Fixed charges is the generic designation of those current expenses which arise from contracts of preceding years and those over which the management has no substantial control. They include the cost of water purchased from other water-supply systems, rent of other water-supply systems leased and controlled by the enterprise, the interest and dividend charges on the stocks and bonds of leased systems, and the charges payable to state and local governments and bearing the designation of "taxes and franchise dues," and kindred names. Income and operating loss.-The income of an individual is the wealth that comes to him or accrues to his benefit (1) as earnings, or compensation for services rendered; (2) as rent from land; (3) as gains from business, the investment of capital, etc.; or (4) as the result of all the factors here mentioned. The income of a corporation or enterprise is the gain that accrues to the capital invested therein as the result of the business conducted by it. The income of a water-supply enterprise is the excess of its revenues over its expenses, including its fixed charges. That portion of this income derived from its water services, or the excess of its waterservice revenues over water-service expenses, is here called waterservice income; and that derived from miscellaneous sources is called miscellaneous income. The corresponding excesses of expenses over revenues are here called, respectively, operating loss, loss from water service, and miscellaneous loss. Interest.-Interest is the generic designation of all amounts that accrue or become payable from a person, firm, corporation, or government for the use of credit capital. In the case of an enterprise such as a water-supply system, it is that portion of its income which is payable for the use of credit capital. Profit and corporate loss.-Profit is a generic term employed by economists and accountants in speaking of the advantage or gain that accrues to the stockholders of a corporation, or to the owners or proprietors of a noncorporate enterprise, as the result or outcome of the business transacted by such corporation or enterprise. In the case of a water-supply enterprise, it is the excess of "income" over "interest," or of revenue over expenses and interest. The corresponding excess of expenses and interest over revenue is called a corporate loss, to distinguish if from the operating loss, or loss from the operation of the enterprise. Dividends and assessments.-Dividends is the generic designation of all amounts of profit appropriated or apportioned to the stockholders of corporations, and assessments is the corresponding designation of all amounts of losses apportioned or allotted among such stockholders. The profits and losses apportioned.to or among firm members receive no specific designations corresponding to the terms "dividends" and "assessments;" and with the undivided ownership of enterprises owned and operated by an individual or a government, there can be no apportionment of profit or loss, and hence no use in the accounts of such enterprises for the terms mentioned above. Summary of business results.-The summary statement of financial results that is periodically prepared for enterprises by closing into it the revenue and expense accounts is given many different designations by accountants and business men and is also prepared in many forms-sometimes as a single account or statement, and sometimes as several separate but related statements-each receiving a characteristic designation, depending somewhat upon the nature of the business for which it is prepared. The statement or account here suggested for summing up the financial results of a water-supply enterprise is arranged in two general divisions, to which are given the names revenue and expense account or income account, and profit and loss account. Revenue and expense account, or income account.-Revenue and expense account, or income account, is the designation here given to that portion of the summary of the financial results of a watersupply enterprise in which is shown the income realized, or operating loss suffered, during a given fiscal period. The summary may be prepared as a single statement or account, or in three subdivisions showing separately the income or operating loss from water service, from miscellaneous sources, and from all factors of operation and management. The income or operating loss shown by the revenue and expense account should always be closed into the second division of the summary of financial results, the profit and loss account. Profit and loss account.-Profit and loss account is the designation here given to that portion of the summary of financial results of a water-supply enterprise in which is shown the profit realized or corporate loss suffered during a given fiscal period. It is the account into which are closed the revenue and expense, or income, account and all accounts with interest. It is also the account debited with all dividends declared and other apportionment of profit made, and credited with all assessments levied on stockholders, and with all other allocation of losses. The balance of the profit and loss account is either a current surplus or a current deficit; the former being the excess of income and of all assessments levied over interest and the dividends declared, and the latter being the excess of operating losses, interest, and dividends over income and assessments. The balance of the profit and loss account of a corporate enterprise is always closed into the balance sheet account for corporate or unreserved surplus, or corporate deficit, the balance for which is always the algebraic sum of the current surplus or deficit and the corporate surplus or deficit of preceding years. The profit and loss account of an enterprise operated by a private individual or firm should be closed into the account with the individual owner or owners. When a water-supply enterprise is operated by a city, it will have many transactions with the municipality, in some of which the enterprise receives services, materials, and money from the city, while in others the city receives them from the enterprise. For all such enterprises a balance sheet account should be credited with the services, materials, and money received from the city and debited with the services, materials, and money furnished or paid to the city. The balance of this account should be debited or credited to the profit and loss account before that account is closed into the account with unreserved revenue accumulations. SYSTEM OF UNIFORM ACCOUNTS. Prerequisites for successful systems of uniform accounts.