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 SEP 30 i9'S 
 
 Railway Accounting 
 Under Federal Requirements 
 
 BY FRANK NAY 
 Comptroller, Rock Island Lines 
 
 A paper read before the Western Railway Club 
 Chicago, January 15, 1917 
 
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 PUBLISHED BY THE EXECUTIVE COMMITTEE 
 
 ASSOCIATION OF AMERICAN RAIL^VAY ACCOUNTING OFFICERS 
 
 ni6 AND U18 ■WOODWARD BUILDING 
 
 WASHINGTON, D. C. 
 
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Railway Accounting 
 Under Federal Requirements 
 
 Railway accounting consists in the combining, assembling and 
 classifying of the hundreds of thousands of transactions of a 
 railway company monthly, into a condensed statement which 
 shall exhibit to the executive officers of the railway and to others 
 interested the assets and liabilities of the company, and the in- 
 come account. In theory, the matter is quite simple, but in 
 practice it is complicated because of the large volume of trans- 
 actions and the diversified character of the transactions. On 
 one railroad, which is probably a fair sample of the larger rail- 
 roads of the country, this data must be gathered from 1,500 
 foremen of section gangs and extra gangs, more than 1,000 sta- 
 tion agents for both freight and passenger traffic, more than 
 1,000 conductors of freight and passenger trains, hundreds of 
 foremen of shop gangs, bridge gangs, building gangs, telegraph 
 line repair gangs ; in fact, it will cause but a moment's reflection 
 by you men of experience to realize the vast multitude of items 
 that must be classified and gathered from all parts of a railroad 
 into one simple statement which will reflect the financial condi- 
 tion of the company, and the result of its operation. However 
 numerous these items may be, they affect but three general di- 
 visions of the accounts; viz., assets, liabilities, and the income 
 account. The balance of income is finally carried to the bal- 
 ance sheet which exhibits the assets on one side and the liabil- 
 ities on the other. Therefore, when an item comes before us 
 for classification, we consciously or unconsciously classify it 
 as affecting an asset, a liability, or the income account. Of 
 course, we have a variety of details in the classification of the 
 
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 2 Railway Accounting Under Federal Requirements 
 
 assets, also of the liabilities and the income account. After it 
 is assigned to one of the three general divisions, it then must 
 be assigned to its appropriate subdivision of one of these three. 
 The Interstate Commerce Commission has prescribed a form of 
 general balance sheet which means a classification of the assets 
 and liabilities, — this is in addition to its ten other classifications. 
 
 If an item is thrown in the wrong class at the start, you will 
 realize that the accounts are mis-stated until correction is made, 
 and then if the correction is made in the month subsequent to 
 that in which it is incurred, it is necessary to purposely cause a 
 misstatement of the account for the month in which the correc- 
 tion is made, because we must inject into that month this cor- 
 rection which has nothing to do with the business of that month. 
 Therefore, it will be understood how important it is that all 
 items shall be properly and correctly classified in the first in- 
 stance. The accounting officer of a railroad has no small task to 
 perform the duties of seeing to it that all of these innumerable 
 items are properly classified and combined into the final state- 
 ment presented to the executive officers. I know from bitter 
 experience that when errors are found in that statement, the 
 accounting officer is the first man "on the carpet." Some of you 
 operating men who think the accounting officer is a grouch, 
 Avould form a better opinion of him if you knew that he only 
 passed along to you the kicks which he receives from his supe- 
 rior, when an error is found in one of the statements. How- 
 ever, I take it from the subject which was given to me, and 
 which appears at the head of this paper, that it was not ex- 
 pected that this paper should deal with the details of railway 
 accounts in general, but that it should deal particularly with 
 the problems of federal requirements and their application to 
 the accounts with which the operating men come in contact. 
 
 First, a few words about the Acts of Congress which caused 
 the problems which we are to discuss tonight. The accounting 
 problems resulting from federal requirements began first in 
 1887, when by Act of Congress, the pooling of traffic was pro- 
 
Raihvay Accounting Under Federal Requirements 3 
 
 hibited and the Interstate Commerce Commission was created. 
 At that time the writer of this paper was pool clerk on the old 
 Cotton Belt Railroad, and having taken a wife in December, 
 1886, the prospect of being thrown out of work by the aboli- 
 tion of railroad pools, presented a big personal problem with 
 which the operating men did not come in contact. The twen- 
 tieth section of the same act required annual reports from com- 
 mon carriers to the Interstate Commerce Commission. Shortly 
 after the passage of this act, a number of accounting officers met 
 with the Auditor of the Interstate Commerce Commission and 
 assisted in the formulation of the annual report that was after- 
 wards required. The compilation of an annual report obviously 
 meant classifications, arrangement, etc. From time to time, sub- 
 sequently, the Interstate Commerce Commission promulgated 
 requirements with respect to the accounts of the carriers, and 
 additional data called for in their annual report. 
 
 The Association of American Railway Accounting Officers, 
 which sprang into existence in 1887, has always co-operated 
 with the Interstate Commerce Commission and that co-opera- 
 tion has been appreciated. For many years prior to and since 
 the passage of the Hepburn Act, the Accounting Officers irivited 
 representatives of the Interstate Commerce Commission to meet 
 with them in their annual conventions, where the)'' were accord- 
 ed the privilege of the floor, and in that way, the Accounting 
 Officers all over the United States formed an acquaintance v.'ith 
 those representatives which has been helpful all through the 
 years, to a better understanding between the Railway Ac- 
 counting Officers and the accounting representatives of the 
 Interstate Commerce Commission. 
 
