Accounting recognizes in as a business factor. All machinery used n pro duction and even the most fixed assets, as buildings, decrease in value with use, the lapse of time and because of new inventions and im provements. This decrease in value must be considered an expense or cost of production just as much as wages and materials, interest and rent. Consequently, true profits cannot be determined nor the real value of the assets stated until after an allowance has been made for depreciation. In Germany, Austria, France, Switzerland and Belgium, all corporations are required by law to set up a special account to cover depreciation. In England and the United States there is no general regulation but the Interstate Commerce Commission and the State legislatures compel the railroads and cer tain public service corporations to make such provision. Most large corporations voluntarily do so.
There are various ways of treating depre ciation on the books. Sometimes the particular asset is credited with the amount' of its de crease, the balance of the account showing its new value. This is called "writing the asset. Sometimes the asset is carried at its original cost and a valuation account credited with the amount of the depreciation. The two accounts, taken together, show the actual value of the asset. Since some assets are consumed slowly while others are short-lived, the deter.' minim= of the proper allowance for deprecia tion is a difficult problem. Absolute accuracy cannot be attained and even approximate esti mates require considerable expertness. Tables applicable to various kinds of machinery and buildings have been worked out from experi ence.
Fluctuations in the value of fixed assets, as measured by the market price, may be consid ered as due to causes not under the control of the business. They may be favorable or un favorable and are often not at all permanent. Usually no consideration is given to them on the books except as there results a depreciation in the value of goods for sale or in the process of manufacture.
Stocks, bonds and the securities of other concerns bought for investment are carried on the books at their original cost, if this is be low the market quotations, otherwise the mar ket value is substituted. • In Austria, the law requires the use of the market value in case of either depreciation or appreciation. In this country it is considered conservative to disre gard appreciation unless the increased value of the asset is actually realized upon by its sale.
Goodwill may be defined as the monetary value placed upon the reputation, connections or advantages possessed by a firm whereby it is able to make unusual profits. In forming consolidations it is often used to represent the difference between the price paid and the in trinsic value of the property acquired. Al though a firm may possess or create advantages by which its profits are increased, it is generally agreed that it is bad practice to set up an ac count for goodwill unless it has beenpur chased. As to whether goodwill should be considered a depreciating asset and gradually written off the books is a question of dispute among accountants. On account of its intangi bility it is regarded conservative to do so.
Cost Accounting is one of the latest developed and most difficult and technical branches of accounting. It is applicable to a manufacturing business rather than to a mer cantile or trading concern. The manufacturer buys raw materials, semi-raw materials, parts already finished, etc., and by means of a prop erly equipped factory and the employment of skilled and unskilled labor, converts these materials into a finished product which he sells. In order to meet competition intelligently and to prepare estimates on work to be performed with accuracy the manufacturer must be able to determine from his records the actual cost of each unit produced during a given period and the cost of goods in process of manufacture at the end of the period. This necessitates the keeping of a class of expenses, known as manu facturing expenses, different from those of a mercantile firm, and the use of many additional ledger accounts.
Three elements enter into the cost of a manufactured article: (1) Raw materials; (2) productive labor; (3) manufacturing ex penses. Manufacturing expenses are also called indirect or overhead expenses and in clude all expenditures outside of those for raw materials and productive labor, such as power, heat, light, factory supplies, taxes, insurance, repairs, depreciation of machinery, etc. Some times a fourth element is included — the sell ing expenses. The first two elements may be called the Prime Cost; the first three the Fac tory Cost; and all four the Total Cost. But these terms are used to express so many various meanings by the different writers on Cost Ac counting as to render a complete discussion too long for this article.