ACCOUNTING. It is difficult to dis tinguish between bookkeeping and accounting. In attempts to do so bookkeeping is called the art of recording business transactions and ac counting the science. Bookkeeping gives the history of the business in a systematic manner, while accounting classifies, analyzes and then interprets the facts thus recorded and shows the results as losses and gains, leakages, econo mies, changes in value, etc., in such a way as to reveal the progress or retrogression and the limitations and possibilities of the business. The primary object of bookkeeping is to show debts, both those due to the owner and those due by him to others; the purpose of account ing is to show profits and losses and valuations. Accounting is more than advanced bookkeep ing and an accountant is more than an expert bookkeeper. A person might keep a set of books with perfect accuracy by mechanically observing the rules of debit and credit. The accountant must be able to design the set of books and the system of accounts which will give the desired information with the minimum of effort. He must have such a comprehen sive view of business, both its economic and legal aspects, that he can not only see the ef fect of all kinds of transactions on the profit and loss statement and balance sheet, hut also recognize and classify all other factors which enter into the determination of the true status of an enterprise. The development and rapid rise of accounting is due to the change from private to corporate form of business organi zation. The enormous growth of manufactur ing, transportation and mining companies, and investment nvestment of their ownership in the hands of many shareholders demands a more ac curate determination of profit and loss and valuation of assets than when such enterprises were owned by small private companies. A proper accounting system is an aid to the creditors of a corporation in determining the value of its securities and shows the stock holders whether they are receiving a just share of its profits. Since the charges for service rendered by the public service com panies coming more generally under the regulation of legislative authority, it is essen tial to know the exact value of the capital upon which dividends must be paid and the true profit which has been earned in order to fix those charges on an equitable basis. This
requires a careful classification of items and a regard for certain factors which bookkeep ing, as formerly known, did not take into con sideration.
Increasing interest in municipal affairs has resulted in the development of accounting sys tems for cities, counties and States with a view to unifying and classifying their revenues and expenditures so as to show true costs and the comparative efficiency of various depart ments and changing administrations.
Accounting has made prominent the prob lem of distinguishing between a revenue ex penditure and a capital expenditure. If an item is regarded as a revenue expenditure, it is debited to some expense account and decreases profit; if it is considered a capital expenditure, some real account is debited and the assets in creased. For many years the railroads, quite generally, regarded as an expense most im provements in their rolling stock and better ment of their tracks. They charged to operating expenses instead of to construction, account the cost of reduction of grades, the re placement of wooden bridges by those of steel, and even the cost of extensions and branches. They claimed that these expenditures for im provements were necessary to hold business against competition and were not simply fac tors to increase business.
The commonly accepted theory of account ing requires that in so far as any expenditure results in an addition of substantial and per manent character which increases the value of the plant, such expenditure shall be considered an increase in assets is debited to construc tion account. This s not always upheld by legal decisions hut since 1906 the Interstate Commerce Commission has prescribed a uni form set of accounts for railroads engaged in interstate commerce which embodies this prin ciple. It is often difficult to determine whether an expenditure should be considered a real ex pense or an increase in capital. Sometimes it partakes of the nature of both and has to be divided, as when an old machine is replaced by a new one of an improved and more ex pensive type.