-The annual revenues of the different water-supply enterprises of the United States vary from less than one thousand to over ten million dollars per annum, and their assets vary from less than ten thousand to over one hundred and fifty million dollars. The number of accounts that are required, or that can be used to advantage, for administrative purposes by any enterprise must vary with the volume of business and assets, and hence a uniform system of accounts must first of all be adjustable to the requirements of large and small enterprises, and to this end must have the following special characteristics: (1) The financial data must be so classified and the accounts must be so arranged that the accounts will provide summaries of results or conditions along the same fixed lines and upon the same bases, so that comparisons can be made between the summaries of different fiscal periods and between those for similar enterprises. (2) The accounts must so divide and subdivide expenses as to disclose the three elements which make up the total cost of servicethe demand cost, the customer cost, and the consumption cost; and in turn must separate these costs into those that are fixed and those that are variable, so that from the data it will be possible to determine the equity and wisdom of the existing rates for services, and also to make all proper revision of incorrect rates for such services. (3) The accounts must be so designated as to make the system readily understood and thus easy of application. Groups and orders of accounts.—To meet the requirements stated, the accounts of a uniform system must be arranged in different groups, subgroups, classes, subclasses, and minor divisions, and therefore must be of several orders, each order and each account bearing a definite relation to all the others. The system must also be devised in such a way that the number and kind of accounts employed may be adapted to the requirements of each enterprise, while at the same time providing accounting data of a uniform and comparable character. In the introduction attention has been called to five principal groups of data to be recorded in the balance sheet accounts and four other groups to be recorded in the revenue and expense accounts. One order of accounts is provided for these nine principal groups of data, a second for the several subgroups of the same data, a third for the classes of data into which the several subgroups are divided, and fourth and fifth orders are for the subclasses and minor divisions of data to be entered of record in the accounts. To meet the requirements for success above set forth the financial data to be recorded in these orders of accounts must be classified along fixed lines, and a given account must always be used to record data of the same character. Further, the accounts must be given names and other designations that will locate each individual account as readily as the ordinary index indicates the proper page of a book. It is believed that these objects will be realized in the scheme of naming and numbering accounts presented herewith. The nine principal accounts designed for recording the financial data of the smaller enterprises, and for summarizing such data for the larger enterprises, are assigned numbers as follows: 1. Fixed assets and outlays. 2. Current assets. 3. Assets of funds with investments. 4. Liabilities. 5. Proprietary interests. 6. Water-service revenues. 7. Miscellaneous revenues. 8. Water-service expenses. 9. Expenses other than for water service. When the business of an enterprise is of such volume or character that its proper administration requires more than the nine accounts above mentioned, and use is made of accounts subordinate to them, as has already been explained, the accounts to be summed up in each of the nine accounts may be nine or fewer in number, as may be advantageous for administrative purposes. The accounts of this second order are indicated numerically by numbers containing two digits, the first or left-hand digit indicating the primary group to which the account belongs, or the number of the account into which it is summarized, and the second digit marking its position among the subaccounts of the principal account. Thus the number 16, as applied to an account, indicates that it constitutes the sixth subgroup (distribution system accounts) of the first group (fixed asset accounts). The accounts of the third order bear the same relation to those of the second that those of the second do to the first, and the same rule applies to the relation of accounts of the fourth order to those of the third, and of those of the fifth order to those of the fourth. The division and subdivision of data, and thus the use of different orders of accounts, may be extended as far as may be desired for any enterprise, however large; or it may be stopped at any point, only those accounts being employed that can be used to advantage. This feature of the system, which permits the use of a small number of accounts for a small enterprise is as much to be considered and commended as that which provides a large number of accounts for the use of an enterprise with a vast volume of business. The numerical index for each account indicates its order and its place in the system, and provides all other information required for locating the position of the account and the character of the data recorded therein. Thus 16458 is the index number of the eighth subdivision of the fifth subclass of the fourth class (main pipes and specials) of the sixth subgroup (distribution system properties) of the first group of accounts (fixed assets). The number giving group, subgroup, class, subclass, etc., may be called the designation or account number, and is applied to every account employed by the enterprise. The decimal system of designating accounts here presented was substantially suggested by Mr. Albert H. Wehr, vice-president and general manager of the Baltimore County Water and Electric Company. It takes the place in this report of the scheme of indexing accounts suggested by the Bureau of the Census in its 1906 report for cities containing over 30,000 inhabitants, which was adapted from the system of indexing employed by the Interstate Commerce Commission and the New York Public Service Commission, and consists of a combination of capital and small letters and of Roman and Arabic numerals. For convenience in referring to the groups, subgroups, classes, subclasses, and minor divisions of accounts, use is made of the