More than six years have passed since the Subcommittee on Terminology of the American Institute of Accountants recommended the discontinuance of the term surplus in accounting. This pronouncement has had considerable effect in accounting circles, and a definite trend away from the use of the condemned term can be perceived. It is true the economic meaning of surplus is different from its accounting signification. To the economist, surplus represents unearned income due to the inelasticity of the supply of any productive factor, conceptually more or less the same as the economic rent of land. The literature of both professions contains many articles comparing the dissimilar meanings of homonymic words common to the two disciplines, so that no student of either should be unduly misled by a different signification of the term surplus in the other profession. Certainly the economist has no greater claim to use of the term than has the accountant. With reference to the problem of the inclusion in capital or paid-in surplus of premium paid on capital stock, the major discussion in the legal decisions revolves around whether such premium on stock is available for dividends, each case interpreting the statute of a particular state.
The training of recruits for a profession is a topic of perennial interest to practioners of the art as well as to educators. This can be seen in a variety of circumstances, in the formal qualifications required of candidates for admission, in the many discussions of the problem which stud the literature, in the continuous existence of committees on education in professional organizations, in the responses of practitioners to invitations to appear before students, and in the occasional appointment of commissions to review the educational process. This concern is vital to the improvement of the profession and perhaps to its continued existence. For instance, the College of Accountants in Venice, which was founded in 1581 and later achieved a status similar to that of state boards of accountancy, admitted members to the college or society by requiring, first, a certificate of fitness from a magistrate, second, an apprenticeship of six years, third, a certificate from a magistrate on the legal attainments of the candidate, fourth, a declaration by the accountant under whom he had served as to his ability, fifth, an examination before a board of examiners, and sixth, another examination before the governing body.
The author presents a report on the American Accounting Association activities based on a partly delivered speech by the president of the Association as of April 1956. The author provides statistics on member participation in the Association, mentioning that many members participate in more than one activity. He explains the activities of officers and committees with an example, highlighting the fact that each officer or committee views the Association primarily in terms of its field. He discusses the joint education committee and their chairmen, who considers his committee to be the most important and their achievements in their fields. The author throws light upon the representation of the Association by its president and other members and its cooperative relationship with other accounting organizations. He briefly mentions the annual conventions and annual reports in the journal "The Accounting Review." He also discusses the question of increasing membership for the Association.
The author discusses the effects of inflation on the income of public utilities. He gives an introduction to the scenario of measuring corporate income following the inflation resulting from the world wars. He makes an attempt to measure the amount of the overstatement of income for the electric utility industry and fourteen individual companies. In studying the electric utility industry, he illustrates the adjustments made to depreciation charges in Table 1. He discusses over-statement of income and decrease in the real income of electrical utilities after converting them into dollars, using Table 2. He then enumerates the factors which give rise to the margin of error in assessing income. He explains the procedures followed in studying fourteen individual companies in face of certain defects in the study of the electrical utility industry. In Table 3, the author presents confirmation to the conclusions indicated in the study of the electrical utility industry, and a comparison of the operating adjusted income author shows that the results of the years 1940 and 1953, in Table 4, while in Table 5, the depreciation adjustment is not proportional to the depreciation charge. He presents a comparison between public utilities and other industries.
This article provides tips for answering examination questions of certified public accountants' (C.P.A.) examination. The results of C.P.A. examinations given in the past show that each year the percentage of candidates passing the entire examination is relatively low, ranging from ten to thirty-five per cent in the various states. Examiners have long been puzzled by this condition. Is it due to insufficient formal education, lack of practical experience, inability to express oneself or other causes. While it was found that the best of candidates, under the pressure of the examination, will give an occasional poor answer.
Savings and loan associations are permitted to deduct, under Sec. 593 of the Internal Revenue Code of 1954, any amount they choose as additions to reserves for bad debts, so long as those amounts do not bring theft total reserves, surplus, and undivided profits accounts to more than 12 per cent of savings capital. This provision is in direct contradiction to established accounting theory, which holds that deductions for bad debts should be estimated in relation to the risk assets owned as part of the process of matching costs and revenues of any given period, so that the net income of that period may be determined. Even though the savings and loan industry is apparently suffering no current tax pain, a longer-range look at Sec. 593 should provide a sobering view for the associations. Competitors and opponents of the associations may argue that Sec. 593 is a tax-avoidance device, giving the associations an unfair tax advantage. The tremendous growth of the savings and loan business since the removal of tax exemption in 1951 has permitted the great majority of the associations to add to their reserves with an almost complete disregard for the income tax factor. Thus the provision could lead to much more onerous and burdensome taxation being imposed upon the associations. Another danger in the reserve provision is the likelihood that the 12 per cent level set by the law for tax-free building of reserves will have the effect of a ceiling upon efforts to build reserves, even though much higher reserves may be needed. It is extremely difficult to predict what level of reserves may be necessary for any given association, and it is dangerous to think in terms of a stipulated reserve level which may be applied to the entire savings and loan industry. Finally, the provisions of Sec. 593 are dangerous to associations in periods of economic tension because, as savings and more liquid assets might contract sharply, continued deductions for reserves would be desirable, but they perhaps could be provided only by paying the penalty of corporate income taxation, whereas in prosperous times, no tax need be paid. Thus, at the time the institutions might most need liquidity, their stability and solvency would be most threatened by taxation. The provisions of Sec. 593 may prove very harmful if they induce the associations to modify their business behavior solely in order to minimize their corporate income taxes. It would appear that, since the bad debt deduction is one which applies for nearly all accrual basis taxpayers-not savings and loan associations alone -before net income may be computed, the amount of the deduction is essentially an accounting problem and should be computed according to accounting principles applying to the determination of net income.
The article presents some problems prepared by the board of examiners of the American Institute of Accountants as part of an examination in accounting practice. The first problem required a student to prepare a schedule showing the cash payment of the buyer to the selling party, profit and loss statement of the company involved in the transaction and total taxable income statement of the selling party on the basis of information and conditions given to him. The second problem required the student to prepare a schedule showing how cash payments should be made to partners who are selling, with the realization of assets. The third problem required the student to prepare entreaties to reflect the exchange on the books of a corporation and compute depreciation on the purchase made by the corporation on the basis of the entreaties. The fourth problem required the student to prepare a statement accounting for the decrease in net working capital and a statement accounting for the decrease in cash on the basis of the information supplied. The solutions to each of the problems have been provided.