If it is desired, a surplus account or a deficit ac count may be carried by means of the same method as is customary when capital stock has a fixed par value, but this is unnecessary. The only advantage would be that in this way the average book value of the shares at the time of organization could be shown.
Under either form of organization any portion of the free surplus set aside in specific reserves, such as sinking fund reserve, reserve for the redemption of debt, or reserve for renewals and betterments, should be stated separately.
11. Proprietary accounts of non-stock corporations.
A non-stock corporation, as the name implies, does not keep accounts for dividends, profit-and-loss sur plus or capital stock. Otherwise, the accounts of this kind of corporation are the same as those of associa tions and societies.
12. Reserves as a part of proprietorship.—Reserves are generally divided into two broad classes—those which represent losses actually sustained in the value of assets or anticipated losses; and those which are a portion of the surplus, and which are created by charges to operating expenses or surplus. A third class is sometimes included—reserve for taxes, etc.; but such accounts are really liabilities.
Good examples of the first class of reserve accounts are the reserve for bad debts and the reserve for de preciation. Theoretically at least, these reserve ac counts are created to offset a decline in the value of the relevant assets, and they are increased as rapidly as the assets which they offset shrink in value. But this may not always be the case. Reserves for depreciation and reserves for doubtful debts are sometimes created for greater amounts than are necessary to take care of the losses sustained. \\There, however, the reserves are created to measure actual losses, they cannot be proprietary accounts and should not be considered as part of the net wealth. Thus, if a reserve for depre,
ciation has been created to take care of the accrued de preciation to date, it represents that portion of the asset value which has dis4peared. It cannot, there fore, be said to be a portion of the proprietorship, be cause a certain amount of the original capital, cor responding to the amount of the reserve, has been consumed in operating. On the other hand, those re serves which are not created for the purpose of meas uring losses actually sustained, but which represent funds set aside out of surplus and locked up so effec tually as to prevent their distribution as dividends, are part of the proprietary interest.
13. Capital in the economic sense distinguished from capital in the accounting scnse.—In the volume on "Economics" in the Modern Business Text the reader learned that capital, in terms of economics, is a fund or stock of wealth which is used in the produc tion of other wealth. The economist regards capital only from this point of view; capital to him means as sets. From the accountant's standpoint, the term capital means proprietorship, or ownership—in other words, the equity in the assets. Altho the terms are often used interchangeably in legal decisions, it is important to bear this distinction in mind in reading business literature. Because of the liability of con fusion in the terminology, the word proprietorship is coming more into use. If a business had no liabili ties the economist's conception of capital would agree with that of the accountant, but since such a situation seldom occurs, it is well to keep clearly in mind the different meanings of this term.