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accrued interest thereon, if any, the difference between the money value of the consideration
received and the par value of the securities plus the accrued interest shall be deemed a
discount. In no case (except as provided in the third and fourth paragraphs of this account)
shall discounts be included as part of the cost of anything charged to any accotmt pre-
scribed in this classification.

Note C. — For definition of securities actually issued ^ see Note B, under general balance-
sheet Account No. 755, Funded Debt Unmatured.

Note D. — ^Whenever interest, premium, or discount assignable to the construction
period is incurred in connection with an expenditure covered by some specific road and
equipment account or accounts, such interest, premium, or discount sn£dl be charged
directly to the specific account to which it is related.


27. Sent with this Instruction Paper is a copy of the Classi-
fication of Investment in Road and Eqtiipnient of Steam Roads,
effective Jiily 1, 1914. This pamphlet shoiild be studied as a
part of this lesson, the same as if it were reprinted within the
pages of tliis Instruction Paper. Study not only the general
instructions but also the matter concerning each general and
primary accoimt, paying close attention to the notes imder
many of the accounts, as it is in these notes that the fine points
are brought out. Analyze for yourself each account along the
line of the few mentioned under the general headings in this

It is not necessary that any part of this classification be com-
mitted to memory but it should be so thoroughly studied that
the close association of the different accounts will be clearly
imderstood as well as the nature of each in itself. *

The Examination Questions that follow are to be answered
from the information in the classification pamphlet. No diffi-
culty will be encoimtered in doing so if the foregoing direc-
tions are carefully followed.

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(PART 2)



1. The operating-expense accoimts cover all expenses
resulting from the operation of the road and such expenses as are
incident thereto and are not separable from the rail operations.

On July 1, 1914, a new Classification of Operating Revenues '
and Operating Expenses of Steam Roads went into effect. In
presenting this classification for use, the Interstate Commerce
Commission issued the following introductory letter:

To Accounting Officers of Steam Railways:

This Classification of Operating Revenues and Operating Expenses
supersedes the Classification of Operating Revenues, first issue, effective
July 1, 1907, and the Supplement thereto, effective July 1, 1908; the
Classification of Operating Expenses, third revised issue, effective July 1,
1907, and the Supplement thereto, effective July 1, 1908; and the Classi-
fication of Revenues and Expenses for Outside Operations, first issue,
effective July 1, 1908. It also supersedes conflicting instructions contained
in Accounting Bulletin No. 8.

Accounts are provided in this classification for the revenues and expenses
of operations which heretofore have been classed as auxiliary or outside
operations. The purpose in merging these accounts has been to secure a
statement of revenues and expenses in connection with the operation of
all physical property, the cost of which is includible in the accounts for
investment in road and equipment.



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The accounts for maintenance of physical property have been arranged
to correspond with those for the investment in such property. Depre-
ciation accounts have been provided for the current depreciation of fixed
improvements, although until further directed the recognition in operating
expenses of current depreciation of fixed improvements is optional with the
carrier. It is provided that organization and general administration
expenses directly assignable to investments in stocks, bonds, and other
securities shall be excluded from the accounts of this classification and
included in Income Account No. 549, Maintenance of Investment Organi-

The general and special instructions contain a comprehensive statement
of the principles tmderlying the classification, indicating generally the
application of tiie accounting rules. The attention of accounting officers
is called to the importance of requiring all employes who are assigned to
accounting work in connection with operating revenues and operating
expenses to familiarize themselves thoroughly with these instructions.

In the preparation of the revision of the accounting rules contained in
this and other classifications for steam roads, which are concurrently
issued, the Conmiission has had the cooperation of the Association of
American Railway Accounting Officers and of its Standing Committee on
Corporate, Fiscal, and General Accounts.

The classification, in tentative form, has been presented for criticism

' and suggestions to the chief accounting officer of each railway and to the

railway conmiissions of the several States. All suggestions received from

such parties have been given careful consideration, and many of them have

been incorporated in the classification as here issued. ■

2. This classification calls for the use of eight general
accoiints which control primary accoimts as follows:

Maintenance of way and structures, which is divided into
seventy-nine primary accoimts.