 Prior to the passage of the Interstate Commerce Act in 1887, 
 besides the poohng of freight the railroads had paid rebates to 
 large shippers, against which there was no law at that time. 
 The pooling of freight was a plan of the railroads to avoid the 
 payment of rebates ; as, for example, one pool that is recalled is 
 that of the Texas Traffic Association, which provided that each 
 
4 Railway Accounting Under Federal Requirements 
 
 railroad operating in the State of Texas should receive a cer- 
 tain percentage of the earnings of all of the railroads regardless 
 of the amount of traffic actually carried. If one railroad under 
 the pool arrangement should receive 5 per cent of the total 
 earnings of all railroads, and if it actually carried over its line 
 8 per cent of the total earnings, it was obliged to give up 3 per 
 cent, or all in excess of the 5 per cent to which it was entitled. 
 On the other hand, if the same road earned only 3 per cent, it 
 collected from the pool from funds paid in by others who car- 
 ried in excess of their proportion, the additional 2 per cent. 
 Under those conditions there was no incentive for one railroad 
 to pay a rebate or reduce the charge or make any special effort 
 to secure the traffic over its own line. Therefore, when the 
 pooling of freight was prohibited, the temptation for the pay- 
 ment of rebates was restored. The same act of 1887 prohibited 
 what are known as rebates ; that is, by means of refunds to cer- 
 tain shippers, giving such shippers in effect a reduced rate as 
 compared with the amount paid by other shippers, but through 
 the pressure brought to bear by the shippers and the eagerness 
 of each traffic official to make a good showing for his road, 
 and thus retain his position and make himself eligible for ad- 
 vancement, the payment of rebates became quite prevalent. This 
 was all stopped by the Hepburn Act, which was passed in June, 
 1906, and became effective in August, 1906. Under the Hep- 
 burn Act the Interstate Commerce Commission was authorized 
 to employ inspectors to examine the books and accounts of rail- 
 roads, and that provision effectively stopped the payment of 
 rebates, because if any such payments were made, they would 
 be disclosed by an examination of the books and records. 
 
 Naturally, the accounting requirements became more bur- 
 densome after the passage of the Hepburn Act. It so happened 
 that on the very day that act was passed by Congress, the As- 
 sociation of American Railway Accounting Officers was in ses- 
 sion at Bluff Point, N. Y. It also happened that just prior to 
 that time a committee of twenty-five was created by the Ac- 
 
Railway Accounting Under Federal Requirements 5 
 
 counting Officers' Association, to take up questions in so-called 
 liigher accounting; the committees prior to that considered 
 only freight, passenger and disbursement accounts. The Ac- 
 counting Officers voted immediately to offer the services of this 
 new committee to the Interstate Commerce Commission in 
 connection with the formulation of the new system of accounts 
 required under the Hepburn Act. 
 
 Mr. Henry C. Adams, at that time in charge of statistics and 
 accounts for the Interstate Commerce Commission, was in the 
 annual meeting at Bluff Point, N. Y., and assured the Associa- 
 tion of Accounting Officers that the sei-vices of this newly cre- 
 ated commiittee would be heartily welcomed. From that time to 
 the present time this Committee of Twenty-five, of which the 
 writer of this paper has been continuously a member with the 
 exception of one year, in which, by his urgent request, his 
 name was dropped from the committee, — has been meeting 
 with Mr. Adam.s and his successors, anywhere from four to 
 twelve times a year. As hereinbefore stated, Mr. Adams had 
 been meeting with the Accounting Officers of railroads in their 
 annual conventions for many years prior to the Hepburn Act, 
 and the wisdom of the accounting officers in promoting that re- 
 lationship was confirmed by the way in which Mr. Adams took 
 them into his confidence when he started to formulate the new 
 scheme of accounts to be promulgated by the Interstate Com- 
 merce Commission. 
 
 At the first meeting of the Committee of Twenty-five, Mr. 
 Adams frankly laid his plans before the committee, stating 
 that he had been importuned by many accountants, — both ex- 
 pert and so-called expert, seeking employment with him in the 
 production of a system of railroad accounts. However, he stated 
 that he had no idea of turning the matter over to them, but that 
 from his association with the Railway Accounting Officers he 
 believed he could secure the most valuable assistance from this 
 Committee of Twenty-five Chief Accounting Officers of Rail- 
 roads. Those twenty-five men were representing mostly the 
 
6 Raihvay Accounting Under Federal Requirements 
 
 largest railroads in the country. As I recall, there was some- 
 thing like 60 per cent of the railroad mileage of the country rep- 
 resented. He had learned that there were different methods of 
 accounting in vogue by the different railroads; he had heard 
 the merits of these different methods presented in the annual 
 conventions. He stated it was his idea that the system of ac- 
 counts to be promulgated by the Interstate Commerce Com- 
 mission should be what he would call the best American prac- 
 tice ; that \s, it would be his idea to select what would eventually 
 be termed the best practice for classifying each item, and adopt 
 that as the standard to be embodied in the accounting orders 
 by the Interstate Commerce Commission. He was more or less 
 familiar with the methods of handling accounts of railways in 
 Europe, but he did not undertake to import any European ideas 
 into his plan. 
 
 With the best American practice as a platform, he sat down 
 with the Committee of Twenty-five to go over the entire scheme 
 of accounts, item by item. Of course, I believed that he would 
 adopt the Rock Island classification as being the best American 
 practice. There were twenty-four other gentlemen on the com- 
 mittee who had similar ideas. However, we discussed the 
 merits of the various ideas, — Mr. Adams sometimes participat- 
 ing in the discussions, but more frequently sitting by as a care- 
 ful listener, with one or two stenographers taking notes all the 
 while, so that the salient points in the discussions might be pre- 
 served, and reserving to himself the final judgment as to what 
 method to adopt. In that way, Mr. Adams proceeded to for- 
 mulate a scheme of accounts which is now observed b)^ all rail- 
 roads in the United States, and which I believe does really rep- 
 resent, as a whole, the best American practice. 
 
 One point was urged by the Railway Accounting Officers 
 from the beginning and through all of our conferences dovv'n 
 to the present time ; namely, that the Interstate Commerce 
 Commission would promulgate the principles, requirements 
 and classifications without prescribing special forms of ab- 
 
Raihvay Accounting Under Federal Requirements 
 
 7 
 
 stracts, reports, waybills, vouchers, pay rolls, etc., etc. 
 The Accounting Officers assured him that if he would re- 
 strict his accounting scheme to classifications of the items 
 included in each account, we would observe his require- 
 ments and principles to the letter and give him the results ex- 
 pressed in figures which would be compiled with painstaking 
 accuracy. V<q wished to be left free to have some initiative of 
 our ovi'n with regard to the method of the detailed compilation 
 from the original record up to the final figures that are reported 
 to the Interstate Commerce Commission. \\& urged that the 
 dififerences in the organization of dififerent companies, and the 
 differences in local conditions, were such as to cause diversity 
 in detailed practices, and that the Railway Accounting Officers 
 should be left free to prescribe such detailed methods for the in- 
 dividual railroads on the assurance that the final results re- 
 ported to the Interstate Commerce Commission would be a 
 strict and accurate compliance with the classifications of ac- 
 counts ordered. 
 
