Methods Commonly Employed

Two methods of booking depreciation in the ledger are commonly employed. The periodic adjusting entry on account of depreciation has as its basic purpose the separation of the mixed account under asset title into its two elements—the one to show the expense element, the other to set up the true valuation of the asset. The expense element is set up under the one title “Depreciation” for all the assets. The deduction from the values as shown in the unadjusted asset account may be made either by credit entry direct to the asset account or by entry to a separate “Depreciation Reserve” account, each one of these reserves distinguished by the name of the asset to which it applies.

The latter method is preferred because thus the asset account at any time shows the original cost of the property—information of value for many purposes and worth the effort needed to maintain it distinct from other items. Under this method every wasting asset account is immediately followed by its particular depreciation reserve account, called its “valuation” account. The depreciation reserve is as much a part of the record of the asset as is the asset account itself. The two accounts are complementary, neither giving reliable information without the other. The reserve account is thus always and only a balance sheet account.

The above statement indicates the most satisfactory method of handling the various depreciation reserve accounts on the balance sheet. Although appearing on the credit side of the ledger, they are in no sense liability accounts, being interpreted always as credits to the asset account, held in suspense, as it were, in the reserve account, pending full determination of their accuracy, which governs their ultimate disposition. Thus, on the balance sheet, either only the net present value of the asset should be shown, or preferably its original cost with its value extended short, its depreciation reserve deducted, and the present value, thus determined, full-extended. Further information of some value is given if besides the amount of the reserve the rate of depreciation is shown, though this is not often done. Occasionally an entirely incorrect showing, from the viewpoint of strict form, is seen when not only are the depreciation reserves—usually in one item—shown on the right side of the balance sheet but are set up in the Net Worth section, seemingly as a part of the surplus or other true profit reserves. This practice cannot be justified on any ground except that the sheet is kept in balance—a consideration which is far removed from real essentials.

Renewals and Replacements

First Method. As to the handling of the reserve at the time of renewal of parts and replacement of the entire asset, here also two methods are met. Under the one, the original cost of the part (or whole) retired is transferred from the asset account, its salvage value as defined above being carried to a Salvage account, and the cost less salvage portion being charged to the reserve account of the asset. This clears the asset account of all capital charges on account of the part (or whole) retired. The new part (or whole) replacing it is now charged to the asset account which then represents true cost of the new asset. If it is a whole which is replaced, theoretically the charging of it against the reserve should just clear that account of all values. Practically the preliminary estimate or forecast of the amount and time of depreciation never coincides exactly with the fact of depreciation. A credit balance in the reserve indicates an overallowance for depreciation and is an item of true reserved profits, i.e., surplus; whereas a debit balance indicates an insufficient allowance and is an expense item chargeable against surplus and not current profits. This matter is treated at greater length on page 205. When the whole asset is replaced, the depreciation reserve should always be cleared of any remaining balance, as indicated above, so that the new asset and its depreciation allowance may be handled and watched unobscured by the record of any inherited sins or virtues from the past.

Second Method. The other method of handling the reserve at the time of replacement requires a comparison of the cost of the displaced asset and the cost of the new asset. The old asset account is allowed to stand untouched, but any betterment, i.e., excess of reproduction cost over original cost, is charged to it so that the asset account may show cost of the new asset. This cost, except for its betterment portion, if any, is now charged against the reserve. Both methods thus accomplish the same purpose, but the first is more direct and simpler of operation. It may be interesting to note that, in early instructions to railway accounting officers, the Interstate Commerce Commission prescribed the second method, which emphasizes the betterment feature. The present regulation is in accord with the first method.

Occasionally one finds a practice which, though based on the second method, differs in that no determination of betterment values is made, the original asset values remaining undisturbed and the entire reproduction cost being charged against the reserve account. This practice, of course, is due to a lack of understanding of the nature and purpose of the depreciation charge and its offsetting reserve, and is counter to correct principles. There is, however, seeming judicial support for it in cases of the valuation of utility properties for rate purposes. The problem is discussed in full on page 202. The entries on the general books thus present no difficulties.

