of evolving a system which will

provide for a constantly increasing efficiency with experience
acquired in the management of affairs, instead of utilizing the
executive branch of the government for giving to the public the
best possible service at the least possible cost, there has been
an evolution of processes and activities that has been in the direc
tion of destroying all responsibility for inefficiency and waste.
Congress has undertaken to settle matters which should be left
to administrative judgment. The president, as chief executive,
has failed to assume the leadership and to exercise the powers
granted. Although initially the president gave much of his per
sonal time and thought to the details of administration, as these
details became more numerous and encumbering the chief ex
ecutive, having failed to develop an expert staff, became farther
and farther removed from administrative considerations, until at
the present time he, as the only officer who represents the people
as a whole and who is constitutionally responsible for the manner
in which the business is done, is in almost complete isolation.
Instead of being an executive his chief function is a negative
one—that of vetoing legislation; his chief occupation is that of
a distributor of party patronage.
What may be Done under Our Constitution
In considering what is involved in making a national budget

the first question to be decided is whether we shall undertake to
develop an efficient government under our present constitution,
or accept the conclusion of certain writers that we are practically
helpless until we adopt the British system.
Fallacy of reasoning from analogy:

In my opinion there are two fallacies in the reasoning that
leads to this conclusion. First, premises for reasoning are used
which are not based on experience. We have never tried to de
velop ; we have never taken the steps necessary to find out whether
or not our constitution is adapted to efficient administration. Sec
ond, the history of parliamentary government is itself an argu
ment in favor of our own system if adequately developed. In
urging a parliamentary system it is commonly said that the par
liament dominates the government. As a matter of fact (except
323
in the matter of his own selection and tenure) the head of the
British administration controls the legislature. In other words,
the prime minister is a real executive such as a business
man is accustomed to. It is the prime minister as
the head of the administration who assumes responsibil
ity for the manner of doing business; he assumes responsi
bility for making report to the parliament on what has been
done; he assumes responsibility for submitting to the parliament
definite proposals as to what in his opinion should be undertaken;
he even goes to the point of assuming responsibility for recom
mending what financial measures should be taken in order to meet
the proposed expenditures. On these proposals he is ready to
stand or fall as they may appeal or fail to appeal to the judgment
of the people. Incidentally, the result has been that by reason
of the executive’s assuming responsibility for leadership before
the country he has forced the parliament to consider and act on
broad measures of public policy instead of spending their time
to decide whether or not a particular janitor’s salary shall be
increased $10 a month.
Incidentally, the result of executive leadership has been that
all matters of administration are left to the prime minister and
the heads of departments who are selected by him, and the parlia
ment finds time to consider questions of policy. By reason
of the prime minister’s laying before parliament a definite state
ment which shows present conditions and past results as well as
one which contains definite proposals as to what in his opinion
should be undertaken, he has placed in the hands of members of
the legislative branch the data necessary to the consideration
of policy and forced them to engage in oral debate on issues
affecting the general welfare of the nation. This attitude and
procedure have kept the parliament out of the realm of petty
politics and kept the whole record of the governmental proceed
ings before the country.
Our constitution adapted to efficient budget procedure:

Those who point to this result as a reason for changing our
constitutional form do so on the theory that it would be more
consistent with ideals of popular government to have an execu
tive selected by the legislature and for an indeterminate tenure,
than to have an executive chosen by an independent electoral
324
college for a fixed term of years. In my opinion this conclusion

is not based on experience nor is it based on sound reasoning.
The plan has not operated that way in private corporations.
Moreover, under a constitution like our own an effective execu
tive has never been developed, and therefore no comparison can
be made. The fact is that the development of an effective chief
executive has never been seriously considered. When an effec
tive executive has been developed it will be time for us to com
pare the relative advantages and disadvantages of the one system
or the other. Theoretically, there are some very definite and
concrete advantages in favor of a legislative recall of the execu
tive, such as obtains under the British system. On the other
hand there are many advantages which might be urged for a
fixed term of years and for independence of the executive—the
system provided for by our own constitution. At this time what
the country needs is not a change in the form of government,
but constructive leadership by a real executive using the powers
already conferred; leadership which will demand for itself a
competent staff that may be used to keep the executive informed
about what is going on; leadership which is based on a knowledge
of existing conditions; leadership which is not afraid to assume
responsibility for going before the people; leadership which will
utilize the superior powers of the president to formulate issues
which may be understood and force the acceptance or rejection of
a definite welfare programme; leadership which stands for effi
ciency in the conduct of the affairs of the government.
In my opinion all these results can be obtained under our con
stitution. Our present system of election is quite as well adapted
to constructive leadership as is the English method, provided
the leader becomes a real executive after he has been elected
and forgets that he is a part of a non-governmental agency organ
ized for the purpose of controlling the electorate. There is a dif
ference in the method of enforcing responsibility here, but there
is also a difference in the stability which may be given to policies
for which the president becomes the advocate. In any event even
a mistaken policy cannot last more than four years. As a matter
of fact there is no ruler in the world who is more sensitive to
public opinion than the president of the United States; nor is
there any leader who is less potent when he does not have public
opinion and the congress back of him.
325
Changes Needed in Organization of the Chief Executive
Before a national budget may be adopted a second decision

must be reached, namely, that the president of the United States
may be given the ordinary machinery of a corporate business
with which to conduct its affairs. At present the president has
practically no staff. For the constitutional head of an adminis
tration there is practically no means for obtaining information
about what is going on. In order to get together a statement of
financial condition as of June 30, last, and an operation account
for the fiscal year ended on that date, it was necessary to collect
the data de novo. Even the analysis of estimates and the prep
aration of summaries in such form as to present the appearance
of a budget required a special investigation and report. There
has never been developed in the government of the United States
a regular organization for doing these things, and there has never
been a basis for clear thinking about any problems of adminis
tration, to say nothing of enabling the executive to submit to
congress and to the country an annual budget. The organization
of the office of chief executive of the government of the United
States is about the same as would be established to conduct the
correspondence and manage the household of a society belle in
the city of New York. The organization and technique which
have been developed in departments for keeping members of the
cabinet in touch with what is going on would discredit any de
partment executive in the world. With few exceptions business
experience and knowledge of results are written in the brain
tissues of those who have the immediate contact with the prob
lem, and this memory and experience is made available to ir
responsible committees of congress through a process of inquisi
tion, or in compliance with special statute law. The rec
ord thus made is a distorted picture, drawn by those who
have no responsibility for accuracy of portrayal and who are
animated by a spirit of hostility toward administrative officers
who are responsible. Moreover, when such a record is made it
is made available too late to have any administrative significance.
Changes in Congressional Organization
The introduction of a budget system will also require a re-
326
organization of the congressional committee system in such man

ner that congress may be equipped to consider and determine
questions of policy instead of attempting to determine matters
of minor administrative detail. Such an organization would be
necessary to cooperation between the legislative and executive
branches in reaching decisions that would commend themselves
to the country and would make for the adaptation of the govern
ment to the needs of the people. Another important result of
such a system would be to establish in congress a majority and
minority leadership which would stand for or stand against the
proposals of the responsible head of the administration. It
would bring about a new alignment in partisan politics which
would place the president, as he should be, at the head of the pro
administration party. In other words it would force the organiza
tion of parties on pro-administration and opposition lines. This
would be effected without any change in the constitution.
What I wish to impress is this: A budget procedure is more
than a technique. A budget is more than an account. Its prep
aration is primarily a technical matter, but its use rests on a broad
democratic principle. A budget is essential to the effective opera
tion of constitutional government. It is necessary to the loca
tion and enforcement of official responsibility. It is one of the
cornerstones of modern democratic political organization. It
finds its first expression in Magna Charta. In its modern devel
opment it is the most effective instrument for making government
responsive to the will of the people that has ever been devised.
Another important fact must be faced. The creation of an
other committee in congress, or the organization of a joint com
mittee, will not reach any of these ends. A joint committee may
be essential to intelligent legislative action, and in a bi-cameral
legislature may be an essential part of the machinery required
for determining what requests will be granted and what revenues
will be raised; but if this agency is employed to make a budget
it can only serve to divert attention while the Congress still fur
ther invades and subverts executive power.
Conclusion
The question before the American people is: Shall we hold a

single man responsible for the efficiency with which the public
327
business is managed and for the economy with which funds are
used, or shall we still further enlarge on a system of irresponsible
congressional committees? The question for the chief executive
to decide is whether he will accept the easy and customary course
or go before the country assuming responsibility for every item
contained in a budget prepared and submitted in the manner
prescribed by the constitution.
The issue which is presented to congress is: Will it recognize
the increasing limitations of a practice that has already reduced
that branch of the service to a body which makes progress by the
momentum of mass and weight, and whose action is in consider
able measure determined by forces that are not controlled by
ideals of public welfare, or will it assume the normal constitu
tional functions of a legislative agency which will have time and
opportunity to discuss important issues and gain the respect of
one hundred million people for the manner and intelligence in
which the legislative business of the nation is conducted?
These are large responsibilities, but they must be met before
the government of the United States may be efficiently managed,
and the millions of dollars taken from the pockets of the people
may be economically applied to the welfare purposes for which
our federal establishment is organized and is maintained.
328
(Second Series)
Interest as an Element of Production Costs

By Edward L. Suefern
The discussion as to whether interest shall or shall not be

treated as an element of cost rather than as an element of profit,
appears to the writer to involve the manner in which a fact plus
a point of view shall be stated. Hence such a discussion will of
necessity be inconclusive, for the viewpoints do not agree.
Terms and definitions of terms do not help us much, but
facts remain facts however we view them. If a man should
borrow all the capital for his business, at what point would his
costs terminate and his profits begin? If we were to take his
point of view, it would have to be that no profits could accrue
until interest as well as insurance and other general charges
had been covered. It is beside the mark to say that the interest
he would have to pay should be considered as a part of the profits
payable to the lender. So far as he is concerned, there can be no
profits to him until his interest has been earned, and it certainly
is part of his cost of doing business.
That interest rates are variable does not affect the fact—
other elements are variable likewise—material and labor are
variables when one location is compared with another, yet they
must be treated as costs quite as surely as if they were everywhere
the same.
If a contract were taken for the construction of some special
machine tools, on the basis of cost and a percentage, and this
contract required one-third of the plant capacity and one-third
of the working capital for a given period, it seems clear that
no accurate record of costs could be made that did not include
interest as one of the elements of production. No true compari
son could be made as to the relative advantage of special as
against regular classes of output without including in the costs
of each the interest item.
In many classes of industries the distribution of the interest
as an element of production costs might be considered as an un-
329
necessary refinement of accounting. In textile production, for

example, where the variation of costs of different classes of output
is determined so largely by the difference in cost of material, and
where the labor and machine usage elements are practically the
same for all outputs, it may be quite possible to treat the interest
item as a whole, rather than to distribute it through production.
Even in such instances, however, the relative economy of using
one type of machines over another type is affected by interest
considerations.
In the opinion of the writer, the manner in which interest
shall be expressed depends very largely upon the conditions
obtaining in each instance, the character of the business and
the output and the uniformity or variations thereof. In other
words: What is it you ought to know ? Determining this, how
should this knowledge be obtained?
Interest Should be Included as Part of the Cost

By J. Lee Nicholson
The writer firmly believes in the theory that interest on capital
invested should be charged to the proper expense accounts before
ascertaining the actual profit from manufacturing or trading.
There is a large difference in risk between capital invested
in stocks, bonds and real estate and capital invested in manufac
turing or other commercial undertakings; and it is not to be
disputed that capital invested in commercial enterprises is liable
to far greater risk than that of capital invested in securities.
It is only fair that the capital invested in commercial enterprises
should have credit for at least the same return as that in securities
before a trading profit is shown.
The two articles in the April number of The Journal by
Wm. Morse Cole and A. Hamilton Church give such logical
reasons for the inclusion of interest as a part of the cost that the
writer desires to quote the following paragraphs as aptly setting
forth his views:
“Prices must be fixed at such a point that they shall at least cover
(1) materials, or goods; (2) labor, or service; and (3) expense burden,
or what are commonly called ‘overhead charges.’ Obviously, if the last
of these is not quite fully covered, the continuance of production or
330
service is not economically advisable (unless, of course, the work serves

other purposes than those which are immediately connected with the
initial enterprise). If, again, the income provided by the price gives
less than a proper amount as interest on the investment—investment in
the form of capital locked up in machinery, facilities, material, or wait
ing produce—the return is not economically sufficient to make the enter
prise self-supporting. If this interest is not included in the expense
burden, therefore, it must be added later, somewhere, before one can know
whether the return is adequate to make the enterprise self-supporting.
Since one of the purposes of accounting is to show whether the return is
adequate, the interest would seem necessarily to be involved somewhere
in the accounting.”
Wm. Morse Cole.
“Wherever capital is made use of, whether in the power plant, in the
erection of buildings, or in the purchase of costly special machinery, the
use of such capital has to be paid for, somehow and somewhere. It is
only rational that it should be paid for by just those processes (and there
fore those jobs) which involve its use. To exclude interest charge from
cost of these jobs is to ignore one of the most important matters that
we should know, namely—how far this use of capital is economically
justified.”
A. Hamilton Church.
The citing of some examples may tend to throw additional

light on this most interesting subject.
Take, for example, a textile plant. This plant comprises a
yarn mill, a weaving mill, and a knitting mill. The yarn mill
manufactures the yarn for both the other mills. As there are
many mills manufacturing yarn exclusively, this company is in
position either to buy yarn or manufacture it itself.
The prime question of importance in reference to the yarn
mill is whether or not it is profitable to maintain this mill con
sidering the capital tied up. The capital invested in this par
ticular mill, we will say, amounts to $200,000.00. If the yarn
were bought instead of manufactured, this $200,000.00 could be
invested in other departments of the business, or invested to
draw interest for the company, or distributed to the stockholders,
thereby allowing them to invest the proportion they receive at
interest.
It is the writer’s opinion, considering that the total investment
is used in manufacturing, that it is necessary to charge the in
terest of the investment to the cost of production. No true
331
comparison can be made between the cost of the yarn manu

factured and the purchase price of yarn, unless the interest is
charged as stated.
For another illustration let us take a plant manufacturing
axles, one mill being located in the east, and another one in the
west, both plants manufacturing exactly the same product. The
western plant was recently established to meet western competi
tion, and, as the cost of freight is a large item, the advisability
of this matter can be readily understood. In the western plant
the machinery was purchased, but the building and grounds
were leased for twenty-one years, with the privilege of purchase
at the expiration of that time. The eastern plant was owned
in its entirety. The company therefore had a rental charge
against manufacturing in one plant, and no charge for rental in
the other. This company had not, up to this time, ever charged
interest against its manufactured product, and now the question
arose as to how to compare the costs between the eastern plant
and the western plant. As all other elements were equal, and
no interest was charged on the capital used in manufacturing
in the eastern plant, the result would necessarily show that the
cost was greater to manufacture goods in the west than it was
in the east. The question was naturally settled by the eastern
plant charging against the cost of production interest for that
part of the capital used in the manufacture of the product in
the east. In no other way could a comparison of production
costs be made. The opponents of interest charged as costs per
haps would claim that the rent of the western plant would be
charged as administrative expenses. In answer to this, I would
say that whatever expense is necessary to operate a plant must
be charged against the cost of the product if true costs are to
be obtained. It is just as necessary to have buildings and
grounds in connection with a manufacturing establishment, as
it is to have machinery and workmen for turning out the product.
Suppose we take it for granted that the concession is made
that the rent of a building, used only for manufacturing pur
poses, should be charged as cost of production. Why, then,
should not the interest on the capital invested—where the build
ing is owned—be charged against the cost of the product?
Fundamentally, the question is whether or not interest on
capital should be charged as an expense of doing business. If
332
it is conceded that interest should be so charged, surely no one

can seriously make an argument that this charge should not be
allocated over those elements of business where the capital is
invested.
It may be of interest to the readers of The Journal to sub
mit a few -additional opinions besides those contained in the
April number.
In Cost Accounts by L. Whitten Hawkins, page 109, he
says:
“No charge should be made in cost accounts for the services of a

principal, nor for interest on his own capital. Whatever return is pro
duced by this is profit, and not an expense of manufacture.”
In the bulletin of the American Economic Association, pages

119 and 120, Arthur Lowes Dickinson is quoted as stating:
“The manner in which capital is provided cannot affect the cost of

manufacture.”
This statement was referred to by Wm. Morse Cole in the

same bulletin, pages 129 and 132, from which the following
quotation is taken:
“Mr. Dickinson and I, you see, are in perfect agreement as to what

we want—namely, isolation of causes; but the line of cleavage between
causes we are inclined to draw differently. Mr. Dickinson, conceiving
profit to be a certain surplus divisible between all three of the agents of
production—labor, land, and capital—wishes to exclude all interest from
cost; while I, conceiving profit to be only what is left after rent, pure
interest, and wages have been paid—that is, virtually the compensation
for risks taken—wish pure interest, and pure interest only, to count as
a cost. Many accountants count as cost all interest on investment, in
cluding all risk elements.”
J. C. Duncan, in the same bulletin, pages 146 and 147, also

in answer to Mr. Dickinson, states:
“To the speaker’s mind all such charges are really direct additions to
the cost of production, and should be apportioned directly to the various
departments involved. Rent and interest should not be regarded as
divisions of profits, because profit does not start until provision is made
for these items.”
333
F. E. Webner, in his book Factory Costs, in commenting on

Mr. Dickinson’s views, writes as follows:
“From the standpoint of practical costing, Mr. Dickinson’s logic

is not satisfactory. The interest on an investment in plant and equip
ment or rent paid for use of factory would seem to be almost as direct
an incident of cost as labor, material, power, or incoming freight. It is
obvious that the manufacturer cannot make his product without a plant,
and its rental or interest charge is usually one of the first incurred
manufacturing expenses. Why, then, should it be differentiated from all
other manufacturing expenses and be excluded from the cost of product?”
Mr. Webner, in commenting on the views of J. C. Duncan,

on page 155 of his book, has this to say:
“It is very obvious that rent of factory buildings and interest on money
invested in factory and for manufacturing purposes must appear in
some way in the cost of conducting the business, whether they be re
garded as production costs or as a division of profits. From the practical
standpoint any cost necessarily incurred in the production of goods is
most conveniently and most safely included in production costs.”
On page 47 of Multiple Costs by Stanley Gerry is the

following quotation:
“We may even carry this a stage further, and also charge to the factory
interest on the stocks of raw material on the same basis, for whatever
advantage accrues to the factory from the employment of extra capital
the cost of same should appear as a charge against its efficiency.”
Interest Does Not Enter Into the Cost of Production

