occurred during the year and consequently the state of the assets and liabilities as affected by the operations of the year. Clearly, too, the results will be correctly shown only in the event that there has been an accurate taking of stock. For instance, in the retail business concern, we saw that to close goods account it is necessary in the first place to have a careful inventory, or in some way to ascertain the value of the goods on hand, otherwise the results would be incomplete and would not admit of comparison because they would not show where the concern stood. The same thing is true of fixed capital. It is not possible to tell what the result of a year's operation has been unless recognition is made of the fact of depreciation, or, what amounts to the same thing, physical assets are revalued. Such revaluation of physical assets is equivalent to the stock-taking process. If there were a revaluation of such assets at the end of each year or other fiscal period before writing up profit and loss account and if depreciation had occurred as it usually would, this would mean a debit entry in profit and loss corresponding to depreciation. The consequence would be that net profit would be reduced to a corresponding extent. The same result is attained when, after ascertaining what is called net profit, an allocation of such profit is made by debiting in profit and loss account an entry representing the amount set aside for depreciation, depreciation account being thereupon similarly credited. If a credit entry be now made in each of the assets or plant accounts to show the amount of reduction in the value of assets estimated to have taken place in the course of the year, depreciation will be debited. So also in the case of the inventory the question of accuracy in profit and loss will be sharply affected by the method adopted in valuing the goods. If, for example, an old stock is carried along on the books (and in the inventory) at the cost price originally paid for it, when as a matter of fact it has depreciated a good deal owing to change of style or fashion, this merely means that an ele

ment of loss in the business has been concealed and that profit and loss account has not been conducted in such a way as to make an accurate showing of the results of the business. Here we have another example of depreciation, exhibiting itself in the case of goods where no provision is made for recognizing their deterioration in selling power or capacity to command money.

Profit and Loss Analysis.

From what has been said it will be understood that the showing made by profit and loss account is at all times a relative matter. Profit and loss, as has been seen, may or may not take account of depreciation; it may or may not take account of appreciation; it may or may not represent an accretion of new forms of wealth represented by additional assets purchased out of current incomes. Whether profit and loss shows anything definite or not depends upon the way in which it has been made up. It may show nothing more than the actual surplus of current cash income over current cash outgo. Or it may show the difference between the changes that have taken place in the direction of greater ownership over those that have taken place in the direction of reduced ownership. For example, a concern organized to exploit a valuable patent or franchise which had a definite number of years to run and which had been paid for in a lump sum might show very large profits from year to year resulting from actual operation and yet might be found to be a losing business when the gross profit made was reduced by deducting an amount corresponding to the fact that a year's life of the franchise or privilege had disappeared. The alternative that is offered in making up a profit and loss account is at all events obvious. It may be made to include simply cash or liquid incomes and outgoes or it may be made to include additions to and deductions from capital. If it is the former then the changes in the value of capital do not figure in profit and loss but go ul

timately to capital account through revaluation of assets or otherwise. It cannot be said that there is a definite determination as to the attitude to be taken by a business on this question in organizing its accounting and in making its profit and loss showing. This is why the auditor or examiner who is going through the books of a concern always studies profit and loss with particular care in order to make up his mind as to the way in which the account has been constructed. If it has been constructed in a certain way, a given kind and scope of additional information may be needed. In another way, the nature of the additional data would be different. A profit and loss account carried on so as to show simply the increase in cash means, due to the selling of goods for more than their cost, deducting the selling cost, has to be supplemented by an accurate statement of the remaining value of goods on hand, or, if the plant is one which employs fixed capital, it must be supplemented by a statement showing changes in the value of such fixed capital, or if the concern has sold goods on credit for sums that are not collectible, thus giving rise to bad debts, that fact must be noted. The question whether a profit is actually available for distribution is thus a very serious one, not only in an accounting sense but also in the broader economic sense which underlies accounting. The subject has been dealt with extensively by the courts both in England and the United States but it cannot be said that there is thus far any definite consensus of opinion as to the legal position of this issue. The matter is clearer where a given form of accounting has been prescribed for a given class of concern and is enforced upon that concern through public examination. Thus the national banking act prescribes that national banks shall not declare a dividend until after they have accumulated a surplus of at least 20 per cent of their capital. In determining whether such a surplus has been accumulated or not, the Comptroller of the Currency ascertains whether the assets of the concern

contain any element of bad paper and if such an element is present it is usually deducted in estimating the surplus. But what is comparatively simple with a financial institution is very far from simple when trade values, fixed capital of doubtful worth, stocks of raw materials which are fluctuating in value, and other items of the same sort are brought into question. Here there may be a very fair difference of opinion as to whether a concern has made a profit or not, or incurred a loss or not, and the question can be settled only tentatively and by the use of good business judgment.

Declaration of Dividends.

Upon the question whether a profit has or has not been earned depends ordinarily the action of the concern in declaring dividends. It may be good judgment not to declare a dividend even when a profit has been earned but to keep it in the business for the purpose of enlarging operations and rendering possible a larger volume of business. If there is a good deal of what is called "water" in the capitalization, it may be very desirable to keep the profit in the business for the purpose of bringing the actual worth of the assets nearer to an equality with the capital stock that has been authorized and issued. Conversely, it may be good policy to declare a dividend when a nominal loss has been incurred, such loss being perhaps simply due to reinvestment of profits in assets whose increased value does not appear in the profit and loss account. For example, if a concern of $25,000 capital has in the course of a year invested, say, $5,000 in new machinery, paying therfor out of current receipts which would otherwise have appeared as profits, its profit and loss account may not show any profit. If the concern has a fair balance of cash the declaration of a dividend might well be warranted on the ground that a substantial earning had been made and that, through its reinvestment, any immediate necessity for further investment of the same kind had been avoided. The declar

ation of a dividend is at all times largely a matter of policy. A concern whose assets are recognized as declining in value and likely to continue to decline, as in the case of the concern which is working a terminable patent right or franchise considered in a former illustration, may be perfectly justifiable in declaring a dividend if the conditions are known to the stockholders and, if they realize that by accepting a dividend which represents a division of such a profit, they are really accepting a partial return of their ownership in the capital of the concern. The profit and loss account must be studied in connection with the balance sheet and this will next be undertaken. It must however be borne in mind that even when studied in connection with the balance sheet the same questions as to depreciation, appreciation, representation of accrued assets and liabilities, etc., that have already been spoken of in profit and loss are still present and require to be taken account of the more carefully in the balance sheet if they have not been dealt with in profit and loss account. If they have not been provided for in the accounting at all, the same remarks that apply to profit and loss apply in like measure to the balance sheet after profit and loss has been incorporated therein.

XI. THE BALANCE SHEET.

Object of the Balance Sheet.

A brief reférence has already been made to the balance sheet in speaking of bookkeeping and of the methods of stating the affairs of a business (See p. 40 foregoing). It is now necessary to consider more particularly what is meant by a balance sheet and what relation it bears to the accounting and bookkeeping of the concern. Essentially the balance sheet is a statement of assets and liabilities designed to show where the concern stands in relation to the rest of the world. When compared with former balance sheets,

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