Moreover, it has often been decided in the courts, that the income or profits of a corporation cannot be secured by a stockholder unless thru a formal action of the Board of Directors distributing them in the form of dividends. Therefore, we see that while a stockholder has an equitable right to the surplus as sets of the corporations whose stock he holds, he has not an enforceable legal right to secure any portion of them until either the Board of Directors has formally voted a distribution of them, or until the corporation has taken the necessary legal steps to dissolve its existence.
4. Increase in value due to economic conditions not to be the technical accounting standpoint, it is considered improper to give effect in the balance sheet to the increase in value of any fixed asset due to economic conditions. This is especially true if such increase is to be credited to surplus and made available for dividends.
Thus, we say that a corporation should not in crease the value of its plant land on its books, even tho it is reasonably sure that the land is worth more than when originally purchased. There is no inten tion of making a sale and therefore the profit cannot be realized and the increase in value should not be credited to the profit and loss or to the surplus ac count. Hence it would follow that, according to our conception of income, profits, actually distributed, or dividends actually received by a stockholder, consti tute his sole source of income. Earnings not yet paid out in dividends have no legal existence as income of the stockholder.
The law does not prohibit a stockholder from carrying, as income, dividends which his company has declared out of capital. True, he may be called upon to return them if such dividends result in the defraud ing of creditors, but if they merely involve impair ment of capital, dividends can apparently be treated as income by the stockholder. In this connection, it should be noted that it makes no difference whether the stockholder owns one share or ninety-seven per cent of the stock of a company.
5. A balance sheet should disclose financial condi tion.—From a technical accounting standpoint, the balance sheet of a business purports to show the assets which it owns and the liabilities which it owes. Thus, in the case of a holding company, its principal assets would be the stocks and bonds of its sub-companies; its liabilities would probably consist of notes payable and collateral trust bonds or notes which have as se curity, a pledge of the stocks and bonds of its subsidi aries. Happily, the science of accounting is not
hedged in by narrow bounds. It is ready to foisake the old for the new when anything is to be gained in clearness, economy or convenience by so doing.
6. The accountant and the law.—Frequently, an accountant is compelled by law to do things which he knows are wrong. In common with his fellow men, however, he submits to the law. On the other hand, where he is not absolutely limited by the law, he adopts those methods which he knows are correct ac cording to the principles of his science.
The law, after all, is nothing more than the crystal lization of human experience in the form of written enactment. When a custom or a practice becomes sufficiently, well established among men, it is recog nized and sanctioned by an enactment.
7. Accounting practice and the law at variance.— The accountant has always recognized the distinc tion between revenue and cash, between expense and disbursements. The law, even to this day, does not always recognize that distinction.
The accountant has recognized the necessity of pro viding for depreciation before determining the net profits of a business organization. There have been numerous court decisions in which a provision for de preciation before the ascertainment of net profits was disallowed.
The process of educating legislators, courts and a large number of business men in accounting methods has been a slow and laborious one for the accountant, but happily, the results of his labors are already be ginning to bear fruit. Many of the principles which have been rejected heretofore by legislators and by judges have been embodied in the law thru the rul ings of public service commissions. If, therefore, the accountant proceeds along the lines of correct prin ciples, and uses scientific methods in the attainment of his desired ends, the fact that current legal loctrine or opinion does not support him, is of small impor tance. He therefore justifies himself in preparing financial statements for organizations of the holding company type which have no basis or standing under our present legal doctrine.