was finally decided by the Interstate Commerce Commission that the excess cost of the new should be included in the capital account even though the capacity or earning power was not materially increased.

The question no doubt arises as to whether or not substitutions of capital are not covered by repairs. Up to a certain point this is so. Repairs are merely minor replacements. Where a substitution does not amount to an actual change of identity in a structure or facility, and is caused by wear and tear or a casualty, such substitution should be treated in the accounts as repairs.

The foregoing comments have to do mostly with charges or debits to the fixed capital account. The credits to that account are made up of withdrawals of property, or, as technically termed, "retirements." When any property, either tangible or intangible, is withdrawn from service, the capital account should be credited with the original cost of such property so withdrawn. If the original cost is not known and cannot be ascertained except at an undue expense, careful estimate should be made and the estimated amount credited. Credits should be made for property retired equal to the amount at which such property stood charged in the capital account at the time it was removed.

Because the consideration of credits in the past has been largely subordinated to that of debits and so much attention is now being devoted to them by many corporations, particularly those operating under public service commissions, with wellestablished accounting departments, the question of credits seems, if anything, more important than that of debits.

It has been the practice of many large corporations, even those using great care in the distribution of charges between capital and income, to overlook the fact that it is as necessary to credit the cost of property abandoned or destroyed as it is, in debiting the cost of property installed, to exclude from the amount so debited that portion of the expenditure which partakes of the nature of maintenance and repairs. When a No. 6 line, charged to capital account, is later removed and a No. 2/0 line installed. in replacement, if a credit is not made to the fixed capital account when the No. 6 line is removed, and the full cost of the No. 2/0

line is charged, it is obvious that there is reflected in that account the cost of two lines, whereas there is only one in service.

When additional capital stock or bonds are to be issued, the proceeds of which are to pay for the increase in the capital account, as in the new line, new securities will be issued for this new line, notwithstanding that securities are still outstanding for the original one. The new line is then forced to carry a heavier interest charge than should be expected of it. In a rate adjustment a return can, of course, be allowed in all but exceptional instances only on the line actually in service. Therefore, if the new line has been capitalized on top of the old one, both investors must share in the sacrifice due directly in the first instance to the improper accounting for changes in the property

account.

Experience with capital accounting, however, indicates that most corporations are now careful in their accounting when replacements like the foregoing illustration are made, so that only the net increase in cost will be included in the capital account; but, on the other hand, if a steam generating station is entirely abandoned, or goes into complete disuse due to the taking of power from some outside source, sight seems to be lost of the necessity for recognizing, in the accounts the fact that it has been withdrawn and retired from service. While, in many instances, it is impracticable to charge off the entire cost at once, immediate recognition of the fact should be made in the accounts, and suitable provision made so that it will finally completely disappear from the statement of assets of the corporation.

It may seem that it is entirely unnecessary that such distinctions as the foregoing be considered. If the fixed capital account were simply one in which to record expenditures and then forget about them, granted, but that is not the purpose of keeping capital accounts. They are to record the use made of the funds contributed by the investors, the measure of their principal, the record of the security behind the secured obligations-mortgage bonds. The cost of the property devoted to rendering the service can be authenticated only in this account.

While, in the current keeping of the accounts, these 'distinctions, which may appear unduly refined, are not a matter of every-day use, without a thorough understanding of the principles

which underlie them it will be impossible to distinguish correctly between those expenditures which are chargeable to capital and those which should be financed from income if there is to be compliance with the systems of accounts prepared by the various accounting associations and required by public utility laws and the commissions enforcing them.

PRACTICAL APPLICATION

All charges or debits to capital account should be made in such a manner as to enable the identification of the property the acquisition of which they record. In order to do this, it is necessary that some distinguishing number be assigned to each piece of construction work. The most satisfactory method of doing this is by work order, job or project system. Under such a system a number is assigned to every new piece of construction work. The order for the work should describe it in great detail and contain an estimate of the cost, with a description of the principal items of materials to be used therein. All records of charges and credits in connection with it thereafter should show this number. The project record can be operated as either a memorandum account or an auxiliary record. Where it is used as an auxiliary record, the projects are carried, pending their completion, in a construction "work in progress" account, ani later closed into the fixed capital account.