Subsidiary Records

Subsidiary records should usually be kept to show the detail of the group asset accounts carried on the general ledger. Not only is this necessary to maintain an adequate check on the inventory of the group asset and control over it, but without a detailed record of items it is impossible to keep careful watch over the operation of the forces of decay and depreciation and, therefore, equally impossible to build up reliable experience data concerning each group of assets. The amount of detail necessary in the record of the plant assets is dependent upon the information desired and capable of being obtained within a limit of cost low enough to make it worth the cost. This is a matter of policy which the management must determine. It may be desirable to carry the records in much greater detail for a period than would be justifiable as a permanent policy. It may be worth while to make more or less frequent studies of particular groups of assets in order to check up the effect of the depreciation rates.

As is pointed out elsewhere, while the preliminary estimate of expected life, and determination therefrom of the depreciation rate, are of great importance and the utmost skill and judgment possible should be employed, only a policy of everlasting vigilance and readjustment, in the light of new data available with the increasing age of the asset, will bring satisfactory results. To predetermine a rate and then to expect it without supervision to work out to a successful conclusion is, to say the least, foolish. Only by means of a complete record of life histories can a mass of reliable data be built up which can be made to serve as a guide for the future. The depreciation problem is an individual problem and must, from the nature of things, remain so to a marked degree. Until conditions under which the lives of assets are to be lived become more or less standardized, or so long as each concern must carry its own depreciation insurance, standard rates of depreciation will not have a controlling significance.

Grouping and Classification of Plant Assets

From what has been said it is evident that the assets of a plant must be divided into groups for the sake of simplicity and convenience in keeping record of them. The basis of grouping should be physical similarity, process, or product. Thus, all tram cars might be carried in a group, as also all machines doing the same work or process. Groups of machines performing different processes on the same product could well be treated as a depreciation unit, and likewise all buildings used for the same purpose, if of a similar type of construction. If the latter are of different types it might be desirable to keep separate records. As stated above, the information desired must govern the groups under which record of behavior and performance are kept.

A numerical or an alphabetic numeric system of classification and identification is advantageous. Each machine, piece of equipment, or other asset should be marked or tagged when installed so that any particular piece of equipment can be identified at any time. The tag should carry date of installation and the name of the maker or vendor, as well as its own identification number. By the use of a combined alphabetical and decimal numerical system, almost any possible grouping can be made according to main and auxiliary groups, processes, or products.

Form of Plant Ledger

The form of the plant register or ledger need not be elaborate. Its main subdivisions should correspond with the subdivisions of plant and equipment carried on the general ledger. Thus, if we find therein accounts with buildings (factory, store, office, etc.), machinery, furniture and fixtures for factory, store, and office, delivery equipment, etc., subsidiary records should show corresponding subdivisions. It should be a matter of fixed policy to require a periodic proof of these subsidiary records against their respective controlling accounts on the general ledger. Only thus can the inclusion of all items in both records be made certain. The control established must cover both the items of the assets record—the original cost as shown by the asset account—and the accumulated depreciation as shown by the reserve account.

Asset Record

Aside from the title and classification and identification number, the plant register should provide a record of the asset under the heads of:

On the form shown below, provision is made for adjustment of the original estimate of depreciation. Where there is a realizable scrap value, additional columns to show scrap value and total depreciation to be written off should be provided. The form shown would have to be adapted to the method of depreciation decided upon as applicable to a particular asset. Thus, if working hours or service output are the basis, provision should be made to show the basis of calculation of each period’s depreciation burden. The following form is well adapted to make record of the asset under the straight line method of depreciation.

Periodic Revision of Rates

In Chapter VIII where the problems in connection with depreciation rates were discussed, a periodic testing of the effects of the particular rate employed was laid down as an essential for the application of any rate. The determination of the rate in the first place is a problem requiring expert knowledge and the most careful consideration of many factors. Hardly less important, however, for the successful operation of any depreciation scheme is the attention given to the manner of its operation and a modification and readjustment of rates to bring the theoretical expectation of the wasting of the asset into accord with its actual wasting to date.

At the beginning, when the asset is first installed the depreciation rate must be based, so far as this particular asset is concerned, entirely on contingencies. None of its life has been lived; none of its actions and behavior have yet become a matter of record. What it is apt to do can be forecast only by a study of its ancestors—heredity as modified by a reasonable expectation of change due to different environment. However, at the end of five years, say, there is available a record of service and behavior in the light of which not only can the accuracy of the forecast be judged, but also a more reliable forecast for the remainder of its service life can be made.

