the evidence available. It is probable that most persons would look to the liability side of the account, and specifically to the item "capital stock;" some might add the "funded debt"; others might go still further and include the surplus. A few would probably confine their attention to the assets side of the account, and attempt to determine what specific resources represent the capital investment. These several points of view would necessarily create nothing but confusion in any general discussion as to what was the original or present capitalization; whether the concern is adequately capitalized or overcapitalized; whether the invested capital is amply protected; whether dividends have been declared out of capital; whether dividends represent fair return to the shareholders; or as to any other question relating to the capital of the corporation. Many of these assumptions do violence to any well considered view of the purpose and function of capital. To conceive of capital as a liability does not admit of the consideration of many of the commonest capital relations-it affords no basis for either investment or administrative judgment. Yet this is no reason why information about capital may not be found on the liability side as well as the asset side of the balance sheet.

A Definition Submitted.-To be consistent and logical in the assembling and classification of the data and experience of business, it is submitted that capital must be considered as a resource; that the capital of a railroad or other corporation must be considered as included in the general category of "assets." Using the terms in the sense commonly accepted by persons whose business is not incorporated and by the courts in the interpretation of the law of corporations, it would be confined to those assets of the corporation which have been provided and which are intended for continuing, productive use. This is the sense in which

it is used throughout this work, whether the discussion relates to original acquisition of capital or to management of capital. But for the purpose of obtaining and representing facts about capital it is assumed that liability accounts as well as asset accounts may be used: asset accounts to tell the story of the results of capital expenditure and pertaining to the result of administration of properties; liability accounts to tell the story of the methods of financing and of the issue and retirement of obligations entered into to obtain capital.

Capital as an Instrument of a Going Concern.—Accepting the definition that capital is the assets of the corporation which have been contributed for continuing use, a number of questions are constantly before those interested pertaining to these assets. What amount has been contributed for capital use? What properties have been acquired and what are now possessed which may serve the continuing uses of the company as a going concern? What is the relation of such properties to the amount of capital contributed? What is the difference to be accounted for?

If we are to know what properties the company owns that may be continuously used, we must eliminate from the list of assets, all things acquired or possessed which are intended for consumption, and all which in the regular course of business are intended for conversion or sale at a profit. But cash in hand obtained from the sale of shares or credit obligations must be considered as capital; also the property purchased with those funds. A working fund, whether provided by shareholders or set aside by the board of directors out of the proceeds of sales of shares or of bonds, is capital. Any application of money funds or credit funds to the acquisition of resources intended for continuous, productive use is an act of capitalization and an appropriation of funds to capital purposes. The

fact that bad judgment may have been used in the choice of investments in capitalization is an essential element in the consideration of financial management, but it cannot alter the nature of assets.

Accepting as a criterion the economic and institutional purpose of assets acquired or in possession, it follows that any classification of resources which distinguishes capital assets from assets which are not intended for capital use must relate to a going concern. Strictly speaking, a corporation which is about to close up its affairs, or to become permanently non-operative would not be considered as having a capital. It may have properties, and it may have obligations which were incurred in the acquisition of capital; but in any statement of financial condition of such a defunct or moribund institution, there would be no need to distinguish between those properties which were acquired for capital use and those which were not. The purpose of such a statement would be to show the realization value of all the property, and the amount of the claims against it, and to enable the shareholders to determine whether the balance available for final distribution would be sufficient to represent their original investment.

Classification and Valuation of Capital Assets. It may be assumed that the only purpose of classification of assets is to enable investors and the management to think intelligently about the business of the corporation and about its financial condition as a going concern. The object of capitalization being to obtain resources needed for productive use, it is desirable to have these resources stated in their productive relation; to show what obligations have been incurred for capital and what in due course of current business. This will enable the manager and the investor to ascertain how the capital funds have been invested, and whether the investment has been impaired. The business purpose of acquiring assets other than capital being one

of realization or conversion into cash, it is desirable to have these resources stated at their cash and estimated realization value, and to state them so that the net results of operation may be ascertained at a glance. In estimating the value of capital assets, the purpose is to determine the amount of the investment represented. The proper basis for the valuation of the things to be continuously used for productive purposes would be original cost with adequate allowance for depreciation; otherwise, there can be no means of determining whether the capital has been wisely invested and adequately protected. As to all assets other than capital resources, it would seem that they should be appraised at their realization value.

Classification of Capital Liabilities.-Capital liabilities are those incurred in obtaining capital funds and property. Good judgment might suggest that the corporation should not enter into credit contracts for funds or properties to be continuously used for productive purposes, as under such an arrangement embarrassing demands for payment may be made. Nevertheless, failure or refusal to regard such obligations as capital liabilities will not aid the investor or the management in determining the real financial condition. For this reason the capital obligations or liabilities of a corporation are to be considered under four general heads: (1) capital shares; (2) credit obligations; (3) lease contracts; and (4) surplus appropriated for capital use.

Practical Considerations in Original Capitalization.Among the important considerations in original capitalization, two pertain to capital assets and two to capital liabilities. Those pertaining to capital assets are (1) the character of capital resources which will be needed; and (2) the amount of funds which will be required to obtain those resources. Those pertaining to capital liabilities are (1) the future advantage or disadvantage to the corpora

tion of incurring or "issuing" one or another kind of contract or obligation in procuring the funds or other capital resources required, assuming that a favorable investment market may be found; and (2) the present ability of the corporation to sell or exchange one or another class of obligations-shares, bonds, debentures, short term notes, etc. In determining the character of issues or obligations entered into in obtaining capital, considerations as to the future advantage to the corporation have usually been subordinated to the interests of promoters. The condition of the market or the immediate possibility of acquiring funds and properties and the margin of profit available to promoters have been the factors which have only too frequently determined whether one or another class of securities should be issued.

The Corporation's Interest in the Choice of Capital Issues. The form of contract or obligation incurred for capital which is best suited to the interests of the corporation is the capital share. A certificate to a shareholder is an evidence of proprietary right to participate in the benefits of the trust estate, the legal title to which is held by the corporation. There is no obligation upon the part of the corporation to pay any amount at any time. There is no contract for the return of capital contributed so long as it is needed by the corporation, and no obligation even to pay dividends except as they may be declared by the board of directors. The directors could not return the capital except after formal notice and by following legally prescribed procedure for the reduction of capital; they may not declare dividends except out of unappropriated surplus.

Advantage of Issue of Shares.-The advantage to the corporation of this kind of contract is at once apparent. The period during which capital will be needed is the life of the corporation; the obligation to the shareholder to return his capital does not mature until the affairs of the corpora