ment having an expectation of life in service of more than one year (exclusive of hand tools and other small tools that may be lost), cash, and materials and supplies on hand.

The intangible assets of a water-supply enterprise are the costs of its organization, the value of its franchise, its patent rights, and all other intangible wealth in its possession.

Landed assets, referred to in the instructions for asset and expense accounts as "lands," is the common designation of all freehold and other interests in land (exclusive of improvements thereon) the term of which is more than one year.

Nonlanded assets comprise all assets not properly spoken of as landed in accordance with the foregoing definition.

Fixed assets. The fixed assets of an enterprise are those resources or forms of wealth which are employed by it in the accomplishment of the principal purposes of its business, and which have an expectation of life in service of more than one year (exceptions being made of hand tools and other small portable tools that may be lost or stolen, for which no particular person is made financially responsible). Expenditures which increase the aggregate value of the fixed assets of an enterprise or government are here called outlays, this term covering the accrued costs, paid or payable, of lands, buildings, and other properties more or less permanent in character and thus available for more than a single use, which are acquired or constructed for the purpose of adding to or taking the place of existing fixed assets.

The fixed assets of water-supply enterprises are for accounting purposes arranged, according to their uses in the business, in three principal groups, which are here called general, departmental, and miscellaneous. Definitions of these terms, as well as of a number of others applied to fixed assets, either in the list of asset accounts or in the instructions with reference thereto that follow, are here given:

The general fixed assets or general properties of a water-supply enterprise are those which pertain to the business as a whole and not to any particular subdivision thereof.

The departmental fixed assets or departmental properties of a watersupply enterprise are those which are directly employed in the various departments or branches of its work of collecting or supplying water to its customers.

The miscellaneous fixed assets or miscellaneous properties of a watersupply enterprise are those which are used for purposes subordinate or accessory to the work of collecting and supplying water.

Landed improvements, in the case of a water-supply enterprise, include buildings, miscellaneous landed improvements, building fixtures, and water-supply system fixtures. Buildings include all houses, stations, sheds, and other structures used for office, storehouse, shop, or stable purposes, or for protecting equipment. Miscellaneous landed improvements include fences, roads, walks, drains, and kindred improvements on land. Building fixtures is a designation for all material constructions such as water pipes, electric wires and their attachments, and all other structures permanently attached to and made parts of a building. Water-supply system fixtures include all dams, reservoirs, pipes, and other immovable structures located upon or in the ground for the purpose of collecting, purifying, pumping, or distributing water.

The word equipment, as here used, includes all furniture, machinery, tools, apparatus, and conveyances. The word furniture is the common name for desks, chairs, tables, safes, filing cases, and the like. The word machinery is the designation for pumps, elevators, hoists, engines, water wheels, and electric and other motors; boilers and furnaces, whether used for furnishing steam to engines or for heating purposes; dynamos for producing electric currents; machine tools, cranes, shafting, belts, and other apparatus which are ordinarily employed in shops and which may be utilized in such places or elsewhere in connection with the watersupply enterprise. Tools is the common designation of hand and other small implements, including smithing equipment employed for any mechanical purpose. The word apparatus is the common

designation of all mechanical devices and constructions used in scientific and professional work and experimentation, including those employed in chemical and bacteriological laboratories of the water-supply system, and all the appliances used exclusively by the several engineers. Conveyances is the inclusive name for carriages, wagons, carts, and horses or other animals to draw them, automobiles, autocycles, bicycles, and other means of locomotion.

Original construction and acquisition is the designation most frequently applied to all fixed assets belonging to an enterprise which were constructed or acquired by it prior to the beginning of its operation.

Additions is the generic designation here applied to all new structures, fixtures, and equipment and other properties added to those in the possession or control of an enterprise at the beginning of its operation.

Replacements are mechanical changes in physical properties which have as their primary aim the substitution of one building, structure, piece of machinery, or equipment for another, or the restoration of such building, etc., to a state or condition as good as that existing at the time when the displaced properties were acquired or constructed. Replacements always consist of new structures, or new sections of old structures, which can best be treated in accounts as new structures.

The word renewals is sometimes given a meaning identical with that assigned above to replacements. It is here used as the designation for changes in the value of properties which result from extensions of the term of duration of interests in land and other tangible fixed assets, and the extension of franchises, water rights, and other intangible fixed assets.

