"

Bacon's time, at any rate in relation to physical and economic science, the more rational method has been adopted of investigating first and then of making the theory fit the facts. And in the investigation of the facts which afford the data of economic science the economist strictly so-called and the accountant are I think but parts of one whole.

It has been the custom for many years among more or less illiterate persons to indulge in rather sorry jests at the expense of the votaries of what they have denominated the dismal science of political economy. Such, however, should learn that in its bearing upon the best interests and welfare of society it is a science and a philosophy,

"Not harsh and crabbed as dull fools suppose,

But musical as is Apollo's lute."

As the same great poet has said,

"Peace hath her victories

No less renowned than war,"

and when mankind shall resolve to devote the energies they have expended in endeavoring to destroy one another to the investigation of the phenomena with which they are surrounded—which is probably what they were placed in the world to do with the object of improving and ameliorating as far as may be their ethical, social, and physical condition, it will be seen, I believe, that what Mill called the present low state of improvement will in comparison with the past advance by leaps and bounds; and when this happy time shall have arrived, I venture to predict it will be recognized that those who have contributed not the least to this result have been these same economists, and that their painstaking inquiries were among the noblest efforts that could engage the attention of the human mind.

ACCOUNTANCY-DISCUSSION

EDWARD L. SUFFERN: Without attempting to address myself directly to the discussion of either of the two papers which have been presented to us, I shall take the liberty of offering my contribution to this meeting rather in the form of queries than as an affirmative statement.

Notwithstanding this utterance, I do make the following declaration: That, in my opinion, the manner in which the grouping of the units of costs is made should be largely determined in accordance with the specific information which the general accounting system is designed to develop.

I concede that proper economic principles must be fully recognized in every system, and that there must be due consideration of every cost, but I can conceive of conditions where the greatest business intelligence would be required in order to determine correctly how these costs should be grouped. I have in my mind the problems which already are presented to the Tariff Commissions, problems which we hope they will have fuller opportunity to study than they now enjoy. Their problem, as I understand it, will be to determine the relative costs of the units produced, in a great variety of forms, for the purpose of making comparisons as to the relative costs of these units at home and abroad.

Now my first query is, what elements of costs shall be considered for such a comparison? Is it not clear that a distinction must be made between such elements as are permanent and inherent and such as are accidental? For example-the factors absolutely inherent to each are the cost of material, the cost of labor (direct and indirect), the process cost, and the interest on costs during the period of conversion-these are permanent elements, without which no unit can be produced anywhere. In addition to these, however, there may be at least one other element which might affect the cost of production, and which should be considered from the standpoint of a comparison which is supposed to cover the whole range of any particular form of production. This is a certain form of taxes. Wherever taxation may be so levied as to become in effect a tax on output, such tax must be considered as an inherent part of the cost of production; but, if the tax be a tax on property value or a franchise tax, it need not be so considered, in my opinion, because it will then fall in another group.

This other group I call the secondary group, and it consists of the accidental items, each of which it is true is an element of cost, but each of which is affected by the conditions under which the business may be conducted rather than by the character of the business itself.

These elements are taxation and insurance, which are affected by the situs of the business; interest on capital, which would be largely affected by the ratio existing between capital requirements and capital invested; and depreciation, which is affected by the quality of the original investment, the character of usage, and developments of invention. All of these are elements which must be considered if due regard be paid to economic principles; but how shall they appear in a scheme of comparative costs? Can we separate the determinate and indeterminate factors?

My next question relates to the proper application in a general accounting system of the economic principle of exhaustion of natural resources where the same affects costs. Upon what basis shall a reserve be established? Can any definite rule be formulated, or shall the basis conform to the conditions controlling each case? If the latter, what principles shall govern? Can any element of chance be allowed to affect the application of the principles? In the case of ore beds, coal areas, and mines of other minerals, should it be insisted that provision be made to offset depletion through a retention of profits, wherever possible; or shall we assume that the economic principle of conservation may be suspended in such cases and no regard need be paid to its existence?