Frequency of Revision of Rates

Because of the conditions stated above, a periodic testing of rates should be made. How frequently this should be done depends largely on local conditions. Certainly sufficient time should be allowed to pass to secure a really worthwhile test. What constitutes a sufficient time depends largely on the expected length of life. Long-lived assets obviously need not be tested so frequently as short-lived assets; and the periods should be shortened when the asset has been serving under supernormal conditions; the intensity of its life would be a controlling factor. It is usually stated that this testing of rates and conditions should be made at least every five years in the form of an appraisal. In the physical appraisal care should be used not to allow present market prices to enter into it, else the element of fluctuation may easily be brought in to nullify or exaggerate the real results of depreciation.

Test of Condition Per Cent

At the time of reappraisal the estimated condition per cent or the expectancy as to remaining service life are the points most to be considered. C. E. Grunsky has made an interesting contribution to the study of expectancy—theoretical, it is true, in the sense that it is based on assumed hypotheses, but nevertheless of value as calling attention to a phase of the subject that presents large possibilities. He takes 10,000 similar articles, all of probable life-terms of 10 years, and all simultaneously installed. Assuming that of these 10,000, 100 will fail or go out of service at the end of the first year, 200 at the end of the second year, that the largest numbers will fail in the years just before and just after the expected life-term of 10 years, and from then on, that there will be a gradual decrease in the number of failures until the 20th year, beyond which time (double the estimated life-period) none will remain in service—the following table is shown, which gives in the last column at the right the life expectancy of all remaining articles as at the beginning of a given year.

It will thus be seen that an article which has survived its 5th year, has at the beginning of its 6th an expectancy, not of 5 years but of 6.12 years; an article which has lived its allotted 10 years has an expectancy of 3.67 years; and so on. Certainly Mr. Grunsky’s study, if it serves no other purpose, at least draws attention to possible lines of development and, read in connection with facts as to the known length of life of many assets which have outlived their expected terms, it draws strong attention to the need of very careful use of any so-called mortality tables. These life history tables for assets are similar to the mortality tables used by life insurance companies.

Table of Expectancy[37]

Composite and Group Rates

In the practical application of the depreciation rate in a large plant, every separate piece of property is not, of course, considered by itself. The plant is divided into groups of similar assets, determined roughly on the basis of life expectancy, conditions of service, etc. Using these groups it is possible to find the rate of composite depreciation—a figure which serves as a check over the group depreciation. This is also sometimes called the “mean life” of the plant. It is determined by two methods—one called the direct, the other the dollar-year method. Assuming groups of assets of varying life lengths and costs, the following examples show the manner of estimating the amount of depreciation for the whole plant and also composite life; that is, the mean average life of the individual assets when viewed not as units but as a composite whole:

Mean Life
Direct Method

Mean life is $355,000 ÷ $37,500, or 9⁷/₁₅ periods.

Under the dollar-year method, the invested values are weighted by the length of their investment term and thus all investments are reduced to the common basis of one dollar for one year:

Mean Life
Dollar-Year (or Weighted Ratio) Method

Column (f) ÷ column (e), (7,100,000 ÷ 750,000 = 9⁷/₁₅) gives the mean life.

Column (e) ÷ the longest life-period, 20 years, (750,000 ÷ 20 = 37,500) gives an annual charge for the whole plant.

What is known as “mean” age or plant expectancy as to remaining life may be found similarly. Assume a physical appraisal made after 12 years’ life of the above assets:

Mean Age (Life Expectancy)
Direct Method

The figure of mean or composite life may serve two purposes. First, it forms the basis for comparison with other similar plants and is about the only fair basis for comparison. Second, it gives the basis for estimating the amount of annual depreciation of the plant as a whole. This statement does not mean that individual depreciation reserves are not to be carried for each group of assets and those charged with the value of the asset as soon as it is discarded and renewed. But the use of the estimated mean or composite life figure does give a control over the amounts which should always be found in the individual group reserve accounts, i.e., at any given time the sum of the individual reserve account balances should be approximately equal to the amount as shown by the reserve when calculated on the mean life basis.

The Reserve as an Index of Financial Condition

The statement is often made that a balance sheet showing depreciation reserves points to a conservative policy in the treatment of plant properties. Usually such a balance sheet affords little or no basis for expressing a judgment as to conservatism or the lack of it. All that it does show is that recognition is made of the fact of depreciation. As to its adequacy or inadequacy, a knowledge of other factors is necessary.