Betterments are mechanical changes in tangible properties which have as their primary aim and result the substitution of new structures or equipment that are better or of greater capacity or value than those displaced, or which result in making the properties affected more valuable and useful or of greater capacity than they were at the time of their installation or acquisition.

Floating assets. Floating assets is the common designation here employed in referring to that portion of the wealth in the possession or control of a water-supply enterprise which is not included under fixed assets as defined above. The floating assets of a water-supply enterprise are of two distinct classes, here designated, respectively, "current assets" and "invested assets."

Current assets are those resources consisting of cash and other forms of wealth readily convertible into cash, which an enterprise or government possesses, that are available for meeting current expenses, interest, and outlays, for making investments, and for meeting other claims of creditors and trust beneficiaries that mature or become due during the current fiscal period.

Invested assets, also called investments, include all forms of wealth that have been acquired and are held for purposes other than those for which the enterprise or government acquiring and holding them was organized and is maintained. Among the many purposes for which investments may be acquired and held are those of securing an income from them, of deriving gain by their rise in value, of avoiding losses that otherwise would be suffered, and of securing other business advantages that may seem possible through their acquisition and possession.

The accounts of many enterprises with their fixed, current, and invested assets contain exaggerated statements of the value of those assets, owing to the fact that insufficient allowance has been made in the accounts for losses from depreciation and other causes. To the extent of these exaggerations the accounts include the record of nominal assets. Further, it should be observed that when an enterprise holds among its investments, or otherwise, stocks, bonds, or other securities issued by itself, these securities constitute nominal investments and may be recorded in accounts and summarized in balance sheets either as invested or as nominal assets, as may seem best from considerations of administrative expediency. But in whatever account they are recorded, the fact that such so-called invest

ments are investments in name only or that the nominal assets in- ' clude securities held for investment purposes should in some way be made evident.

Current and invested assets are called reserved assets when they have been withheld or separated from other assets of the enterprise, or are appropriated or otherwise set aside for specified purposes connected with the conduct or management of the business. The current and invested assets not devoted to special uses are here spoken of as unreserved assets.

In the accompanying tentative scheme of accounts for watersupply enterprises, the accounts for recording floating assets are arranged in two divisions, to which are given the designations "current asset accounts" and "accounts for the assets of funds with investments." The division current asset accounts is arranged for recording (1) all current assets other than cash which have been specially set aside for investment, and (2) all miscellaneous nominal assets or the nominal assets not included as above described under the title "invested assets." The division accounts for assets of funds with investments is arranged for recording all invested assets and all cash held for investment. The accounts contained in the accompanying tentative scheme of accounts for recording floating assets, in addition to being arranged in two divisions as stated, are subdivided into twelve groups, eight of which are for recording actual current assets, one for recording nominal current assets, and three for recording the assets of funds with investments.

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The eight accounts for recording actual current assets are given the names "current cash," "materials and supplies, ' ments," "revenue accounts of private consumers within city," "revenue accounts of private consumers outside city," "revenue accounts of city and other water-supply enterprises," "miscellaneous revenue accounts," and "miscellaneous nonrevenue accounts." It is believed that these terms are substantially selfexplanatory, and hence no definitions are prepared for the classes of assets to be recorded in these accounts, although in the paragraphs which follow, instructions are given for recording actual current assets as well as the various classes of nominal current assets in the accounts mentioned.

Capital. The word "capital," which at an early date became one of the most important technical terms employed by economists, is now used by them in the case of productive enterprises with a meaning substantially identical with that which most accountants assign to the accounting term "assets." It is the wealth employed by or in the possession of a given enterprise. Economists classify this wealth, or capital, according to its form, and refer to certain classes thereof as "fixed," "invested," "current," and "floating," substantially as accountants refer to the same wealth as assets. Spoken of as capital, the wealth in the possession and control of an enterprise is separable into two portions, referred to as credit capital, or creditor's capital, and proprietor's capital.

The credit capital, or creditor's capital, of an enterprise is that portion of the aggregate wealth in its possession or control which represents the contributions to the enterprise either by creditors or for trust beneficiaries, and is measured by their claims. The term is never used in accounting as the designation of any class of assets, nor of any group of accounts, all claims of creditors and trust beneficiaries being recorded and summarized under the legal term "liabilities."

