If this means anything more than that A's capital account is A's capital account, I confess that I fail to see it.

He goes on to say: "In his argument Mr. Walton ignores the distinction between investing in the business of a firm and lending to the firm; that is to say, he ignores the distinction between a contribution and a loan. A party who receives a loan is under obligation to repay it, but a party who receives a contribution is not under obligation to repay it and therefore does not incur any liability. If A lends money to the firm of A & Co. the operation does not change the net capital of the firm. Its assets are increased but its liabilities are also increased to the same extent. But if A contributes money to the firm of A & Co. the operation does change the net capital of the firm; its assets are increased, while there is no corresponding increase of liability."

Mr. Van Cleve then goes on to say that it is a non-sequitur to claim that because every debit must have a credit every asset must be represented by a liability. "The doctrine of equal assets and liabilities is self-evidently false." After a long discussion of this statement, he clinches the matter by saying, "Everybody knows that in most cases there are credit items on the balance sheet which instead of representing liability represent net capital, and that in some cases there are debit items which instead of representing asset represent negative net capital, that is to say, deficit." This is purely and simply begging the question. If capital represents a liability to the proprietor, and deficit represents a debt due by the proprietor, as many of us claim, his statement that everybody knows the contrary fails to be convincing. His bringing in the deficit is peculiarly unfortunate for him, because in an individual or partnership business it is unquestionably a debt due by the proprietor to the business. If you do not believe it, ask the creditors, who will not hesitate to claim that the proprietor owes the business that much money, and what is more, they will make him pay it, if they can. If negative capital is a debt due by the proprietor, positive capital is certainly a debt due to him.

Again, A, B and C are a firm in which A has $10,000.00, to the credit of that mysterious account which is neither an asset nor a liability, but that nondescript thing called capital, which is "neither fish, flesh, fowl, nor good red herring." He decides to withdraw and let B and C continue the business. The $10,000.00 must be transferred to the credit of his personal account. In the twinkling of an eye that which was no liability becomes a most undoubted one, and no one can find any argument to prove that it was not always a liability, except the bare statement that it was not, unsupported by any real argument whatever.

As to the statement that a party who receives a contribution is not under obligation to repay it and therefore does not incur any liability, it simply is not true. Of course, there is no question here of contributions to benevolent objects, which are gifts and not business investments. If A contributes his $10,000.00 to the partnership, the life of which is fixed at five years, and at the end of that time B and C elect to go on with the business, if there is no liability of $10,000.00 to A, and a liability that must be paid out of the business, it is time we revised our ideas about

the settlement of partnership affairs. In ordinary circumstances there would be no liability calling for present payment during the five years. But neither would there be if A had lent the firm $10,000.00 on a note due five years after date. Because A could not demand payment on the note during the five years, it is no less a liability during all that time, and would certainly be shown as such on the books. If A thought that when he was asked to make a contribution to the capital of the firm there would never be any liability on the part of any one to repay him, he would probably have decided to put his money into a less anomalous position.

Mr. Van Cleve attempts to answer some questions by Professor Duncan, but he does so by merely making statements of his own opinions, without the faintest glimmer of an argument to support them. To get around the necessity of calling one side of a balance sheet liabilities, he suggests that we call one side active and the other passive. Imagine the blank look on the faces of an ordinary board of directors, when they are told that one set of accounts is active and the other passive.

In his turn Mr. Van Cleve asks questions.

1. When you speak of the assets and liabilities of the business, do you not know that you are violating the laws of rational speech, that you are using relative terms from a reversible standpoint?

I do not know anything of the kind, and I have given some very good reasons why I am not doing so; reasons which have met only with a statement that I am wrong, but with not one single argument to prove it.

2. When you use the word liability to mean both liability of the proprietor and liability to the proprietor, do you not know that you are using one and the same word to mean both liability and asset?

I never used any such expression in that way. The capital is a liability to the proprietor on the books of the firm or business. It is an asset only on the proprietor's personal books. I have shown why. No one has yet successfully contradicted me.