 We were fortunate in having a broadminded, far-seeing man 
 like ]\Ir. Adams to deal Avith at that time ; one less astute might 
 have insisted upon prescribing detailed forms and methods of 
 compilations for the various railroads, deluding himself with the 
 idea that only in that way could uniformity of results be pro- 
 duced. Furthermore, we explained that with the rapid intro- 
 duction of computing machines, our methods of detailed com- 
 pilation were bound to change frequently, and if we found we 
 could handle a certain piece of work more economically by in- 
 troducing machines, we did not want to have such economy de- 
 layed by waiting for an order from the Interstate Commerce 
 Comrnission. Also, that the organization on one railroad m.ight 
 he such that the use of certain machines would produce substan- 
 tial economy, while on another railroad, due to a different or- 
 ganization, the same machines miglit not produce any economy 
 at all, but might possibly increase the expense. Larger roads 
 could make use of many accounting machines and we did not 
 
8 Railway Accomiting Under Federal Requirements 
 
 wish to have methods prescribed which might preclude or defer 
 their use. Speaking of accounting machines, I am reminded 
 that some years ago that grand Santa Fe statistician, Mr. James 
 Peabody, recently called to his heavenly reward, and myself 
 were walking through the Skirvin Hotel in Oklahoma City, 
 when a native Oklahoman, who knew us by sight, said, "There 
 go them, two railroad addin' machines." 
 
 Be it said to the credit of Mr. Adams and his successors, that 
 up to the present time, the wishes of the Accounting Officers 
 with regard to being left free to prescribe the details of com- 
 pilations of the classifications of accounts on the individual rail- 
 roads, have been respected to the profit of the railroads and 
 also to the profit of the Interstate Commerce Commission. Now, 
 I have felt that it was advisable to take this much of your time 
 to let you on the inside a little bit as to how these accounts 
 came into being. I do not think that that situation is generally 
 understood and in the rest of the paper I will tiy to get down 
 to the problems. 
 
 The first classification that was undertaken by Mr. Adams 
 and the committee was that of operating expenses. In connec- 
 tion with that classification, it was also necessary to consider 
 at the same time the classification of expenditures for road and 
 equipment, or in other words, the expenditures for capital ac- 
 count. After the classification of operating expenses came, 
 necessarily, a classification of operating revenues. Prior to that 
 time the term "gross earnings" had been used to designate what 
 are now called operating revenues. Some of us still use that 
 term, and I should like to put in a plea right here that we use 
 the official term "revenues," and from what immediately fol- 
 lows I think you will appreciate the importance of it. The Ac- 
 counting Officers were almost unanimously opposed to the con- 
 tinuation of the use of the term "earnings" as appHed to gross 
 receipts, because the tenn "earnings" created an erroneous im- 
 pression. In connection with banking and many classes of busi- 
 ness, the term "earnings" refers to what is left after the ex- 
 
Raikvay Accounting Under Federal Requirements 9 
 
 penses and cost of maintenance have been deducted from the 
 gross receipts, while with railroads, the term "earnings" had 
 been applied to the gross receipts. If the earnings of Railroad 
 "A" for example were referred to in the public press as $75,- 
 000,000, the impression was created that that large sum of 
 money represented profits available for dividends ; but when the 
 operating expenses, taxes, rentals and interest were deducted 
 therefrom, which ordinarily would leave about $5,000,000, 
 the figure thus left would be the one that would generally be 
 called earnings in banking and commercial business. Many of 
 us were in favor of using the word "receipts," and the word 
 "revenues" was finally adopted as a sort of compromise between 
 "earnings" on the one hand and "receipts" on the other. 
 
 As to operating expenses, the first subdivision which nat- 
 urally came before the committee in joint conference with Mr. 
 Adams, was that of Maintenance of Way and Structures, and 
 under this subdivision is included a very large portion of the 
 items which require consideration of capital expenditures in 
 connection with the cost of maintanance. Prior to July 1, 1907, 
 the Interstate Com.merce Commission prescribed a classifica- 
 tion of operating expenses, showing how the items that were 
 put into operating expenses should be classified; but that classi- 
 fication made little or no attempt to prescribe what items should 
 be included therein; as, for example, under the old classifica- 
 tion, many railroads charged the entire cost of all ballast, all 
 new rails, all additional side tracks, all new bridges with the ex- 
 ception of very large steel bridges, and many other items, to 
 operating expenses, while other railroads charged to operating 
 expenses only the cost to renew bridges in kind, and as to rails, 
 charged the increased weight of rails, and as to side tracks 
 charged the cost of all additional side tracks to capital account. 
 In other words, it was found that quite a few railroads had 
 taken the advanced step of drawing the line between operating 
 expenses and capital account in connection with the renewal of 
 existing structures and facilities. Many heated arguments were 
 