By J. Porter Joplin, C.P.A.
The prime object in obtaining the cost of manufactured goods,

merchandise to be sold, or some commodity to be supplied to the
public, is to assist in determining the price for which the mer
chandise or commodity can be sold and allow a reasonable and
fair margin of profit; also to enable manufacturers, producers
or dealers to compete intelligently in the open market. Another
reason why a correct cost accounting is desirable is the demand
for and the necessity of a correct or fair value of all merchan
dise or products which would enter into the balance sheet as an
asset when such balance sheet is needed or is in demand.
334
In determining the cost of manufactured goods it is necessary

to know what has gone directly into such goods, such as labor
and material, to which should be added its correct proportion
of overhead charges or burden; and when goods, product, or
material of any description is manufactured or created through
power, or machinery, or fixtures a fair figure for depreciation
on the machinery used should be added.
Why the question of interest should enter into the cost of
material or manufactured goods has not been cleared up with
any degree of satisfaction by the exponents of this view. It is
a fundamental principle that when goods are bought or manu
factured to be sold, no profits are to be considered until a sale is
perfected, and yet by following out the plan of charging interest
in determining costs a profit is taken (on paper) at an early
stage of the proceedings. Neither does it seem logical to charge
interest on an amount invested in certain machinery when the
machinery is only one factor in the invested capital needed to
produce the product on which the cost is to be determined, and
in some cases a factor of the least magnitude. As a general
principle it would seem not to serve the end for which it was
intended, and is a most undesirable practice.
A balance sheet prepared along lines where interest has been
included in determining the value of goods in process or of
manufactured articles is open to severe criticism and it is doubt
ful if a balance sheet so prepared would be accepted as being
sound in premise. It certainly would not be viewed with the
same favor when seeking additional working capital or a tem
porary loan as the one presented where no interest has been
figured in determining the value of the product on the basis of
cost.
Invested capital most certainly has its place, and is considered
in due course at the end of each closing period. After all charges
against profits have been made, including interest on borrowed
money, and fixed charges such as interest on bonded indebted
ness, it receives the residue, either in the form of dividends, or
added book value to the capital stock as reflected in the surplus
of an incorporated company, or in the capital account of an indi
vidual or of a firm of individuals.
335
Determination of the Income Rate of Investment
By Bertram D. Kribben, C.P.A., LL.B.
The precise determination of the income rate of investments

is a problem which, though rarely resorted to in commercial
circles, occasionally confronts the accountant. Comparatively
few accountants are proficient in the use of logarithms, and for
the purpose of illustrating a sufficiently accurate method by
which the income rate of investments may be determined without
the use of logarithms, the writer submits the following method.
It is based on the methods of successive approximations coupled
with interpolation.
The values of an investment do not vary in the same ratio
of progression in which the income rate varies, but they vary
with the power of the rate. Hence when large values are to
be computed, or the investment has a long time to run, simple
interpolation is inaccurate. Simple interpolation is also insuffi
ciently accurate when the required argument exceeds one-half
of the difference of the arguments employed. But when the
investments are comparatively small simple interpolation will,
in the majority of cases, be sufficiently exact.
The doctrine of interpolation is thus stated by Professor
Chauvenet :
Let T, T + w, T + 2W, T + 3W, etc., express equidistant
values of the variable; F, F', F", F'", etc., corresponding values
of the given function; and let the differences of the first, second
and following orders be formed as expressed in the following
table:
Argument Function 1st diff. 2d diff. 3d diff. 4th diff.
T F
a
T +w F' b
a' c
T + 2w F" b' d
a" c'
T + 3w F"' b"
a
T + 4w F""
The differences are to be found by subtracting downwards,

that is, each number is subtracted from the number below it,
336
and the proper algebraic sign must be prefixed. The differences

of any order are formed from those of the preceding order in
the same manner as the first differences are formed from the
given functions. The even differences (2d, 4th, etc.) fall in
the same lines with the argument and function; the odd differ
ences (1st, 3d, etc.) between the lines.
Now denoting the function corresponding to a value of the
argument T + nw by F(n) we have from algebra:
n(n— 1) n(n— 1) (n — 2) n(n—1) (n — 2) (n— 3)
F(n) = F + na +------------- b +------------------------- c H------------------------------------- d + etc.
1.2 1.2.3 1.2.3.4
in which the coefficients are those of the nth power of a binominal.
In the formula the interpolation sets out from the first of
the given functions, and the differences used are those of their
respective orders. If w be taken successively equal to 0, 1, 2, 3,
etc., we shall obtain the functions of F, F', F", F"', etc., and
intermediate values are formed by using fractional values of n.
We usually apply the formula only to interpolating between
the function from which we set out and the following one, in
which case n is less than unity. To find the proper value of n in
each case let T + t denote the value of the argument for which
we wish to interpolate a value of the function; then
t
nw = t n=—
w
that is, n is the value of t reduced to a fraction of the interval w.
The formula therefore becomes for simple interpolation:
n— 1 n — 2, n—3
F(n) = F + n[a +-------- (b +--------- (c +--------- + etc.)]
2 3 4
But when the powers of the fractional part of the argument
are required it becomes:
b c d e
F(n)=F + n(a------ +---------- +------- ), etc.
2 3 4 5
n2 11d 5e
+----- (b — c +---------------- +), etc.
1.2 12 6
n3 3d 7e
+----- (c--------- +--------- ), etc.
12.3 2 4
337
n4
+-------- (d — 2e+), etc.
1.2.34
In the problem to be presented the terms beyond c become

insensible.
Let us now take a problem with which an accountant is
liable to be confronted in his practice. The amounts and the
periods are both stated at large amounts so that the full effect
of the method may appear, and inasmuch as bonds or investments
are more frequently bought between interest maturity dates than
on them the problem is thus stated:
Required the income rate on $1,000,000—3½% per annum
interest bearing bonds, interest payable semi-annually, dated
January 1, 1907, maturing in thirty years, bought March 20,
1912, for $948,000.00.
The first step is to determine approximately the amount of
the 50 period function.
There has been paid for the investment.......................................... $948,000.00

Deduct for tentative purposes purely, so as to find from bond ta
bles an amount roughly approaching a tentative function, the
interest paid for 4/9 of a period and assume it to be 80 days’
simple interest on the value of the bond at the bond rate...... 7,777.78
Tentative function ............................................................................... $940,222.22
An inspection of bond tables shows that the function re

quired, .94022222, lies between 50 and 49 periods at both of the
rates .0195 and .01925. We therefore use the function for 50
periods at the rates .0195 and .01925 respectively for the purpose
of obtaining a tentative argument, and inasmuch (as will appear
later) as we shall, for the purpose of accurately determining
the rate, need, according to the method of interpolation, at least
four successive functions, we further use the functions for the
arguments .019 and .01875 thus:
Argument Function 1st diff. 2d diff. 3d diff.

rate value a b c
.0195 .93648705
.00764444
.01925 .94413149 .00008222
.00772666 .00000096
.019 .95185815 .00008318
.00780984
.01875 .95966799
338
Then we compute an approximate rate in which we denote

the tentative function required .94022222 by y, thus:
Argument Function Function
Rate Value Value
.0195 = .93648705 = .93648705
.01925 = .94413149 y = .94022222
Difference .00025 : .00764444 = x: .00373517
Solving the equation we have as the value of x, —.000122
Argument .0195
Tentative rate .019378

We next recompute the present value of $948,000 at this
rate. It involves work unless logarithms are used. The value
is expressed by the problem .948000 ÷ (1 + .019378)4/9. The
answer is .93994800, very nearly and sufficiently exact for pres
ent purposes. Substituting this as the new value of y we re
state the equation, the last member becoming .939948 —
.93648705=.00346095, and we have .00025 : .00764444=
x : .00346095.
Hence x is —.000113
Argument .0195
New rate .019387

Recomputing the function y, with this value we find it to be
•93994433 very nearly. This is substantially within a few cents
of the 50 period value.
We now compute its value by the formula:
n2 n3
F(n) = F+ n(a —1/2b + 1/3c) + — (b— c) + —c, etc.
2 3
This is sufficient as the remaining terms are insensible and we
have
w = .0195 — .01925 = .00025 ; t = .0195 — .019387 = .000113.
t .000113
— =-------- = .452 = n, and hence
w .00025
F = .93648705
+ .452 (.00764444 — .00004111+ .00000032) = .00343685
+ .1021 (.00008222—.00000096) = .00000830
+ .0308 X .00000096 = .00000003
F(n) = .019387 = .93993223

But the function required is .93994433
a difference of .00001210
339
We have from the approximation .0002 5 = .00764444, there

fore .00001 = 30.5 78, and to obtain the correction for the rate
we have
.00001210 ÷ 30.578 .0000004 = correction
Argument .0193870
and we have as the rate .0193866
This rate computed for 50 periods gives .93994446, within

.00000003 of the function required and leaves in practice 3 cents
to be distributed over 50 periods of accumulation and renders
any recomputation of the present value of y with this rate
superfluous.
The precision of this method is doubtless worthless from
a commercial standpoint. It has value, however, for the student
and the accountant, so that if it be required of him to state
actually the values of investments he may have a method involv
ing less work than he might otherwise have.
340
The Accounting of Interest and Discount on Notes
By John Bauer
Assistant Professor of Economics, Cornell University
Second Article
In the preceding article, the cycle of the interest account was

completed, the various items having been followed through a
regular financial period. We now turn to a critical examination
of the account itself.
Theoretically the nature of the different entries in the interest
account can be explained from first to last according to correct
principles. We are concerned throughout with asset and liability
values and their changes, and not with earnings and costs,
as is usually assumed. But it is nearly impossible for a beginning
student to follow the abstruse and complicated relationships
without confusion. Even a person understanding the account
pretty thoroughly is likely to fall into momentary confusion in
explaining a particular entry. As a matter of fact, the great
majority of writers are either altogether wrong in their explana
tion of the entries, or they make no pretense of explanation,
satisfying themselves with mere rules.
From a practical standpoint we may make the following prin
cipal criticisms against the Interest account:
(1) It does not give sufficient information about the business.
It is not enough for the manager to know what were the net
interest gains above costs, or net costs above gains, for a period.
He should know separably what were the gains and what the
costs. The two have no dependence upon each other; the gains
come from notes receivable and the costs from notes payable—
why should the two be balanced against each other? Certainly,
to find the standing of the business you would not balance notes
payable against notes receivable. Is it any more desirable to
balance the returns realized from the one against the costs
of the other?
As a matter of fact, the manager of the business should
know in detail the facts relating to earnings and those relating to
341
costs. He should know not only the complete interest earnings,

but also those from the different classes of notes, e. g., mortgage
or unsecured, interest bearing or non-interest bearing. Like
wise he should know not only the total interest costs, but also
those from different classes of obligations. Obviously these facts
cannot be secured from the Interest account as it stands, except
through a great deal of separate analysis and calculation. An
account should show clearly and directly its share of the facts
and results of the business. The Interest account falls far short
of this standard.
(2) It has no statistical value. For statistical purposes, the
items of the account should be homogeneous; the debits should
represent one certain kind of transactions, and the credits a
certain kind; then the sum of the debits for the period should
represent something distinctive, likewise the sum of the credits;
the debits and credits should be definitely related and their
balance should show a precise fact or result of the business.
Look at the Interest account: the entries are mixed and con
fused; they have no clear relations to each other; the sum of
debits signifies nothing, nor does the sum of credits. Statis
tically the account is worth exactly nothing, and it is the statis
tical end of accounting that is becoming more and more im
portant to proper control of the business.
(3) When the third class of entries during the period is
omitted, which is usually the case both as the account is taught
by most texts and as it is employed by most business concerns,
even the net results are vitiated. The net earnings or net costs
may be over or under stated. Perhaps two illustrations will
suffice to bring out this point clearly.
Suppose during the month a note of $1,000 is acquired with
interest accrued $30; Notes Receivable is debited $1,000, but
the interest accrued, $30, which should be debited to Interest, is
neglected. Now, at the end of the month in calculating the
interest accrued on notes receivable, $32 is included for the note
in question, allowing an extra accrual of $2 for the time the
note was held by the business. The $32 appears then as a
credit in red ink, and, since it has no offsetting debit anywhere,
obviously the effect is to show earnings of $32 for the month—
a gross and indefensible misstatement. If, however, the $30
interest accrued had been properly debited when the note was
342
first acquired, this would appear as an offset to the $32

red ink credit at the end of the month, and there would appear
then only $2 earning for the period on the note in question—
which would be proper. The $30 interest accrued when the
note was acquired could in no sense be regarded as earnings of
the business. It was an asset, and if it was not debited then
as it should have been, and was included in the inventory of
assets at the end of the period, it resulted in showing unwar
ranted gains—which, if taken out of the business, would consti
tute withdrawal of capital and not profits.
Again, suppose there was acquired during the period a non
interest bearing note of $1,000 with sixty days to maturity.
Notes Receivable is debited $1,000, but the discount of $10,
which should be credited to Interest to show the real value of
the note, is neglected. But, at the end of the period a calculation
of the discount due on all notes receivable is entered as a red
ink debit to Interest. Now, in reference to the one note in
question there is a discount of $8; since there is no offsetting
credit, the showing is a cost of $8—which is absurd. Notes
receivable should produce earnings, not costs. If, however, the
$10 discount due when the note was acquired had been properly
credited, then with the $8 discount due at the end of the month
debited, this showing would be correct, namely earnings of $2
for the period on the note in question.
Likewise, if the interest accrued or discount due on notes pay
able is disregarded when notes are assumed by the firm during
the period, the results are wrong. In the first case, the interest
costs are grossly overstated, and in the second earnings are shown
instead of costs—which is ridiculous.
To be sure, in a business where few notes are handled, these
inaccuracies are not a matter of great importance, and perhaps,
since their effect is in opposite directions, they largely counter
balance each other. The latter proposition is likely to apply
particularly to a business handling large amounts of all kinds
of notes. Still, they are inaccuracies, and in so far as they are
allowed they prevent the manager from knowing as definitely
as he should where the business stands and what it is doing.
Properly to meet the criticisms that have been made, the
general Interest account should be broken up into six individual
accounts. Four of these are directly connected with Notes Re-
343
ceivable and Notes Payable and constitute subsidiary asset and

liability accounts, and two are pure proprietorship accounts,
which finally are closed into Loss and Gain.
The individual accounts are (1) Interest Accrued on Notes
Receivable, (2) Discount on Notes Receivable, (3) Interest Ac
crued on Notes Payable, (4) Discount on Notes Payable, (5)
Interest Earnings, (6) Interest Costs.
(1) Interest Accrued on Notes Receivable has to do with
interest bearing notes owned by the business. The face value of
these notes is recorded in Notes Receivable account and the
values above face should appear in Interest Accrued on Notes
Receivable. The form of the account and the various entries
are as follows:
INTEREST ACCRUED ON NOTES RECEIVABLE
Dr. Cr.
1. At the beginning of the period: 1. During the period: interest pay
interest accrued on notes receiv ments on notes receivable.
able.
2. During the period: interest ac
crued on new notes receivable
acquired by the business.
3. At the close of the period: in
terest accrued during the period
on all notes owned by the busi
ness during that time. (The cor
responding credit goes to Interest
Earning.)
This is a pure asset account. At the beginning of the period

there is debited the total interest accrued at that time, an asset
of the business. In all subsequent entries, the debits are in
creases and the credits decreases in this form of assets. There
are two kinds of increases and one kind of decrease. The in
creases are due (1) to any interest accrued on new notes receiv
able acquired by the business,* and (2) to interest accruals due
to passage of time.† Any decrease is due to interest payments
received.‡ At the close of the period, the balance of the account
* Suppose a $1,000 note with $30 Interest accrued is acquired; Notes Re
ceivable is debited $1,000, and Interest Accrued on Notes Receivable, $30; both
debits represent increases in asset value.
† Interest accrues day by day, i. e., the value of any note owned grows daily
larger, and so might be debited daily. But that would be rather impracticable, and
to save time the accruals for the entire period are debited in one entry at the close
of the period.
‡ Suppose $100 cash for interest due is received, at the moment payment is
received the value of Interest accrued suddenly decreases by $100 and cash
obviously increases. Consequently Interest Accrued on Notes Receivable is credited
and Cash is debited. There is merely an exchange of asset values.
344
is an asset, showing the value of interest accrued at that time

on all notes owned by the business.||
We have seen that the interest accruals for the period are
debited in one entry at the close of the period—representing asset
increases for the time covered. Now, what should be the cor
responding credit? Since there is no corresponding decrease in
any other form of assets, obviously there is a pure gain and the
credit is an increase in proprietorship. Suppose, we provide an
Interest Earnings account. Then from the asset standpoint, the
increase in value is debited to Interest Accrued on Notes Re
ceivable, as has been explained, and from the proprietorship
standpoint, it is credited to Interest Earnings. This account
will be considered separately later in the discussion.¶
(2) The second account to be considered is Discount on
Notes Receivable. It has to do with non-interest bearing notes
owned by the business and like the foregoing account is sub
sidiary to Notes Receivable. Remember that non-interest bear
ing notes owned by the business are debited to Notes Receivable
at their face value, which represents a future, not real, value.
The difference between face and real value is recorded in Dis
count on Notes Receivable. The form of the account and the
entries are as follows:
DISCOUNT ON NOTES RECEIVABLE
Dr. Cr.
1. During the period: discounts al 1. At the beginning of the period:

lowed on notes receivable when discount due on notes receivable.
prepaid. 2. During the period: discount due
2. At the close of the period: all on new notes receivable acquired
decreases in discounts on notes by the business.
held during the period due to the
passage of time. (The corre
sponding credit goes to Interest
Earnings.)
In theory this must be considered a negative asset account,

but it is one of a rather peculiar nature. Usually negative
asset accounts deal with liabilities, but this merely represents
|| This becomes the first entry of the next period. If the interest accruals
were debited day by day as they take place, then a balance of the account could
be taken at any moment and it would show the total value of interest then
accrued on all notes receivable. Ideally it should be possible to take such a bal
ance any day, but practically It is enough if it is taken at the end of every week
or month.
¶ If accruals were recorded day by day as they take place, from the asset
standpoint they would be debited dally to Interest Accrued on Notes Receivable,
and from the proprietorship standpoint credited daily to Interest Earnings.
345
an offset against overvalued positive assets carried in Notes Re

ceivable. At the beginning of the period we have credited the
discount due on all non-interest bearing notes owned by the
business at that time. This credit combined with the face value
debited to Notes Receivable gives the real value of the notes.
Then all increases in discount due are credits and all decreases
are debits. Since with the passage of time the value of the
notes becomes greater and greater and the offsetting discount
therefore smaller and smaller, there can be only one kind of
increase, namely, through the acquisition of new non-interest
bearing notes by the business.* But, there are two kinds of
decreases in discount, (1) those due to the prepayment of
notes,† and (2) decreases due to the passage of time, i. e., the
notes increase in value day by day as they approach maturity
and the offsetting discount value correspondingly grows smaller.‡
The balance of the account at the close of the period shows
the discounts then due on all notes owned by the business.
We have seen that the decrease in discount due to the pas
sage of time is debited. What is the corresponding credit?
From another view, this decrease is really an increase in notes
receivable values. Since with this increase there is no corre
sponding decrease in some other form of assets, the correspond
ing credit must be an increase in proprietorship; it is a gain
realized from the notes through the passage of time. This
should be credited to Interest Earnings account. ||
(3) The next account that we have to consider is Interest
Accrued on Notes Payable. It has to do with interest bearing
notes owned by the business. It is in nature just the reverse
♦ Suppose a $1,000 note due in 60 days is acquired, Notes Receivable is
debited $1,000, and Discount on Notes Receivable credited $10, the two combined
giving the real value of the note.
† Someone pays you a $1,000 note with still 60 days to maturity; you credit
Notes Receivable $1,000, debit Cash $990, and debit Discount on Notes Receivable
$10, the latter being a sudden decrease in this form of negative assets. The
payment cancelled not only $1,000 in Notes Receivable but also $10 offsetting
value in Discount on Notes Receivable.
‡ These decreases in discount might be debited daily as they take place, but
practically it is sufficient if they are entered in a lump sum at the close of the
period.
|| Interest is the Increase of value due to the passage of time; it is value
created by time. An interest-bearing note, if its rate is equal to the market
rate, is worth exactly its face at the moment of issue, and then becomes more
and more valuable as time passes and interest accrues. A non-interest bearing
note at the moment of issue is worth a sum which with regular interest (ap
proximately) to maturity Is then equal to the face value. In either case, the
value of the note increases as time goes on. From the note standpoint, the in
crease in either case is an asset and is debited; from proprietorship standpoint
It is a gain and is credited. The nature of the gain is exactly the same in either
case, and should be so shown in the accounts. The gains should be credited to
the Interest Earning account.
346
of Interest Accrued on Notes Receivable discussed above. It

