21. Separation of depreciation and renewal re will be readily granted by most account ants that the question of repairs and renewals and the question of depreciation must be treated sepa rately. For that reason it would seem desirable to create two reserves; one a reserve for depreciation and the other a reserve for renewals. The advantage of this method is that neither of the reserves can be ex hausted without attention being called directly to the fact, whereas if the reserve for repairs and renewals is merged in the reserve for depreciation, the fact might be overlooked. It follows, then, that if the amount set aside for renewals and for depreciation of each separate unit is kept track of in the plant ledger, the information will prove of value in the sub sequent treatment in the accounts of the individual units of plant equipment; moreover, by this means it is possible to compare the actual expense of the re pairs of separate units with the amounts set aside on the predetermined basis for repairs and renewals. It is obvious that nothing should be charged against the reserve for depreciation on account of repairs and re newals.
22. Capitalization of machinery made for its own use by a concern.—Where a firm manufactures ma chinery for its own use, the capital account should be charged with the cost of the material, the direct labor and that proportion of manufacturing overhead ap plicable to the machine, and the latter accounts credited therewith. It would be incorrect for the firm to add any element of profit to the capitalized value because such procedure would inflate the assets by the amount of the profit. Nor should the amount be credited to sales account since it would inflate the sales account by a corresponding amount.
A profit must not be confused with a saving. No profit is realized nor is a sale effected, until goods are transferred to outsiders at an excess over cost. If a concern is able to manufacture the machine more cheap ly than it can buy it in the open market, of course a saving has been made. Here the question will arise as to whether or not it would be proper to capitalize the machine at the market value. The answer is that
capital accounts should not be charged with anything except the cost of acquiring the asset. If the con cern can manufacture the machine for less than it can purchase it in the open market, it has clearly made a saving to the extent of the difference. On the other hand, if the concern has made a miscalcula tion and the cost of the finished machines proved greater than their prevailing market price, the con cern would not be justified in capitalizing the ma chine at the cost price because to do so would be to capitalize a mistake in judgment. The market price of the machine should, in that event, be used as the basis for the charge to capital account and the difference between the actual cost and the market price would be charged to surplus account.
23. Conclusion.—The foregoing discussion is not intended to be exhaustive and the conclusions stated are subject to adjustment, due to change in sur rounding conditions and circumstances. It requires much discrimination and experience to determine whether specific expenditures belong to capital or to revenue. Probably no other question offers greater difficulties to the accountant as well as to the operat ing manager than this question of capital and revenue charges. If those who are charged with the duty of making a decision act with common honesty and good judgment the difficulties are not insurmountable. In cases where plant records have been inadequately kept for a series of years, where depreciation has not been properly considered, or where the proper discrimina tion has not been employed in distinguishing between capital and revenue charges, it is undoubtedly a wise plan to have the physical assets appraised by com petent valuers for the purpose of arriving at their true value. Once this value has been arrived at, the necessary detail plant ledger records can be installed and the accounts in the future will reflect the true financial condition of the enterprise.