10 Railway Accounting Under Federal Requirements 
 
 indulged in on this question of the division of expense of re- 
 newals of existing structures between additions and betterments, 
 and operating expenses. Those arguments were between the 
 accounting officers themselves; Mr. Adams got the benefit of 
 them. On the one hand, certain accounting officers, — largely 
 those that had followed that practice, maintained that when a 
 steel bridge was erected to replace a wooden structure there was 
 a distinct betterment to the property, which should be recog- 
 nized by an" appropriate charge to the capital account. On the 
 other hand, those who had been following a dififerent practice 
 argued from their convictions just as conscientiously as the oth- 
 ers, that the substitution of steel bridges for wooden bridges 
 was required by the progress of the art of railroading; that 
 the substitution of heavier rails for lighter rails was also a re- 
 quirement of such progress, and that the entire cost of such re- 
 newals with improved structures and facilities, should be 
 charged to operating expenses, so that the operating expenses 
 of a railroad when stated, would include the entire cost of 
 keeping the property up to date. These accountants pointed to 
 the railways of England which years ago adopted the practice 
 of charging large sums to additions and betterments, repre- 
 sented by improved facilities and structures, such as increased 
 weight of rails, etc., and the result of such practice is that their 
 capitalization is now $250,000 to $275,000 per mile of road. 
 They claimed that such a policy would lead to the over-capitali- 
 zation of the railroads in the United States. They claimed that 
 the plan of charging the full amount of these improvements 
 necessary to keep up with the progress of the art of railroading 
 was a conservative practice and would be commended by busi- 
 ness men as a sound method. On the other hand, the others 
 claimed that any additions or betterments to property should be 
 represented in the capital account so that the books of the com- 
 pany would show the true investment in the property and also 
 the true net income from operation. INIr. Adams decided, as 
 you gentlemen all knovv-. to adopt the plan by which each addi- 
 
Raikvay Accounting Under Federal Requirements 11 
 
 tion and betterment expenditure is charged to the capital ac- 
 count. Subsequently a classification showing such items, which 
 are chargeable to additions and betterments, was ordered by 
 the Interstate Commerce Commission. 
 
 However, Mr. Adams injected into his scheme of accounts, 
 an option to charge to operating expenses, small items costing 
 less than $300 which v/ould theoretically be chargeable to addi- 
 tions and betterments, — the object being to relieve the prop- 
 erty account from the multitude of small expenditures which, 
 in theory, would be proper charges to the capital account but 
 which, as a practical proposition, should be eliminated there- 
 from. Certain exceptions were made to this minimum charge, 
 such as tracks, additional land, etc. This minimum rule pre- 
 vailed until after the federal valuation bureau was created, 
 which bureau finally requested that that option be withdrawn 
 and all additions and betterments regardless of the amount of 
 expenditure, charged to capital account. Since then the fed- 
 eral valuation bureau has thought better of the matter and it is 
 now believed that they are anxious to have this rule modified 
 because the present rule is putting into the records of the val- 
 uation bureau a multitude of details covering these small ex- 
 penditures. Some of the difficulties which come up in connec- 
 tion with these small items, will be apparent when they are 
 mentioned; as, for example, under the rules as they exist to- 
 day, which provide that every expenditure for an addition or 
 betterment to the property, however small, must be charged to 
 the capital account, we are required to charge, for illustration, 
 the cost of a new shelf which is added to an office on which to 
 place files. The cost of that shelf may be 37 cents for labor 
 and material. In the course of a year or two that shelf is 
 knocked out to make room for something else, or because 
 it is in the way, but when it is taken down, the chances are 
 about 10 to 1 no one will remember that its cost should be 
 written out of property account. Such a proceeding involves 
 the process of making what some roads call an "authority for 
 
12 Raihvay Accounting Under Federal Requirements 
 
 expenditure" which must go the rounds of approval and be re- 
 corded in the regular manner in order to get a 37-cent item out 
 of the property account. It being so small, however, as I said 
 before, the chances are at least 10 to 1 that some one will take 
 a hammer and knock the shelf out, pull the nails and that will 
 be the end of it. A stationery case may be put in its place, cost- 
 ing say $6.00 for labor and material. Then in the course of two 
 or three years it is decided to store the stationery supplies some 
 place else; another receptacle is provided, its cost charged to 
 capital account and the old stationery case will be torn out. At 
 that time, it is very likely that no one will think about issuing 
 the necessary document which will write the cost of the old 
 stationery case out of the capital account. In fact, a strict appli- 
 cation of the present rules will lead in many cases to very ridicu- 
 lous situations. Each such small item affecting capital account 
 must be reported in detail to the Interstate Commerce Commis- 
 sion. It is believed that the Interstate Commerce Commission 
 in the near future will modify its orders and will probably make 
 a mandatory order requiring all items under a certain minimum, 
 which minimum will perhaps not exceed $100, to be charged 
 to operating expenses, even though theoretically the expendi- 
 ture should be charged to additions and betterments. Please 
 do not draw the inference that the writer of this paper claims 
 to have inside information as to what the Commission will do. 
 In a certain rate case I succeeded in getting into the record a 
 guess as to what the I. C. C. would do, and a proxy friend of 
 mine wrote the I. C. C. complaining of the "leak." We have 
 heard about "leaks," recently. I received a letter from the I. 
 C. C. stating that the thing complained of was similar to what 
 Mark Twain said about his own obituary written by a friend 
 who was misinformed that he was dead, — "Greatly exagger- 
 ated." 
 
 The accounting officers will generally welcome some such 
 change, and I believe the operating officers will also. While the 
 change would mean slight additional charges to operating ex- 
 
Raihvay Accounting Under Federal Requirements 13 
 
 penses, yet the amounts involved will not be large, and it will 
 prevent the necessity of keeping track of the details of innum- 
 erable small transactions, and also prevent the carrying 
 into our property account of a lot of little items which will 
 never be written out when they actually disappear from the 
 property. On the other hand, some accounting officers still 
 favor the present rule, and a very prominent accounting offi- 
 cer, who has written much on the subject of railroad accounts, 
 goes so far as to state that if a right of way board fence is con- 
 structed with one nail in each board to each post, and if later 
 the fence is gone over and an additional nail put into each 
 board at each post, the cost of each such additional nail and the 
 application thereof should be added to the capital account. That 
 was written some time ago, before we had so many wire fences. 
 Theoretically, he is right, but in the interest of accuracy in the 
 final statement of our property account, and for the purpose of 
 reducing headaches for both the operating and accounting de- 
 partment employes of the railroad company, he is wrong 
 Knowing that it will be impossible to have an option of any 
 kind restored, we should have an order of the Interstate Com- 
 merce Commission requiring that all expenditures for additions 
 and betterments, involving less than $100 in any one instance, 
 shall be charged to operating expenses. 
 