is connected with Notes Payable just as the other is connected
with Notes Receivable. The form and entries of the account
follow:
INTEREST ACCRUED ON NOTES PAYABLE
Dr. Cr.
I. During the period: interest pay 1. At the beginning of the period:

ments made on notes. interest accrued on notes payable.
2. During the period: any interest
accrued on new notes payable as
sumed by the business.
3. At the close of the period: inter
est accrued during the period on
all notes owed by the business
during that time. (The corre
sponding debit goes to Interest
Costs.)
This is a pure negative asset or liability account. It records

a debt owed by the business. At the beginning of the period, it
has credited the total interest accrued on notes payable at that
time. The face of the notes credited to Notes Payable, plus
the interest accrued credited here, gives the real value of the
notes owed by the business. All subsequent credits to the account
are increases in interest accrued against the business, increases
in liability; all the debits are decreases.
On account of previous discussions it is not worth while
to analyze the individual items. At the close of the period,
after all entries have been made, the balance of the account is
the amount of interest then accrued against the business, or, if
the accruals are credited daily as they take place, such a
balance could be taken at any moment.
Observe the third credit entry, the interest accrued during
the period on notes owed by the business during that time.
This is an increase in liability due to the passage of time. Since
there is no corresponding increase in assets, the corresponding
debit must be a decrease in proprietorship. This is a cost in
curred from the notes through the passage of time and should
be debited to Interest Costs.
(4) The fourth account is Discounts on Notes Payable.
Again in view of previous discussions it is not worth while to
analyze the account extensively. It is subsidiary to Notes Pay-
347
able and has to do with non-interest bearing notes owed by the

business. It is the reverse of Discount on Notes Receivable.
The form and entries are as follows:
DISCOUNT ON NOTES PAYABLE
Dr. Cr.
1. At the beginning of the period: 1. During the period: discounts re

discount due on notes payable. ceived on notes payable when
2. During the period: discount on prepaid.
new notes payable assumed by the 2. At the end of the period: all de
business. creases in discounts on notes re
ceivable owed during the period,
due to the passage of time. (The
corresponding debit goes to In
terest Costs.)
At the beginning of the period, the debit entry is a present

offset against the future values credited to Notes Payable. At
the end of the period, after all entries have been made the bal
ance is the offset which then stands against Notes Payable.
Again, if the decreases in the discount were debited as they take
place, such a balance could be taken at any time. But, again,
periodical balances are sufficient.
With the lapse of time, the notes approach nearer to maturity,
their value increases, and the discount therefore decreases. This
is a credit entry which resolves itself into an increase in liability.
Since there is no corresponding increase in positive assets, the
corresponding debit must be a decrease in proprietorship; it is a
cost of the business and should be debited to Interest Costs.*
(5) The next two accounts are altogether different in nature
from any of the foregoing. They are fundamentally proprietor
ship instead of asset accounts. So far, except incidentally, the
increases in value due to the passage of time have been regarded
primarily from the standpoint of the notes, and not from their
effect upon proprietorship. Now we shall regard them, not
as additions to note values owned or owed, but as earnings or
costs of the business. The increases are the same as before but
are viewed from a different standpoint. Consequently where
before we had a debit, we now have a credit, and vice versa.
The first of the two accounts is Interest Earnings. The form
and entries are as follows:
♦ Just as all notes receivable earn interest for the business, so all notes
payable, with or without interest, earn interest against the business.
348
INTEREST EARNINGS
Dr. Cr.
At the close of the period:

x. Interest accrued during the pe
riod on all notes receivable owned
by the business during that time.
(Corresponding debit appears in
Interest Accrued on Notes Re
ceivable.)
2. Decreases in discounts due on
notes receivable held during the
period, the decreases being due
to the approaching maturity of
the notes. (The corresponding
debit goes to Discount on Notes
Receivable.)
This is a pure account, recording increases in proprietorship,

and only those due to the working of time. We enter here in
terest earnings and nothing else. However, we record real
earnings, not apparent; we include those from non-interest bear
ing notes receivable as well as from the interest bearing, and
only the earnings that belong to the period. Necessarily
the entries are all credits and are made at the close of the period,
at the moment when the adjustments are made in the subsidiary
notes accounts discussed above.*
This account might well serve to bring together all interest
earnings for the period, however realized. Thus it might include
not only the items recorded above but also interest earnings
of bonds, mortgage notes, and personal accounts. In this way
it would be of considerable statistical value, showing clearly the
interest earning from various sources from period to period.
Obviously the account contains credit entries only. When
all interest earnings are recorded for the period, they are sum
marized and are then transferred and credited to Loss or Gain,
General Income, Surplus, or some subsidiary proprietorship ac
count.
(6) The last account to be considered is Interest Costs. Its
form and entries are as follows:
* However, the entries may be made daily as the earnings are actually
realized, although this would be a waste of time in practice.
349
INTEREST COSTS
Dr. Cr.
At the close of the period:

1. Interest accrued during the pe
riod on all interest bearing notes
owed by the business during
that time. (The corresponding
credit appears in Interest Ac
crued on Notes Payable.)
2. Decreases in discounts due on
notes owed during the period,
the decreases being due to the
approaching maturity of the
notes. (The corresponding credit
appears in Discount on Notes
Payable.)
We need not discuss this account extensively. It is a pure

account, dealing with decreases in proprietorship and those only
that are due to the working of time. It records the interest costs
exactly as the previous account records the earnings, and its
purpose and serviceability are the same. It contains debit en
tries only, which, when summarized, are transferred to Loss
and Gain or other proprietorship accounts.
So much, then, for the rather tedious analysis and presenta
tion of the principles of interest accounting. It would seem that
the analysis here presented is superior in every way to the gen
eral Interest account as taught and practised. The advantages
may be briefly summarized as follows: (1) The nature of the
accounts is more easily perceived and readily explained; there
is less danger of theoretical confusion. (2) Each account shows
clearly a definite set of facts; there is not a jumble of unrelated
items; clear statistical records are kept, and the costs and earn
ings are definitely shown for the convenience of the business.
There is but one objection—more work is required than with
the old Interest account. However, the additional work is amply
justified by the clearer and more definite results. With a concern
which handles a large number of notes the additional work is
almost negligible. Perhaps where very few notes are handled
the old accounts may well be continued. Otherwise such a course
is not in accord with good modern theory or practice of ac
counting.
350
Published monthly for The American Association of
Public Accountants by The Ronald Press Company,
20 Vesey Street, New York. Thomas Conyngton, President;
J. M. Nelson, Secretary; Hugh R. Conyngton, Treasurer.
Office of Publication: Cooperstown, New York.
A. P. Richardson, Editor Jos. French Johnson, Consulting Editor

H. R. Conyngton, Managing Editor
ASSOCIATE EDITORS
W. M. Cole, Harvard University Isaac Loos, University of Iowa
John B. Geijsbeek, Edward Sherwood Meade,
University of Denver University of Pennsylvania
Stephen W. Gilman, Harlow S. Person,
University of Wisconsin Tuck School, Dartmouth College
John H. Gray, University of Minnesota M. H. Robinson, University of Illinois
Henry R. Hatfield, H. Parker Willis,
University of California George Washington University
Frederick C. Hicks,
University of Cincinnati
EDITORIAL
The Proposed Tax on Incomes
It was to be expected that the income tax bill as submitted
to the House of Representatives would meet with a considerable
amount of adverse criticism. It would be difficult to imagine any
bill of so far reaching a character which would not excite keen
opposition, and no doubt the makers of this bill fully expected to
be the butt of abuse from many different sections of the country.
But looking at the matter impartially it may be admitted at once
that, while the bill is far from perfect, it is so great an improve
ment upon previous legislation of a similar character that the
warmest praise should be accorded to the legislators who are
responsible for its making.
We make no argument for an income tax as such, and readily
admit the force of opposition to the principle, but recognizing the
certainty that such taxation will become law, it is necessary to
consider its probable application.
It has been said by a well-known authority on legislation that
there was deeper ignorance on the subject of income taxation
than upon almost any other class of legislation which could be
mentioned. It was thought apparently even by some of the mem-
351
bers of the ways and means committee, that in the case of the
income tax all that was necessary was to specify that incomes
in excess of a certain amount should be taxed and that the
method of taxation might safely be left to the officers of the
treasury department. There was an astonishing lack of interest
on the part of the public in the preparation of the income tax
section of the Underwood tariff bill. Every business man and a
large percentage of investors were so intimately interested in
the provisions of the section of the bill dealing with the customs
tariff upon imports that they entirely overlooked or deemed of
no particular moment the section which embodies provisions
for the taxation of income. Fortunately, however, the drafting
of this bill was left in capable hands and the subcommittee
appointed to this particular duty was ready to listen to expert
advice, and has honestly endeavored to introduce into the bill
such phraseology as will ensure a workable business-like act.
Times out of number mention has been made of the im
practicable and futile provisions of the corporation tax law, and
accountants generally have been kept informed of the campaign
undertaken by the American Association to secure an amend
ment of that law which would permit corporations to adopt the
fiscal rather than the calendar year. Now, however, this amend
ment has been dropped because in the passage of the income tax
bill—which is comparatively certain—the corporation tax law
will be repealed and its absurd provisions can work no further
injury.
It would be foolish to pretend that the Underwood tariff bill
in so far as it concerns incomes is ideally perfect. Indeed, in
one particular at least, it is far from being what accountants
and business people would desire to have it. This is in the
regulations relative to the reports of individual income. In
the case of corporations, joint stock companies and insurance
companies the bill provides that the fiscal year shall be per
mitted to be the basis of inventory and report but this permission
is not extended to individuals. In support of this differentiation
the framers of the bill maintain that by collection at the source
of income the amount of tax to be collected directly from the
individual is comparatively small and therefore the right to
use the fiscal year is unimportant, but it must be remembered
that the law makes no levy upon partnerships and therefore in or-
352
Editorial
der to reach the income of partnerships the tax will be collected

from the income of the several partners. Such income must
be based upon the revenues of the partnership or firm, and it
requires no argument to prove that a vast number of unincor
porated firms find it almost compulsory to adopt a fiscal period
not coincident with the calendar year.
But, while we may regret the failure of the legislators in
Washington to extend the fiscal privilege so far as we wish, we
may feel profoundly thankful that the utterly ridiculous regula
tion whereby the calendar year was made obligatory in regard
to corporation inventories and reports has been avoided in the
preparation of this superseding bill.
In the original draft there were certain ambiguities which it
was felt might render difficult the administration of the law, and
in response to suggestions a few changes have been made. It
is apparently the desire of members of both houses that the
legislation to be enacted shall be of the kind which for lack of a
better name may be called “business like.”
It is not our purpose to deal specifically with the provisions
of the bill except in one or two particulars.
A good deal of opposition to the bill has been made on the
score that holders of guaranteed bonds would not be reached
by such a law inasmuch as the companies issuing those bonds
have guaranteed the holders against impairment of capital or
interest, and the case of Mr. Andrew Carnegie has been fre
quently cited. It has been pointed out that if the United States
Steel Corporation is compelled to pay the income tax on the
Carnegie bonds such payment must come out of the pockets of
the common stockholder. But frankly and looking at the matter
without partiality, is the government or is the nation responsible
for the agreements entered into by a company with its creditors ?
Would it be proper and just so to frame legislation that the
rights of common stockholders jeopardized by the action of
their directorate should be protected at the expense of a sacri
fice of principle? The theory of taxation at the source is one
that is generally accepted as the best, and it would seem utterly
unreasonable to suppose that this should not be adopted be
cause by its adoption the provisions of a guaranteed bond issue
would bear hardly upon those responsible for such provisions.
It should be remembered also that under the provisions of
353
the bill the additional tax on amounts of income over $20,000

is collected from the recipient of the income, and is not collected
at the source. Therefore, although it may be decided by the
courts that the Steel Corporation must pay the one per cent on
the Carnegie bonds, that does not indicate that Mr. Carnegie
himself will escape the payment of the entire amount of addi
tional tax.
It has been argued that the exemption of $4,000 in the case
of individuals is far too high and savors too strongly of class
legislation. We believe that the exemption might be consider
ably decreased with advantage, and it seems to us that it might
be put as low as $1,000 per annum, but even if this were done
the income tax law would still be class legislation. Practical
taxation of incomes must always be legislation against a class
because it is universally recognized that the idea of collection
of an income tax from all incomes is entirely beyond possibility.
In theory it might be well enough to propose a universal tax
on income. In practice such a tax could never be collected.
Therefore the revival of the old objection on the subject of class
legislation seems to us utterly beside the point.
Possibly before this issue of The Journal of Accountancy
will have reached its readers the tariff bill will have passed
the House of Representatives, and it may be that changes not
foreseen at present will have been introduced, but at the time of
writing the bill, in so far as it concerns taxation of incomes, is a
distinct improvement upon any of its predecessors of similar in
tent. And the fact that expert advice has been accepted in this
case leads to a fairly confident hope that in future legislation
having a technical bearing will be prepared with due attention to
technical requirements.
For the Good of the Profession

In the April number of The Journal appeared a letter from a
correspondent, in which The Journal was charged with asking
support “for the good of the profession.” To this The Journal
must plead guilty, but in extenuation of the offense it may be said
that the request which distressed our correspondent was not for
354
Editorial
financial support, but for contributions of articles and help in the

way of suggestions and comment.
Phrases are sometimes so hackneyed that they do not carry
their full weight of meaning. “For the good of the profes
sion” is a legitimate appeal, but it is not probable that one
accountant in a hundred recognizes just how much it does
mean, or in other words, how much more powerful an agent
for the good of accountancy The Journal could be made if it
had the hearty support and cooperation of its subscribers.
The accounting conditions of this country are in a state of
change. Requirements are changing; methods are changing; the
ends to be attained are changing. Accountants must keep up
with these changing conditions. But how can this be done?
Among the subscribers and readers of The Journal are found
the most active and progressive accountants of the country.
These men are in touch with actual accounting conditions, and
every one of them is meeting and solving problems which are
new—and solving them at a cost of much time, trouble and
thought. The same difficulties are coming up over and over
again in the various parts of the country, and being solved each
time with the same expenditure of time, trouble and thought.
Suppose that every progressive accountant of the country
when he encountered a new and difficult problem reported it
and his solution of it to The Journal. Suppose that those who
considered the solution imperfect, inadequate, or not the best,
sent in to The Journal their own views as to the proper solu
tion. And suppose every active accountant of the country sent
The Journal full notice of accounting legislation, accounting
events, or any other accounting information of real interest
to the profession. Suppose, still further, that the best qualified
accountants of the country contributed articles on the more
difficult problems and procedure of the calling as the need arose.
If this were done, would not The Journal be a real clearing
house of accounting information? Would it not be the most
potent, the most effective and the most influential single agency
for the advancement of the profession? Would there be one
live accountant in the country who did not take The Journal?
Why, on the other hand, may it be asked, is this not so?
Why is it that so often the accountant working out some diffi
cult problem for himself, jealously guards his secret instead of
355
giving it to the profession, in so far as professional propriety

will reasonably permit? Why is it that out of the many hun
dreds of possible contributors to The Journal, its actual con
tributors are so few ?
In the really progressive professions and callings an un
stinted contribution to the common fund of knowledge obtains.
If a doctor makes an important discovery, performs a new
operation, or performs an old one in a new way, he hastens to
announce it to the world through his journal. If an engineer
successfully solves some new and intricate problem of construc
tion, or discovers a short cut or a better method, he promptly
proclaims it to the engineering world through the columns of
his journal.
This spirit is found in every other active trade and profession,
with perhaps the single exception of the law, and here there are
no such changing conditions as confront accountancy. But
even in the legal profession we find a rich literature in which
every phase of law is treated voluminously. There is no attempt
and, in fact, no possibility of concealing for private good the
knowledge which is the capital of the calling.
It is time for Accountancy to wake up. The calling is con
spicuously lacking in the shoulder touch, in the esprit de corps
which makes a profession and makes for the good of its mem
bership. If accountancy is to be a real profession, its profes
sional obligations cannot be evaded or avoided. Every member
must do his part “for the good of the profession.” In helping
others he will help himself.
356
Conducted by John R. Wildman, M.C.S., C.P.A.
Problem No. 17 (Demonstration)
The Kent Wire Screen Company having acquired all of

the capital stock of the Derby Wire Netting Company, it is
proposed to merge the latter with the former as of July 1, 1912.
The trial balances June 30, 1912, of the respective companies
after closing, are as follows:
Kent Wire Screen Company
Land and buildings, $525,750; equipment, $85,729.43; motor

trucks, $8,780.25; furniture and fixtures, $6,943.27; Derby Wire
Netting Company, capital stock, par value $100,000, cost $97,-
713.50; materials and supplies, $18,379.51; goods in process,
$16,591.46; finished goods, $23,468.46; cash, $12,640.31; accounts
receivable, $54,345.26; notes receivable and interest, $10,132.75;
sinking fund, $45,376.59; deferred charges to expense, $1,537.82;
first mortgage 6% gold bonds payable, due 1927, $250,000; taxes
accrued, $5,250; salaries and wages accrued, $3,178.29; accounts
payable, $85,216.04; due to Derby Wire Netting Company,
$536.12; notes payable and interest, $41,273.25; interest accrued
on bonds payable, $2,500; reserve for depreciation of plant and
equipment, $69,434.91; preferred capital stock outstanding,
$250,000; common capital stock outstanding, $150,000; profit
and loss surplus, $50,000.
Derby Wire Netting Company
Land and buildings, $240,327.92; machinery and tools,

