Deterioration of plant still continues.

See page 82.

Stock dividends.

See page 45.

as these, however much they may increase the real value of the undertaking and may justify a corresponding valuation in the case of change in partnership or sale of shares, cannot safely be set against actual physical deterioration of the plant. The latter, as a distinct and unavoidable circumstance, should be dealt with on its merits, and improvements in another direction be left to a subsequent valuation, when the real maximum value has to be ascertained.

In a joint-stock company effect may be given to such assumed increase in value by the higher market value of the shares; further, the original capital of a company may be increased under such circumstances by the distribution to the shareholders of new shares as "stock dividend."

CHAPTER II.

DIVISION INTO CLASSES FOR DEPRECIATION.

In order to estimate correctly the alteration in value which the capital sunk in factory plant undergoes from year to year, it is necessary to have some record of the original value or cost as a starting point. If the factory has been bought, the price forms this basis; if it has been built and equipped by the occupiers, there will either be a record of capital expenditure, or if not, as frequently happens in factories which have grown up by slow and irregular additions, and it be desired to inaugurate a proper system, a valuation will be necessary, to which subsequent depreciation rates can be applied. It may be that each annual review will show a growth of value by mere extension, even after deducting for deterioration; but it is important to take strict account of the latter, so as not to allow the nominal capital to be unduly swelled.

In some undertakings, not only the method, but the rate of depreciation is fixed in the deed of partnership or articles of association. It may have been a wise precaution to agree upon the principle of writing off, and even to fix a minimum rate, but it is obviously impossible to thus decide in advance on an absolute rate. Sometimes it is prescribed that deterioration by time and use shall be met by applying a fixed proportion of the profits to make good what has been lost. This method is more frequently adopted in the articles of joint-stock undertakings in France than in England; but it is obviously

Valuation as a

basis for depreciation.

See page 56.

Prescribed rates

of depreciation.

Fixed proportion of profits written off.

Writing off in proportion to output.

See page 55.

unsound, as deterioration goes on even if no profits are being made. A percentage on the output or cost value of the products would be a better plan, and by referring to the accounts of preceding years a fair rate from this point of view may be established. While, however, this is useful, and indeed necessary, in estimating the cost of future production, it is not the best for dealing with the past. A percentage on the capital value as it was left at a previous review is for this purpose the most suitable. The sound plan is to write off this percentage in every year, Repairs charged besides charging to revenue the expenditure for repairs. It is, however, quite proper, in determining the rates of writing off for any year, to take into account the activity or slackness of certain departments. Credit has also to be taken in the plant account for actual renewals and additions which have been made.

to revenue.

See page 57.

It must always be remembered that to depreciate plant is to provide for contingencies as well as for the rate of wearing out which may be immediately visible. Therefore Rates subject to till a factory has been working for many years, any rate of adjustment.

Comparison of factories difficult.

depreciation must be tentative and subject to occasional adjustment. If a very low rate be adopted and yet after a course of years be shown to have been sufficient, it does not follow that the original adoption of such a rate was prudent. The risks have been run, and should have been provided for.

The great diversity of system renders a comparison between the practice in different factories difficult. In one, the greatest attention will be paid to repairs; renewals and even extensions will be effected out of revenue, and little or nothing written off for depreciation. In another, there may be apparently an ample provision made in the capital account for depreciation; but repairs may be neglected and a too liberal addition may be made to capital for so-called new plant.

into classes.

liable to error.

To facilitate a correct estimate of deterioration it is expedient in many undertakings to divide the property into Division of plant classes and to deal separately with each. Sometimes it is preferred to write off at one average rate from the whole of the sunk capital; and, if this average happens to be a fair one, the method has the advantage of simplicity. But simplicity is its only merit, and it has many drawbacks. Buildings and machinery generally require very different rates; and although a fair average may have been esta- Average rates blished, this is liable to be affected by the vicissitudes of particular years, and without modification may lead to considerable error. For instance, the manufacturing work of one year or a series of years, may have told more severely on certain parts of the plant or buildings than on other parts, and if the wear and tear due to such work have not been sufficiently noted, estimates for future operations of a similar kind, which allow only for the previous depreciation rate, may prove erroneous.

There are frequent instances of factories engaged in multifarious operations, where a certain total result of profit is obtained, concerning which little or no investigation is made to ascertain to which branch of manufacture it is due. And in the absence of a proper analysis, the most remunerative class of operations may be neglected, or contracts taken in other branches at prices which would show a loss if the deterioration of plant due to them were properly allotted. As a corollary to the foregoing, it should be held dangerous to establish an average rate merely because it has been found appropriate in some other factory apparently similar, unless the conditions are exactly alike.

Sometimes an equal instalment from the original value of the plant is written off every year; sometimes each machine or item of plant is considered separately; but it is more usual to write off a percentage, not of the original value, but from the balance of the plant account of the

Wear and tear not duly allotted

Analysis of profit and charges.

Equal instalments of original cost written off.

See page 63.

Division into classes.

Example of classification.

See page 50.

expenses

show no available asset,

preceding year. Thus, if at the end of the first year 10 per cent. has been written off £100, then the 10 per cent. will in the second year be written off £90, and so on. Additions made within the year go, however, to neutralise such reductions, and in many cases to increase the actual total capital value.

When dividing into classes the capital sunk in manufacturing plant, it is desirable, on the one hand, to have various distinct general categories; on the other hand, a minute subdivision is generally impracticable and inconvenient.

The following is an example of the classification frequently adopted in factories :-Preliminary expenses; Land, including adaptation; Buildings and wharfs; Fixed plant and machinery; Steam engines, boilers and furnaces; Small loose plant and tools; Horses. To these must be added undertakings which are of a terminable or wasting kind, and for which special depreciation is necessary.

In establishing a new manufactory there is often an Preliminary outlay of capital for Preliminary Expenses, giving no actual asset in buildings, plant, or other tangible property. Such are the legal expenses connected with the formation of a joint-stock company, and in some cases there are the expenses of obtaining an Act of Parliament. Outlay of this kind may be just as necessary to the purpose in view as any other part of the expenditure, and may have been foreseen and reckoned on as part of the required capital. While, however, the earnings of the factory may, so long as they continue, afford a profit on such accessory outlay, the latter may be quite valueless as an asset in the event of the undertaking being wound up or sold, and therefore it is generally deemed prudent to cancel quickly this portion of the capital by writing it off annually out of the earlier earnings.

should be quickly

cancelled.

See page 56.

Railways, as already referred to, afford a conspicuous