 One of the matters in which you gentlemen are largely inter- 
 ested, and which provoked a lot of discussion in the meetings 
 of the Committee of Twenty-five and with Mr. Adams, was 
 the matter of depreciation. At the start, Mr. Adams had in 
 his mind pretty thoroughly, that an adequate charge should 
 be made against the current operations of the carriers, and be 
 included in their operating expense accounts for depreciation 
 of all property, including both fixed property and equipment. 
 He contended that depreciation was going on from year to 
 year, and that the operations for each year should stand their 
 share of the depreciation, and unless such depreciation charge 
 was made, the income account of the company was not correctly 
 
14 Railway Accounting Under Federal Requirements 
 
 stated. Some of the members of the committee agreed with Mr. 
 Adams, but the majority did not. As to the fixed property, a 
 large majority of the committee contended that if the work of 
 maintenance was kept up to the proper standard, there was no 
 depreciation running from year to year ; or, in other words, that 
 the fixed property was permanent, and what depreciation there 
 was, if any, depended upon the standard of maintenance that 
 was adopted by the individual carrier. It was claimed that the 
 road bed, from year to year as it solidified and seasoned, im- 
 proved rather than depreciated, aside from the erosion on the 
 sides of the embankments and cuts, which become the subject of 
 maintenance expenditures from time to time. A goodly number 
 of the committee contended that a similar condition obtained 
 with regard to equipment, and it was stated in the committee 
 that unless conditions changed which demanded a different type 
 of locomotive, the various parts of a locomotive could be re- 
 newed from time to time until finally there would be nothing left 
 of the original locomotive but the number. Yet if all these re- 
 newals were charged to operating expenses as they went along, 
 the locomotive would be maintained. On the other hand, it 
 was found that the size, capacity, and in many cases the type of 
 equipment had been subject to frequent changes in the past, 
 and that the depreciation due to obsolescence, was a real factor 
 to be reckoned with. 
 
 The final outcome of all this controversy was that the repre- 
 sentatives of the Interstate Commerce Commission agreed that 
 if the committee would not seriously oppose the accounts cov- 
 ering depreciation on rolling stock, the matter of depreciation 
 on fixed property would be waived, and so the first classification 
 of operating expenses provided for depreciation of equipment, 
 but omitted depreciation on fixed property. The last classifi- 
 cation promulgated, which became effective July 1, 1914, con- 
 tains permissive provisions for depreciation on fixed property ; 
 that is to say, the carriers now may, if they so elect, make 
 charges against maintenance of way and structure accounts for 
 
Railway Accounting Under Federal Requirements 15 
 
 depreciation of fixed property. So far as my knowledge goes, 
 very few, if any, railroads are making any charges to operat- 
 ing expenses for depreciation on fixed property. 
 
 In promulgating the classification which provides for depre- 
 ciation on rolling stock, no fixed percentages were ordered by 
 the Interstate Commerce Commission, but the matter of per- 
 centage was left to the carriers. The result was anything but 
 uniformity, because the carriers charged varying percentages 
 from nothing up to 6 per cent. ; usually, according to the pros- 
 perity of the company. One small railroad^ which produced an 
 annual deficit of nearly $1,000,000, made no charges whatever to 
 depreciation on equipment, while another railroad which was 
 quite prosperous, charged to depreciation of equipment 6 per 
 cent, per annum. In the old copy books, when w^e were boys, 
 many of us learned penmanship by copying the old saying — 
 "Many men of many minds," and in connection with this depre- 
 ciation on equipment, there were certainly many minds be- 
 cause nearly all the rates and fractions thereof, between nothing 
 and 6 per cent, were used; that is to say, some roads charged 
 34 of 1 per cent. ; some ^ of 1 per cent. ; some ^ ; some 1 
 per cent. ; some 1^4 per cent., and so on, up to 6 per cent. On 
 the other hand, it should be remembered that the Interstate 
 Commerce Commission also included in the classification of 
 operating expenses, what are known as the renewal accounts 
 under the head of Maintenance of Equipment. These renewal 
 accounts took up the slack, so to speak, because to those ac- 
 counts, when a car is destroyed, mvist be charged the difference 
 between the original cost of the car on the one hand, and on the 
 other, the sum of the salvage and the amount which had been 
 previously charged to the regular depreciation account. To 
 illustrate : If a car is destroyed which is 20 years old, the rules 
 require that the original cost thereof, which we will say was 
 $800, shall be credited to the property account, and charged as 
 follows: Supposing $100 salvage, and $700 net loss. The 
 $100 goes to the material account and of the $700, so much 
 
16 Railway Accounting Under Federal Requirements 
 
 as has already been credited to the depreciation account and 
 charged to operating expenses in the regular depreciation 
 charge shall be charged to the depreciation reserve, and the re- 
 mainder shall be charged to renewal account under operating 
 expenses. If a road has charged nothing to depreciation during 
 the 30 years of the life of the car^ it has no credit reserve set up, 
 and therefore, must charge the full $700 to operating expenses 
 under the renewal account. If a road has charged ^ of 1 per 
 cent, for the 20 years, it will have 5 per cent, of the depreciable 
 value of the car, or 5 per cent, of $700 or $35.00 in the deprecia- 
 tion fund, and it will charge $35.00 to the depreciation reserve 
 and $665.00 to operating expenses under the renewal account. 
 If the road has been charging 5 per cent, per annum for depre- 
 ciation, it will have the full $700 set up in its depreciation re- 
 serve account and will charge the $700 to that account, and 
 nothing to operating expenses under the head of renewals. So 
 you see the road that charges the small rate of depreciation 
 simply puts off the evil day, because in the end, the difference 
 between the salvage and the original cost of the car must go to 
 operating expenses, either under the depreciation account cur- 
 rently, or under the head of the renewal account when the car 
 is destroyed. 
 