The proprietor's capital of an enterprise is that portion of the aggregate wealth in its possession or control which represents the property rights of its stockholders or other owners in its assets. The amount of such capital or wealth in a given enterprise is always measured by the excess of the value of its actual assets over the legal claims of its creditors and trust beneficiaries. The term "proprietor's capital" is never used in accounting as the designation of a class of assets, nor of any group of accounts, all property rights of stockholders or other owners in the assets being recorded and summarized under such terms as "capital stock," "stock," "surplus," "corporate capital," "proprietary interests," etc.

Capital account is a designation at present applied by the great majority of accountants to a cash account in which are recorded, with certain minor receipts and payments, the receipts and payments on account of capital—that is, receipts which represent an increase in the amount of proprietor's capital and credit capital employed in the business, payments for fixed assets which increase the total capital employed permanently in the business, and payments for the liquidation of debts which decrease the amount of credit capital so employed. This usage is in harmony with the use of the word "capital" by economists, to which attention has been called. The word "capital" is also used by many accountants as the designation of all accounts summed up in the balance sheet. This practice involves a use of the word with a signification somewhat at variance with that attached to it by economists, and with other terms employed by accountants. For this reason the term "balance sheet accounts" has here been preferred as the common designation of the accounts last mentioned.

Liabilities.—In the accounts of public service corporations the term "liabilities" is primarily employed as the common designation of (1) amounts of money or money's worth in the form of lands, goods, or services which an enterprise is under legal obligation to pay, deliver, or render to others or to their heirs and assigns; or (2) similar amounts which it is under legal obligations to hold, use, or expend in specified ways or for specified objects in the interest of specified persons, and not in the interest of the enterprise. The term is also used to designate (3) amounts of money or other wealth which an enterprise owes to itself or to one of its funds, or which one branch or division of its business owes to another; (4) amounts recorded in so-called liability accounts by credit entries which represent accounting offsets to the debit entries of asset accounts, and which are amounts recorded (a) to assist in securing accounting control over specified contracts, such as those for maintaining sinking fund reserves, (b) to maintain accounting control over the legal regulation of governmental expenditures, such as are contained in appropriation acts, or (c) for other purposes; and (5) amounts which the enterprise, under specified circumstances or subject to specified conditions, may be called upon to pay, deliver, or render in the future, but for the payment, delivery, or rendering of which there is no present obligation.

Debts, trusts, and nominal liabilities.-Those liabilities of an enterprise which are included above under (1) constitute its debts, or its obligations to its creditors; while the liabilities included under (2) are properly spoken of as trusts, since they are its obligations to those for whom as trust beneficiaries the enterprise is acting as trustee. The liabilities properly spoken of as debts and trusts as above represent the claims of others upon the enterprise or upon its assets, and thus measure the amount of credit capital employed or utilized by the enterprise. Of the other amounts recorded in the so-called liability accounts of an enterprise, and referred to above under (3), (4), and (5), none represents wealth in any form which has been received from others or constitutes a claim upon the wealth in the possession or control of the enterprise. They are liabilities in name only, and are therefore properly spoken of as nominal liabilities. In accounting, these nominal liabilities should be carefully distinguished from the legal obligations mentioned under (1) and (2), or the accounts will fail to exhibit the true condition of business at any given time, and to set forth the results or outcome of transactions for any given period. The nominal liabilities mentioned above under (5) are generally called contingent liabilities. The debts, trusts, and nominal liabilities of an enterprise are separable, for administrative purposes, into two principal classes-fixed and current.

The fixed liabilities of a water-supply enterprise are those which have a number of years to run, or upon which interest is to be paid in perpetuity, and for the amortization of which no assets, other than those of sinking funds, have been specifically authorized or appropriated. Such liabilities are usually evidenced by some formal instrument called a "bond," or are given some other descrip

tive designation. The fixed liabilities of a water-supply enterprise are generally called "debts." An exception to this rule is met with in the case of such of its fixed liabilities as are held by the sinking and other funds, or otherwise as investments of the enterprise, which are not "debts" but "nominal liabilities." The fixed liabilities of a governmental enterprise, when spoken of as debts, are generally given the specific designation funded, from the fact that provision has been made for their final amortization by "funds" generally called "sinking funds."