Maintenance of equipment, which is divided into- thirty-
seven primary accoimts.

Traffic, which is divided into nine primary accounts.

Transportation, rail line, which is divided into fifty primary

Transportation, water-line, which is divided into three pri-
mary accounts.

Miscellaneous operations, which is divided into six primary

General, which is divided into twelve primary accoimts. _

Transportation for investment, credit, which is not sub-

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3. The handling of the accotmts in this classification is gov-
erned by notes in comlection with the primary accoiints and
by general and special instructions given separately in the pam-
phlet. Under the special instructions are given the following,
which are of special importance:

Accounts for Operating Expenses. — ^The accounts prescribed for
operating expenses are designed to show expenses of furnishing transpor-
tation service, including the expenses of maintaining the plant used in
the service. The accounting shall be as nearly as practicable upon the
basis of accruals; however, the option is allowed the carrier of omitting
charges to the accounts provided for the depreciation of fixed improve-
ments and of including the depreciation (ledger value less salvage) of
such property in the appropriate repair accounts at the time the property
is converted or retired for replacement.

Fioced improvements means structures which are fixed asj» location, such
as timnels, bridges, buildings, earthworks, etc.

Maintenance Expenses. — The accounts provided for maintenance of
fixed improvements and of equipment are designed to show the cost of
repairs and also the loss through depreciation of the property used in
operations, including all such expenses resulting from ordinary wear and
tear of service, exposure to the elements, inadequacy, obsolescence, or other
depreciation, or from accident, fire, flood, or other casualty.

The difference between the depreciation upon fixed improvements
retired and replaced and the amount provided for through the depreciation
accounts, shall be included in the repair accounts when the property is
retired. Similar adjustments on account of equipment retired shall be
included in the accounts for equipment retirements. (See classification
of investment in road and equipment, general accotmt II, Equipment.)

Distribution of Charges for Property Retired and Replaced.
In case the amount chargeable as operating expenses for property retired
and replaced, (as provided for in section 7 of-the general instructions for the
classification of investment in road and equipment) is relatively large and
its inclusion would seriously distort the expense accoimts for a single year,
the carrier, if so authorized by the Commission, may charge the amount
thereof to Balance-Sheet Account No. 726, Property Abandoned Charge-
able to Operating Expenses, and distribute it thereafter, in accordance
with the provisions of that account to the operating expenses of succeed-
ing years.

If so. authorized by the Commission, the carrier may charge to profit
and loss any extraordinarily large item representing the cost of property
retired and replaced, instead of charging such item to operating expenses.
.The carrier shall file with the Commission a statement of the cost and a
description of the property retired and the reasons which, in its judgment,
indicate the propriety of charging the cost of such property to profit and loss.

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Depreciation of Fixed Improvements. — Depreciation accounts, in
which to include uniform monthly charges tp cover the depreciation of
fixed improvements, have been provided for the purpose of creating
reserves which will meet or reduce the amounts otherwise chargeable, as
may be appropriate, to operating expense or to profit and loss accounts
to cover property retired. Such depreciation charges shall be based in
each instance upon the percentage of the original cost (estimated if not
known), ledger value, or purchase price of the property determined to be
equitable by the carrier's experience and best sources of information as
to the actual current loss from depreciation. A statement of the bases
used by the carrier for computing these charges shall be included in its
annual report to the Commission. Until further directed, the use of
depreciation accounts for fixed improvements is optional with the carrier.

Equalization of Expenses. — ^For the piupose of equalizing the
monthly charges for the repairs of fixed improvements and equipment, the
carrier may include each month in the appropriate primary repair accounts
a tmif orm proportion of the amount of authorized estimates of such expenses
for the fiscal or calendar year. In a like mariner, the authorized estimates
of expenses on account of personal injury or loss and damage liability, for
stationery or printing, and for advertising may be equalized in the monthly
accotmts for the fiscal or calendar year. If the carrier has been tuiable to
carry out its program for repairs and does not adjust its accounts to con-
form to the actual expenditures, it may carry forward the balances and
treat them as provided in section 20, relating to balances in operating
reserves. If, on account of claims for personal injury or loss and damage
being imsettled at the close of the year, the accounts for such expenses are
not adjusted, the balances carried forward in the operating reserve account
shall be analyzed as also provided for in section 20 of these instructions.