 It may be interesting to you to know that a few months ago 
 the Interstate Commerce Commission sent out special circulars 
 calling for data concerning the depreciation charge, including 
 among other things, the rate at which depreciation is computed. 
 Some roads have been called upon to justify the rates which 
 they charge, and those roads which have been so called upon, 
 have been charging less than 2 per cent, per annum. This 
 would lead one to believe that while the Commission is not yet 
 ready to promulgate a uniform rate for all railroads, yet it has 
 progressed far enough in the study of this subject to believe that 
 anything less than 2 per cent, is inadequate. The Commission 
 would have saved itself much embarrassment if it had deferred 
 the ordering of depreciation until it had studied the subject suf- 
 ficiently to be able to order a minimum and maximum rate. 
 
Railway Accounting Under Federal Requirements 17 
 
 With a minimum and maximum rate, of course, there would 
 not be exact uniformity, but the range between the minimum 
 and maximum would not be so wide as the range between noth- 
 ing and 6 per cent. 
 
 Reference has hereinbefore been made to the difference of 
 opinions regarding the proper treatment in the accounts of the 
 cost of replacing existing structures with improved ones. Some 
 thought that the entire cost of the new improved structure, as, 
 for example, a steel bridge substituted for a pile structure, 
 should all be charged to operating expenses ; others thought that 
 the excess over the cost to renew in kind, should be charged to 
 additions and betterments, and still others thought that the ex- 
 cess over the original cost should be charged to additions and 
 betterments. yThe Interstate Commerce Commission at first 
 ordered the second plan ; namely, that the cost in excess of the 
 cost to renew in kind, should be charged to additions and bet- 
 terments, but in the latest classifications, that is changed so that 
 now the cost in excess of the original cost is chargeable to addi- 
 tions and betterments. The fallacy of the first order, viz., to 
 charge to additions and betterments, the excess over the cost to 
 renew in kind, may be illustrated by the following example: 
 Suppose a pile structure which originally cost $5,000 is renewed 
 with a steel bridge the total cost of which was $25,000 ; suppose 
 that since the original pile bridge was built, the prices of labor 
 and material had risen, so that when the steel bridge was erected it 
 would have cost $10,000 to renew the pile bridge in kind. There 
 was included in the original capital account, $5,000, — being the 
 original cost of the construction of this pile bridge. Now, the 
 new steel bridge cost $25,000 and the cost to renew in kind is 
 $10,000, so that the excess of $15,000 is charged to property 
 account, making a total charge of $20,000 to the property ac- 
 count for this steel bridge. Now suppose that this road con- 
 structs a new line, requiring a steel bridge of exactly the same 
 size, and spends $25,000 therefor, there would be found in the 
 property account of this new road, $25,000 therefor, as the cost 
 
18 Railway Accounting Under Federal Requirements 
 
 of this identical bridge erected at the same time as the other 
 one, although in the property account there is only $20,000 for 
 the steel bridge which was erected to replace the pile bridge. 
 This defect has been eliminated in the classification effective 
 July 1, 1914, and which is now in effect, because at the present 
 time, in the case of the renewal referred to, the excess over the 
 original cost, or $20,000, would be charged to capital account in 
 connection with the erection of the steel bridge costing $25,000, 
 so that the result would be to charge the total cost of the new 
 steel bridge, viz., $25,000, to the capital account. The same prin- 
 ciple applies in renewals of wooden bridges with brick or stone 
 structures, and all other renewals of existing structures with 
 improved structures, 
 
 /One item which many think is a proper charge to capital 
 account in connection with renewals, has been omitted ; namely, 
 the substitution of treated ties for untreated ties. The treat- 
 ment of ties by the various processes as well as the treatment 
 of bridge timbers, lengthens the life of such ties and timber, and 
 undoubtedly produces improved ties and timbers. However, 
 the Interstate Commerce Commission requires the entire cost of 
 ties, both plain and treated, to be charged to operating expenses. 
 Some years ago when the muck-raking articles were being writ- 
 ten about railroads. Everybody's Magazine published one of 
 those articles in which the Rock Island was accused of misrep- 
 resenting its maintenance cost by charging the entire cost of 
 treated ties to operating expenses, whereas a considerable por- 
 tion of that cost should have been charged against the capital 
 account. The article was of the character of many of those 
 published at that time, condemning in severe terms both the 
 honesty and ability of the Rock Island officials. The writer of 
 this paper wrote to Everybody's Magazine at that time, calling 
 attention to several mis-statements, and misconceptions by the 
 writer of the article, explaining that the rules of the Interstate 
 Commerce Commission which were the law of the land, re- 
 quired that the entire cost of treated ties be charged to operating 
 
Railway Accounting Under Federal Requirements 19 
 
 expenses. Attention was also drawn to the fact that while the 
 writer of the article implied that he would like to see a higher 
 moral standard among the Rock Island officials, yet in this 
 case, he was deliberately advising us to violate the law of the 
 land. Everybody's Magazine was asked to publish a correction 
 of these erroneous and misleading statements, but such correc- 
 tion was never published, and it took four letters, addressed to 
 the editor of the magazine to secure any response whatever, and 
 then only through a mutual friend was an acknowledgment 
 made. Prior to that time I had been a reader of Everybody's, 
 but since then I have not read it, because the officials of that 
 magazine shov/ed plainly that they had no hesitation in care- 
 lessly villi fying a man, and that they would not retract or cor- 
 rect an error when it was pointed out to them. There is an 
 element of betterment in the treated ties, but no one knows hoM^ 
 to measure it. The latest classification, however, provided that 
 the cost of metal ties when substituted for wooden ties over 
 the cost of the wooden ties removed, shall be charged to capi- 
 tal account. 
 
 Another important feature in connection with the early clas- 
 sincations under the Hepburn Act was that the first classification 
 of Additions and Betterments, as many of you may know, wa? 
 on v.hat we called a "commodity" basis ; that is to say, it was en- 
 tirely different from the classification of construction expendi- 
 tures. It classified such expenditures under such heads as main 
 tracks, sidings and spur tracks, terminal yards, including under 
 those headings all the rails, ties, grading, ballast, fastenings, 
 etc. It was impossible to add the additions and betterments 
 classification in that shape, item by item, to the construction 
 classification without re-classifying the items. Therefore, we 
 were practically compelled to keep two classifications of addi- 
 tions and betterm.ents. However, in the revised classification 
 eft'ective July 1, 1914, this has been changed and now the clas- 
 sification for additions and betterments is the same as the clas- 
 sification for construction of road. 
 