The current liabilities of a water-supply enterprise are those which should be met and liquidated as a part of the transactions of the current fiscal period, or at an early date thereafter. These liabilities are of two classes: (1) Those for the satisfaction or payment of which provision is fully made by cash or other assets on hand, authorized or appropriated for that purpose; and (2) those for which no such provision has been made. The current liabilities referred to under (2) are generally referred to in legal decisions as floating debts. Excluding the nominal liabilities, which-with the exception of those mentioned above under "fixed liabilities"-may be considered as current liabilities, and excluding those current liabilities arising from deposits of customers to guarantee the payment of water rates or the rendering of specified services, all current liabilities of water-supply enterprises are "debts." The deposits of customers give rise to "trusts" rather than "debts," and can best be recorded in accounts as "deposits by customers," although this designation should not be allowed to conceal the fact that the reception of these deposits gives rise to what in law are known as private trusts.

In addition to the classification mentioned above, liabilities are in the accompanying tentative scheme of accounts classified upon a number of other bases, the resulting classes being given specific names corresponding to their popular or legal significance. Among such classifications mention may here be made of those based upon (1) the time when liabilities become due or payable or are to be satisfied, and (2) the character of the instrument or record evidencing the debt or trust. Classified on the former basis, liabilities are called outstanding due and demand liabilities, liabilities outstanding but not due, and outstanding liabilities awaiting final determination or adjustment; when classified on the latter basis, they are called bonds, notes payable, warrants payable, and accounts payable.

Funded, current, and floating debts constitute outstanding due and demand liabilities, liabilities outstanding but not due, and outstanding liabilities awaiting final determination or adjustment, according as they are payable on demand at the present or at some future time, and according to whether the amount payable has been determined or adjusted or is awaiting such determination or adjustment.

The term bond is more or less generally applied to every written evidence of corporate and governmental debt given under the seal of the nation, state, or municipality issuing it. Less formal written evidences of indebtedness are given the specific designations notes payable, warrants payable, or audits payable, while the amounts recorded only in accounts are generally called accounts payable. Bonds and other fixed debt liabilities are of two classes: Those guaranteed by liens or other security on specified property, and those not so secured. Those secured by liens are called mortgages-first, second, or third, according to the priority of the lien. Fixed debt obligations not secured by liens are here called deben

tures.

Proprietary interests. In accounting, proprietary interests are the property rights or equity of the stockholders, owners, or others who constitute the proprietors of the business or enterprise in the assets or wealth belonging to or employed in or by the business or enterprise.

Proprietary interests are by the great majority of modern accountants listed in balance sheets and ledgers as liabilities, and many writers on accounting have explained how these interests are

liabilities of the business or corporation to the owners, but economists have pointed out the great difference between proprietary interests and liabilities. That difference may be summed up and stated very concisely by saying that proprietary interests are "rights in, while liabilities are "claims upon" the assets of a business or enterprise. One of the best modern authorities, Charles E. Sprague, A. M., Ph. D., C. P. A., writing on "The Philosophy of Accounts," recognizes and states the differences between liabilities and proprietary interests in a very forcible manner in a passage which is reproduced on page 20 of this report.

Proprietary interests of corporations.-The proprietary interests of corporations, which may be presented in balance sheet statements under the designation of corporate capital rather than under that of "proprietary interests," are vested in their stockholders, and are represented by certificates of ownership called "stock certificates." These certificates of stock are of four general classes, here called debenture stocks, first preferred stocks, second preferred stocks, and common stocks.

Debenture stocks are those issued under an absolute contract to pay thereon at stated intervals a specified return.

First preferred stocks are those which have the first claim up to a specified rate upon such dividends as may be distributed. They may be cumulative or noncumulative, participating or nonparticipating. If cumulative, the amount by which the dividend at any dividend period fails to reach the stipulated rate is carried forward to continue as a claim upon earnings until satisfied; if noncumulative, such amount lapses. If a first preferred stock is participating, it is not limited to the stipulated rate in the amount of dividends which it may receive, but is entitled to participate, in accordance with the terms of the contract under which it is issued, in further dividends; if nonparticipating, it is limited to the stipulated rate.

Second preferred stocks are those whose claims in the distribution of dividends are next after those of first preferred stocks. These stocks also may be cumulative or noncumulative, participating or nonparticipating.