$48,934.27; horses, wagons, and harness, $6,387.35; furniture and
fixtures, $8,500; capital stock of the Improved Screen Door
Company, par $20,000, cost $23,45 7.86; patents, $10,000; raw
materials, $23,721.89; goods in process, $32,568.34; finished
goods, $18,478.27; cash, $14,686.43; accounts receivable,
$57,395.05; due from the Kent Wire Screen Company, $536.12;
357
notes receivable and interest, $8,037.50; sinking fund, $30,483.14;

consignment, $1,000; deferred charges to operations, $1,250; first
mortgage 5% gold bonds payable, due 1930, $100,000; taxes
accrued, $2,787; salaries and wages accrued, $5,843.62; accounts
payable, $114,527.16; due the Improved Screen Door Company,
$10,000; notes payable and interest, $51,673.53; interest accrued
on first mortgage bonds, $833.33; reserve for sinking fund,
$30,483.14; reserve for depreciation of plant and equipment,
$37,329.52; common capital stock outstanding, $100,000; profit
and loss surplus, $72,286.84.
From the foregoing submit:
(a) The entries on the books of The Kent Wire Screen
Company necessary to effect the merger.
(b) The necessary entries on the books of the Derby Wire
Netting Company.
(c) Balance sheet of The Kent Wire Screen Company after
the merger.
Solution to Problem No. 17
A consolidated trial balance of the books of the Kent Wire

Screen Company and the Derby Wire Netting Company serves
the dual purpose of showing the situation with regard to the
individual companies and the effect of the consolidation. It is
therefore presented before beginning a discussion of the various
requirements of the problem, and is as follows:
Trial Balance
Consolidated June 30,1912
Trial Kent Derby
Balance Elimina Wire Wire Net
Debits Tune 30,1912 tions Screen Co. ting Co.
Land and buildings ............ $ 766,077.92 $525,750.00 $240,327.92
Machinery, tools and equip
ment .............................. 134,663.70 85,72943 48,934.27
Horses, wagons, harness and
motor trucks ............... 15,167.60 8,780.25 6,387.35
Furniture and fixtures .... 15,443.27 6,943.27 8,500.00
Derby Wire Netting Co.,
stock, $100,000 par ...... $ 97,713.50 97,713.50
Materials and supplies .... 42,101.40 18,379.51 23,721.89
Goods in process ......... 49,159.80 16,591.46 32,568.34
Finished goods ........... 41,946.73 23,468.46 18,478.27
Cash .............................. 27,326.74 12,640.31 14,686.43
358
Accounts receivable ........... 111,740.31 54,345.26 57,395-05

Notes receivable and interest 18,170.25 10,132.75 8,037.50
Sinking funds ..................... 75,85973 45,376.59 30,483.14
Deferred charges to expense 2,787.82 1,537.82 1,250.00
The Improved Screen Door
Co., $20,000 par ............... 23,457.86 23,457.86
Patents .................................. 10,000.00 10,000.00
Kent Wire Screen Co......... 536.12 536.12
Consignment ...................... 1,000.00 1,000.00
Total debits .............. $1,334,903.13 $98,249.62 $907,388.61 $525,764.14
Credits
First mortgage 6% bonds,
due 1927 .............................$ 250,000.00 $2 5 0,000.00
Taxes accrued ..................... 8,037.00 5,250.00 $ 2,787.00
Salaries and wages accrued. 9,021.91 3,178.29 5,843.62
Accounts payable ............... 199,743.20 85,216.04 114,527.16
Due Derby Wire Netting Co. $ 536.12 536.12
Notes payable and interest. 92,946.78 41,273.25 51,673.53
Interest accrued on bonds
payable .............................. 3,333-33 2,500.00 833.33
Reserve for depreciation
plant and equipment .... 106,764.43 69,434.91 37,329.52
Preferred capital stock out-
standing ............................ 250,000.00 2 5 0,000.00
Common capital stock out-
standing ............................ 152,286.50 97,713 50 150,000.00 100,000.00
Profit and loss surplus........ 122,286.84 50,000.00 72,286.84
First mortgage 5% bonds,
due 1930 ............................ 100,000.00 100,000.00
The Improved Screen Door
Co......................................... 10,000.00 10,000.00
Reserve for sinking fund.. 30,483.14 30,483.14
Total credits ............. $1,334,903.13 $98,249.62 $907,388.61 $525,764.14
The object of this problem is to show the effect of a merger

on the accounts of the companies involved. In New York State,
“Any corporation lawfully owning all of the stock of any other
corporation organized for and engaged in business similar or
incidental to that of the possessor corporation may merge such
other corporation with it and be possessed of all estate, property,
rights, privileges and franchises of such other corporation.” A
consolidation differs from a merger in that “any two or more
corporations organized for the purpose of carrying on any kind
of business of the same or similar nature which a corporation
organized under the business corporations law might carry on,
may consolidate into a single corporation.” The essential dif
ference between the two is that in the case of merger all the
stock of the subsidiary or adjunct company must be owned by
359
the parent company, whereas in consolidation no cross-ownership

of stock is necessary.
The entire capital stock of the Derby Wire Netting Company
was owned by the Kent Wire Screen Company and carried on
the books as an asset. The ownership of the capital stock made
the merger possible legally and the merging of the accounts
followed. It was not consistent for the Kent Wire Screen Com
pany to take up the assets and liabilities of the Derby Wire Net
ting Company and carry the stock of the latter as an asset.
No more was it consistent to consider accounts between com
panies as assets and liabilities of the respective companies.
Hence the necessity for eliminating in the consolidated trial bal
ance the accounts between companies and the capital stock.
The capital stock of the Derby Wire Netting Company in
the amount of $100,000 par was, it will be noted, carried on the
books of the Kent Wire Screen Company at cost, namely,
$97,713,50. This latter amount is therefore the amount at which
the elimination is shown both on the debit and credit sides of the
consolidated trial balance. Since the common capital stock of
the Derby Wire Netting Company outstanding is $100,000, and
the cost to the Kent Wire Screen Company was but $97,713.50,
there appears in the consolidated trial balance, opposite the item
common capital stock outstanding, the amount of $152,286.50,
of which $2,286.50 is the excess over $150,000 of the common
capital stock of the Kent Wire Screen Company. This amount
of $2,286.50 will be recognized as the difference between $100,000
and $97,713.50. This difference from the point of view of the
Kent Wire Screen Company after the merger becomes in effect
surplus, and in setting up the balance sheet after the merger
should be treated as such.
Previous to the merger, the Kent Wire Screen Company
owed the Derby Wire Netting Company $536.12 on open ac
count. In merging the two companies this amount is treated
as an elimination since in the very nature of things a concern may
not owe itself money.
The matter of offsets should, in case of mergers and con
solidations, receive careful attention. It often becomes neces
sary in practice to spend considerable time in reconciling ac
counts between or among companies in order that when the
accounts of the companies are put together intercompany trans-
360
actions may be in agreement. This is especially true of capital

stock, bonds, accounts receivable, and sometimes interest, notes re
ceivable and interest, advances, consignments, and other items
of a similar nature to the ones mentioned above.
From the consolidated trial balance there may now be pre
pared the entries on the books of the Kent Wire Screen Com
pany necessary to show the effect of the merger. It is not thought
that any additional light will be thrown on the solution of the
problem by setting forth the assets and liabilities in detail since
they are shown very clearly in the consolidated trial balance.
They have therefore, in the entry which follows, been set up
under the general captions of sundry assets and of sundry lia
bilities.
Sundry assets ...................................................................$525,228.02

Accounts receivable (account of Kent W. S. Co.) ... 536.12
To Sundry liabilities ........................................ $353477.30
Derby W. N. Co., outstanding capital
stock ................................................... 100,000.00
Profit and loss surplus ............................ 72,286.84
To place on the books of the Kent Wire

Screen Co. the assets, liabilities, capital and
surplus of the Derby Wire Netting Co. in
accordance with the terms of merger of the
two companies as of July 1, 1912.
Accounts payable (Derby W. N. Co.) ....................... 536.12

To accounts receivable (Kent W. S. Co.)... 536.12
To offset accounts between companies after

merger.
Derby W. N. Co., outstanding capital stock............. 100,000.00

To Derby W. N. Co., stock (asset)............. 97,713.50
Profit and loss surplus ............................ 2,286.5a
To offset the accounts between companies

relating to capital stock and take up as
surplus on the books of the Kent W. S. Co.,
the difference between the par and cost of
Derby W. N. Co. capital stock.
The closing entries on the books of the Derby Wire Netting

Company are simple in the extreme. They consist merely in
setting up an account with the Kent Wire Screen Company and
closing out to this account all other accounts on the books. As
in the previous case, it is not thought necessary to itemize the
assets and liabilities. The entries are as follows:
361
The Kent Wire Screen Co............................................. $525,764.14

To sundry assets................................ $525,764.14
To close out all assets to the Kent W. S.
Company in accordance with the terms of
merger of July 1, 1912.
Sundry liabilities ............................................................ 353,477.30

Capital stock ................................................................... 100,000.00
Profit and loss surplus ................................................... 72,286.84
To Kent W. S. Co............................................ 525,764.14
To close out liabilities, capital stock and sur

plus to the Kent W. S. Co. in accordance
with the terms of merger of July 1, 1912.
The above entries complete the requirements of the problem

except as to the balance sheet of the Kent Wire Screen Company
after the merger which appears below.
THE KENT WIRE SCREEN COMPANY
Balance Sheet—June 30, 1912
Assets
Land and buildings ......................................................................... $ 766,077.92

Machinery, tools and equipment ................................................... 134,663.70
Horses, wagons, harness andmotor trucks .................................. 15,167.60
Furniture and fixtures ....................................................................... 15,443.27
Patents ................................................................................................ 10,000.00
Securities owned ................................................................................... 23,457.86
Working and trading assets:
Materials and supplies ..............................................$ 42,101.40
Goods in process ...................................................... 49,159.80
Finished goods .......................................................... 41,946.73
Total working and trading assets .................................. 133,207.93

Current assets:
Cash ........................................................................$ 27,326.74
Accounts receivable .................................................. 111,740.31
Notes receivable and interest .................................. 18,170.25
Total current assets............................................................ 157,237.30

Sinking funds ................................................................................... 75,859.73
Deferred charges toexpense ........................................................... 2,787.82
Consignments .................................................................................... 1,000.00
Total assets ............................................................. $1,334,903.13
Liabilities and Capital
Capital stock outstanding:

Preferred ................................................................$250,000.00
Common ..................................................................... 150,000.00
Total capital stock outstanding.................................. $ 400,000.00

362
Bonds outstanding:
Kent Wire Screen Co. 6’s due 1927..................... $250,000.00
Derby Wire Netting Co. 5’s due 1930................... 100,000.00
Total bonds outstanding............................................. 350,000.00

Current liabilities:
Taxes accrued ...........................................................$ 8,037.00
Salaries and wages accrued .................................... 9,021.91
Accounts payable ...................................................... 209,743.20
Notes payable and interest ...................................... 92,946.78
Int. accrued on bonds payable ................................ 3,333.33
Total current liabilities............................................... 323,082.22

Reserves:
Depreciation of plant and equipment................. $106,764.43
Sinking fund ............................................................ 30,483.14
Total reserves................................................................ 137,247.57

Profit and loss surplus ................................................................... 124,573.34
Total liabilities and capital $1,334,903.13
Problem No. 17-A (Practice)
The following items appear on the balance sheet of the

American Pin Company, June 30, 1912: Land, buildings, equip
ment, etc., $335,000; capital stock of the Bronx Pin Ticket
Company, par, $5 0,000; cost, $5 7,400; patents, $15,000; working
and trading assets, $3 7,5 00; cash, $10,000; accounts receivable,
$32,000; due from Bronx Pin Ticket Company, $375.82; de
ferred assets, $1,500; first mortgage 6% gold bonds payable, due
1922, $100,000; taxes accrued, $3,250; salaries and wages ac
crued, $4,327.82; accounts payable, $123,749.83; notes payable
and interest, $80,125; interest accrued on first mortgage bonds
payable, $2,500; reserve for depreciation of buildings and equip
ment, $3 5,000; preferred capital stock outstanding, $7 5,000; com
mon capital stock outstanding, $50,000; profit and loss surplus,
$14,823.17.
The American Pin Company having acquired all the capital
stock of the Bronx Pin Ticket Company, the balance sheet of
which appears below, it is proposed to merge the two companies
as of July 1, 1912.
The Bronx Pin Ticket Co.
Assets—land, buildings, and equipment, etc., $260,000; capital

stock of the Blauser Pin Tray Company carried at par, $35,000;
363
patents, working, and trading assets, $32,625; cash, $10,365.27;

accounts receivable, $37,943.86; sinking fund, $3,236.92; deferred
charges to expense, $1,200. Liabilities and capital—first mort-
gage 5% gold bonds payable, due 1925, $50,000; taxes accrued,
$2,750; salaries and wages accrued, $3,147.83; due to creditors,
$144,720.30; due to American Pin Company, $3 75.82; notes
payable and interest, $31,372.53; interest accrued on first mort
gage bonds payable, $1,250; reserve for depreciation of plant
and equipment, $27,500; common capital stock outstanding,
$5 0,000; profit and loss surplus, $69,2 5 4.5 7.
Prepare:
(a) The entries on the books of the American Pin Company.
(b) The entries on the books of the Bronx Pin Ticket Com
pany.
(c) Balance sheet of the American Pin Company after the
merger.
364
The regular semi-annual meeting of the Board of Trustees of the
American Association of Public Accountants was held at the Lawyers’
Club, in the city of New York, on Monday, April 14th, 1913.
There were present:
President, Robert H. Montgomery.
Treasurer, James Whitaker Fernley.
Vice-Presidents: Arthur Young (Illinois), Herbert M. Temple (Min
nesota), Clarkson E. Lord (New Jersey), William F. Weiss (New York),
Charles S. Jenckes (Rhode Island), George Mahon (Virginia).
Trustees: Hamilton S. Corwin, J. S. M. Goodloe, Elijah W. Sells,
J. E. Sterrett, E. L. Suffern.
The Secretary, A. P. Richardson.
J. J. McKnight, representing the president of the Ohio Society, was
accorded the privilege of the floor.
The minutes of the preceding meeting as printed and distributed to
trustees were approved.
The report of the treasurer showed total receipts amounting to
$9,229.02 and disbursements $5,706.88. Balance on hand, $3,522.14.
The report of the secretary was received and filed. In this report
the secretary discussed the work of his office at considerable length. On
the subject of federal legislation the report reviewed the work which
has been done in Washington in regard to the introduction of the fiscal
in preference to the calendar year in the case of corporation reports, and
stated that there was a gratifying change in regard to the reception
accorded to constructive criticism.
Under the caption The Kentucky Situation, a brief resume of the
efforts to effect harmony was given, and the prospects for the new society
were discussed.
The secretary reported a successful tour to the societies in the south,
west and northwest, and expressed the opinion that a considerable amount
of benefit had been derived from the effort to establish closer relation
ships between the national and state organizations. In nearly every
place visited there was a prompt and enthusiastic response to the plea
for co-operation as soon as the work undertaken by the national asso
ciation was described.
The report of the executive committee reviewed the work done in
the six months. Two mail votes had been taken. One in regard to the
admittance of the Kentucky Society of Public Accountants, and one in
regard to the publication of C. P. A. questions. In both cases the vote
was affirmative. The report also referred to the appointment of a sub
committee to investigate the practicability of holding the 1914 convention
in Washington, D. C. The sense of the sub-committee was that it
would be advisable to hold a convention without depending upon the
invitation of a state society, and Washington seemed to be a satisfactory
365
place for such convention. The report recommended that the question
of holding the 1914 convention in Washington be seriously considered by
the association.
This suggestion was approved by the board of trustees and referred
to the 1913 meeting in Boston.
The president stated that the committee on accounting terminology
had not yet completed its report, but that progress was being made.
In lieu of a report from the committee on annual meeting, a tentative
programme was submitted and a vote of thanks was extended to the
annual meeting committee for the work which had been done in prepara
tion for the convention.
The report of the committee on federal legislation dealt with three
activities which were undertaken in the half year. The first of these
was the introduction of the fiscal year in corporation reports to the
government; the second, a suggestion for clearer language in legislation
in regard to accounting matters, and the third the endeavor to induce
members of the association to become affiliated with commercial clubs
and other business organizations. The report stated that several hear
ings had been attended in Washington and that there was every indication
that a considerable amount of success had attended the efforts made.
The campaign for betterment of legislation must be continued. The idea
of affiliation with business organizations was being well received.
The report of the committee on Journal showed progress during the
half-year and again drew attention to the need for articles from members
of the association. Subscriptions and advertising were showing an in
crease.
The report of the membership committee was read and the applications
favorably mentioned were approved for admittance.
The chairman of the committee on state legislation, Mr. J. S. M.
Goodloe, reported orally upon the work done by his committee through
the past six months, particularly in regard to legislation in Delaware,
Tennessee, Texas, Kansas, Kentucky, Alabama and Oregon, and also in
regard to suggested amendments to legislation in Minnesota, Ohio and
Washington. The committee was endeavoring to prevent the passage of
unsatisfactory bills or amendments.
Upon motion, duly carried, the committee was requested to prepare a
digest of provisions which should be inserted in every C. P. A. bill—this
to be presented to the association and printed in the year book.
The report of the special committee on credit information dealt with
the campaign which had been begun to obtain the views of bankers in
regard to the certification of borrowers’ statements. The report stated
that the replies had been very favorable and a digest of them would be
prepared and circulated among bankers and note brokers and among
some of the larger borrowers.
The president referred to the question of state legislation in regard
to reports of corporations and read letters in reply to a circular which
had been sent out urging state societies to take action to securing the
366
introduction of the fiscal year. Upon motion, duly seconded, the question
was referred to the committee on state legislation.
Trial Board
The board of trustees then adjourned and convened as a trial board

to hear cause why the Kentucky Association of Public Accountants should
not be dropped from membership as provided in article VII, section I
of the by-laws of the association. By unanimous vote of the members
of the trial board the Kentucky Association of Public Accountants was
expelled from membership in the American Association of Public
Accountants.
Upon resumption as the board of trustees the secretary reported the
following deaths:
J. B. Simpson, president of the Alabama Society; Arthur J. Besson,
New Jersey; J. W. Barber, California; and F. C. Tufts, of Massachusetts.
It was resolved that minutes should be made expressing the regret of
the board of trustees at the deaths of its member, Mr. J. B. Simpson, of
Alabama, and its former member, Mr. F. C. Tufts—expressions of sym
pathy to be sent to the members of state societies with which Mr. Simpson
and Mr. Tufts had been associated.
At the conclusion of the meeting, the president of the New York State
Society invited the members of the board of trustees to attend a meeting
of the New York State Society to be held that evening in New York.
The following were elected members of the American Association of

Public Accountants:
Georgia Society of Certified Public Accountants:

Fellow:
Charles Neville, C.P.A.
Illinois Society of Certified Public Accountants:
Fellow:
Artemas R. Hopkins, C.P.A. (subject to consent of the New Jersey
Society).
Kentucky Society of Public Accountants:
Fellows:
W. S. Parker
Thomas E. Turner
Overton S. Meldrum
Enos Spencer
Charles G. Harris
James S. Escott
A. H. Ummethun
Homer F. Harris
T. A. Pedley
367
L. Comingor
Associates:
J. C. Mahon
Frederick L. Brigham
Arthur J. Wrege
Edward F. Stoll
Arthur B. Zubrod
William J. Ryans
Certified Public Accountants of Massachusetts, Incorporated:
Fellows:
Frederick Stewart, C.P.A.
Hazen P. Philbrick, C.P.A.
J. Chester Crandell, C.P.A.
Associate :
Ralph K. Hyde, C.P.A.
Michigan Association of Certified Public Accountants:
Fellows:
William Leslie, C.P.A.
David Smith, C.P.A.
A. Van Oss, C.P.A. (subject to consent of New York State Society)
Missouri Society of Certified Public Accountants:
Fellow:
James B. Campbell, C.P.A. (Minn.) (subject to consent of Minne
sota Society)
New York State Society of Certified Public Accountants:
Fellows:
Paul E. Bacas, C.P.A.
S. G. H. Fitch, C.P.A.
Harold D. Greeley, C.P.A.
Joseph J. Klein, C.P.A.
John H. Koch, C.P.A.
Paul L. Loewenwarter, C.P.A.
Marcus A. Muller, C.P.A.
Francis D. Neville, C.P.A.
A. T. Spratlin, C.P.A.
W. J. Struss, C.P.A.
DeKay Winans, C.P.A.
Albert F. Young, Jr., C.P.A.
E. B. Wade, C.P.A.
Rhode Island Society of Certified Public Accountants:
Fellow:
William B. Sherman, C.P.A.
Tennessee Society of Public Accountants:
Fellows:
Ira P. Jones
William C. Slayden
J. Roy Curtis
368
Fred E. Ivy
Robert Hall Jones
Robert L. Bright
M. Orion Carter
John G. Parks
Henry E. N. F. Mason
Allen B. Fisher
George Milton Clark
Associate:
J. Douglas Lord
Wisconsin Association of Public Accountants:
Fellows:
Wesley T. Cole.
George P. Johnson
Washington Society of Certified Public Accountants:
Fellow:
Herbert E. Post, C.P.A.
North Carolina State Board of Accountancy

The State Board of Accountancy provided for in the act passed during
the last session of the legislature of North Carolina consists of four
members, three of whom are accountants and one an attorney. The
Board met on April 19, and elected the following officers:
President—Moreland R. Lynch, High Point.
Treasurer—G. G. Scott, Charlotte.
Secretary—J. D. Hightower, Greensboro.
The fourth member of the board is David Stern of Greensboro.
The board will hold its first examination on August 25, at Wilmington,
North Carolina.
369
Pennsylvania C. P. A. Examinations of
November, 1912
(Continued)
COMMERCIAL LAW
Answers by Walter D. Stewart, LL.B.
Member of the Philadelphia Bar
Question i
Samuel Mason died leaving a will in which he appointed Robert

Goodman his trustee, giving him full power in his discretion to make
sales of any stocks, bonds or securities forming part of his estate. Good
man was seized with a lingering illness which largely incapacitated him
from actively attending to the duties of the trust and he accordingly
gave a power of attorney to one William Sampson, duly executing it
as trustee under the will of Samuel Mason, and authorizing Sampson to
sell and dispose of the securities as his attorney. Sampson, acting in
good faith, sold some stock at a price far below its real value. Goodman
died, a new trustee was appointed, and he brought suit to recover from
the purchaser the stock which had been sold. Can he do so, and if so
why?
Answer to Question 1
There are but two possible reasons why the stock can be recovered
from the purchaser: (1) That it was a bad bargain, and (2) that Good
man, the original trustee, had no power to delegate his authority to
Sampson. The first reason has no foundation in law, as the parties were
dealing at arm’s length, and both were entitled to the benefit of the
best bargain that they could drive. As to the second reason, it appears
that the delegation of authority to sell stock was proper for the reason
that the trustee was, in the words of the trust, given “full power in his
discretion to make sale, etc.” It was, therefore, an exercise of his dis
cretion to delegate the power of sale to another. The acts of the agent
were binding on the trustee, and the sale which the agent made was, there
fore, good and complete. If any one could be held responsible for the loss
occasioned by the sale of the stock it would possibly be Mason’s estate
or Sampson, but as this is a matter outside of the scope of the case
stated, there is no need to go into it.
Question 2
Robert Filmore under a written agreement leased unto James Thomp

son a house in the city of Philadelphia for the term of five years at the
370
rent of $40 per month. Property was enhanced a good deal in value at the
end of two years and the landlord suggested to his tenant that it would
be only the fair thing if he should increase the rent to $50 a month. To
this the tenant agreed, writing a letter in which he said, “I agree here
after to pay the sum of $50 per month for the property rented by me
from you.” Notwithstanding this letter, however, the tenant refused to
pay more than $40 a month and the landlord brought suit to recover
the agreed amount of $50. Can he recover? State the reasons for
your answer.
A contract in order to be enforceable must be supported by a considera

tion, which means that there must be some benefit to be derived by the
party making the promise in return for the promise made. In the case
stated, the parties have already entered into a valid contract by which
one has agreed to lease certain premises to the other for the term of
five years at certain rent. As long as the lessee performs all the
covenants contained in the lease he is entitled to stay on the premises
for the full five years. Any agreement on the part of the lessee to pay
an increased rent would result in any benefit to the lessee, and is, there
fore, void and not enforceable, and the landlord should not be permitted
to recover the amount of the increased rent. (See Taylor vs. Winterd,
6 Phila. Reports, 126.)
Question 3
Thomas Brown died leaving a will in which after one or two other
provisions he provided as follows: “All the rest of my estate I give unto
my friend Edward Simpson to hold the same in trust and collect the
income and pay the same unto my wife for her life, and at her death
to deliver the principal to my children in equal shares.” In his
estate were 100 shares of stock of the Pennsylvania Railroad Company.
The trustee, desiring to take advantage of a rise in the market price
of the stock, sold the same through his brokers and endorsed the certifi
cate, which stood in the name of Thomas Brown, as trustee, and the
broker presented it to the railroad company for transfer. The railroad
company refused to make the transfer. Was its position right or wrong,
and what remedy had the trustee against the company?
A corporation or a transfer agent for a corporation is under no obli

gation to permit of a transfer of stock if such acquiescence would expose
the agent or his principal to a successful claim by any one for the
replacement of the stock or for its value. The corporation or the
transfer agent is in a sense the custodian of the rights of stock owners.
371
The purchaser of stock does not receive the certificate of his vendor,
but a new one made out in his own name and reciting nothing contained
in the former. He is, therefore, protected in the enjoyment of his
purchase, even though there was no right to make the transfer to him.
For this reason an unauthorized transfer is a wrong done to the owners
of stock, for which not only the person who makes it, but anyone know
ingly assisting in the wrong, is responsible. The corporation—or its
transfer agent—has in its keeping the primary evidence of title to the
stock, and is justly held to proper diligence and care in its preserva
tion. From this it results that it may rightfully demand evidence of
authority to make a transfer before it permits the transfer to be made.
Its own safety requires that it be satisfied of the right of the person
proposing to make a transfer to do what he proposes. Generally,
sufficient evidence of such right is found in the possession of legal
title to the stock, but in equity, whatever puts a party upon inquiry
is notice of what inquiry must reveal.
Where a party dies intestate, the administrator or executor of his
estate is entitled to sell the stock of the estate without showing any
other authority than that he has been appointed administrator or ex
ecutor. A trustee of an insolvent estate would seem to stand on the
same footing. His primary duty is administration; that is, to dispose
of the personal property and therewith pay the debts of the deceased
insolvent and make distribution among the next of kin or legatees.
There is, however, a marked difference between the powers of an ad
ministrator or executor and those of an ordinary trustee. The common
duty of the latter is not administration or sale, but custody and man
agement. The power of sale is not a necessary incident to the trust
If in truth he has not such power, the corporation or transfer agent,
by accepting his certificate and issuing others in lieu thereof to his
transferee, is assisting him to destroy the rights of the beneficiary in
the trust. But it has been held that the mere designation of the stock
holder as trustee, without a specification of the trust or names of the
beneficiary is not such notice to the transfer agents as to make it
their duty to look beyond the legal title, for it did not point to any
sources of information. It, therefore, seems that the railroad company
has no right to refuse to make the transfer, and the trustee has two
remedies: (1) By a bill in equity against the railroad company to
compel them to transfer the stock, and (2) An action against them to
recover whatever actual damage may have been suffered by the refusal
to transfer the stock when the same was requested. Such actual damage
would arise in the event of a decline in the value of the stock.
Question 4
Henry Evans, desiring to purchase a team of horses, requested a friend

of his named Robert Thompson to procure a team for him. Thompson
went to Frederick Wilson, the owner of some horses, and, desiring to
make some profit in the transaction himself, purchased a team for the
372
sum of $800, which he agreed to pay therefor. The transaction was

wholly in Thompson’s name and Wilson sold the horses to him and
knew nothing whatever about Evans. Thompson was to pay for the
horses in thirty days. They were delivered to him and he in turn
delivered them to Evans for the price of $1,000, which Evans paid him
therefor. Thompson failed to pay Wilson, however, and Wilson then
brought suit against Evans for the $800, the price at which he sold
them to Thompson. Can he recover? State the reasons for your
answer.
There is no privity of contract between Wilson and Evans. The

transaction between Wilson and Thompson was entirely separate from
the transaction between Thompson and Evans; and although Evans
authorized Thompson to procure a team for him, yet when Thompson
procured that team he did so as an entirely independent purchaser.
Wilson cannot, therefore, recover from Evans.
Question 5
Having come to an adjustment of certain accounts between them,

Howard Pine gave unto Samuel Barnes his note for $577.19. The time
of the settlement was January, 1912. After the note had been signed
by Pine and delivered to Barnes and the parties had separated, Barnes
observed that the note was written upon an old printed form of a
note on which there had been printed as part of the date, the figures
“190.” In filling in the note, the figure “2” had been added so that the
note apparently read “January, 1902.” To correct this, Barnes took his
pen and made a figure one through the cypher. What effect had this
upon the note if any?
The Negotiable Instruments Act of May 16, 1901, provides that

where a negotiable instrument is materially altered without the assent
of all parties liable thereon, it is avoided, except as against a party
who has himself made, authorized or assented to the alteration and
subsequent indorsers. But when an instrument has been materially
altered and is in the hands of a holder in due course, not a party to the
alteration he may enforce payment thereof according to its original
tenor. A change in date is specified under the act as a material altera
tion. The case stated, however, does not seem to come under the pro
visions of the act, as the change of the date of the note was not an
alteration, but the correction of a mistake. If it could be proved that
the change was merely to correct some mistake and to make the note
conform to the original intention of the parties, it would not avoid
the note, but it would be still enforceable as against the maker. (See
373
Hammerschlag vs. Union National Bank of Wilmington, 13 W. N. C.,

No. 205.)
Question 6
One Frank Hastings was the owner of the household furniture in

the house where he lived, including a piano. Being pressed for money,
he desired to make a sale of the piano, and Thomas Stone agreed to
purchase it from him for $100 and paid him the cash therefor. Hast
ings said that he was about to move in a few days and that it would
be convenient if the piano were left at the house until the time of
removal, when Stone could come and take it away. To this Stone
agreed. The following day, however, the landlord distrained upon
all the furniture in the house for unpaid rent. Was Stone entitled to
claim and to take away the piano which he had bought and paid for?
State the reasons for your answer.
The general rule of law is that all goods on the premises are liable to
distress for rent in arrear. There are certain exceptions to this rule
in the case of goods left on the premises in the course of trade, but the
case stated does not come within any of the exceptions. The title to
the goods is immaterial, and as long as they remain on the premises the
landlord is entitled to levy on them for rent. Under the circumstances
Stone would not be entitled to remove the piano which he had bought
and paid for.
Question 7
Samuel Ellison gave a bond and mortgage secured upon his house
for the sum of $5,000. He failed to pay interest and the mortgage was
foreclosed. The holder of the mortgage bought the property at sheriff’s
sale for $50. He afterwards sold the property for the sum of $6,000,
thus receiving more than the amount he had loaned to Ellison. Not
withstanding this, he brought suit upon the bond to recover from
Ellison the sum of $4,950 with interest. Is he entitled to recover?
A mortgage in Pennsylvania is in the nature of a security for the

payment of a debt. The property is pledged as collateral for the pay
ment of the debt represented by the bond, which in the case stated was
for the sum of $5,000. A default having been made in the payment
of the interest as specified in the bond, it was then the privilege of the
holder of the mortgage to proceed to sell the property which was
the collateral he held for the payment of the note or bond. The prop
erty was offered at public sale by the sheriff and was sold for $50. It is
374
immaterial who purchased the property. The amount of the debt was
only reduced by the amount of the proceeds of the sheriff sale. As a
result, there was still due to the holder of the mortgage the sum of
$4,950 with interest, and the holder of the bond was entitled to proceed
on it to recover that amount from Ellison, his mortgagor.
Question 8
James Black wrote to William Tomlinson offering him one hundred

barrels of apples at $3 per barrel. Tomlinson replied, “I accept your
offer, you guaranteeing apples to be shipped immediately and free from
all defects.” The market price of apples rose within the next week
one dollar per barrel, and no apples arriving Tomlinson wired, asking
why his apples had not been shipped. To this Black replied that he
had sold the apples elsewhere and was not shipping any to him. Tom
linson then brought suit for the one dollar per barrel advance in price.
Can he recover? State the reasons for your answer.
In order to make a contract complete and binding on all parties
there must be an offer made by one of the parties to the other, which
offer must be accepted without any qualifications. In the case stated,
Tomlinson accepted the offer, but not in the terms in which the offer
was made. He had another condition, to wit: That the party making
the offer guarantee the apples to be shipped immediately and free from
all defects. A contract was, therefore, not made, and Black was not
obliged to ship the apples. Tomlinson was, therefore, not entitled to
recover.
Question 9
The Maple and Elm Street Railway Company was incorporated with
an authorized capital stock of $250,000, all of which was issued. Fred
erick Wheeler was the President of the Road and, being engaged in
stock speculation and in need of money, he issued 500 additional shares
of stock, to which he procured the signature of the secretary and affixed
the seal in the regular way. This stock he sold and received the money,
which he appropriated to his own use. Afterwards the fraud was dis
covered. What are the rights of the holders of this over-issued stock?
Are they entitled to be considered stockholders of the company or can
they recover the value of the stock in cash from the corporation? Give
your reasons for your answer.
A corporation is bound to recognize as members the bona fide holders
of stock issued by the president and secretary without authority, where
such officers have charge of issuing stock and the certificates are not
on their face distinguishable from stock properly issued, provided such
issue does not increase the corporation’s capital beyond the authorized
375
amount. By bona fide holders are meant those who have paid a valuable
consideration for the stock without notice of the fraud; but if such
stock would increase the corporation’s capital beyond the authorized
amount, the holders thereof do not become stockholders in the ordinary
sense of the word, but the corporation must refund to them the amount
advanced on the stock. The reason upon which the law is based is
that the regular stockholders have intrusted the president and secretary
with the authority and power to issue certificates of stock, and where
such officers have exceeded their authority and one of two innocent
parties must suffer by reason thereof, the law holds that the one who
must suffer is he who has afforded the opportunity for the commission
of the fraud. (See Willis vs. Fry, 13 Phila. Reports, 33.) It might
be added, however, that the Corporation Act of 1874 provides that
certificates of stock must be signed by the president and countersigned
by the treasurer, so that the stock certificates signed by the president
and secretary, without the treasurer’s signature, would under Pennsyl
vania law be void, and would be notice to the subscriber of the fraud
committed in their issuance.
Question 10
Five persons agree to organize a corporation for the purpose of

carrying on the manufacture of iron and steel. Each is to contribute
$10,000 and receive stock to that amount. Owing to the necessity of
advertising, a month or so must elapse before the charter can be
obtained and they are all desirous of expediting the matter as much as
possible. Two of their number, accordingly, who are most active,
purchase some machinery for installation in the property which they
rent, and lumber and other materials for making alterations in the
building. The purchases are all made in the name of the Star Iron
Works, which they have selected as the name of the company. Owing
to a disagreement between them, however, the company is not formed.
Are the other parties liable for the purchases made by the two above
mentioned, and if so upon what theory?
Answer to Question io
The directors and promoters of a proposed corporation who enter into

a contract for work to be done or material to be furnished for the
corporation before obtaining a charter are personally liable on such
contract. (See Dengler vs. Helms, 4 Walker, 476.) In the case stated
the three persons who were not concerned in the purchase of machinery
merely agreed to subscribe to a certain amount of stock of the pro
posed corporation, and it was contemplated that they should become
liable only as such subscribers or stockholders. There is nothing in the
question which indicates that the three inactive parties authorized the
purchase of the machinery or ratified the transaction after it was com
pleted. In the absence of such authorization or ratification they could
not be held liable for the purchase price.
376
New York C. P. A. Examinations of
January, 1913
Answers by Paul-Joseph Esquerre, C.P.A.
PRACTICAL ACCOUNTING—PART I
Question i1
Company C was incorporated in May, 1910, to acquire the stock of com

panies A and B. Company C’s capital stock is divided into preferred,
$2,500,000; common, $1,500,000; all the stock is outstanding and fully
paid; it has been issued (a) for stock to the stockholders of companies
A and B, (b) $20,000 of preferred for organization expenses, (c) for
cash. The stockholders of A and B received preferred stock for the
intrinsic, undepreciated book value of the assets, as reflected by the fol
lowing balance sheets of their companies at June 30, 1910, and $300,000
of common stock divisible equally to companies A and B.
A B A B
Plant, land ... .$ 90,000 $ 195,000 Capital Stock
Building and outstanding:
equipment ... 254,000 318,000 Common ... .$ 700,000 $1,000,000
Machinery and Preferred .... 100,000
Transportation 6% bonds, 1915,
equipment ... 21,000 17,000 J&J, and in
Investment in terest accrued 92,700
land ............ 150,000 Accounts pay
Investment in able ......... 59,8oo 41,656
bonds—Co. B 60,000 Loans payable . 65,800 35,ooo
Investment in Audited vouch
stocks ...... 200,000 ers unpaid .. 18,320 13,400
Goods in process 45,ooo 49,341 Demand notes
Finished goods 69,000 76,340 payable .... 5,000
Materials and Reserve for de
supplies .... 58,000 51,300 preciation ... 24,900 30,000
Cash ............... 17,420 19,175 Reserve for
Accounts re doubtful ac
ceivable .... 51,000 92,800 counts .......... 5,000 2,000
Demand notes— Reserve for
Co. B .......... 5,000 contingencies. 16,000
Accrued interest 1,800 Surplus ......... 111,000 26,000
$1,100,820 $1,245,756 $1,100,820 $1,245,756
Between July 1 and July 31, 1910, the following transactions oc
curred: organization expenses paid in cash by Company C, $5,000;
intercompany advances by C: to A $60,000, to B $60,000; Company A
reduced its accounts payable by $25,000, its loans payable by $30,000, and
377
its audited vouchers by $15,000; Company B reduced its accounts payable

by $29,500, liquidated its audited vouchers unpaid and its interest due
under the bonds.
The manufacturing operations of the period show: Company A—
labor, $10,000; overhead expense, $8,000; materials consumed, $9,886;
inventory of goods in process, $46,300, of finished goods, $50,740; selling
expenses paid, $1,600; administration expenses, $2,500; sales, $72,500;
collections of open accounts, $86,400. Company B—labor, $3,600; over
head, $2,350; materials, $5,210; inventory of goods in process, $40,500, of
finished goods, $46,380; sales, $98,000; collection of open accounts,
$109,150; administration expenses, $3,000.75; selling expenses, $1,040.
No materials were purchased during the period and the current ex
penses were paid as soon as the invoices were audited. Company A
declared a dividend of $100,000 and Company B a dividend of $25,000.
Prepare the consolidated balance sheet of companies A and B and C,
at July 31, 1910, to be submitted to the directors of Company C, and
so arranged as to show them the exact detail of the properties that
they control.
Consolidated Balance Sheet of Companies A, B, C, at March 31, 1910 *