20 Raihvay Accounting Under Federal Requirements 
 
 Some small items engaged a lot of the attention of the com- 
 mittee in the early days, one of which comes to my mind, — 
 that of loss and damage to company material. The Committee 
 of Twenty-five was almost evenly divided, probably reflecting 
 former practices, about one-half claiming that when company 
 material was lost or damaged in transit, the cost of such loss or 
 damage should be charged to the purpose for which it was in- 
 tended ; that is to say, if a lot of ties were destroyed in transit 
 by fire, the cost of those ties would be charged to ties just the 
 same as if they had been put in the track; if a lot of window 
 glass intended for windows in coaches was smashed en route, 
 the cost thereof was to be charged to repairs to passenger cars 
 just the same as if it had actually been put in the coaches. About 
 half of the committee thought that loss and damage to company 
 material should be treated the same as loss and damage to com- 
 mercial freight; that such loss and damage so far as opera- 
 tions were concerned, should not be distinguished from loss and 
 damage to commercial freight. Very often the same mistake 
 or the same accident would damage both commercial and com- 
 pany freight, and it was the claim that the cost of the glass, for 
 example, that was intended for the coaches, and which was 
 smashed, should be charged to loss and damage-freight, and not 
 to repairs to passenger cars ; that the cost of the ties which were 
 burned up in transit before they were put in track, should be 
 charged to loss and damage-freight and not to ties, under the 
 head of maintenance of way and structures. The final vote of 
 the committee was a majority of one in favor of charging such 
 losses to loss and damage-freight. The Interstate Commerce 
 Commission's representatives saw it in the same way, and it 
 was so ordered in the classification which was promulgated. 
 
 An important principle recognized in the Interstate Com- 
 merce Commission accounts is that the charges to operating ex- 
 penses should be based on accruals. In former years it will be 
 remembered that most of the railway accounts were kept ac- 
 cording to the month in which the various vouchers and bills 
 
Raihvay Accounting Under Federal Requirements 21 
 
 were audited, regardless of when the expense accrued. Some 
 times controversies will arise about certain payments and no 
 vouchers are made for a long period until the controversy is 
 settled. In such cases, a large sum was put into operating ex- 
 penses in the month in which the vouchers were audited, thus 
 distorting the showing for that month. However, for years, 
 some roads had been in the habit of accruing charges to oper- 
 ating expenses by estimating from previous experience the 
 amounts that would be due each month on various accounts 
 when the actual figures were not available ; that is to say, if 
 company "A," for example, used the tracks of company "B" 
 and became indebted to company "B" regularly each month for 
 a certain fixed sum, say $5,000 monthly, and if the vouchers 
 therefor, were held up owing to a dispute, the accounting officer 
 of company "A" would charge the proper operating expense ac- 
 count each month with $5,000 and set aside that amount as a re- 
 serve to take care of the vouchers when finally approved and 
 audited. When the settlement was finally reached, there would 
 be a difference between the estimated charge and the actual 
 amount finally determined, and that difference, whether a debit 
 or credit, would be adjusted when determined. This is a great 
 improvement over the old plan of waiting perhaps for two years 
 until the controversy was ended, and then have $120,000 to 
 charge out all in one month. The Interstate Commerce Commis- 
 sion recognized the principle of accruing or estimating these 
 charges in advance when the regular bills and vouchers were not 
 rendered or audited, and in a meeting held within the last year, 
 Mr. Sweney, now in charge of accounts for the Interstate Com- 
 merce Commission, stated that he did not suppose there was 
 any well-regulated railroad in the United States that does not 
 now keep its accounts on the basis of accruals, thus indicating 
 that he thought they were not correctly kept unless on the ac- 
 crual basis. 
 
 Another point which has caused much controversy in connec- 
 tion with these classifications is the matter of abandoned prop- 
 
22 Railway Accounting Under Federal Requirements 
 
 erty. The classification provides that when property is retired 
 and replaced, the original cost thereof less salvage, shall be 
 charged to operating expenses. This means that if a road 
 makes a cut-off abandoning part of the curve and shortening 
 the line, the original cost of the old road, less the salvage, shall 
 be charged to operating expenses. This ruling was contested 
 by the Kansas City Southern Railway, which, in changing its 
 line some years ago, did actually abandon many portions of 
 curves. They left the cost of the old property in the property 
 account, where many railroad accounting officers and executives 
 think it should remain, and the Interstate Commerce Commis- 
 sion brought action against the road to compel it to charge off 
 the original cost of such abandoned roads. The decision was 
 against the railroad, and it has had to make the charges as re- 
 quired by the classification. Such a rule, however, brings about 
 this situation : If it is decided to reduce the grade of a line by 
 by cutting down the humps and filling in the low places in the 
 track, doing the work on the old right of way, the entire cost of 
 reducing the grade is chargeable, under this rule, to the capital 
 account. However, if it is decided to reduce the grade by aban- 
 doning a certain portion of the line and constructing a new 
 line entirely, the effect of charging the cost of the abandoned 
 line to operating expenses means that a very large portion of 
 the cost of reducing the grade in that way is chargeable to 
 operating expenses. In other words, if the work is done ver- 
 tically, the charge is to capital account ; if it is done laterally, the 
 charge is to operating expenses. On a certain railroad it so 
 happened that a reduction in grade was contemplated on the 
 original right of way, and bids were asked from contractors to 
 do the work. One of the contractors conceived the idea of re- 
 ducing the grade by abandoning the old line and constructing a 
 new line, and showed that the cost thereof would be substan- 
 tially less ; the saving was about $750,000. Suppose that the to- 
 tal cost if done on the old right of way was $3,000,000 and if 
 done by abandoning the old line and constructing a new line, 
 
Railway Accounting Under Federal Requirements 23 
 
 the cost would be $2,250,000. Suppose the original cost less 
 salvage of the line thus abandoned was $2,250,000. If the work 
 is done on the old line or vertically, the entire cost of $3,000,000 
 would be chargeable to capital account. If performed by aban- 
 doning the old line and constructing a new line or laterally, the 
 total cost would be chargeable to operating expenses. It was 
 pointed out to the Commission in the Kansas City Southern 
 case that when a line is projected, several surveys are made 
 and all of them are abandoned but one; that a line is never 
 completely finished; as time progresses and the railroads pro- 
 gress, changes are made, and the accounts promulgated by the 
 Interstate Commerce Commission should not cause such dis- 
 crepancies as have been illustrated herein. The abandoned line 
 is analogous to the temporary survey that was abandoned, and 
 is a part of the legitimate cost of the completed line. How- 
 ever, the Commission has not conceded that view, and it is only 
 fair to state many railroads agree with the Commission. 
 