Common stocks are those whose claims in the distribution of dividends are subordinate to the claims of all other stocks.

In addition to the differences in corporation stocks noted in the foregoing definitions, it should be observed that stocks differ in regard to the voting power incident to their ownership, and that stocks are sometimes issued under contracts wherein the issuing corporation reserves to itself the right, either absolute or subject to conditions expressed in the contract under which the stocks are issued, to retire them at its option.

Proprietary interests of governments and individuals.—In their essentials the proprietary interests of individuals and governments in the water-supply enterprises owned and operated by them are the same as those of stockholders in corporate enterprises, although such interests are differently evidenced. The interests of governments and of individuals may be considered as constituting an undivided whole, as contrasted with the collective ownership of the stockholders of a corporation.

Proprietary interests, how divided.—The proprietary interests of stockholders in the property of corporations, and those of individuals and governments in the enterprises controlled by them, when considered from a legal standpoint, consist of a single and indivisible whole. For accounting purposes, however, they are considered as separated or separable into the original contributions to the business made by stockholders and other proprietors and wealth obtained in some other way. Thus the proprietary interests of individual owners are for the purpose mentioned separable, if not separated, into those which represent the original or first contributions made to the business, and those added thereto in the shape of profits earned but not withdrawn from the business. The former are spoken of by a variety of designations descriptive of the facts involved, and the latter are called surplus. In like manner, the proprietary interests of stockholders in the properties of a corporation

are separated into those which spring either from the whole of the stockholders' contribution or contributions to the business or that portion of the whole which was represented by their payments for the par value of the certificates of stock, and all other interests of the stockholders. The former class of interests are recorded in corporation accounts under the general designation stocks; and the latter class, under the name surplus. The proprietary interests of governments are not separated or separable in the manner stated above for private individuals and corporations. All the interests of the people as proprietors represent contributions and no part surplus or undivided profits. The surplus recorded in the accounts of individuals and of corporations, and the proprietary interests of governments, considered as a whole, are divisible according to the uses made of them into two general groups known, respectively, as reserves, surplus reserves or proprietary reserves, and unreserved surplus or unreserved proprietary interests.

Surplus reserves, proprietary reserves, or reserves are amounts or portions of the property rights or equity of the proprietors in any business that are reserved or set aside from the ordinary purposes of the business and dedicated or appropriated to specified purposes. In the case of private individuals and corporations, these reserves are always portions of the "surplus" and are thus properly called surplus reserves.

The most common purposes for which the surplus of corporations and individuals and the proprietary interests of governments are reserved are for meeting future losses from bad debts, unwise investments, depreciation, casualties, and kindred causes, and for the amortization of loans or for the acquisition of additional fixed assets, the purchase of investments, and allied objects.

Proprietary reserves are given many different names. Those which must be kept intact during the life of the corporation are called permanent reserves. The permanent reserves most frequently met with in corporation accounting are those arising from premiums on stocks issued. Temporary reserves are surplus or proprietary reserves that are not intended to be kept intact during the life of the corporation or of the government. They are separable into two subclasses known as contractual and noncontractual reserves.

Contractual reserves are reserves necessitated by contracts, such as reserves to cover sinking funds provided for by mortgages. Noncontractual reserves are such temporary surplus or proprietary reserves as are reserved without being required under any contract. Proprietary or surplus reserves are to be carefully distinguished from unadjusted claims, arising from past losses, which are sometimes though improperly-called reserves. Such claims are liabilities, and should be recorded, as has been stated, in accounts with "outstanding liabilities awaiting final determination or adjustment." With reference to such claims, the word "reserves" can signify nothing more than the word "estimates," which should be