These questions are asked not from any purpose to inject casuistry into the discussion, but rather with the idea of trying to develop the thought that the application of the economic principles to any accounting system must be carefully and intelligently considered, and must include the conception of the peculiarities and individualities controlling each case. What is needed in any accounting system is that there shall be developed through it a record or history of facts, so displayed that they shall present an intelligible and intelligent review of transactions and conditions for the purpose of assisting practical conclusions as to future operations.

J. C. DUNCAN: If I interpret Mr. Dickinson correctly, he does not believe that rent and interest should be considered as costs of production, but rather views them as deductions from

profits. To the economist profit is a return over and above all rent and interest charges. If the owner of an enterprise does not secure that return it would be better for him to lend his resources to some one else who would pay him the rent and interest and assume the risks of production. Moreover, if he should lend his land and capital, he can then work for some one else and get a wage, so that even the entrepreneur's salary or wage should be considered a part of costs, because he is entitled to pay himself as much as some one else would pay him.

Mr. Dickinson in considering rent and interest as deductions from profits really gives those returns to the owner of the land and the capital, if he is not the proprietor of the enterprise. Under such a condition our point of difference is that with Mr. Dickinson's attitude the rent and interest are not included and segregated to the various divisions of the enterprise and put in as elements of costs directly.

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.

Professor Cole brings out one point that to the speaker's mind is very important, namely, "costs contain in themselves no element of profit for the enterprise." To the speaker's mind no profit should be added between departments, because profits can not be determined until sales are made, and should not be introduced as departmental charges. The speaker believes that if we are to establish our accounting on an economic basis all the items which in any way contribute to the make-up of the article produced should be included in the operating charges of the department. That would include material costs, labor, interest, rent, salaries, and even taxes, whether the manager is owner or not. If we take this point of view, we have an economic basis for the accounting system of any business and for all conditions of ownership of capital, land, and the use of labor.

Mr. Dickinson refers to the method railroads use in treating their rental and interest accounts. According to the rules of the Interstate Commerce Commission, these charges are considered deduction from profits, and not operating costs. If operating expense has the full significance it should have, it seems to the speaker that this omission of rental and interest charges really

leads to an incorrect statement. Rent, interest, and taxes are really operating costs, because they are contracted by the operating plant of a railroad and should be included in that division of the accounts. Unless they are so included, we have an incomplete basis for the determination of the various costs of transportation. To the writer's mind a good many of our difficulties in railroad accounting would be very largely eliminated if a serious effort were made to arrange our accounts so that the freight, passenger, mail, express, and other railroad activities would show up the sources of income and have charged to them their various expenses rather than to show up the accounts in their present way. As a matter of fact, one great cause of the present confusion of railroad accounting is due to the fact that the income side of railroad accounts is shown up on the economic basis, while the expenditure side of the income account is presented from an engineering point of view. The receipts side of the income account shows the amounts received from the freight, passenger, and the various other operating departments; it shows the rental of their lines. The expenditure side is based upon what the costs are to run the various parts of the business considered from the engineering point of view. In the latter case we have shown money expended in the maintenance of way and structure, in the maintenance of equipment, the sums used in traffic, and conducting transportation; but it is all considered from the viewpoint of the entire road, making it utterly impossible for one to have any definite idea of what each class of service takes from the treasury; while we do have shown what each class of service earns.

In addition to all this the present railroad income account distinctly keeps out of operating expenses the items of rentals, interest, taxes; and even depreciation is not regarded as a cost of operation.

Certainly the term "operating expenses" must be defined as meaning something quite different in railroad accounting from what it means in manufacturing accounting; and, moreover, with this present method of handling the expenses and receipts, we do not get a satisfactory basis for determining our costs.

Would it be better for all concerned if our railroads' income accounts were so stated that both the expenditures and receipts sides were put on the same basis? The speaker feels that a serious effort should be made to carry the proper proportions of rent,