ASSETS
Eliminations Consolidated
Company A Company B Company C and additions balance sheet
Capital Assets:
Plant land ......................... $ 90,000.00 $ 195,000.00 $ 285,000.00
Buildings and equipment.... 254,000.00 318,000.00 572,000.00
Machinery and tools ............ 228,600.00 276,800.00 505,400.00
Transportation equipment ... 21,000.00 17,000.00 38,000.00
Goodwill ................................ 514,900.00† 514,900.00
Investments in land .............. 150,000.00 150,000.00
Investment in bonds of Com
pany B ............................ 60,000.00 60,000.00*
Investment in stocks of other
200,000.00 2,314,900.00 2,314,900.00‡ 200,000.00
$ 853,600.00 $ 956,800.00 $2,314,900.00 $1,860,000.00 $2,265,300.00
Working and Trading Assets:
Materials and supplies ..... $ 48,114.00 $ 46,090.00 $ 94,204.00
46,300.00 40,500.00 86,800.00
Finished goods ...................... 50,740.00 46,380.00 97,120.00
$ 145,154.00 $ 132,970.00 278,124.00
Current Assets:
Cash ................................... $ 73,520.00 $ 132,734.25 $1,540,100.00 $1,746,354.25
Accounts receivable .............. 37,100.00 81,650.00 118,750.00
Demand notes, Co. B............ 5,000.00 5,000.00*
Accrued income .................. 300.00 300.00*
Advances to affiliated com
panies ............................ 120,000.00 120,000.00*
Dividends receivable ............ 125,000.00 125,000.00*
$ 115,920.00 $214,384.25 $1,785,100.00 $ 250,300.00 $1,865,104.25
Deferred Debit Items:
Organization expense ...... $ 25,000.00 $ 25,000.00
$1,114,674.00 $1,304,154.25 $4,125,000.00 $2,110,300.00 $4,433,528.25
378
LIABILITIES
Eliminations Consolidated
Company A Company B Company C additions balance sheet
Capital Liabilities:
Capital stock outstanding:
Preferred ..................... $ 100,000.00 $2,500,000.00 $ 100,000.00* $2,500,000.00
Common .......................... 700,000.00 $1,000,000.00 $1,500,000.00 $1,700,000.00* 1,500,000.00
Bonds, 6%, 1915, J & J.... 90,000.00 60,000.00* 30,000.00
$ 800,000.00 $1,090,000.00 $4,000,000.00 $1,860,000.00 $4,030,000.00
Current Liabilities:
Demand notes payable ........ $ 5,000.00 $ 5.000.00*
Loans payable ..................... $ 35,800.00 35,000.00 $ 70.800.00
Advances by affiliated com
panies .......................... 60,000.00 60,000.00 120,000.00*
Accounts payable ................ 34,800.00 12,156.00 46,956.00
Audited vouchers ................ 3,320.00 3,320.00
Dividends payable .............. 100,000.00 25,000.00 1S5.000.00*
Interest accrued in bonds.. 450.00 300.00* 150.00
$ 233,920.00 $ 137,606.00 $ 250,300.00 $ 121,226.00
Surplus:
1. Appropriated:
Reserve for depreciation.$ 24,900.00 $ 30,000.00 $ 54,900.00
Reserve for doubtful ac
counts receivable .... 5,000.00 2,000.00 7.000.00
Reserve for contingencies 16,000.00 16,000.00
$ 45,900.00 $ 32,000.00 $ 77.900.00
2. Available for dividends.. 34,854.00 44,548.25 125,000.00 204,402.25
$ 80,754.00 $ 76,548.25 $ 125,000.00 $ 282,302.25
$1,114,674.00 $1,304,154.25 $4,125,000.00 $2,110,300.00 $4,433,528.25
♦ Intercompany holdings.
† Investment eliminated because represented by the assets which represent its value, less the lia
bilities for which they are subject.
‡ Composed of:
Excess of cost over intrinsic value of assets of A and B ....................................$310,000.00
Surplus of A and B :
a. Appropriated for reserves ............................................................ $ 77,900.00
b. Available for dividends ................................................................ 127,000.00 204,900.00
$514,900.00
CASH—COMPANY A
Balance .............................$ 17,420.00 Accounts payable .......... $ 25,000.00

Company C...................... 60,000.00 Loans payable ................ 30,000.00
Accounts receivable .... 86,400.00 Audited vouchers ........... 15,000.00
Interest on bonds.......... 1,800.00 Labor ............................... 10,000.00
Factory expense ........... 8,000.00
Selling ............................ 1,600.00
Administration expense . 2,500.00
Balance .......................... 73,520.00
$165,620.00 $165,620.00
Balance .............................$ 73,520.00
Red ink entries are indicated by italics.
379
GOODS IN PROCESS—COMPANY A
Balance ........................... $ 45,000.00 Finished goods ............... $ 26,586.00

Materials and supplies.. 9,886.00 Inventory ......................... 46,300.00
Cash—labor ..................... 10,000.00
Cash—factory expense .. 8,000.00
$ 72,886.00 $ 72,886.00
Balance .............................$ 46,300.00
PROFIT AND LOSS—COMPANY A
Finished goods ................$ 44,846.00 Sales ................................ $ 72,500.00

Selling expense ............. 1,600.00 Interest on bonds........... 300.00
Administration expense . 2,500.00
Surplus ............................ 23,854.00
$ 72,800.00 $ 72,800.00
FINISHED GOODS—COMPANY A
Goods in process ............ $ 26,586.00 Inventory .........................$ 50,740.00

Balance ............................ 69,000.00 Profit and loss ............... 44,846.00
$ 95,586.00 $ 95,586.00
SURPLUS—COMPANY A
Dividends ........................ $100,000.00 Balance ............................ $111,000.00

$134,854.00 $134,854.00
Balance ............................ $ 34,854.00
CASH—COMPANY B
Balance .............................$ 19,175.00 Accounts payable ........... $ 29,500.00

Company C .................... 60,000.00 Audited vouchers... 13,400.00
Accounts receivable .... 109,150.00 Interest on bonds............. 2,700.00
Labor .. .............................. 3,600.00
Factory expense............. 2,350.00
Selling .............................. 1,040.00
Administration expenses. 3,000.75
Balance ............................ 132,734.25
$188,325.00 $188,325.00
Balance .............................$132,734 25
380
GOODS IN PROCESS—COMPANY B
Balance ............................ $ 49,341.00 Finished goods ................$ 20,001.00

Materials and supplies .. 5,210.00 Inventory ......................... 40,500.00
Cash—labor ..................... 3,600.00
Cash—factory expense .. 2,350.00
$ 60,501.00 $ 60,501.00
Balance ............................ $ 40,500.00
PROFIT AND LOSS—COMPANY B
Finished goods ............... $ 49,961.00 Sales .................................$ 98,000.00

Selling expense............... 1,040.00
Administration expense.. 3,000.75
Interest on bonds............ 450.00
Surplus ............................ 43,548.25
$ 98,000.00 $ 98,000.00
FINISHED GOODS—COMPANY B
Goods in process ........... $ 20,001.00 Inventory ......................... $ 46,380.00

$ 96,341.00 $ 96,341.00
SURPLUS—COMPANY B
Dividends ........................ $ 25,000.00 Balance ............................. $ 26,000.00

$ 69,548.25 $ 69,548.25
CASH—COMPANY C
Preferred capital stock.$ 465,100.00 Advances ...................... $ 120,000.00

Common capital stock.. 1,200,000.00 Organization expenses .5,000.00
Balance 1,540,100.00
$1,665,100.00--------------------------------- ---
------------------------------------------------------------------- $1,665,100.00
Balance ......................... $1,540,100.00 ----------------
CAPITAL STOCK, PREFERRED—COMPANY C
Preferred capital stock Investment in stocks... 956,900.00

Authorized ................$2,500,000.00 Investment in stocks... 1,058,000.00
Organization expenses . 20,000.00
Cash .............................. 465,100.00
$2,500,000.00 $2,500,000.00
381
CAPITAL STOCK, COMMON—COMPANY C
Common capital stock Investment in stocks...$ 300,000.00

authorized ................. $1,500,000.00 Cash .............................. 1,200,000.00
$1,500,000.00 $1,500,000.00
INVESTMENTS IN STOCKS OF OTHER COMPANIES—

COMPANY C
Preferred capital stock.$ 9 5 6,900.00 Balance .......................... $2,314,900.00

Preferred capital stock. 1,058,000 00
Common capital stock.. 3 00,000.00
$2,314,900.00 $2,314,900.00
Balance ......................... $2,314,900.00
Comments on Question 1, Part I
The points of interest in this problem appear to be:

1. The amount of cash which has been obtained by Company C
through the issue of stock is not given; and since the amount of stock
issued by C in exchange for the capital stock of A and B is not men
tioned, the accurate building up of the cash account of C depends upon
the understanding of what constitutes “intrinsic, undepreciated book
value of the assets.”
2. The goodwill which, so far as C is concerned, represents the dif
ference between the intrinsic book value of the assets and the price paid
for the stock of A and B, i. e., $300,000, will have to be expressed in the
consolidated balance sheet at a figure which can be obtained only from
careful consideration of its components.
3. All the intercompany holdings will have to be eliminated from the
consolidation, upon the ground that this exclusion will not in any way
alter the status of a single one of the assets of A and B controlled by C.
If this test cannot be applied to a proposed elimination, it should not
be made.
1. The Amount of the Issues of Stock for Cash:

The term “intrinsic undepreciated book value” means all the assets
of A and B, as appearing on the balance sheets submitted, less their
liabilities to outsiders, no cognizance whatever to be taken of the reserves.
Thus, since the intrinsic undepreciated book value of the assets of A
and B is in the aggregate $2,014,000, this amount of preferred stock was
issued by C to the stockholders of A and B. Further, if $20,000 of the
same stock was issued for organization expense, the company must have
received $465,100 in cash for the balance. As to the common stock, it
is plain that the price paid in stock by Company C for the excess of cost
382
over intrinsic value being $300,000, the balance of the authorization, i. e.,
$1,200,000, was issued for cash.
2. The Component Parts of the Goodwill:
The assets of A and B, as appearing in the balance sheets of

these two companies at June 30, 1910, aggregate ................... $2,346,576.00
Deducting from this figure the amount which has been acquired
through the use of credit, i. e., through the incurrence of
liabilities to outsiders .................................................................. 331,676.00
We obtain an amount of............................................................... $2,014,900.00

Which represents, according to principles of accounting. 1,800,000.00
of assets acquired through the use of the capital contribu
tions of the stockholders, as evidenced by the capital stock
liabilities of the two companies.
Deducting the capital stock, a remainder of.................................. $ 214,900.00
which cannot be anything else than the assets acquired by

companies A and B through the reinvestment of their un
divided profits of prior periods, as measured by:
a. The surplus available for dividends...................................... $ 137,000.00
3. The Eliminations:
Irrespective of their importance to companies A and B in their
capacity as separate entities, the debts of A to B and of B to A are
nothing to C, who owns the stock of both. It is plain that if, for instance,
the demand notes held by A against B were to be repaid by the latter,
A would have more cash, and less claims against other companies, while
B would have less cash, and a lesser amount of liabilities to outsiders.
But it is also evident that the consolidation of the cash account of A,
B and C would give a figure absolutely identical with the one shown in
the balance sheet, i. e., $1,746,354.25, which is the true extent of C’s
control of available cash. If the same reasoning is applied to any one
of the eliminations shown in the above solution, the same result will be
obtained.
The elimination of the investment in stocks of other companies as
carried by C in its balance sheet, must be eliminated because, instead of
expressing the amount of the investment, it is required that the assets
which it controls, subject to whatever liabilities attach to them, be ex
pressed in detail. The elimination of the capital stock of companies
A and B is indicated by logic. If the said stock originally controlled the
assets of A and B, and has since been replaced by the stock of C, it is
only the latter which controls the assets; the former is a nonentity to
C for purposes of a consolidated balance sheet. It represents only
documentary evidence of the transfer of the assets which were originally
acquired out of it.
Although the requirements of the problem do not call for ledger
accounts, they have been given here as they may be of help to the
student of accounting.
383
b. The surplus appropriated for the purpose of reserves.... $ 77,900.00
$ 214,900.00
Thus we have found two of the components of the goodwill acquired

by Company C. As to the third, it must, of necessity, be the $300,000 of
common stock issued by C in excess of the intrinsic value of the assets
of A and B. To prove that the resulting figure of $514,900.00, which is
called goodwill on the consolidated balance sheet submitted above, is
truly what it pretends to be, let us assume that instead of expressing its
investment in stocks of other companies at cost, as appears to have been
done, Company C had expressed it at the par of the stocks acquired.
The journal entry would have been:
Investment in stocks of other companies... .$1,800,000.00

Goodwill ..................................................................... 514,900.00
To capital stock preferred ....................... $2,014,900.00
Capital stock common ....................... 300,000.00
For acquisition of the stock of companies

A and B, the goodwill being represented
by:
1. Undivided profits ................ $137,000.00
2. Appropriations of surplus.. 77,900.00
3. The goodwill value of the
investment covers the in
trinsic value of the assets
acquired ....................... 300,000.00
$514,900.00
Question 2
Karl Smith is a real estate broker and agent who, among other things,
manages properties in consideration of commissions, ranging from 3%
to 5% on rent collections. For the last two years his books have been
kept in haphazard fashion and in violation of the law of agency. They
are incomplete as to footings and postings; no trial balance of the general
ledger has been obtained and no reconciliation of bank balances has been
established during the above mentioned period. The tenants’ rent book is
a species of “tickler” in which the current rent charges are entered in
pencil and inked in when paid; the names of the tenants of properties
not leased are also entered in pencil and erased when the tenants move,
the new names being entered in the places thus left vacant.
Having accidentally discovered irregularities in the tenants’ book,
Karl Smith has discharged his bookkeeper-cashier and engaged an ac
countant to conduct an examination of his books, records and accounts,
discover the extent of the shortage, which he fears is considerable, and
install a new system of accounts.
After spending considerable time in an attempt to place the books on
an accounting basis, the accountant finally obtains the following trial
384
balance of the ledger, as of September 30, 1912, installs a new system

which will permit his client to fulfil his accounting duty as an agent arid
renders a preliminary report accompanied by a statement showing clearly
the financial status of the relations of Karl Smith to his principals:
TRIAL BALANCE
Cash .................................... $ 350.20 Karl Smith, capital .......... $ 4,360.40

Petty cash ........................ 100.00 Commissions ..................... 22,510.00
The Augusta Terrace (a) 216.00 Phoenix Insurance Co... 470.00
The Victoria Court (a) .. 805.00 London Insurance Co.... 450.10
The St. Quentin Court (a) 650.00 The Frederic Apartment
The Audubon Court (a) . 270 00 (f) 2,385.30
The Evening Despatch (b) 75.00 The Venetian Court (f) .. 2,500.00
The Morning News (b).. 35.00 The Franklin Castle (f).. 3,231.00
The Union Wall Paper St. Martin Hall (f).......... 2,850.70
Co. (b) .......................... 111.20 Tenants .............................. 1,550.00
The Janitors’ Supplies Co.
(b) 45.25
Insurance account (c) .... 920.10
Karl Smith, drawings (d) 16,930.00
Cash shortage (e)............. 380.00
Salaries .............................. 12,140.00
Office expense ................... 3,130.00
Furniture and equipment. 4,150.75
$40,307.50 $40,307.50
Notations by the accountant:

(a) Remittances on account of collection of October rents, paid in
advance upon signing lease, not as yet credited to principals.
Settlements to be made on the 29th of every month.
(b) Balances represent payments from March to June, 1912, for ad
vertising, decorating and supplies, for the account of managed
properties. Paid bills cannot be found; no detail available; item
ized receipted bills asked for by letter; no answer at September
30, 1912.
(c) Premiums on fire insurance placed by agent for account of sundry
clients not principals. Premiums will be paid to agent if risk is
accepted and he will deduct commissions of from 5% to 15% from
settlement with companies.
(d) Probably contains charges which might properly be capitalized
under caption “Furniture and Fixtures” if positive information
were available.
(e) Entries made in cash book by accountant, for rent collections ap
pearing in monthly statements to principals but not appearing in
cash book or in duplicate of bank deposits obtained from banks.
(/) According to the terms of his employment the agent must remit
on the fifth day in every month.
Prepare the preliminary report and the statement submitted by the
accountant to Karl Smith, as at September 30, 1912.
385
EXHIBIT A
Agency Balance Sheet of Karl Smith, Real Estate Agent, Showing

His Relation to His Principals at September 30TH, 1912
Assets held for the account Liabilities to principals pay

of the principals: able in subsequent period:
Cash .................................. $ 350.20 The Frederick Apartment.$ 2,385.30
Petty cash ......................... 100.00 The Venetian Court.......... 2,500.00
The Franklin Castle.......... 3,231.00
Total ....................... $ 450.20 St. Martin Hall ............... 2,850.70
Claims against principals: $10,967.00

a. October rent collections Offsets of debits to prin
remitted with Septem cipals:
ber rents: Collections of October
The Augusta Terrace..$ 215.00 rents not as yet debited
The Victoria Court.... 805.00 to tenants, or credited
The St. Quentin Court. 650.00 to owners, but paid to
The Audubon Court... 270.00 the latter...................... * 1,940.00
$ 1,940.00
b. Disbursements for ad

vertising, decorating and
janitor’s supplies, await
ing distribution to vari
ous owners:
The Evening Despatch.$ 75.00
The Morning News.... 35.00
Union Wall Paper Co.. 111.20
Janitors’ Supplies Co... 45.25
Total ....................... $ 266.45
Total .................................. $ 2,206.45
Offsets of credits to prin

cipals:
Rents credited to princi
pals and charged to ten
ants; not as yet credited *$390.00
Agency deficiency ........... $ 9,860.35
Total ..................................$12,907.00 Total .................................. $12,907.00
386
EXHIBIT B
Personal Balance Sheet of Karl Smith, Real Estate Agent, at

September 30TH, 1912
Furniture and equipment.$ 4,150.75 Liability to principals. ...$ 9,860.35

Insurance receivable (see Insurance payable (see
contra) .......................... 920.10 contra) .......................... 920.10
Total ..............$ 5,070.85

Deficit ................................ 5,709.60
$10,780.45 $10,780.45
EXHIBIT C
Profit and Loss Account for Two Years Ended September 30TH, 1912
Salaries ...............................$12,140.00 Commissions ..................... $22,510.00

Office expense................... 3,13000
Cash shortage ................... 380.00
Net profit—drawing acct.. 6,860.00
$22,510.00 $22,510.00
DRAWING ACCOUNT
Drawings ...........................$16,930.00 Net profit ........................... $ 6,860.00

Capital—impairment ........ 10,070.00
$16,930.00 $16,930.00
CAPITAL
Impairment ....................... $10,070.00 Balance ...............................$ 4,360.40