used rather than the word "reserves," since its use would obviate the confounding of a liability with a proprietary interest. Nominal proprietary interests.—Attention has already been called to the fact that the asset accounts of a water-supply enterprise may include amounts which do not represent wealth in the possession or control of the enterprise but are amounts that are assets in name only. So far as these nominal assets are not balanced by or constitute offsets to nominal liabilities, they are balanced by credit entries in proprietary interest accounts, and such credit entries not representing any property rights of the owners can properly be spoken of only as nominal proprietary interests. Among the nominal proprietary interests of privately managed water-supply enterprises are those which are represented by shares of stock held in the treasury or by one of the funds of the enterprise. Other nominal proprietary interests that may be recorded in the accounts of publicly as well as privately owned enterprises are those which represent 1 discounts, rebates, and other deductions that will be allowed in the collection of revenue bills charged on the ledger; and 2 losses by depreciation, bad debts, bad investments, etc., that have previously taken place and that have been met from revenue by charges in the expense accounts, but which have not yet been recorded and thus canceled or written off in accounts with those assets whose change in value gave rise to the costs and losses which constitute the expenses mentioned. The amounts last mentioned are sometimes called "reserves," but are nothing more or less than offsets to actual or nominal assets, and hence should be recorded in accounts under names that disclose at a glance their real character as nominal and not actual proprietary interests.

Classification of proprietary interests in accounts.--In classifying proprietary interests for a uniform scheme of accounts such as is here presented, recognition must be given to all the differences which arise by reason of the varying forms of ownership. Further, the classification should be made in such a way as to permit a summary of data under a few comparable heads. The heads chosen for this purpose are (1) stock and unreserved proprietary interests, (2) reserved proprietary interests, and (3) miscellaneous nominal proprietary interests. Under the first head should be included the interests of private corporations represented by their stock and undivided and unappropriated surplus, the latter to be recorded under the designation **unreserved proprietary interests other than corporate stock," and all real and unreserved proprietary interests of governments and private owners. Under the second head should be included all reserved proprietary interests of individuals, corporations, and governments; and under the third head should be entered all nominal proprietary interests recorded in the accounts, other than those represented by capital stock held by sinking and other funds of the enterprise.

The revenues of water-supply enterprises, which are derived from two distinct sources and are thus readily separable into two classes, are here called water-service revenues and miscellaneous

revenues.

Water-service revenues are those derived from furnishing water to consumers, including the value of water supplied without compensation. As the great majority of cities speak of such revenues as "water rates," or "rates," this designation is sometimes used in these instructions interchangeably with that of "water-service revenues."

Miscellaneous revenues include all revenues of water-supply enterprises other than those obtained from furnishing water to consumers. The revenue of an enterprise is the aggregate of its revenues from all sources. In the case of water-supply enterprises it is the sum of its water-service and miscellaneous revenues. In addition to being used as a noun with the foregoing signification, the word revenue is employed as an adjective in many compound terms.

Revenue accounts is the generic designation of all accounts in which accruing and accrued revenues are recorded or by means of which they are summarized.

Expenses.-Expenses are (1) the accrued costs, paid or payable, of services, rents, and materials utilized in the conduct or management of an enterprise or government; and (2) its losses due to depreciation and kindred causes. They are the costs and losses which must be met from, charged to, or deducted from revenue, in order to ascertain the income secured by the management of the enterprise as compensation, in the form of interest and dividends, for the capital employed by it.

Expenses may be classified in many ways, and thus may be referred to under many specific designations. When classified with reference to the branch of the business for which they are incurred or suffered, the costs and losses of a water-supply enterprise which constitute its expenses are here spoken of as waterservice expenses, miscellaneous expenses, and fixed charges. Water-service expenses are divided into general expenses and departmental expenses. All classes of expenses other than fixed charges are also subdivided into operating expenses, expenses for repairs, and expenses for depreciation and amortization. The foregoing double classification of expenses is devised principally for accounting purposes and permits them to be summarized by the branches of the business in connection with which they were incurred and also by character or object. These various classes of expenses may be described as follows:

Water-service expenses is the generic term which is employed in referring to those expenses of water-supply enterprises to which are given the specific designations "general expenses" and "departmental expenses."

General expenses are (1) the costs and losses of an enterprise incident to the general management of its business and the collection of its revenues, including expenses for repairs and depreciation of buildings and equipment employed in such management and collection; and (2) costs which pertain to the business as a whole rather than to any particular subdivision thereof. The expenses included under (1) are hereafter referred to as general management expenses. Departmental expenses are the costs and losses of a water-supply enterprise which are directly connected with specific branches of its business of collecting and furnishing water to consumers, including the costs and losses incident to the repairs and depreciation of the properties, appliances, and fixtures employed in the business other than those specifically used in connection with the general management of the business. They include, respectively, collection system, purification system, pumping system, and distribution system expenses.