Fluctuating Reserve. According to successive balance sheets a reserve may vary little from year to year, or it may show considerable increase or decrease, and any of these conditions may be entirely normal and express adequacy of reserve requirements. In the first case, stability of the reserve may result because the asset is short-lived and hence is more or less frequently replaced; or different units of the property may have been installed at somewhat regular intervals so that retirements from service are also somewhat regular. Under either supposition, the charges against the reserve for the units displaced would just about keep pace with the regular credits to reserve for replacement purposes. In other words, that condition of the reserve for that class of asset is the normal condition—except perhaps in the case of a rapidly expanding plant, or other conditions not counted as normal when the reserve requirements were put into operation—and any other condition should lead to inquiry and investigation.

Increasing Reserve. In the second case where the reserve is showing a considerable increase from year to year, that also may be a normal condition. Long-lived assets are seldom replaced with any degree of regularity in the annual charge against the reserve, except in the case of very large plants where the number of such assets is correspondingly large in proportion to their size. Here more or less regular installations may take place as a result of an expanding business, covering a period of approximately the same length as that of the life of the asset. So here, too, any other than a regularly increasing reserve must incite inquiry.

Decreasing Reserve. As to the third case, that of a somewhat regularly decreasing reserve, the condition is not usually normal but may occasionally be met in a plant where one type of equipment is being retired and not replaced, due perhaps to a changing line of activity; as when, for instance, a stock furniture manufacturer works gradually into the exclusive manufacture of automobile and carriage bodies. Some types of equipment will thus be gradually retired and their reserves will constantly diminish, their place being taken by other reserves covering the new type of equipment. However, this condition of decreasing reserves, while entirely normal under certain circumstances, being unusual, should always receive careful investigation. It is here that mean life and mean age or composite plant depreciation are of assistance in forming a judgment as to the general adequacy of reserves.

The Reserve in Relation to Expanding Plant

In the case of a plant the development of which is stationary, the problem of judging the adequacy of the reserves is simple in comparison with a plant which is expanding, resulting not only in the installation of more of the same kind of equipment but also of equipment of other kinds. A disturbing element is thus introduced and careful oversight of the depreciation policy must be exercised. In all cases, intelligent reading of the reserve and its sufficiency are internal problems based on intimate knowledge of conditions. Lacking this knowledge no true judgment can be made. The character of the asset, number of units in use, dates of installation, a comparison of the assumed conditions at date of installation with the actual conditions of the present—all are factors to be taken into account.

Reserve as Related to Efficiency

The general relation of efficiency to depreciation has already been discussed. As to whether the condition of the reserve is any index of the efficiency of the service rendered by the plant unit, attention is briefly directed to a misinterpretation of individual reserves. Experts state that many types of equipment cannot deteriorate actually more than a fixed per cent of their cost and continue to give efficient service. If, say, 30% is the limit in the case of one type, this does not, of course, indicate that, as soon as the depreciation reserve shows an amount equal to 30% of the cost, the approach of inefficient operation and the time of discard are at hand. It must be borne in mind that the reserve is a device based on financial considerations and, if properly calculated and handled, no asset should be ready for retirement until its reserve approaches in amount the value at which the asset is carried in its account. Nor is the point of approaching inefficiency shown until that condition of the reserve is found.

Reserve not Based on Cost of Replacement

The question is sometimes raised as to whether reserve requirements should be based on original cost or cost of replacement new. The question usually reveals a lack of understanding both of the purpose of the depreciation charge and the means of financing depreciation. It is usually said that the reserves carried on the books are for the purpose of providing the means of financing the replacement. It is not the purpose here to go into the question of original cost versus cost of reproduction new, either as a basis for valuation of public utility properties or from the viewpoint as to where the incidence of the burden of replacement properly should rest—whether on the users of the service given by the asset to be replaced or on those using the new asset. In the private enterprise where the rights of the public are not so apparent, under present-day tenets of political and economic philosophy, only internal policies and purposes to be accomplished need be considered.

As stated above, the basic purpose of the creation of the reserve is to burden the product with depreciation charge as a real part of the cost of production. If we are concerned with real and actual costs of production, by no stretch of the imagination can replacement cost—what it might cost to replace the asset at some more or less distant time—enter into the question. It might, with equal obscurity of logic, be said that, because the labor cost is bound to be higher 10 years from now than at present, in order to get the true present cost of the product the estimated future labor cost should be taken in place of the actual present cost.