following terminology: Summary accounts are the controlling accounts of all the general accounts and are assigned the numbers 1 to 9. Each summary account is the controlling account of all general accounts having as their first digit one that is identical with the number of the specified summary account. General accounts are those for subgroups of data and are indicated by numbers with two digits, the first of which indicates the group to which they are assigned and the second their position in that group. Subgeneral accounts are those indicated by three digits, and are controlling accounts for those with four digits. Primary accounts are those indicated by four digits, and are controlling accounts of those with five digits. Subprimary accounts are those with five digits, and are the controlling accounts of those having six digits if such accounts are employed. Clearing accounts are accounts through which are adjusted the debits and credits that at the time of their original entry are incapable of proper distribution to their accounts of final entry. As their name indicates, the object of such accounts is to carry the items entered therein until it becomes possible to segregate them by months or other desired periods of time, or by the purpose for which they were used or consumed, or until they can be transferred to the proper branch of service or to the proper account of final entry. In the accompanying scheme of accounts, clearing accounts are given account numbers either ending in or containing zero (0). The digits which precede the zero indicate the group, subgroup, or class to which a given clearing account belongs and of which its financial data form a part. Thus an account numbered 140 is one in which are recorded outlays for uncompleted purification system properties (recorded in account 14); and account numbered 1450 is one in which are recorded outlays for uncompleted roughing filters (recorded in account 145). Special designations of accounts.-To avoid confusion in the use of designations of the character here described, it is important that the significance of the different account numbers shall not be changed without some clear indication of the fact. Such changes may be desired, for instance, in the case of several plants operated by one central organization where accounts are kept separately as to some features of the plant and collectively as to others, through the same books. This, or any similar requirement, can readily be met by using a character other than the ten digits, or by adding the letters of the alphabet to the account number, as, for instance, 221 a, 221 b, 221 c, etc. Each account will thus assume its place in the fixed order and retain its full meaning, and no confusion will arise as to the significance of the classification. This plan of introducing letters or other symbols whenever it is desired will give all needed freedom to the personal equation and afford scope for any desire for originality, and will meet all real wants for other classifications in peculiar cases. Use of the accounts.-As stated before, any enterprise can adopt as few or as many of the general, subgeneral, primary, subprimary, and clearing accounts as it finds advantageous for administrative purposes, and its choice will not disturb the general results shown in the various divisions or centers of classification, since each division or center will show the revenue from certain sources and the expenses and outlays for the same objects or purposes, as the case may be. In order to secure the most comparable results and those possessing the greatest value for statistical purposes, however, enterprises of the same size should use accounts of the same order as their accounts of original record. In this connection it is suggested that the following schedule of classification may well be adopted by the several water-supply enterprises: Enterprises having a gross annual revenue of less than $2,500 should use summary accounts only. Enterprises having a gross annual revenue of $2,500 and less than $25,000 should use summary and general accounts. Enterprises having a gross annual revenue of $25,000 and less than $250,000 should use the summary, general, and subgeneral accounts. Enterprises having a gross annual revenue of $250,000 and less than $2,500,000 should use the summary, general, subgeneral, and primary accounts. Enterprises having an annual revenue of over $2,500,000, and as many of those having a smaller income as desire, should use the summary, general, subgeneral, primary, and subprimary accounts. General rules and instructions.—In employing the system of accounts here described, the following general rules and instructions suggested by Mr. Wehr, of the Baltimore County Water and Electric Company, should be carefully observed. All items of expenditure should be carefully classified by the heads of departments responsible therefor. The classification of account numbers should be noted on orders and requisitions as issued and corresponding notes made upon bills as received and upon the vouchers. When bills and vouchers contain amounts chargeable to several accounts, the account to which each item is to be charged should be noted opposite the amount of the bill and also on the face of the voucher. Supplies, materials, and tools, as issued from the storeroom, should be charged direct to the account benefited. Repairs of tools must follow the same course. Salaries of clerks, foremen, and street foremen should be charged direct to the proper account in proportion to the time employed. In classifying items, care should be taken to distinguish between expenses and outlays. This is especially necessary in the case of construction work performed by the force employed in operation. When questions arise in this connection, it should be remembered that an outlay account should include all items of drafting and other preliminary work and supervision, whether the work is done by employees of the enterprise or by contract. But discretion must be exercised so as to preclude the charging of a single dollar of operating expense in an outlay account; and to be on the safe side, the tendency should be, when in doubt, to charge to expenses. "Labor" should be understood to mean not only the manual work of laborers and mechanics, but also superintendence, supervision, clerical work, engineering, other than the preliminary engineering of a general character, and inspection, so far as they are chargeable directly to the account referred to. "Materials" should be understood to mean not only finished and