Collection system expenses are those expenses of a water-supply enterprise incidental to the operation, repair, and depreciation of the collection system of the enterprise. The collection system is here considered as including reservoirs, dams, and other structures and fixtures used for the collection of water and for conveying it to the purification works or the distribution system; the land upon which such reservoirs, dams, structures, and fixtures are located; and the structures and improvements upon such lands which are not used for purification or pumping purposes.

Purification system expenses are those expenses of a water-supply enterprise connected with the operation, repair, and depreciation of reservoirs and other fixtures, appliances, and equipment employed primarily for the purification of the water, including the land on which such reservoirs, etc., are located, and the improvements, etc., thereupon. The lands, reservoirs, etc., mentioned constitute what is here referred to as the purification system of a water-supply enterprise.

Pumping system expenses are the expenses of a water-supply enterprise connected with the operation, repair, and depreciation of the machinery, fixtures, and equipment of such enterprise which are employed directly or indirectly in pumping water. Such machinery, fixtures, and equipment are here called the pumping

system of a water-supply enterprise. They include, among other things, the boilers for supplying steam, the water wheels, steam engines, steam pumps, other pumps, electrical motors, and all other appliances used in the work mentioned, together with the buildings in which they are situated and the land upon which they are located, etc.

Distribution system expenses are the expenses of a water-supply enterprise connected with the operation, repair, and depreciation of the reservoirs, standpipes, elevated tanks, pipes, and other fixtures and appliances connected with the distribution of water to consumers and with storage for such distribution, all of which constitute the distribution system of a water-supply enterprise.

Miscellaneous expenses are the expenses of a water-supply enterprise which are incident to miscellaneous revenues; or, in other words, incident to the operation of the properties, funds, and accessory undertakings yielding miscellaneous revenues.

Operating expenses, or expenses of operation, of an enterprise are the costs of the service, rents, and materials, other than those for repairs, which are utilized in the conduct or management of the enterprise.

Expenses for repairs are the costs of those mechanical and physical changes in the fixed properties and equipment constituting parts of the fixed assets of an enterprise, which are called repairs. These are changes which primarily affect the results of current operation rather than the value of the properties or equipment. They are the changes made for the purpose of keeping the properties in as good working order as they were originally expected to be after the lapse of time which intervenes between the date of acquisition or construction and that of repairs. The term "repairs" should not, therefore, be applied to any mechanical or physical changes which result in new structures or equipment, or in such reconstruction of the old structures or equipment as makes them in all respects as valuable and serviceable as, or of greater capacity than, they were at the time of original construction or acquisition.

Expenses for depreciation are the current losses suffered by an enterprise as the result of a lessening in the value of its properties due (1) to decay, wearing out, destruction, or obsolescence of tangible assets as the result of physical changes or uses; or (2) to the supersession of tangible properties, or the destruction of the value of intangible assets, as the result of new inventions or discoveries, or changes in popular demand for or upon the properties or equipment affected, or of legislation or other factors affecting the value of the same. A lessening or diminution in value due to the factors mentioned under (1) is here called a physical depreciation; and that brought about by the factors mentioned under (2), a functional depreciation. Physical depreciation, due to the gradual decay, wearing out, or obsolescence of physical properties, is here called ordinary physical depreciation, while that produced as the result of some unforeseen casualty is called extraordinary physical depreciation. The term depreciation when used without any qualifying word will, in the accompanying instructions, be understood as meaning “ordinary physical depreciation," and the phrase depreciation by supersession will be employed interchangeably with that of "functional depreciation." The latter is always to be classed as an extraordinary depreciation.

The losses suffered by depreciation, and thus the current expenses properly chargeable under that head, can seldom be ascertained and accurately stated at the time when they occur or are suffered, and hence can be expressed in accounts only by estimates. Some general rules for the preparation of these estimates are given in the instructions for expense accounts, which follow.

Some accountants, instead of using the word' depreciation" in accounts, as in the term "expenses for depreciation," use the term "amortization of fixed assets," or kindred terms involving the use of the word "amortization" in connection with the name of the asset affected by depreciation. In this scheme of accounts the word amortization is used in this sense only in connection with intangible assets such as franchise values, the value of patent rights, etc., and terminable rights in land.