 In this paper not all problems are mentioned, and perhaps not 
 the most important. You may now be thinking of problems 
 which ought to have been referred to. Whenever I try to write 
 a paper or attempt to make a speech I nearly always find after- 
 wards that I have neglected to say that which I should have said 
 and often have said things that had better have been left un- 
 said. 
 
 I have said that the representatives of the Interstate Com- 
 merce Commission proposed to incorporate in their classifica- 
 tions of railway accounts, the best American practice. I feel 
 sure that is the case, because it is plain to me that the Interstate 
 Commerce Commission copied largely from the Rock Island 
 scheme of accounts. I have no doubt that each of the other 
 members of the Committee of Twenty-five who were privileged 
 to advise with the representatives of the Interstate Commerce 
 Commission in their labors, will agree with me so far as the 
 best American practice is concerned, because I have evidence 
 
24 Railway Accounting Under Federal Requirements 
 
 that each one of them feels just as certain as I do, that their 
 own individual classifications were largely copied by the Inter- 
 state Commerce Commission. What a pleasant feeling that 
 produces in our breasts, and you gentlemen would not have 
 any of us disillusioned. 
 
 On Tuesday evening, January 9th, I had the pleasure of list- 
 ening to an intensely interesting and instructive talk by Mr. L. 
 M. Allen, Passenger Traffic Manager of the Rock Island, on 
 the subject — "Co-operation." Like everything else which Mr. 
 Allen undertakes, his address was a complete success. His 
 hearers learned how easy, and at the same time how important 
 it is that every last one of us should co-operate to boost the pas- 
 senger traffic of the Rock Island. Mr. Allen is a man who also 
 exhibits toward the other departments, the same co-operative 
 spirit which he asks for his department. 
 
 In conclusion I wish to emphasize the importance of co-op- 
 eration between the accounting department and the operating 
 department of a railroad, in order to produce accurate state- 
 ments of results from operation. 
 
 You men in the operating department originate the records 
 from which the accounts are compiled. On some railroads a 
 substantial part of this compilation is performed by clerks in 
 the offices of the operating department while on others, the ma- 
 jority of the compilations are performed under the direct su- 
 pervision of the accounting department. No matter which plan 
 is used, attention is called to the fact that the closest co-opera- 
 tion and understanding should prevail. In short, the operating 
 department and the accounting department should be like a 
 pair of twins, — Siamese twins, for example; namely, insep- 
 arable. I know it has been fashionable for the accounting offi- 
 cers and clerks to find fault with the operating officers and 
 clerks for incomplete, inaccurate and delayed information, and 
 on the other hand, it has been about as fashionable for the op- 
 erating officers and clerks to find fault with the technical re- 
 quirements of the accounting department. When each under- 
 
Railway Accounting Under Federal Requirements 25 
 
 stands the other, the fault-finding ceases. We must realize that 
 we are playing a great big game; at an expenditure of hun- 
 dreds of millions of dollars the railroad plant and equipment 
 are furnished. To have charge of the operations and the 
 finances of such magnitude involves an immense responsibility. 
 Necessarily the organization by departments must be absolutely 
 complete and more or less complicated. All departments must 
 co-operate or failure will result. In a baseball game each one 
 has his part to play; the success depends on team work. If, in 
 order to thrill the grand stand, the pitclier erroneously attempts 
 to play third base, the runner is often safe, perhaps reaches 
 home, and the game is lost. If the third baseman is constantly 
 finding fault with the catcher, it interferes with his efificiency, 
 and when right field makes a long throw home, the catcher 
 misses the ball, lets the man in safe and the game is lost. This 
 railroad game is far more important than any baseball game, 
 but the same team work spirit must be there. The operating 
 department has its position to play, the accounting department 
 has its position to play, and there are the other positions to be 
 played. As the baseball players back each other up, so that in 
 case a ball is missed by the first man, the second one gets it, — 
 so the accounting and operating departments should back each 
 other up, to the end that the game may be won. And what is 
 the winning of the game ? In baseball it is not measured by the 
 number of motions the pitcher makes before he delivers the 
 ball, or the number of bases stolen, or the number of home 
 runs and hits by any particular man, or the number of put outs 
 by any particular man ; it is measured away out on the bulletin 
 board at the back of the field by the number of runs made. So 
 the score of the railroad game is measured by the figures at the 
 bottom of the income account, which show the final balance of 
 income left after all obligations are provided for. The railroad 
 score is not measured by the number of trains run, not by the 
 number of cars repaired, not by the amount of the pay roll, 
 not by the number of vouchers audited, not by the number of 
 
36 Railway Accounting Under Federal Requirements 
 
 tons per car, not by the number of statements made ; but a 
 combination of all together, each one doing his own part effi- 
 ciently, always looking out for a chance to assist the others, 
 playing the game every minute, — produces that final score or 
 balance of income, and the more co-operation and more assis- 
 tance each department of a railroad renders the other, the larger 
 is the score represented by the balance of income. 
 
 Oh ! I realize that I am not saying anything new ; you all 
 know this as well as I, but we need to have these things re- 
 peated, and if through any suggestion I have been able to bring 
 forward tonight in any part of this paper, the result will be 
 that you and I, when we take our places on the railroad dia- 
 mond tomorrow morning, will play the game with a little more 
 "pep" and with the co-operative spirit slightly improved, then 
 this paper shall not have been written in vain. 
 
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