The Financing of Replacements

If one purpose of the depreciation reserve is that of financing depreciation, this can mean only that the reserve must insure provision being made so that the capital invested will not be lessened or encroached upon by the wasting of the assets in which it is invested. It is no necessary or proper purpose of the reserve to provide for increasing the invested capital. Financing the replacement of the retired asset is a separate financial problem and only concerns accountancy, so far as the records may reflect that policy. The reserve, in itself, does not furnish the means of financing any part of replacement, as was fully shown above. If the new asset is expected to cost more than the old, certainly business prudence would dictate provision for the added cost as well as ready funds of an amount equal to the original cost. The actual capital provided originally need be sufficient only for the time being; to provide more than that, if remaining idle, would be folly. If there is evidence of expansion, or if it is recognized that more will be needed—due to change in markets—for replacement purposes than was originally needed at the inception of the enterprise, provision must be made therefor.

Methods of Financing Replacements. In the financing of replacements, three courses are open:

In the third case present dividends may be sacrificed for the sake of the future. Such reserve profits must be kept and used for the intended purpose, the purpose dictating their form as liquid or fixed. It cannot be too strongly emphasized that these are reserves of profits—not valuation or offset accounts under the title of reserves. Depreciation reserves, except they become secret reserves in the sense referred to below, have no right to serve any other purpose than that intended, viz., to provide insurance that none of the originally invested capital shall be dissipated and that the current product shall be burdened with its just share of all the materials and costs of production.

Secret Reserve

A great deal has been said about inaccuracies in the depreciation charge; the need of periodic readjustments has been emphasized. Now it is purposed to look into the effects of inaccurate charges remaining unadjusted on the books. In a desire to be on the safe side, some concerns, notably financial institutions, make very liberal provision for depreciation. Such a policy is not entirely to be condemned and is decidedly refreshing in comparison with the parsimonious allowances, begrudgingly made in some quarters. The effect of such a policy, if operated without check, is to create what is known as a “secret reserve.” The value of the asset is charged more rapidly against operation than the asset actually wastes. Hence the books show a reserve sufficient to cover the cost of asset while there are still values remaining in the asset. In other words, the business possesses an asset of value which is carried on the books as of no value. Were the real present value of the asset brought on the books, the contra credit would appear in some surplus or profits reserved account. Such would constitute a true record of the item, openly stated. So long as the asset remains concealed, i.e., without record on the books, its contra credit is also latent and constitutes a secret reserve of profits.

A too liberal depreciation policy, if recognized and adjusted at the time of a reappraisal, will require a separation from the depreciation reserve of the portion brought about by the overallowance, and its showing as a part of the surplus. When so handled, an overcharge for depreciation has no permanently bad effect except as it may show, for purposes of comparison, too high costs of production for the period overburdened. However it may be and sometimes is, used for purposes of fraud and therefore, as a fixed policy, the practice of the secret reserve is to be condemned.

Insufficient Charge

On the other side is the parsimonious policy of too low a charge or none at all. This results, whether consciously or not, in a charge against capital instead of revenue. At the close of the fiscal period the books are supposed to be brought into accord with the facts of true condition as then existing. Therefore, if the full portion of the accrued expenses is not separated from the wasting asset accounts, but is allowed to stand on the books under the title of assets, then these true expense items will still be carried hidden under the cloak of asset titles. The depreciation is thus carried as a charge against capital. The depreciation of a going concern should never be so treated; it is an operating charge, and no flight of fancy or shuffling of figures can make anything else of it.

In the case of a property, showing inflated values because of too low depreciation charges in the past, which is taken over and rehabilitated, the sums spent on the property previous to operation to put it in condition are properly capital charges. This is allowed on the theory—unfortunately, not always a fact—that the difference between the book value of the property and what was paid for it represents the estimated expenditures necessary to bring the property up to its book value. If such is not the case and full book value was given for the property, the charge is still allowed, being looked upon as in the nature of an organization expense, representing in an instance of this sort the measure of the bad bargain made. This will, of course, result in a penalty in the form of an added depreciation burden on all product from the property taken over and rehabilitated.

Appreciation as an Offset to Depreciation

If depreciation is so inevitable and the necessity of its charge so absolute, can anything be said in support of the proposal to offset depreciation against appreciation? By appreciation is meant an increase in value due to the passing of time. Judicial authority can be found in support of it in cases of valuation for rate purposes.[42] There is no question but that a realized increment in land or any other asset offsets a depreciation or any other expense charge in just the same way that any other item of income offsets an expense. There is, however, this marked difference between depreciation and appreciation: the former is an inexorable reality advancing day by day entirely independent of market fluctuations, whereas the latter is dependent on the market and usually cannot be realized until the asset is sold.

