The argument is sometimes used that increase in the value of the intangible properties of railways is greater than the depreciation of physical properties and that for this reason no depreciation or renewal reserve need be provided.
Other executives provide large amounts for depre ciation in prosperous years and set aside either small amounts or nothing in lean years, with the result that the true earnings of the individual years are not stated in their respective income accounts. While in prac tice this _haphazard method in many cases may not result in the overstatement of property values the procedure cannot be recommended. Pernicious econ omy in the expenditures for repairs often increases the depreciation of machines so that the ultimate cost of the repairs and renewals is greater than if the neces sary disbursements had been made at the proper time.
15. Repairs and renewals.—During the early years of the life of a new machine the charges for repairs and renewals will 'be slight, tending to increase as the machine grows older. When a plant has been operat ing for some length of time, the constant addition of new machinery has a tendency to average, from year to year, the charges for repairs and renewals. In other plants, the item is a fluctuating one. It would seem desirable in some cases to attempt to predeter mine the cost of the repairs and the renewals during the life of the machine, and to make a periodical charge against income and a credit to a reserve for repairs and renewals for the annual pro rata amount. The actual cost of the repairs and the renewals made on a machine over the first few years of its operation would prob ably not amount to the sum set aside with the result that there would be a credit balance in the reserve for repairs and renewals account ; later, as the cost of re pairs and renewals increased and exceeded the an nual sum charged to income and credited to the re serve account, the excess credit balance in the reserve account would be consumed gradually. Under this method of procedure a repairs and renewals account would receive the charges for the actual cost of the repairs and the renewals made during the period.
The income account would be charged with the prede termined amount based upon the estimated cost of re pairs made during the life of the machine and this amount would be credited to the reserve account; the amount charged against income would appear in the profit-and-loss account; the amount charged to the repairs account, which represents the actual cost of the repairs made during the period, would be trans ferred at the closing of the books to the debit of the reserve for repairs and renewals account. If the amount of repairs was underestimated at the begin ning, the undertaking in the succeeding years would, naturally, be under the necessity of increasing the amount to be charged against income.
This operation does not of course take care of the depreciation which goes on irresistibly even tho proper amounts are expended for repairs. While de preciation has been discussed both in the volume on "Accounting Principles" and in the volume on "Cost Finding" it may be well to state here that the question of the depreciation charge, for such depreciation as accrues irrespective of operations, is one that creates considerable discussion. Some accountants state that depreciation should not be considered a charge against operations, if it goes on irrespective of operations. It is also pointed out that, during enforced idleness, cer tain equipment might depreciate much more than if properly cared for during a longer term of actual operation. The difficulty, perhaps, may best be ad justed by charging depreciation against cost of op eration while the factory is in operation, since ma chinery is purchased with the view of wearing it out as it is operated. If, however, due to enforced idle ness, there is no production and consequently no units of production against which the depreciation may be charged, this charge may well be made against the profit-and-loss surplus accounts, but it cannot be ig nored. The excessive undistributed overhead ac cumulated during a period of dull business, if charged against the production of the following period, im properly inflates costs and also results in erroneous inventory valuations.