unfinished products, appliances, or parts, but such smaller articles as are usually termed "supplies," including in every case freight and drayage charges thereon, if any. "Tools" should be understood to mean hand tools of mechanics and other tools used in the work chargeable to the account referred to. "Miscellaneous expenses" should be understood to mean all expenses chargeable to the account referred to that are not for labor, materials, or tools. The cost of experiments should be charged under operating expenses to the account most affected or benefited, unless such experiments are made in connection with and preliminary to some construction work, in which case this cost should be charged to the proper outlay account. In closing the books, the balance of each account should be carried into the next higher account, i. e., subprimary account balances should be carried to the respective primary accounts, the primary account balances to the subgeneral accounts, the subgeneral account balances to the general accounts, and the general account balances to the summary accounts, except that in the case of accounts recording assets, liabilities, and proprietary interests the balances of these accounts, of whichever order, may be forwarded into the next fiscal year in such detail as may be desired. The tentative list of balance sheet accounts which immediately follows, and the corresponding list of revenue and expense accounts to be found on later pages will fully illustrate the scheme of naming and numbering accounts recommended for the proposed system of uniform accounts. In these lists of accounts only the summary, general, and subgeneral accounts are mentioned. With these accounts, enterprises can use as few or as many of the subordinate accounts as they desire, but whatever number is employed they should be arranged in harmony with the system herewith presented. DIVISION 1.-ACCOUNTS FOR ACTUAL CURRENT ASSETS. 21. Current cash. 211. General fund cash. 212. Special and trust fund cash. 22. Materials and supplies. 221. Materials and supplies in general storerooms. 228. Materials and supplies for accessory enterprises. 229. Scrap, and scrap value of old fixtures and equipment. 23. Prepayments (advance payments of the expenses of future periods). 231. Prepaid insurance. 232. Prepaid rents. 233. Prepaid cost of water. 234. Prepaid taxes. 235. Prepaid franchise dues. 236 to 239. Other prepayments. 24. Revenue accounts of private customers within city. 241. Debtors for metered residences. 242. Debtors for metered commercial houses. 243. Debtors for metered industrial enterprises. 244. Debtors for metered churches and charities. 245. Debtors for unmetered residences. 246. Debtors for unmetered commercial houses. 247. Debtors for unmetered industrial enterprises. 248. Debtors for unmetered churches and charities. 249. Debtors for unmetered miscellaneous water service. 25. Revenue accounts of private customers outside city (see instructions). 26. Revenue accounts of city and other water-supply enter General. The list of accounts here suggested in a tentative way for the fixed assets of water-supply enterprises includes one summary, eight general, and fifty-seven subgeneral accounts for recording data relating to the permanent properties of those enterprises, and one general and eight subgeneral accounts for recording outlays for properties in process of construction. In using these accounts, the fixed assets and outlays should be so classified and arranged that the accounts will contain a description of every piece of land belonging to the enterprise, together with a statement of the purposes for which such land was acquired, used, or held, and a detailed exhibit of all improvements upon it. The same accounts should also contain a record in detail of all the fixtures, appliances, equipment, and other fixed assets used by the enterprise, so arranged as to exhibit for each asset its cost and the year of its construction or acquisition. The data last mentioned are necessary in order to provide the basis for an exhibit showing the effect of depreciation upon the value of the fixed assets, which should be contained in the accounts with fixed assets and which should be secured by recording (1) the original cost of each and every piece of property, (2) the amount of ordinary and extraordinary depreciation upon such property suffered during the current year, and (3) the total amount of such depreciation suffered from the time of the acquisition or construction of the property to the close of each fiscal year. The published reports of the water departments of Chicago and Cleveland give suggestions with reference to the method of keeping accounts such as are here outlined, and of presenting the data thus recorded in published reports. Depreciation.-Accountants and business men have devised and made use of a number of different methods of treating, in their fixed asset and other accounts, the losses occasioned by depreciation, and the cost of replacements, renewals, and betterments. Before describing these methods it should first be noted that the losses by depreciation of a public service corporation operating a water-supply system or any other public service utility enterprise increase progressively with the passage of years for each structure, fixture, or appliance constituting a part of its nonlanded permanent properties. Expressed in mathematical terms, it is now a more or less accepted axiom of business management that the losses from depreciation for any given piece of property, or of a water-supply system as a whole, through a number of years constitute a geometrical series in which the loss for each year is a small percentage greater than that for the preceding year, while the aggregate loss at the expiration of the life of such piece of property, or system, is equal to its initial cost. The line which would represent this progressive increase of loss is sometimes called a "sinking fund curve," since it is used to represent graphically the progressive increase in the assets of a sinking fund all of whose resources are kept invested at interest and into which is annually paid a fixed sum, and also all the interest earnings of the fund. The different amounts of loss by depreciation in the earlier and later years of the life of a property or system may be indicated by the following illustration: If the life in service of a piece of apparatus costing a thousand dollars is sixty years, and the annual rate of increment of loss, or its increase one year over that which preceded it, is 24 per cent, the deprecia |