interest, taxes, and depreciation to the various departments, like the freight, the passenger, and all others; and, furthermore, he feels that those expenses are really costs of operation and should be so regarded.

AN OUTLINE OF A RAILROAD'S INCOME AND PROFIT AND LOSS ACCOUNT

ALLEN R. FOOTE: I am very glad to be present on the occasion of the discussion of this question. Those of you who attended the meeting of the American Economic Association held in Washington twenty years ago this day, will remember that at that meeting Professor Henry C. Adams submitted an exceedingly able paper under the title of "Statistics as a means of Preventing Abuses by Corporations."

When Professor Adams had concluded his paper, I had the courage to say that I agreed with his paper in all respects excepting its title. I wished the title to read "Statistics as a Means of Preventing Abuses of Corporations."

I then suggested that the American Economic Association could do no more important or serviceable work than to formulate a scientific statement of costs in which every item of cost would be placed in a proper grouping to give to it its full economic significance, and that when such a cost statement had been devised

a system of accounting should be recommended that would bring it into practical use.

The discussion this evening is the first response of which I have knowledge that has been made to that suggestion. Therefore, I am exceedingly pleased that this discussion has been arranged, and am greatly encouraged by the propositions that have been here advocated.

I hope to see the time come when the corporation laws of every state will contain a provision requiring every corporation to have a fixed date for its fiscal year, and when the stockholders of the corporation will annually select a certified public accountant to make an audit of its business affairs and prepare and submit to the stockholders a scientifically formulated statement of its true economic condition.

When this is done, such statements will contain all the information that can be reasonably required by the federal and by the state governments on which to base their policy for the regulation and taxation of corporations. This will obviate the necessity of the employment of an army of government inspectors.

L. G. POWERS: I wish at the outset to bear testimony to the great pleasure I have taken in the presentation of the subject to which we have listened. It calls attention to the need of more definiteness and a greater application of scientific principles to the work of accountancy. Accountants desire to have recogni tion as professional men, and a recognition of their work as a branch or subdivision of science. It is a requisite of science to have an exact and definite terminology, and scientists are constantly endeavoring to use terms with definite meaning and never to use one term with two different meanings; and accountancy, which has made great and notable progress in the last fifty years, cannot be designated as a science until it develops a scientific terminology.

One particular in which accountancy is very deficient in this respect is the accountant's use of the word "reserve." This word is used with at least three and sometimes more distinct meanings. Thus, it is given the meaning of an asset set aside for a definite purpose, as, the assets of a reserve fund such as those of a government sinking-fund, which can only be used for the purpose of amortizing specific debts. A second use of the term is that which gives it the meaning of a portion of the undivided surplus of a

commercial enterprise, which has been set aside for a definite purpose. A third use of the word "reserve" is met with in the case of enterprises that do not write off depreciation from their asset accounts, but carry a credit depreciation account to which they give the designation "reserve." Such reserve does not represent an "asset" nor a portion of "undivided surplus", but merely an offset to asset values. It is a negation of values. Errors and misconceptions arise when accounts are so kept that the word "reserve" is used with one of these meanings and its actual significance is not disclosed. Greater error and misconception arise when accountants construct a balance sheet on which a single credit item includes all three of these classes of reserves.

As a result of a failure of the average accountant to differentiate these three classes of reserves, the average balance sheet conveys but little exact information to one who is uninitiated in the secrets of a business, and ofttimes such sheets are very misleading. Thus, for illustration, the triple use of the word "reserve", without any effort to differentiate between the three distinct facts of accountancy to which reference has been made, is resorted to at the present time by many public service corporations to assist them in collecting exorbitant charges for their services, in order that they may provide what they call a proper reserve for depreciation, bad debts, etc., but which in reality is for the purpose of creating an enormous undivided surplus unjustly, at the expense of the public.

Another wrong business practice that is fostered and preserved by this triple use of the word "reserve" is that employed by corporation officers, who, under cover of this term, conceal the fact that the assets are being improperly used up in current operations, and no proper provision is made for depreciation.

These are a few of the many vicious business results and business practices that are today fostered by the accountants' failure to apply scientific usages to their business, and to differentiate the various classes of data which they include under the common word "reserve."

Accountants may say, as some of them have said to me, that business men do not want to separate these classes of data by any distinct terminology, and that they must yield to the business men's wishes in the matter. I should like to ask, is this the proper attitude of the profession, if it is seeking to come before the public in the capacity of an impartial witness with reference

to the business standing of the enterprises whose affairs it is called upon to audit in the joint interest of the public, the stockholders, and the business management?

A. LOWES DICKINSON: I have listened to Professor Cole's paper with great interest. It seems that the main point of difference between his views and my own lie in the treatment of rent and interest, which Professor Cole considers should, in part, at any rate, be treated as cost. An interest rate entirely exclusive of the element of risk is a myth and no such rate in practice exists. Even the rate of two per cent on United States government bonds, can not be said to be wholly without risk, for the reason that it is quite conceivable that such bonds might in time of national adversity fall very considerably in value. The more I consider the subject the more I incline to the conclusion that in prac tice at any rate-it would seem to him also in theory-interest and rent (so far as the latter represents a payment for the use of land and buildings and not any charge for other services) could only be considered as a division of profit, and that the adoption of any other principle must lead to injustice and error. This may be emphasized by referring to the Tariff Commission, whose duty it is to inquire into the cost of manufacture of various articles in this country as compared with similar articles abroad. To give effect in such cost to any item of interest is, in fact, to take into consideration as part of the cost the higher profit which the manufacturers in this country realize as compared with those abroad. While the propriety of an import duty to offset the increased cost of production in this country might be justifiable, it would be very hard indeed to justify an import duty for the purpose of enabling manufacturers and others to continue to earn the much higher rates of interest and profit which prevail here.

Referring to Professor Duncan's interesting address and charts, I would say that the problem of segregating railroad operating expenses between freight and passenger traffic is not a new one, but it has hitherto been found impossible of solution. I agree with Professor Gilman in thinking that a much larger proportion of the expense now treated as applicable to both classes of traffic might be segregated, but the case which Professor Gilman cites has shown a very great diversity of opinion between experts on this subject. I believe I am right in saying that three sets of experts dealt with this question in that case-one set produced figures

to show that the passenger traffic of the railroad in question yielded a profit of something like $1,000,000 a year; the second set showed equally conclusively that the expenses were about equal to the receipts; whereas, the third set showed that this class of traffic resulted in a loss of approximately $1,000,000. Such figures show that any methods at present in use must be wholly unreliable. While many items of expense might be divided which are not so divided at present, I would call attention to the item of maintenance of way and structures, involving approximately one quarter of the total operating expenses. It would require very considerable ingenuity to divide this expense between freight and passenger traffic on any but a most arbitrary basis.

On behalf of my profession and myself I wish to express thanks to Professor Cole for his very interesting paper and particularly for the high standards of accounting which he upholds therein.