When, however, as is too often the case, the proposal to offset depreciation by appreciation is meant to justify a policy which takes no cognizance of depreciation on the books because it is offset by appreciation, no support can be found for that view. In itself it reveals an entire lack of knowledge of the purpose of the depreciation charge or a disregard of the fundamental and obvious requirements of prudence. Depreciation is one of the costs of production and without it true cost cannot be shown. Failure to show depreciation on the books would justify also the omission of a cash income item because the cash was to be spent immediately in payment of salaries—a cancellation outside the business records of income against expense which can under no circumstances be justified.

Appreciation Due to Physical Changes

There is a kind of appreciation which is not dependent on fluctuations of the market and which as surely accrues, up to a certain point, day by day as does depreciation. Properties the value of which has been enhanced by earth construction work done on them are susceptible of this kind of appreciation. “Appreciation is generally restricted to physical items, and measures their gain in value due to age, use, and properly directed labor.... It results from work not specifically charged to capital account ... and covers items not represented ... in connection with a valuation.”[43] It is found in connection with such items as roadbeds, solidification and grassing of slopes, drainage, dams, embankments, etc.

Its two forms are called solidification and seasoning, and adaptation. By the first is meant a settling and compacting of loose earth and its protection from wasting and washing away, as by the grassing of slopes, and the planting of trees and shrubs to hold the snows. When a roadbed is turned over to the operating division, it frequently is far from complete in the sense of being in a high state of efficiency, and the cost of its maintenance and up-keep during the early years of its life is much higher than during later years. This appreciation due to seasoning is difficult of valuation, but perhaps the difference in up-keep between early and later years is the best measure of it.

Appreciation Due to Adaptation to Use

“Adaptation” is a term used to cover that class of expenditures needed for the better adaptation of the property to its use. In the early stages of the development of a property many things cannot be foreseen nor can a proper basis be settled upon for a determination of the charges as between capital and revenue. The proper handling of such expenditures as those incurred for drainage requirements, better adaptation of the roadway to the surrounding topography of the country, etc., are difficult. If these costs have not originally been charged against capital, the properties may truly be said to have appreciated in value by reason of them. Items of this kind require a wise discrimination between costs of operation and capital charges. The effect of such changes is almost always lost sight of so far as physical appearance shows, and the appreciation due to them is difficult of valuation at a later time. In the case of railroads, perhaps the difference in maintenance cost as between the early and later years of the roadbed is the best index.

In the case of industrial concerns, the cost of a rearrangement of machinery and working facilities for the better and more economical handling of the product frequently results in an appreciation in value due to adaptation to use. This has already been discussed in Chapter V.

As stated above, appreciation has judicial sanction and its valuation, although fraught with many difficulties and uncertainties, has been made and the results accepted. The generally haphazard method of roughly estimating the value of an appreciation when its determination becomes necessary suggests that it were better, by far, to attempt the proper segregation of the charge between capital and revenue at the time of its incurrence, rather than to take cognizance of an appreciation in value at a later time. There are undoubtedly circumstances in which appreciation in value can be properly recognized and should be taken into the accounts not only of public utility properties but also of industrial concerns.

Unearned Increment

Appreciation in value due to so-called unearned increment is entirely a matter of market value. By this is not meant that the monetary value of this kind of appreciation fluctuates with the market; it accrues from day to day and is just as real as depreciation. Although very real, it does not become realized until the property is disposed of, a thing which is determined by business policy and does not rest on any principles of accountancy. It is not good practice to bring such unrealized values on the books. For a fuller consideration of this phase of the subject, see Chapter XVII where the problem is treated in connection with land and real estate.

Depreciation Policy and Stockholders

A final consideration concerns the relation of the depreciation policy to the stockholder. As stated above, a too liberal depreciation policy results in the creation of secret reserves which may be used to the prejudice of the stockholder by an unscrupulous managing clique desirous of buying minority holdings at a depreciated value or of manipulating the stock for speculative purposes. An insufficient depreciation allowance results in a false optimism, a payment of dividends out of capital, and perhaps finally in a wrecking of the property. Except for the transient, speculative shareholder, a fixed depreciation policy based on a conservatively accurate allowance is always for the best interest of the property and its owners.