Where it is used as a memorandum record, the charges are made concurrently to the fixed capital accounts and to the work order or project account. These are balanced monthly, the total of the monthly charges in the project record agreeing with the debits to fixed capital for the month. This enables the corporation to have in its fixed capital account at all times all the expenditures for construction work regardless of whether the work is complete or incomplete. These projects are the supporting data of the capital account, and the reference to them goes directly back to the original voucher. When a project is finished, all the charges thereto should be promptly summarized both by classes of work from an engineering standpoint, as excavation, foundation, concrete, steel and the various classes of apparatus, and to show the make-up of the distribution of the total charge to the project between the various accounts into which the fixed capital is subdivided in either the general or the fixed capital ledger.

It is well here to call attention to a practical rather than a theoretical subdivision of fixed capital which is of great use, and should be borne in mind in laying out the system of accounting for fixed capital. There are two general classifications of expenditures for fixed capital. The first is the so-called inventory or group classification, which classifies the property acquired according to its general character, regardless of the particular project or extension in connection with which it was made.

This inventory classification is that which is used by the Interstate Commerce Commission in classifying the road and equipment accounts of the railways, and it is also the classification which is used by the National Electric Light Association and the public service commission in classifying expenditures for fixed capital, that is general structures, distribution system, power plant buildings, meters, furniture and fixtures, etc. These are of little interest when we consider the changes therein over a short period of time. For example, it is not particularly significant to know the amount which has been expended for poles and fixtures, or transformers, or electric generators within a particular month or even a year; but at the end of a ten-year period it is very significant to know the relative amount of the expenditures subdivided into these general classes. To give an operating executive a statement of the amounts expended by inventory accounts as shown in the usual classification means little to him. What interests him are the various projects or jobs which you have been engaged in or have in contemplation, such as an additional unit in the power station or an extension to a neighboring community, or the development of a water power. Taken over a long period of years, however, the number of such projects becomes so great that any detailed consideration of them is impossible, and it is necessary to analyze or classify them by the character of the property which was acquired. When, however, it is necessary to make an examination of the company to verify the integrity of the entire capital account, the inventory accounts obviously fall into three groups.

First. Those covering apparatus in the power plant, the several separate buildings, etc. It is necessary to go through the charges and credits and assign expenditures to particular units so that it may be ascertained whether the units to which the

charges relate are still in service, and to determine the total cost of them as shown in the accounts compared with their value. This group of accounts may be commonly designated as "analytical accounts," for the only way in which any opinion can be formed about them is by analyzing in detail the charges made therein.

Second. Those which are homogeneous within themselves, being made up of a large number of similar units, the principal point of differences between the various units being in the size or type. Included in this group, which may be termed "statistical accounts," are meters, transformers, poles, wire and street lamps. With these a consideration of the individual items is impossible and unnecessary, and to verify their integrity it is necessary only to ascertain the number acquired, the number retired and credited, and compare the remainder with the number in service and in stock by sizes and types. This work is merely clerical after it is once laid out.

Third. Those in which the expenditures usually represent individual units, but the units are so varied in character as to make it impossible to classify them by sizes and kinds, as is true of the statistical accounts. Furthermore, the expenditures for most items are so small that the result is not worth the time and expense necessary to ascertain their original cost. Included in this group of accounts are furniture and fixtures, stable equipment, large tools, other than small hand tools, chargeable to materials and supplies, etc. The best way to maintain their integrity is by having the property charged thereto annually inventoried at the time that the materials and supplies inventory is taken, and priced in the same way. The total investment represented by these accounts is not considerable, and the result will be as accurate as if elaborate records were kept so as to make possible a detailed analysis at some future time. Furthermore, if depreciation is recognized in the accounts, as is desirable, none need be accrued for this class of property if it is currently valued at its present worth rather than its original cost.

It is only as to the first of this group of accounts that a detailed project or work order system must be scrupulously maintained. Many companies group all of the purchases of meters under a single project number, and make similar disposition of transformers, arc lamps, etc. The same thing is done with