Charges for stationery and printing, and for advertising, for a fiscal or
calendar year shall be adjusted to the actual expenses.

Balances in Operating Reserves. — If, at the end of a fiscal year,
balances remain in operating reserves, the carrier shall indicate in detail
in a formal report to the Commission the amounts therein, and the con-
ditions causing the carrying forward of such balances, except as to balances
applicable to personal injury or loss and damage liability, for which balances
the carrier shall preserve in its files the details upon which such estimates
were based. Separate records shall be kept of the operating reserve
accounts for each year.

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4. The classification provides that monthly charges shall
be made to operating expenses on account of depreciation of
property and equipment. Even when property is kept in an
apparently good state of repair, the constant use and time will
slowly cause a condition when a complete new piece of property
or eqiiipment will be necessary. To provide for such a con-
dition, operating expenses are charged monthly with amounts
based on a percentage foimd to be the average necessary to
create a reserve that will equal the cost of the property or
equipment during the average time such property or equipment
will be good for the service of the company.

Operating expenses are usually considered to be amounts
paid from a company's cash on accotmt of labor, materials, etc. ;
however, in the matter of depreciation, the amoimts charged
to the operating expense accoimts do not affect the cash accoimt
but are credited to a reserve accoimt in the general ledger, and
the total of such reserve account is deducted from the cost of
equipment or other property as entered on the credit side of the
balance sheet.

5. The equipment depreciation register, illustrated
in Fig. 1, shows Kow a record is made of all equipment placed
in service and the manner of arriving at the depreciation. The
columns headed Date Placed in Service shows the time the equip-
ment was placed in service ; the depreciation is charged from this
date. The colimm headed No. of Cars or Locomotives shows
the nimiber of each class placed in service at one time. In the
column headed Class is entered the name of the class, as box,
fiat, gondola, stock, etc. The colimm headed Original Cost
shows the original cost of each car; the depreciation is figured
on the basis of this amount. When equipment which is not
new and which therefore already has a depreciated value is
placed in service, its value is entered in the colimm headed Dep.
Value. In the column headed Depreciation Ceases is entered
the date when depreciation charges will cease; that is, the date
when the amount charged for depreciation is equal to the original

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— 0.

< §

00 §

• I

< 3











« ^

B 1




4» r-l



Sold, or















Flat 653

No. of
Cars or




Date Placed
in Service





Feb. 1

cost of the equipment, after
which no further deprecia-
tion charges are to be made.
In the column headed Date
Destroyed, Sold, or Changed
is entered the date when
equipment is retired from
service on account ot being
destroyed, sold, or changed
from one class to another,
as the changing of a box car
to a flat car, etc. The col-
umn headed Amoimt of
Depreciation is for the total
amoimt of depreciation
charged to operating ex-
penses from the time the
equipment was put in serv-
ice to the time it was retired.
The column headed Amount
of Salvage is for amounts
received from the sale of old
or retired equipment or
parts of il. When a car is
retired from service, the
sum of the amount charged
to depreciation and the
amount received for salvage
is deducted from theoriginal
cost and the difference is
entered in the column
headed Amount Chargeable
to Expense.

The equipment deprecia-
tion register, therefore, con-
stantly shows the value of
the equipment in service,
as the amount of cost of

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old eqtdpment retired will be constantly deducted and the
cost of any new eqiiipment will be added to the total.

