The purpose of this article, concisely expressed, is to present capital stock and surplus relations. Relation can be taken either as expressing the affinity or dissimilarity of one thing to another, of one idea to another, as the word is commonly interpreted, or it may be taken to mean the expression or narration, the relating, of that which has been brought to one's notice, concerning the topic-matter. The second meaning is developed in the following pages. Various contrasts, similarities, or affinities may obtain between things. A selection must be made. The writer has been interested primarily in the legal significance of these relations, and, secondarily, in the effect of the law, thus arrived at, upon accounting. The terms capital stock and surplus are technical terms closely associated with corporations. Hence the boundaries of this article contain at least part of the subject matter of corporations and do not extend beyond. One further limitation of subject-matter may be mentioned. The treatment is very largely confined to mercantile and manufacturing corporations, operating as going concerns.

The article focuses on the theory of explanation in financial accounting. Observations in this article are a product of screening several articles on the explanation theory, or the theory of valuation, made in the journal "The Accounting review," over the last thirty years. The development of this article begins with that hard core of reliance upon matters of experience which continues to characterize accounting practice. Several species of explanation move in the direction of establishing "fundamental truths" or "first principles." This family of explanations is described in this article as a source explanation. In sharp contrast those types of explanations that base acceptability of propositions on outcomes from the operational employment of one or more propositions as valid. Also, a number of variants of the search for well-springs or foundations of accounting principles have been described. A following section of the article directs attention to a modern emphasis in a segment of accounting writings on a need to orient accounting research toward operational meanings for sentences, and toward prediction qualities for sets of propositions.

Reviews the book "Accounting and Tax Aspects of Patents and Research," by J.A. McFadden and C.D. Tuska.

Reviews the books "Ordinary and Necessary Expenses," by William K. Carson and Herbert Weiner and "Repairs vs. Capital Expenditures," by James C. Wriggins and George Byron Gordon.

Reviews the book "Assignment of Income," by Don J. Summa.

Reviews the book "Thin Capitalization," by Martin M. Lore.

Reviews two books on taxation. "Tax Avoidance vs. Tax Evasion," by Sydney A. Gutkin and David Beck; "Sound Business Purpose," by Robert S. Holzman.

Reviews the book "Arm's Length Transactions," by Robert S. Holzman.

This article tries to find a answer as to whether leasehold improvements are taxable income in the U.S. The Treasury Department has said yes. The lower courts have said no. The issue has not yet been decided by the U.S. Supreme Court. The U.S. Supreme Court attempt to uphold a tax on leasehold improvements will be hampered by its severance theory, that the income must be "something of exchangeable value proceeding from the property, severed from the capital, and coming in, being 'derived,' that is, received or drawn by the recipient for his separate use, benefit, and disposal." An improvement to land, either at the time title to the improvement passes to the lessor subject to the lease, or on reversion by default or any other cause is not exchangeable except as attached to the land. Even the relation of embryo and prospective parent does not obtain to give color to the claim of income in process of realization. The improvement will never be severed from the land except as salvaged material not a part of the growth process.

Questions on treasury stock may be resolved into two fundamental issues, both of which concern the right of a corporation to acquire shares of its own capital stock and which, from that circumstance, are frequently presented without adequate distinction. The right of control incident to ownership is a right which civilization has made an inherent part of itself. "It is mine; I can do with it what I will." This theory applied to the funds of a corporation expresses a natural right of a corporation to acquire shares of its own capital stock. Can a corporation legally acquire shares of its own capital stock? It is understandable that the judges of the state courts during the early years of the nation, having varying degrees of legal education and historic perspective, should have decided this question yes and no. Two contiguous states, whose citizens had very similar social and ancestral backgrounds, took opposing views on this question. In both states the English principles of jurisprudence predominate.