made all departmental copies of the order, but for the purpose of ready identification each copy should be made on different colored paper. These several copies of the order may include the following:

1. Acknowledgment of order.

2. Customer's invoice.

3. Factory order.

4. Shipping order.

5. Sales department record.

6. Collection record.

7. Bookkeeping posting record.

In conclusion, all accounts to be most useful must serve a constructive purpose, and this cannot be done unless the accounts are properly assembled and results promptly obtained. It is only when the managers are promptly furnished with proper accounting data that they are able best to direct selling policies, productive efforts and meet the needs of the business, financial or otherwise.

ation and Depletion in Tax Returns*

BY WILLIAM CAIRNS

The government's attitude toward the accounting for property investments is being defined very rapidly, as the disparity between the various revenue laws which have been enacted during the last decade will show. Probably no branch of the science of accounting has received such detailed and reasonable consideration as this one. From the simple statement of an allowance for all "losses sustained within the year including

a reasonable allowance for depreciation of property," contained in the 1909 statute, to the elaborately described allowances defined in the 1918 revenue law is a big stride; and the accounting profession may well be gratified at the part it has played in bringing about the present condition of affairs.

The 1918 statute recognizes four main classes of allowable deductions from property investments, as follows:

1. Amortization, or the shrinkage in value due to market conditions.

2. Obsolescence, or the shrinkage in value due to the progress of the art.

3. Depreciation, or the shrinkage in value due to exhaustion, wear and tear.

4. Depletion, or the shrinkage in value due to exhaustion of mineral and other deposits, oil and gas wells and timber limits by extraction or cutting.

While no discussion of either the first or second deductions is contemplated by this article, it is relevant to note that amortization is allowed only to firms engaged in war industries, and further is deductible only from the investment in plant specifically used in that part of their business. It is inclusive of depreciation and, on property on which an amortization deduction is claimed, no deduction for depreciation will be considered for any period subsequent to December 31, 1917.

*A thesis presented at the May, 1919, examinations of the American Institute of Accountants.

The obsolescence allowance, although reportable as part of the depreciation deduction on the corporate return, is clearly differentiated from the latter, being defined as an allowance to cover the loss sustained by the normal progress of the art which governs the property in which the taxpayer's funds are invested.

The deduction for depreciation, as described in the 1918 revenue law, is based on sound accounting theory. The regulations call for a recognition of the salvage value of the depreciable property as a necessary factor in the calculation of the allowance. Heretofore this has been ignored by the department as non-essential; but now it is not only recognized but prescribed. There is further an expressed intention to recognize any reasonable method of computing the depreciation allowance, and, in view of this, the accountant's method becomes a question of real (in the sense of pecuniary) service.

A review of the various methods used by clients in computing depreciation shows that the average judgment applied to the treatment of this expense is uncalculating and thoughtless. The methods encountered in examining the accounts of various businesses are usually confined to:

1. The fixed rate method, and

2. The declining balance (unscientific) method.

While the declining balance (scientific) method is occasionally broached in discussion, it is rarely found in practical use.

Theoretical provision for depreciation supposes a return of the capital invested in any property through a charge to the expenses of operations, so that it is desirable to make as equitable distribution of the depreciable cost over the estimated period of usefulness of the property as possible. How do the various methods of computing depreciation, quoted above, do this?

The fixed rate method provides for an equitable distribution of the depreciation, per se, but as maintenance and repair costs are a gradually increasing quantity during the life of the majority of depreciable assets, it is obvious that the total deduction from income over a period of years will not be allocated equally to each year. For example, a building with an estimated life of 30 years and a residual value of 122% would charge each year to depreciation under this method $2.92 for every $100.00 invested; but at the same time the maintenance and repair costs would be increasing from about 8 cents per $100.00 in the

first year to $3.78 per $100.00 in the thirtieth year, so that the joint deduction would be a gradual increase from $3.00 per $100 in the first year, to $6.70 per $100 in the thirtieth year. Without deviating to amplify or rebut the arguments pro and con on the grievous question of method, the fixed rate method of depreciation does not permit the equitable return of the cost of a property investment.

The declining balance (unscientific) method provides for a fixed percentage deduction on the diminishing balance, without regard to any estimate of the life of the asset. To put it simply, it is no method at all. The only reason for commenting upon it is its widespread prevalence among reputable business organizations with an archaic sense of the fit. The unscientific part of the method is that, while the deduction from income each year for depreciation and maintenance combined will be nearer equal than under the fixed rate method, the cost of the property will never be retired. The accountant can render real service to the concern employing this method by a simple demonstration of the folly of paying taxes on expenses.

Neither of these two methods most commonly used in practice, then, will adequately satisfy the principle of equitable distribution. How does the declining balance (scientific) method fit this principle? Let us take again the example quoted above, that of the building with a life of 30 years and a residual value of 12%. In place of the fixed sum of $2.92 per $100 per annum charged to depreciation, we would have a variable and declining amount which would range from $6.70 in the first year to about 80 cents in the thirtieth year. The maintenance would, of course, be the same, and therefore the combined deduction would only vary from $6.78 in the first to about $5.00 in the fifteenth year (its lowest point); thereafter rising again to $5.70 in the thirtieth year-perhaps as nearly equitable a distribution of the cost and carrying charges of this investment as could be made beforehand by estimates.

Now 1918 will probably be the peak tax year of this decade, if not of this generation. Indeed, only a pessimist could imagine the recurrence of such a year of penalty and pain upon the corporate dollar. And, if this is so, any reduction in the taxable income of a corporation for 1918 will be worth more than a similar reduction in amount in a subsequent year. Such a

reduction will save the average corporation 82.4% of that amount in its tax. As stated before, we hold no brief for the technically correct method. We have not seen, however, that it is anywhere contended, with reason, that the declining balance (scientific) method is unscientific. At best, the argument against it was that it was not so practical as the fixed rate method.

Well, let practice be the arbiter, and judge if it is not more practical to take a deduction of $67,000 for depreciation on a new million dollar building in 1918, as against a deduction of $29,200 calculated under the fixed rate method, merely because the declining balance (scientific) method involved more care and judgment in its application to the corporate records. Or, take the case in perspective: our joint charge for property shrinkage in value will gradually decline from $67,800 to $50,000 over the first fifteen years, increasing again to $57,000 in the thirtieth yearthis as against a ratable increase from $30,000 in the first year to $67,000 in the thirtieth year. The government has driven the theorists to the crucible.

The revenue laws have forced recognition of another feature of this subject that accountants have neglected in practice. Depreciation is an element of cost of the work produced by virtue of the use of the property for which the depreciation allowance is claimed. As such, it is allocable pro rata to the finished product and to the work in progress. In shipbuilding and manufacturing concerns where accurate costs of unit production are desired, the allocation becomes necessary and is usually found to be made in practice; although one of the largest shipbuilders of the west has taken the position that depreciation expense is chargeable in toto against the year in which the depreciation occurred. This argument is the logical mate of the one that guides accountants in stating that "the profits before deducting depreciation were such and such," charges depreciation to surplus and reflects a halo of conservatism upon the directors. The practical method is simply for all manufacturing and quasi-manufacturing concerns like machine shops to exercise the same care in distributing depreciation expense to their finished and unfinished work as they do in dividing their labor charges. The one is no less an expense of production than the other.

The question of handling investments in patterns, models, drawings, etc., shows again the government's tendency to be liberal