Accounts: Their Construction and Interpretation for Business Men and Students of Affairs

By William Morse Cole | Go to book overview

CHAPTER FOURTEEN
SOME GENERAL PRINCIPLES ILLUSTRATED IN RAILROAD ACCOUNTING

A RAILROAD report is divided into three parts, as follows: first, the balance sheet, or general account, as it is sometimes called; second, the income sheet, or income account; third, the traffic report, or statistics. These three parts are really but one body and should hang together. The art of interpreting such a report lies largely in the ability to correlate the parts and see whether they are consistent. As a preparation for some practice of that sort, it is well to notice the form of the first two of these three parts of a report, --the form of the last is a matter largely of indifference.

Every balance sheet contains at least two parts for both debit and credit, though in reality most roads show the balance sheet as if all items were in the same class. Each year, however, a greater number of roads are adopting the plan of dividing the sheet. The first of these divisions we may call the capital part, containing all capital items, --that is, all items that are permanent; and the second we may call the current part.

On the credit or liability side of the sheet, these capital items are always at least two in number, namely, capital stock and funded debt. The first of these is obviously permanent, for capital stock is not a debt to be paid but only a liability to be accounted for, and it must endure as long as the corporation endures. Funded debt, too, though ostensibly of a more or less temporary sort, always in practice is permanent, for few railroads or other corporations intend ever to pay off their bonds and few bondholders care for the payment of the debt if only they can get their interest. Men ordinarily buy bonds for investment, and permanence in any investment is one of the valuable features. If the bonds must be paid, usually a road issues new bonds to pay for the old or exchanges the old for a new issue; so the debt itself is none the less permanent.

The first capital item on the debit side of the balance sheet is

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