Knowledge that Transforms

The article presents information on the fact that the Sixteenth Amendment 1913 was formulated to delegate power to the U.S. federal government to levy a tax on the income of natural persons. An income tax on corporations had been effective four years before the amendment. It was decided as early as 1904 that an excise tax could be measured by gross income and a corporate income tax was construed to be an excise tax for the privilege of doing business as a corporate entity. Whatever might have been the intent of the amendment or the popular belief, the income tax has not developed into a personal tax in a strict sense either in law or in other respects. The present Federal income tax is unique in the sense that it cannot be classed with any other known form. From a legal standpoint the tax does not follow the person. From an economic standpoint it does not fall on persons in proportion to their respective economic circumstances. It is neither legally nor otherwise a personal tax based on ability to pay.

It would be a strange business that could exist for any length of time without incurring risks, this essay will be confined to the audit of banks and similar financial institutions. Insofar as the ordinary commercial house is concerned it would not be unfair to state that contingent liabilities are comparatively unimportant the reason being, of course, that the direct liabilities that have definitely been incurred in the course of trading are usually much greater than the risks which may or may not arise as the result of some unforeseen contingency. A banking company that holds partly paid stock or shares in a Limited-Liability Company is liable in case of need to pay up the "calls" made upon shareholders, and it is therefore easy to assess the bank's risk under this heading. The audit should include an inspection of the stock and a careful examination of its wording. The current accounting practice is to mention the amount for which the bank stands liable if a call of all the unpaid capital is made.

Reviews the book "Advanced Accounting," by W.A. Paton.

Reviews the book "Elements of Accounting," by Raymond W. Coleman.

Several surveys of inventory practices have been made. The N.A.C.A. Bulletin of March, 1937, showed that 87% of 197 companies used the rule of cost or market whichever is lower for raw materials in their balance sheets. A report of February 1938 by the National Industrial Conference Board analyzed 916 companies. The rule was applied to raw materials in 63% of the cases, to goods in process in 38% and to furnished goods in 40% of the cases. The research department of the American Institute of Accountants examined 500 annual reports for 1939. The figures tabulated in The Journal of Accountancy for October 1940 show that 56% followed this rule "or variations thereof." These surveys as samples of practice show that the rule is in general use. But a rule may be widely useful in business without having the character necessary to make it a fundamental proposition of accounting. If we wish to search out the character of this rule, if we would like to determine whether it is a convenient and expedient rule of thumb or a basic accounting idea, we might begin by looking up its ancestry.

The article discusses the basis for accounting principles. The concept of a government of law as contrasted with a government of men is one of the best expressions of the role of principles in human affairs. However, this familiar legal dictum refers to a highly specialized application of principles. It assumes a systematized body of law which applies only to those relations between human beings which are regulated by the authority of a politically organized society. At the back of any such system of law lie general principles which were formulated so early in the evolution of human society that we cannot determine their origins. These general conceptions or principles serve as standards for the judgment of human conduct. Some of them are justice, fairness, truth, kindness, friendliness and beauty. There are many of them. They are so general in character that they defy exact definition. Systems of law and types of government come and go; the things which men believe to be just and beautiful change, but these general conceptions persist from age to age.

Reviews the book "New York Corporation Laws, 1941."

The article comments on the paper "An Introduction to Corporate Accounting Standards," by W.A. Paton and A.C. Littleton. The work attempts to build a coherent structure on a philosophical foundation, rather than to discover any coherence in the field of accounting as it is. This savors of thirteenth century science, when conclusions were derived from the application of logic to classical preconceptions, and when recourse to the laboratory was beneath the dignity of scientists. The predominantly deductive approach carries with it the temptation to leave out or deny what ever may conflict with conclusions. Not only does this monograph limit itself to corporation accounting of income but it seems to be mainly preoccupied with manufacturing concerns. Costs attach to products sold, of which more might be said. Contractual interest is relegated to the status of dividends, which statement is good for plenty of argument. And speaking of honest men, it seems that the authors of this monograph have a profound distrust of management, even though they emphasize that a chief purpose of accounting is to serve and represent corporate management.

Reviews the book "Fundamentals of Accounting," by Hiram T. Scovill and C.A. Moyer.

Reviews the book "One Hundred Short Problems in Corporation Finance," by Herbert E. Dougall and Harold W. Torgerson.