Deficit ................................ 5,709.60
$10,070.00 $10,070.00
Karl Smith, Esq.,

Real Estate Agent,
New York.
Dear Sir:
In accordance with your request of ..................... I have made an
examination of your books, records and accounts for the last two years,
and in connection therewith I beg to submit, attached hereto, the fol
lowing described exhibits:
* The two components of the balance shown by the tenant’s account.
387
Exhibit A. Balance sheet of the agency of Karl Smith, real estate

agent, showing the status of his relations to his principals
at September 30th, 1912.
Exhibit B. Personal balance sheet of Karl Smith, real estate agent.
Exhibit C. Profit and loss account of Karl Smith for the two years
ended September 30th, 1912, followed by his drawing ac
count and his capital account as adjusted at September
30th, 1912.
Your suspicions in regard to the extent of the shortage which you

claimed to be due to the peculations of your bookkeeper-cashier are
grounded only to an extent which is almost insignificant in comparison
with the deficiency shown by your accounts in connection with your
relations with your principals.
Your agency balance sheet shows that you have appropriated $9,860.35
of the funds which were intrusted to you in virtue of the terms of your
employment as an agent. The admittedly involuntary conversion of these
trust funds to your own use, was rendered possible by your failure to
comply with the requirements of the law of agency which regulates your
relations with your principals. Under the provisions of that law, an
agent is required to keep his money and his property aside from that
of his principals, and that of his principals aside from that of third
parties. Unquestionably, your accounting has been of such a nature that
the said requirements have been violated. Had you so kept your books
that the cash received from the tenants of your principals would have
been recorded in separate accounts so earmarked as to indicate the
ownership of the funds represented therein, or, at least, in a separate
agency cash account common to all your principals, you would not have
taken advantage of the available cash balance of a cash account which
you treated as your own, to increase your asset furniture and fixtures,
and to defray the cost of running your business over and above the re
turns thereof in the line of profits. In this connection, it may be well
to point out to you that while I have shown the asset furniture and fix
ture, as belonging to you, it is evident that it would belong to your prin
cipals if they were to claim it upon the ground that you have violated
the terms of your employment, thereby inflicting upon them an injury
for which you are liable.
The seriousness of your financial condition is far too evident on the
face of your balance sheet to require extensive comments. You have no
assets of your own, and it is impossible for you to remain engaged in
your present business, unless you are able to obtain the funds necessary
to restitute to your principals that which you have taken from them.
The cash shortage which appears on the debit side of your profit and
loss account represents, so far as I have been able to ascertain from the
conditions of your books, the extent of the defalcation of your book
keeper-cashier. The peculiar method of keeping the so-called tenants’
rent book, which has been in vogue in your office, has enabled your
employee successfully to hide from you the fact that he was taking
388
advantage of an extraordinary looseness in \accounting methods. It may

be interesting to point out to you that even in the event of the said
employee having been under bond, it would not be possible to hold the
bonding company owing to the fact that your own carelessness and lack
of control of your finances has led him into temptation, and deprived
the bonding company of the employer’s collaboration, to which they are
entitled.
While attempting to analyze your drawing account, I have received
the impression that not a few of the charges made therein could have
been made to the asset account, furniture and fixtures. However, I
have refrained from adjusting the account, owing to the lack of positive
information on the subject. I will point out to you that even though
corrections of such a nature could be made to a considerable extent, they
would not help you in the least, since, avowedly, you have acquired the
asset furniture and fixture out of funds to which you had no right
whatever.
In connection with what is called on the agency balance sheet sub
mitted herewith “Claims against principals,” it must be stated that the
attempt on my part to obtain duplicate bills for the amount of $266.45,
which is shown as undistributed to the various principals, has failed
up to date. As soon, however, as said duplicates and the required in
formation are obtained, the accounts referred to will be closed by
charges to the individual principals.
The spirit of the new accounting system which I have installed is
so to arrange your accounts that each trial balance of your general
ledger will show:
Your personal assets, your personal liabilities and your income debits
and credits; and so far as your principals are concerned, the assets which
you hold in trust for their account, the debts which you have contracted
for their account, the balances of their account current, and, on either
side of the trial balance, if the occasion arises, the debit or credit accounts
which act as contras one of the other.
As soon as your business has been rehabilitated, it will, of course, be
necessary to have at least one agency bank account where all the funds
of your principals will be deposited, and upon which you will draw for
your own account only at the time when you are entitled to the com
missions on your collections of the month.
The tenants’ ledger which has been placed in operation, is so arranged
as to show monthly the tenants’ arrears of the prior month, the charges
for the current month, the credits for arrears or current rent, either in
the form of cash paid by the tenant or in the form of concessions charge
able to the principals.
The cash book shows, in separate columns, the cash receipts and the
cash disbursements made for the account of each one of the properties
managed.
The voucher record contains in appropriate columns, the details of
389
the liabilities incurred by you for the account of the principals in con
nection with the management of their properties.
From these different records the following entries will be made
monthly:
Debit “Tenants” and credit “Principals’ account current” with
the current rent.
Credit “Tenants,” debit “Principals’ cash” with the collections.
Debit “Principals,” credit “Principals’ audited vouchers” with the
amount of the invoices received during the month.
Debit “Principals’ audited vouchers,” credit “Principals’ cash”
with the amount of liquidation of liability for audited vouchers.
Debit “Principals’ account current” and credit “Agent’s commis
sion account” with the commissions on the collections.
Debit “Principals’ account current” and credit “Principals’
cash” with the remittances of the month.
Debit “Agent’s general cash” and credit “Principals’ cash” with
the amount of the check covering the commissions.
Thus the trial balance of your agency will reveal the following:
Debits
Agency cash
Tenants—uncollected rents
Credits
Principals’ audited vouchers unpaid
Principals’ account current
I have also drawn a form of monthly statements to principals, which,
besides giving more detailed information than the one you are using at
present, will enable you to check personally the different data recorded
therein. The form will contain practically a copy of your agency trans
actions with your individual principals as shown by the columnar books
referred to above. Under the provisions of the law, your principals are
entitled to such a copy, if they care to have it. The monthly statements
will show:
The arrears of rent and of charges made against tenants for electricity,
telephone service and extension and miscellaneous items collectible from
the tenant; the current rent and current charges as stated above; the
collections of arrears and current charges; all the required information
in connection with the bills received for work done on the properties
managed; commission charged by you, and the remittance accompanying
the statement.
Yours truly,
(To be continued)
390
Correspondence
Importance of Comments on Reports
Editor, The Journal of Accountancy:
Sir: In your March issue, we notice that Mr. R. J. Bennett answers
question 7 of the Pennsylvania C. P. A. examinations of November, 1912,
in detail. On page 220 of The Journal he has the following words: “I
have carefully examined the books and accounts for the past five years
and have set forth the entire data in the accompanying statement.”
We would like to ask the gentleman just what he means by the above
sentence. In doing this we do not mean to place ourselves in a position
where it would appear that we desired to “try to be smart,” for such
is not the case.
In our territory we find one of the most important features of account
ing work is the letter, or text, that is written accompanying the report.
It is one that has given our office a great deal of work and hard study,
and we are trying to improve on this particular subject in every way
that we can, and our special object in writing this letter is to find out
from Mr. Bennett what he means by the sentence that we have brought
up. We find that it is highly advantageous to state plainly whether
or not we audited the books, the exact time that we covered in all the
departments of the books, and how we verified the inventories, the ac
counts receivable and bills receivable and the accounts payable.
We audited a large wholesale grocery house only a few months ago
and the proprietor, when we came to checking up the merchandise, was
out of town, and his secretary and treasurer advised our accountants
that as the accountants who had made the examination for some three
or four years previous to our examination had not done this, he would
rather they would not go into it. We did not like this, but our men
were working under his direction and, of course, his wishes had to be
respected. However, when we turned in our report, we stated in the text
of it that we did not get invoices to support the giving of the cheques,
as this was requested to be passed up by the secretary and treasurer. As
soon as the proprietor found this out, we were called down to his office
and he very plainly informed us that he had been informed that the
merchandise account had been thoroughly checked each year and this
was a big surprise to him, and he positively stated that next year he
wanted us to check the account very carefully, even though it took twenty
days to do it. The account that we refer to was handled on the follow
ing basis: The firm carried no accounts payable ledger for the reason
that everything was paid for by cash and discount taken whenever it
was possible. Two columns on the cash book represented the merchan
dise account, one column was used for foreign purposes and one for
local purposes, cheques were drawn from time to time, paying off dif
ferent firms, and then entered on the cash book, giving the name of the
391
firm and the amount placed in one of the merchandise columns. Very
frequently they would get some New York exchange and sometimes they
would lump ten, fifteen or twenty cheques in one amount and enter it on
the cash book, say to merchandise. Of course, the cheque stub, or register,
would show the amount in detail.
Suppose we had reported to the wholesale grocery that we refer to
that we had audited, or examined, their accounts without telling them
plainly what we had not done, and a big defalcation had sprung up in the
merchandise account, where should we be? We know of any number of
accounting firms, and some of them the very best firms of New York,
Chicago and other places, that have had their representatives in this
territory, who have been bitterly censured because of certain omissions
which could have been easily obviated had they stated what they did and
did not do. In other words, is it not highly important for the protec
tion of the profession and one’s office to be careful to state in detail
what is done, giving special attention to the dates covered, say in check
ing back the representative accounts, verifying accounts receivable, going
into the inventory and accounts payable, and other phases that might
need particular attention?
In conclusion, from Mr. Bennett’s statement, would the average lay
man construe from the text of his report that by this expression, “I
have carefully examined the books and accounts for the past five years
and have set forth the entire data in the accompanying statement,” that
he had thoroughly audited the books, verified the accounts receivable and
payable, gone over the inventories, and to what extent, and if proven
by certain calculations other than the mere checking of them or going
over them? If you will give us your views on this matter and have
Mr. Bennett answer us, personally, or through The Journal, we shall
very much appreciate it.
Yours very truly,
O. R. Ewing & Company.
Memphis, March 22, 1913.
Mr. Bennett’s Reply

Editor, The Journal of Accountancy:
Sir: The letter from O. R. Ewing & Co. to The Journal of Ac
countancy has been forwarded to me for reply. It is customary for the
accountant to write a report or letter to accompany the statements or
exhibits which he submits to his client, but the length of the report
must, of course, depend upon the accountant’s judgment as to how much
information he should place therein. Sometimes this report or letter
covers only a few lines, while at other times it is more extended and
may cover even several pages. Of course the matter contained should
be set forth clearly and unmistakably, with any suggestions or recom
mendations deemed necessary, and perhaps explanatory paragraphs bear
ing on items which appear in the accompanying exhibits. It seems in-
392
Correspondence
advisable, however, to encumber the report with references to minor

matters which could be brought orally to the attention of the book
keeper or office manager. It seems unfair also for the accountant to
use his official position to criticize employees unless the occasion really
demands it. In many cases unimportant errors can be corrected, or even
a change in plans brought about with more harmonious results, through
personal advice rather than through criticism of work by way of the
report. A kind word costs nothing, and a few words of advice may work
wonders in the life of an employee.
Sometimes it is advisable to present a supplementary report. This may
be directed to the president, the treasurer or the office manager, setting
forth ways and means for improving the accounting and office methods.
It will be seen that this does not form a part of the report, but is simply
a separate letter of suggestions and instructions.
I am grateful for the suggestions regarding the sentence in my answer
to question 7 in the March issue of The Journal. It evidently could be
materially improved by a change in wording and by stating more clearly
the scope of the examination. Instead of saying, “I have set forth the
entire data,” I might have stated that the information contained therein
had been condensed from the book accounts as a result of my investi
gations. Other qualifying words could also have been included, such
as would obviously come to one’s mind in an actual case. Of course the
exhibit itself indicates the period under review, while the letter states
that I have made a careful examination of the books covering the five
years ended December 31, 1911. The letter or report is very important,
as suggested in my opening remarks on question 7, yet my answer was
prepared more to illustrate the manner of preparing reports and state
ments than to set up model phraseology. I heartily agree, however, in
the emphasis which Ewing & Co. place upon the report, because if it
is made at all it should be made carefully; but if it is made lengthy
for the purpose of saying something or for offering advice, there is always
the possibility of saying more than is necessary and of being misunder
stood.
Faithfully yours,
R. J. Bennett.
Philadelphia, April 1, 1913.
Louisiana State Board of Accountancy

The Governor of Louisiana has appointed Guy V. W. Lyman of New
Orleans to fill the vacancy in the state board of accountancy.
Mr. Lyman is secretary of the Society of Louisiana Certified Public
Accountants.
The new board organized by the selection of C. E. Wermuth as presi
dent, Moses Elkins as secretary, and G. V. W. Lyman as treasurer. The
examination to be held in New Orleans on May 23 and 24 will be the
first since 1911.
393
Oregon State Board of Accountancy

The Governor of Oregon has announced the personnel of the Board
of Accountancy created under act passed this year. The following are
the members of the new board:
John Y. Richardson, Portland.
Arthur Berridge, Portland.
A. McE. Ball, Portland.
W. H. Wann, Medford.
Charles L. Parrish, Klamath Falls.
The Oregon law becomes effective June 4th.
Tennessee State Board of Accountancy

The Governor of Tennessee has appointed the first board of ac
countancy under the new law as follows:
George M. Clark, Chattanooga, three-year term.
F. M. Pike, Memphis, three-year term.
Walter S. Black, Knoxville, three-year term.
Ira P. Jones, Nashville, two-year term.
O. R. Ewing, Memphis, one-year term.
Announcements
Wright, Schooley and Morse, public accountants, announce that their
office is now in the Woolworth Building, New York.
It is announced that M. H. Bennett, William Mackendrick and Fred

erick F. Hahn, certified public accountants, have consolidated their prac
tices under the firm name of Bennett, Mackendrick and Hahn, with offices
in the Hellman Building, Los Angeles, California.
D. B. Lewis & Company, certified public accountants, Boston, Massa

chusetts, announce that they have transferred their office from 708 to 542
Exchange Building, 53 State Street.
It is announced that T. B. Cornell has withdrawn from the firm of

Smith, Brodie & Cornell, certified public accountants of Kansas City.
The business will be continued by F. A. Smith and A. F. Brodie under
the firm name of Smith & Brodie.
The Pace Institute of Accountancy announces that Harold Dudley

Greeley, L.L.M., C.P.A., has been elected director of the division of
accounting instruction in the metropolitan schools. Mr. Berton L. Max
field, Ph.B., continues as director of the division of law instruction.
Approximately 2500 students are enrolled for the professional three-year
courses in the Pace Institute of Accountancy and the nineteen affiliated
resident schools conducted in conjunction with the Young Men’s Chris
tian Association in New York and other prominent cities.
394
Book Department
BUILDERS’ ACCOUNTS. By John A. Walbank, F.C.A. Gee &
Company. London, 1913. Third Edition. 96 pages. $1.40.
There is a very slight difference between the former edition of Build
ers' Accounts and the present volume, the most important being the fact
that provision is made in the pay roll book for handling health insurance
under the English national insurance act of 1911. Otherwise no
changes of importance have been made since the book first appeared in
1903. That no improvements are suggested during a period in which
American building methods have made such enormous strides would
seem to indicate that the book will be of but little value to an American.
It is claimed that the system described may be adapted to the needs
of both small and large contracting builders, yet the system suggested
as suitable for large undertakings has such very burdensome and antiquated
methods that we cannot see how even in England it can be advan
tageously used. For instance, as to pay roll, the foreman makes daily
returns in writing, giving the name of each workman. The idea of the
foreman writing the names of all the men each day is amusing. No
method is suggested for distinctive serial numbers for various classes
of work, such as contracts, jobbing work, extra, etc. The overhead,
added to actual cost, is a percentage on the wages, instead of in addition
thereto a percentage on material handled.
The financial records are made cumbersome by regarding the cost
records as an integral part, instead of being partly subservient thereto.
The stores issued are handled in a columnar book instead of on cards
or loose leaf—an almost impossible procedure for a large contractor.
Accrued wages at closing period are not considered sufficiently important
to distribute to the jobs and contracts to which they belong, yet it is
advised to take profits on the finished portion of uncompleted contracts.
Accrued wages are shown only on the pay roll account as a total. The
overhead expenses are not treated scientifically in a separate section of
the profit and loss account, thus losing the value of that part of the
system whereby they are considered in the cost accounting. Payments of
the notes payable are not covered by cheque, although all other payments
are so covered. Safeguards on pay roll and other well-known internal
checks are not mentioned.
It was to have been hoped that a book from the press of 1913 would
give us an insight into the progress in modern accounting of our brethern
across the water, but we are disappointed in this. We must, in fact,
refuse to accept it as a modern English book. Nevertheless, as nothing
like it exists in America it is a valuable book for students and small
builders.
John B. Geijsbeek.
395
INTEREST AND BOND VALUES. By M. A. Mackenzie, M.A., F.I.A.,

A.A.S. Toronto University Press. 1912. 94+ 10 pages. Cloth. $2.
The purpose of this book is to set forth in a clear and simple manner
the principal facts relative to interest computations and the calculations
of bond values, and also to explain the use of the various tables con
nected therewith. The author is a member of the faculty of the Uni
versity of Toronto, and while the book was written mainly for his
own classes, it will be found useful by students at other universities and
by business men who come in touch with problems of this nature. The
meaning of present worths, amounts, sinking funds, present values of
bonds, and so forth, is explained, and illustrative examples are given.
The use of algebraic symbols and expressions is almost unavoidable
in a book of this nature, and some of the pages will doubtless seem
formidable to those not accustomed to algebra. However, the algebraical
portions of the book are comparatively small, and should not militate
against its value to the business man or student unfamiliar with higher
mathematics. The most original work is found in the problems and
exercises in the latter part of the text. These are well selected, and a
solution of them by the reader should be of great benefit and will much
increase his grasp of the subject. A valuable addition is the insertion
of five tables of interest computations, covering twelve different rates
from one to five per cent for any number of periods from one to fifty.
In the case of the tables, it would possibly have been better to have the
number of decimal places uniform, say seven or eight, instead of four
in some instances and six in others.
Leroy L. Perrine.
BOOKS RECEIVED FOR REVIEW
Accountants’ and Bookkeepers’ Vade Mecum. By G. E. Stuart Whatley,

London. 2d edition, 1913. 168 pages. 8vo, cloth. Price, $2.50. Gee
& Co.
Accounting Principles. By S. F. Racine. 1913. 274 pages. 8vo, cloth.
Price, $3. S. F. Racine Co.
Advertising as a Business Force. By P. T. Cherington. 1913. 569 pages.
8vo, cloth. Price, $2. Doubleday, Page & Co.
Buyer’s Key for Textile Cost Finding. By F. P. Bennett. 1913. 35
pages. 16mo, limp leather. Price, $3. F. P. Bennett & Co.
Cost Finding in the Cloak and Suit Industry. By Philip Frankel. 1913.
20 pages. 12mo, paper. Price, $2. Philip Frankel.
Cost Reports for Executives as a Means of Plant Control. By B. A.
Franklin. 1913. 149 pages. 8vo, cloth. Price, $5. Engineering Maga
zine Co.
Experiments in Industrial Organisation. By E. Cadbury. 1913. 296
pages. 8vo, cloth. Price, $1.60. Longmans, Greene & Co.
396
THE JOURNAL OF. ACCOUNTANCY V
The American Association of Public Accountants

List of Officers, Trustees and Committees
1912-1913
OFFICERS
President ........................................... Robert H. Montgomery, 55 Liberty Street, New York.