3. Do you not admit that the balance sheet contains items representing asset, items representing liability and items representing the difference between the two?

If you will precede the word liability with "outside," yes, and the difference is the liability to the proprietor. By the way, why do we speak of the outside liabilities of a business, if capital is not recognized as a liability?

4. If you admit that there are three classes of items, can you offer any valid reason why they should not be separated on the balance sheet?

Confining the question to liabilities, they are separated on the balance sheet, into current, fixed, and capital liabilities. The classification is based on differences in degree and not at all on differences in essence as liabilities. A liability is something for the payment of which the business is liable for its current liabilities in a very short time, for its fixed liabilities when they become due, for it capital liabilities when the business is wound up. That is all there is to it.

The readers of this department are probably heartily tired of this discussion. The case is now before them and they must form their own conclusions.

Book Reviews

ACCOUNTING PRACTICE AND PROCEDURE. BY ARTHUR LOWES DICKINSON. New York, The Ronald Press Company, 1914. $3.50, half leather, postpaid.

This work consists of a series of discussions dealing with various phases of accounting. It is perhaps all the more interesting because it does not furnish a complete manual of the subject, but deals with particular problems, which the author has encountered in his long practice, many of them not discussed in any other volume on accounting. It contains a somewhat cursory, and perhaps unnecessary, introductory chapter on bookkeeping, an extended discussion of the form and content of the balance sheet, and chapters dealing respectively with repairs and depreciation, some problems of corporation accounting, cost accounting and the duties of the public

accountant.

The most considerable part of the work is the four chapters dealing with the balance sheet. In these the author describes the general form and arrangement of the balance sheet, and discusses seriatim the various items appearing therein; following somewhat the form, though not the treatment, adopted by most writers since the first edition of Dicksee's Auditing. Mr. Dickinson makes some well founded criticisms of the form of balance sheet prescribed by the interstate commerce commission, and presents an elaborate form, applicable, with due modifications, to any business enterprise. It is to be regretted that he hesitated to take the logical step of recommending that on the credit side of the balance sheet there should first appear the liabilities, the capital and surplus coming later. He recognizes that such an arrangement is theoretically preferable, but retains the conventional form in which the first item on the credit side is capital stock. He claims for the conventional form an advantage in that it brings the capital liabilities directly opposite the fixed assets. But this can equally be secured by taking the logical and easy step of reversing the sequence of items, so that both assets and liabilities begin with the most current items. Montgomery, in his Auditing, takes a stand in favor of the improved arrangement. It is regrettable that Mr. Dickinson's adherence to convention, as against what he admits to be theoretically more correct, has prevented an agreement between these two high authorities.

Features of this portion of the book particularly to be commended are: the discussion of the treatment of profits earned by subsidiary companies whose securities are held for purpose of control; the admirable statement of the reasons for taking the lower of cost and market value of current assets, and the interesting discussion of the valuation of seasonal material. Question may, however, be raised in regard to certain minor details. Is it true that a change in the value of an investment of reserve necessarily affects only the reserve? Is a distinction between working and current assets, based on whether

