Reviewed by W. T. Wrege University of Wisconsin-Milwaukee
The purpose of Saliers’ book was to develop a justification for charging depreciation expense in the determination of income, and for writing down assets over their useful lives. The author’s earnest attempt to convince the reader that depreciation should be charged over the lives of assets began by pointing out that, relatively recently, vast amounts of wealth had been invested in large corporations. Through depreciation charges, companies could recover the cost of capital from the normal operations of the business. Failure to charge for depreciation would result in an overstatement of profits and (possibly) in dividend payments which included returns of capital.
Several events occurred early in this century which made income determination more important. Most states had passed laws prohibiting companies from distributing capital when paying cash dividends. Public utilities were operating as monopolies; and regular tory agencies had to determine what constituted an adequate return on investment. Widespread absentee ownership of large corporations made income determination important to investors in their evaluation of returns on their investments. The newly enacted income tax law made income determination important for taxing purposes.
From these information needs, the author extended his argument for using depreciation charges by citing court cases, public commission pronouncements, and practices of accountants in the United States and Britain. The author conceded that the charge for depreciation is indefinite, but he asserted that the magnitude of investment by large corporations demanded that the problem of determining depreciation charges be “mastered.”
The author’s first chapter, entitled “Character of Industrial Plant,” discussed the accumulation of depreciable assets and defined de-preciation as “the loss of value, whether tangible or intangible in form, resulting from physical decay, or from obsolescence or inade-quacy, which indicate functional decay” (p. 22).
The author next presented the process of recording depreciation. Using a hydroelectric plant as an example, he first established the costs to depreciate. Through the use of a plant ledger, Saliers de-scribed the adjustments required to record charges for depreciation. The author then distinguished between depreciation reserves and depreciation funds. Depreciation reserves were described as the accumulation of charges to reduce apparent net profits to actual net profits by writing down book value of assets to actual values. Depreciation funds were amounts actually created for the purpose of replacing buildings, machinery, etc.
The author’s use of the term “value” is somewhat disturbing to the current reader because of contemporary recognition of current value, entry value, exit value, etc. Saliers’ methods for determining and charging depreciation, however, more clearly show his inten-tion to allocate costs to periods of benefit. The reader would be better served by focusing on the latter point rather than trying to guess what the author meant by value.
In the next part of the book, Saliers developed the propriety of the charge for depreciation. As mentioned earlier, Saliers used court cases, rulings by public commissions, and actions of accountants in the United States and Britain to justify his position throughout this discussion.
In the final section, Saliers described various methods of depre-ciation in use during the period in which he wrote. They include the straight line method, the reducing balance method, the sinking fund method, the annuity method, the equal annual payment method, and the unit cost method. Some of these more complicated methods are little discussed today.
This book is valuable from several standpoints. While depreciation charges are considered normal and proper today, they were viewed with suspicion in 1915. Contrast Saliers’ view of charging depreciation with Paul-Joseph Esquerré’s:
“. . . charges made to operations under the title of ‘depre-ciation’ often contain, if the truth were known, provisions for unknown quantities, the ultimate result being the perversion of accounting truth.” (Esquerré, 1914; 372)
While we describe the allocation of costs to periods of benefit to introductory accounting students today, in 1915 justifying the propriety of depreciation charges through logic and by citing court cases, public commission actions, and the practices of accountants was necessary in order to develop a theoretical foundation and to obtain general acceptance of the practice.
This book would be useful to those interested in accounting for utilities and rate making. The author focused on the benefits and techniques of charging depreciation in railroads and utilities. It will also interest scholars of early development of the depreciation charge. Most importantly, the book provides an insight into the struggle and progress of an earlier theorist.
REFERENCE
Esquerré, Paul-Joseph, Applied Theory of Accounts, New York: The Ronald Press Company, 1914.