Treasurer ....................................James Whitaker -Fernley, 907 Betz Building, Philadelphia.
Secretary ...........................................................A. P. Richardson, 55 Liberty Street, New York
Vice-Presidents:
Alabama State Association of Public Accountants.. .G. L. Lemon, Birmingham
California State Society of Certified Public Account
ants .............................. . ..................................................Norman McLaren, San Francisco
Colorado Society of Certified Public Accountants....Fredk. W. Deidesheimer, Denver
Connecticut Society of Certified Public Accountants..Fredk. W. Child, Greenwich
Georgia Society of Certified Public Accountants........Joel Hunter, Atlanta
Illinois Society of Certified Public Accountants......... Arthur Young, Chicago
Kentucky Society of Public Accountants..................... Thomas E. Turner, Louisville
Louisiana Certified Public Accountants, The Society
of ........................................ .................. Henry Daspit, New Orleans
Maryland Association of Certified Public Accountants. Frank Blacklock, Baltimore
Massachusetts, Certified Public Accountants of, Inc..Waldron H. Rand, Boston
Michigan Association of Certified Public Accountants.Fred T. Gies, Detroit
Minnesota Society of Public Accountants....................Herbert M. Temple, St. Paul
Missouri Society of Certified Public Accountants... .David L. Grey, St. Louis
Montana State Society of Public Accountants........... J. C. Phillips, Butte
New Jersey, Society of Certified Public Accountants
of the State of ........................ ................ . .................. Clarkson E. Lord, New York City
New York State Society of Certified Public Account
ants ...................................................................................William F. Weiss, New York City
Ohio Society of Certified Public Accountants, The...Frank Brewster, Cleveland
Oregon State Society of Public Accountants............. John Y. Richardson, Portland
Pennsylvania Institute of Certified Public Account
ants .................................................................................. T. Edward Ross, Philadelphia
Rhode Island Society of Certified Public Accountants.Charles S. Jenckes, Providence
Tennessee Society of Public Accountants ....................William A. Smith, Memphis
Texas State Society of Public Accountants ............... H. E. Gordon, Dallas
Virginia Society of Public Accountants, Inc................. George Mahon, Lynchburg
Washington Society of Certified Public Accountants.E. G. Shorrock, Seattle
Wisconsin Association of Public Accountants ......... John H. Brown, Milwaukee
TRUSTEES
J. S. M. Goodloe .................................................................................Ohio
John B. Geijsbeek ...............................................................................Colorado For One
J. E. Sterrett ...................................................................................... Pennsylvania Year
Hamilton S. Corwin ......................................................................... New York

W. Ernest Seatree .............................................................................Illinois For Two
E. W. Sells .......................................................................................... New York Years
John A. Cooper .................................................................................. Illinois
W. Sanders Davies .............................................................................New Jersey For Three
E. L. Suffern ...................................................................................... New York Years
AUDITORS
George L. Bishop ....................Massachusetts Wm. Franklin Hall ............... Massachusetts

STANDING COMMITTEES
EXECUTIVE
The President, Chairman ............... New York J. E. Sterrett ................................. Pennsylvania

The Treasurer ...............................Pennsylvania Edward L. Suffern ........................... New York
W. Sanders Davies ......................... New Jersey W. F. Weiss........................................ New York
E. W. Sells .......................................... New York
VI THE JOURNAL OF ACCOUNTANCY
STANDING COMMITTEES- Continued
COMMITTEE ON ANNUAL MEETING committee on ACCOUNTING TERMINOLOGY
Harvey S. Chase, Chairman... .Massachusetts J. Lee Nicholson, Chairman............. New York

Amos D. Albee ..........................Massachusetts H. T. Westermann.................................Missouri
Gerald Wyman ..........................Massachusetts Frank G. DuBois............................ New Jersey
committee on arbitration committee on budget
George Wilkinson, Chairman......... New York John R. Loomis, Chairman ....New York
Hamilton S. Corwin ........................ New York Amos D. Albee ......................... Massachusetts
Joel Hunter ..............................................Georgia Charles Hecht .................................... New York
committee on constitution and by-laws COMMITTEE ON EDUCATION
John A. Cooper, Chairman .................... Illinois John B. Geijsbeek, Chairman.............. Colorado

R. O. Berger ............................................ Illinois Waldron H. Rand ....................... Massachusetts
Carl H. Nau ................................................. Ohio H. J. Freeman .................................... Minnesota
Bertram D. Kribben ............................. Missouri
COMMITTEE on FEDERAL LEGISLATION COMMITTEE on JOURNAL
Arthur Young, Chairman ....................... Illinois J. E. Sterrett, Chairman............. Pennsylvania

Herbert M. Temple ........................... Minnesota William M. Lybrand ...................Pennsylvania
Edward E. Gore ...................................... Illinois J. B. Niven.......................................... New York
committee on membership committee on state legistation
W. Sanders Davies, Chairman... .New Jersey J. S. M. Goodloe, Chairman.................... ..Ohio

Frederick C. Manvel........................ New York Charles F. McWhorter......................New York
Charles E. W. Hellerson.................New York John F. Forbes ...................................California
SPECIAL COMMITTEES
COMMITTEE ON PROFESSIONAL ETHICS committee on standard schedules for uni
form reports of municipal industries and
J. Porter Joplin, Chairman ....................Illinois public SERVICE corporations
J. J. McKnight .............................................. Ohio Harvey S. Chase, Chairman... .Massachusetts
W. R. Mackenzie .................................... Oregon L. H. Conant .....................................New York
special committee on publicity Willis B. Richards ............................ New York
J. H. Kauffman ............................ Ohio
J. E. Sterrett, Chairman ............. Pennsylvania Ernest Reckitt ............................. Illinois
Charles S. Ludlam ........................... New York F. F. White ....................................... New York
W. B. Richards .................................New York Thomas L. Berry ................................. Maryland
Clinton H. Scovell ......................Massachusetts Henry Daspit ......... Louisiana
Edward L. Suffern ........................... New York Charles S. Ludlam....... .................... New York
Specially ruled ANALYSIS paper for certi

fied public accountants carried in stock.
ROMEIKE’S Sample and price on application.

Also blanks and account books of every description printed
to order.
PRESS CLIPPINGS THE HENRY 0. SHEPARD COMPANY

624-632 S Sherman St. CHICAGO, ILL.
Are used nowadays by every up-to-date business
man; they bring you in constant touch with all pub
lic and private wants and supply you with news
bearing upon any line of business. We Will Pay 30c a Copy
We read for our subscribers all the im For any of the following numbers that
portant papers published in the United
States and abroad. are sent to us until 30 copies of each
If you have never used PRESS CLIPPINGS drop issue have been secured:—
us a postal and we will show you how they can be
of advantage to you.
Vol. 11, No. 1—Nov. 1910
Write for booklet and terms.
“ No. 4—Feb. 1911
ROMEIKE, Inc., “ 13, No. 2—Feb. 1912
106-110 Seventh Ave., New York, N. Y. “ No. 5—May 1912.
“ No. 6—June 1912
THE JOURNAL OF ACCOUNTANCY VII
Most Important Book

For Accountants That Has Appeared in Years
RACTICAL ACCOUNTING METHODS” is full of forms, facts and tables.
P Theoretical discussions are omitted. There are 216 forms and tables actually
in use in successful business concerns, (such as the Pennsylvania Railroad,
the Philadelphia Rapid Transit Company and others).
You will apply these forms at once in your practice.
Every Type of Account Authoritative and
ing System Thorough
The book is divided according Years of effort and thousands
to systems. Every type of of dollars were spent in bringing
system is covered. In each case this information to you. A book
the information essential to the covering so wide a field could
planning of practical, successful not be written by any one man.
accounting methods is given. These well-known, well-equipped
The buying, financing, selling accountants are the authors;
and organization policies are EDWARD P. MOXEY, Jr.
explained. Department stores, C. P. A.,Asst. Prof. of Account
banks, fire and life insur ing in the University of Penn
ance companies, railroads, street sylvania.
railways, breweries, build HOWARD McNAYR JEF
ing and loan associations, FERSON, M. C. S., Secretary
executors, gas companies and Treasurer of the Windsor
and municipalities are the Trust Company.
enterprises treated. To OTTO A. GRUNDMAN, C.
gether they present P. A.
every kind of accounting HAROLD DUDLEY GREE
situation known. LEY, L. L. B. C. P. A., Public
Accountant and member of the
New York Bar.
PRINTING AND BINDING
Not only the contents but the printing and
binding are perfect. Easily read type, fine
antique paper and the very best grade of
buckram have been used. There are 494
pages. “PRACTICAL ACCOUNTING
METHODS” will be one of the handsomest
as well as most useful books in your library.
Absolute Proof
That this Book is Worth AT
LEAST Double Its Price
Take “PRACTICAL ACCOUNTING
METHODS” in your hands—open it
and look over the pages. Examine
it carefully. You have all the
time you need. You may keep
it five days and return it at our
expense—if you are not more
than satisfied that this is
the most practical book
on accounting methods
you ever read—if you KEY
don’t think “PRAC PUBLISHING
TICAL ACCOUNT COMPANY,
136 E. Eighth St..
ING METHODS’’ 5th Floor,
is worth double New York City.
its price. Send me a copy of
That’s how much confidence we have in PRACTICAL AC
its value to you. If the book cost $4,000 COUNTING METH
ODS” on trial. If I don’t
it would be worth the price—but it think its worth twice the price
doesn’t—only $4.00—less than I’ll return it. Here is my check
single hour’s time of the men who wrote or money order for $4.00 which
it. Read the free trial coupon. you are to refund (plus all charges)
if I return the book within 5 days
or Send me free one of your handsome,

eight-page booklet describing ‘‘PRACTICAL
ACCOUNTING METHODS”.
PUBLISHINGCOMPANY--------------------------- --------------- -------------
VIII THE JOURNAL OF ACCOUNTANCY
PRINTYPE
Receives the Plaudits of the Public
Vigilant Protector of People’s Eyesight
Hailed as a Benefactor by ManyThousands
of Enthusiastic Admirers. “Officer Prin
type” Responds With Becoming Modesty.
Officer Printype says: “I am overwhelmed by the ova
tion which has greeted my appearance in your midst. I am
simply doing my sworn duty in ridding the Business and
Financial Districts of the Bad Characters that for years have
made Typewriters a menace to your eyesight. I have
mercilessly exposed and relentlessly pursued these danger
ous Typewriter Types, which are responsible for more
cases of Defective Vision than all other causes combined.
“Report direct to my Headquarters, in the Oliver Type
writer Building, Chicago, any machine whose type is
violating the Optical Law and I’ll have the offender haled
before the Court of Public Opinion.”
This radical departure from the old style "outline” letter
makes It possible to produce, on The Oliver Typewriter, a page
Printype of manuscript as clear and attractive as that of the finest book.
The Oliver is the first and only typewriter that successfully
OLIVER
Typewrite
printsprint!
The Primary Reason

Printype resulted from our discovery that "outline” type,
with its sameness, due to absence of shading, was harmful to
the eyes.
Printype is owned and controlled exclusively
by The Oliver Typewriter Company The Silent Test
For months, without any advertising, we put hundreds of
America rings with praise and applause for Prin Printype Oliver Typewriters Into actual service, In many di
type. This superb new typewriter type has attracted verse lines of business. We wanted the public’s verdict. It
more attention than any typewriter innovation came In a burst of admiration and a flood of orders that proved
brought out in recent years. Printype a brilliant success.
Printype letters, wherever seen, excited the keenest interest.
Hundreds of thousands of people have seen this new type and Business men who received their first Printype letter almost in
wondered what It was that made Printype Correspondence seem variably answered, post haste—"Where did you get that type!”
like a spoken message. There’s virility, strength and charm In Thus Printype captured the country without firing a single
Printype correspondence. There’s refinement and “class” and shot.
style.
Not because of Its novelty it's inherent in the type!
Price Not Advanced
A Vast Improvement The Printype Oliver Typewriter sells for $100. You can pay
Printype Is designed in shaded letters and numerals, like the at the rate of 17 cents a day. The “Printyper” is our latest and
type in which books and magazines are printed. It is book best model. The new type adds 25 per cent to the value, but
type transformed and adapted to modern typewriter require not one cent to the price. A small cash payment brings the
ments. machine. (248)
Send Printype Coupon Now!

The Oliver Typewriter Company,
If you or any
one in whom 310 Broadway, New York, N. Y.
you are inter
ested contem Tell Officer "Printype” to write me a let
plate going to ter and send me his Book. I’m interested.
a Business Col
lege, write us
first and we
will, without Name.................................................................
charge, supply
you with some
very valuable Address ..............................................................
Information
on the subject.

Principles of Double-Entry Bookkeeping

By CHARLES M. VAN CLEVE
Of course the object of advertising a book is to sell it, but in this case that is not the
only object. Even if he did not sell a single copy the author of this treatise would consider
himself amply repaid if by means of these advertisements he could persuade accountants
to adopt an intelligible form of report, because he is convinced that that is the one thing
needed to raise the art of accounting to its proper place in the estimation of the public.
The people in general have no technical knowledge of bookkeeping, but they know that in
order to determine how much an individual or a firm or a corporation is worth one must
deduct the total of the liabilities from the total of the assets, and therefore they know that
the form of statement showing assets and liabilities equal is arrant nonsense.
The book explains double-entry bookkeeping, and for that reason it is recommended
to all who appreciate the difference between a man who can give a rational explanation of
his operations and one who merely follows a mechanical routine. But. the accountant does
not need the book to enable him to make his report in proper form. All he needs to do is
to keep his books and make his balance sheet exactly as he has always been accustomed
to do it—and then to consider what the items on his balance sheet mean. In the case of a
corporation, and under normal conditions, all of the items under the head of “Assets”
represent asset from the standpoint of the stockholders, and therefore the items under the
head of “Liabilities” are the only ones about which there is any question. In regard to each
of these items the only question is : Does it represent liability from the standpoint of the
stockholders? If it does not, it must represent part of the net capital. As illustrated in the
advertisement in the March number of The Journal, the accountant now enters on the
left-hand side the assets and the total, and on the right-hand side the liabilities and the total,
and also the balance, which represents the net capital. He carries the balance down on
the left-hand side and then enters on the right-hand side the various items which compose the
net capital, giving the totals to show that the two sides are equal.
That process is of universal application : no balance sheet ever has been made or ever
can be made to which it will not apply, and any person of ordinary intelligence can apply it.
If accountants will adopt that simple suggestion and make their statements in a form show
ing assets, liabilities and net capital separately, they will be surprised to find how much
higher a place their occupation will hold in public esteem.
FOR SALE BY
The James Kempster Printing Co.

117-121 Liberty Street, New York
$1.50 net. By Mail, $1.58

Accountancy and
Business
Administration
Technical training is necessary for success and earning power in modern
business.
Our graduates are in successful practice and occupy responsible posi
tions in private employment. They unite with students in an enthusiastic
endorsement of our standardized professional Courses given in nineteen
Resident schools and by our
Extension Instruction Through the Mails

The Courses are not of the correspondence type—they are Resident
school Courses taught through the mails from New York by Resident school
instructors who are engaged in active professional practice.
A knowledge of bookkeeping is not necessary before admission
to these Courses—a Law school might as well require a prospective student
to have a knowledge of elementary law.
Many students are highly trained office men, others practicing account
ants, and credit in time is given, in such cases, for part of the work.
The Extension students are privileged to transfer to Resident schools at
any time—the Extension work equals the high standard of our Resident
school instruction.
Thorough training for examinations for C. P. A. degree. Special
Courses in Law for business men, Cost Accounting, etc.
Write for Bulletin (32-page) fully explaining all Courses with interesting
history of Accountancy.
Pace Institute of Accountancy

Hudson Terminal, New York City

Journal of Accountancy May 1913 Vol. 15 Issue 5 (Whole Issue)

Uploaded by

Copyright:

Available Formats

Journal of Accountancy May 1913 Vol. 15 Issue 5 (Whole Issue)

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Journal of Accountancy May 1913 Vol. 15 Issue 5 (Whole Issue)

Uploaded by

Copyright:

Available Formats

Journal of Accountancy

Volume 15 Issue 5 Article 13

Journal of accountancy, May 1913, Vol. 15 issue 5 [whole issue]

Follow this and additional works at: https://egrove.olemiss.edu/jofa

Part of the Accounting Commons

THE RONALD PRESS COMPANY

Copyright, 1913, by The Ronald Press Company

RONALD ACCOUNTING SERIES

Cost Accounting for Institutions

THE RONALD PRESS CO 20 Vesey St NEW YORK

The Progress of Accountancy

New York University School of

When writing to advertisers kindly mention The Journal of Accountancy.

When writing to advertisers kindly mention The Journal of Accountancy.

National Business Institute Checking Pen

A Practical Mill Accountant

Senior Accountant Wanted American Plan, $2.50 upwards

The Journal of Accountancy

CONTENTS FOR MAY, 1913

Announcements ......... . 393

THE RONALD PRESS COMPANY

When writing to advertisers kindly mention The Journal of Accountancy.

Wanted An A-1 auditor and account­

Cooley’s Audit Records

Vol. 15 MAY, 1913 No. 5

What is Involved in the Making of a National

It is difficult even to suggest the importance to the American

First let us make sure that we understand each other. In

mates, (2) a summary of departmental estimates for expenditure

The budget as a means of developing cooperation and avoiding

An Appeal to Business Experience

The best way to approach a business problem is through the

An example in corporate organization:

In this institution of which you are a member, the legal or

Administrative problems to be solved:

A question of board or executive control over administrative

ceived by those who framed the charter of this great corporation.

Is a weak board desirable?

Is a weak executive desirable?

The Constitution of the United States in Theory and in

But you may say: Why this appeal to the imagination? If

A century of institutional decay:

has pointed to some very interesting facts about the development

A concluding characterization by the same authority is also

Constitutional principles impaired:

Provision made for a strong executive:

which gives to congress control over appropriations is found

Provision made for a strong legislature:

vidual employees. There is nothing to suggest that it should

Inefficiency and waste the result of irresponsibility:

for each action taken, instead of evolving a system which will

What may be Done under Our Constitution

In considering what is involved in making a national budget

Fallacy of reasoning from analogy:

Our constitution adapted to efficient budget procedure:

college for a fixed term of years. In my opinion this conclusion

Changes Needed in Organization of the Chief Executive

Before a national budget may be adopted a second decision

Changes in Congressional Organization

Wanted An A-1 auditor and account

organization of the congressional committee system in such man

comparison can be made between the cost of the yarn manu

An inspection of bond tables shows that the function re

We have from the approximation .0002 5 = .00764444, there

1. During the period: discounts al 1. At the beginning of the period:

an offset against overvalued positive assets carried in Notes Re

I. During the period: interest pay 1. At the beginning of the period:

1. At the beginning of the period: 1. During the period: discounts re