they form an integral part of the product, a logical one? One cannot well differentiate between the three substances, coal, limestone, and ore, even though only one of the elements comes forth in the ultimate product, steel. Similarly it seems a crudely materialistic view which draws any real distinction between the raw cotton and the coal for fuel, both of which are equally essential to the production of cotton goods. Granting that in some cases the discount on bonds purchased represents a low standard of security, and that the risk thus acknowledged prevents the application of the amortization principle (p. 118), is this any more the case where the bonds are issued at a discount than where they are sold at par, but at a rate higher than the normal one? There is no logical distinction between issuing a six per cent bond at a discount sufficient to make the net rate seven per cent and issuing a seven per cent bond at par. Each may represent the fact that the security is uncertain, and this uncertainty results in a higher interest basis. If a special reserve is required for the discounted bond, there should equally be a reserve covering part of the excessive interest received with each coupon of the seven per cent bond. And, finally, the charging off of discount in proportion to the amount of outstanding bonds happens, in the particular case given by the author, to produce the same results as are obtained by the correct apportionment of the effective interest (p. 140). But this depends on the particular figures used, and is not a general rule. This is easily seen by applying it to a block of bonds, all of which mature at the same time. By the exact method the amount to be written off the first year would be materially less than the amount to be written off in the twentieth year. But writing off in proportion to the amount of outstanding bonds would result in an equal amortization in each of the twenty years. It is probably merely a slip which causes the text to say (p. 115) that the accrued interest does not enter into the present value of an interest bearing note, although it does so enter where the note bears no interest, but has been discounted.

In some respects the chapter on the profit and loss account is the most interesting in the entire book. It is especially gratifying to have the accountant consider the legal problems involved, and the author's attempt to solve the inextricable muddle of the Lee series of cases is particularly valuable. But it may be questioned whether he has not unduly emphasized the doubt thrown on some of the earlier decisions by later cases. Particularly is this so in regard to the question of the exhaustion of mines. It seems somewhat extreme to say, even though the statement agrees with Baumont Palmer, that the decision in the case of Lee v. Neuchatel Asphalte Company has been discredited. Whatever doubt may be raised by the decision in Bond v. Barrow Haematite Steel Company, a decision of the court of appeals in 1912, (re Crabtree, 106 L. T. R., 49) apparently recognizes that in mining companies dividends may be declared irrespective of exhaustion of deposits. In the United States the courts of California, New York and New Jersey, coming down so late as 1907, support the same view. Difficult to accept also is the author's statement that

there is a "consensus that dividends can only be paid out of the surplus profits derived from the use of the capital of the company for those purposes for which the corporation was constituted." Premiums received on the issue of shares are surely not such profits, yet the decision in Hilder v. Dexter makes such dividends legal.

The chapter on depreciation is clear, sound and interesting. Particularly worthy of mention is the section on maintenance expenditures. In the following chapter the explanation of the consolidated balance sheet makes a valuable addition to accounting literature.

The chapter on cost accounting is somewhat less satisfactory, especially where the author wanders from the strict field of accounting to discuss economic theory. The revived form of the subsistence theory of wages, given by the author, neither arrives at an analysis of ultimate costs, nor does it make a consistent exposition of the employer's expenses of production. One may consider either the exertion of the laborer or the expense of the employer as entering into the manufacturing process. The subsistence of the laborer is neither one nor the other. The author's well-known views in regard to the exclusion of interest and rent from cost accounts may have certain merits in actual cost keeping. But the economic analysis by which he attempts to support his views is unsatisfactory. It is not the contractual feature which determines whether a distributive share is a part of profits; and wages, as well as interest, may be considered a commutation of a share in the product. It is also difficult to reconcile the author's statement that interest cannot enter into cost with his approval of charging to the construction account the interest actually paid out during construction. Perhaps he would frankly admit the inconsistency, but justify it on grounds of practical expediency. In this connection it is interesting to recall a statement made by the author at the St. Louis convention of 1904, that property acquired in exchange for bonds may be presumed to be worth the par value of the bonds. But this implies, where the property is not really worth the par value of the bonds, that the discount has been charged to the construction account. In the present work, the charging of discount to capital is properly condemned.

The most interesting feature of accounting is that there are so many points still open to discussion. It would be unfortunate if the disproportionate reference, in this review, to some such matters, should be construed as questioning the value of the treatise. For every point questioned there are scores which are to be approved for soundness of theory, clearness of expression, and originality of treatment. The subject has been handled with a breadth too often lacking in works on accounting. The book is searching in analysis, rich with material gained in a long professional career, clever in exposition, one which neither student nor practitioner can afford to omit from his library. HENRY RAND Hatfield.

The University of California.