6. The entry in the eqtdpment depreciation register of
Fig. 1 shows that a series of flat cars were placed in service
Feb. 1, 1907, and the original cost of each of these cars was
$653. One of the cars was retired from service on Nov. 1,
1912, having been in the service for the period of 5 years and
9 months. The company's records would show that the aver-
age life of this class of cars is 25 years, and to charge depreciation
with the fuU amoimt of the original cost in that time, a charge
of 4 per cent, per annimi was made to operating expenses.
This particular car was in the service only 5 years and 9 months,
and at the rate of 4 per cent, per annum based on the original
cost of $653, during that time $150.19 would have been charged
to operating expenses on account of depreciation. When the
car was retired from service it was sold for $424.99; this salvage
and the amoimt of $150.19, the charge for depreciation, makes
a total of $575.18 to be credited to the account as against the
original cost of $653, and the difference of $77.82 is debited
to the operating expenses as equipment retired in accordance
with the classification.

7. The handling of depreciation accounts in this way
prevents an exceptionally large debit to operating expense
accoimts at any particular time, but causes a gradual charge
to such accotmts, and when equipment or other property on
which depreciation has been accrued is retired from service
the capital accotmts will reflect the true condition of the value
of the road and other property, the cost of which has been
charged to the road and equipment accounts.

Operating expenses $25,000

Depreciation reserve $25,000

Entry made to debit operating expenses and to credit depreciation

reserve accounts with one-twelfth of annual depreciation charge.

Fig, 2

As the operating expense accoimts are closed monthly, one-
twelfth of the annual amoimt will be charged to the various

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depreciation accotints under operating expense accotints each
month, and the charges will cease when the equipment is
retired or the charges equal the original cost.

8. When the depreciation on all classes of equipment in serv-
ice has been figured at the adopted rate basis for each class,
the total amoimt of depreciation is debited to the operating
expense accotmts and credited to the depreciation reserve
account through a journal entry as shown in Fig. 2.



9. A large part of the operating expense of a railroad
results from the payment of wages to its employes. The pay-
ment of wages constitutes a labor expense peculiar to each
department of the railroad organization, which makes it neces-
sary to charge the amoimt paid tb one employe to a different
account than the amoimt paid to an employe in some other

The cost of material and supplies used by a railroad are
usually paid for by voucher. The vouchers are summarized
in the voucher register and the amounts debited to the proper
accounts. The totals of the primary account are summarized
to one total, which is debited to the general account in the
general ledger.

The principle of the voucher system is also followed in the
payment of the wages to employes, although pay rolls and
checks are used for the detail woric.

10, Some of the larger railroads find it convenient as well
as necessary to keep the accounts of each division entirely
separate, as if each division were a separate company. In this
case there must be a division to show the amount to be charged
to each division; this, in the case of a voucher, is shown on its
face as well as the account to which the amount is to be charged.

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Vouchers may be prepared by the various departments
responsible for the expense and must be approved by the proper
officers, but before the voucher is passed for payment to the
payee it must be audited and approved by the auditor of
disbursements or other accotmting officer.


11. The term pay roll is applied to a sheet on which are
entered the names of the employes, the time worked for the
month, the rate of pay, and the amoimt of wages due for the

The payment of the employes is a disbursement and must
therefore be made only after the amounts have been properly
audited and approved by the auditor of disbursements; how-
ever, the time of the employes and the necessary detail for
entry on the pay rolls are usually kept and the rolls made up
in the office of the division superintendent, the division engineer,
the master mechanic, or the head of any department having
the direct charge or supervision of employes.

The division superintendent, being in charge of the trans-
portation service, in which the largest percentage of employes
are engaged, will have expenses on account of the wages paid
and chargeable to the operating expense accounts as follows:
Superintendence, despatching trains, telegraph operators,
station agents and employes, train masters, train conductors,
brakemen, flagmen, etc.


12. Station agents, division operators, and others report
the time of employes in their departments on time books.
These time books show the names of the employes and the
position of each, and columns are provided for each day of
the month, 4;he total number of days worked, the rate, and the
amount due. When employes are paid at a monthly rate,
their time is indicated by a figure 1 for each day of the month
worked. When employes are paid by the hour the number
of hours worked each day is entered in the coltimn showing
the day of the month.

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13. The time for trainmen is not kept in a time book but
on a time card, which is made out for each train run. This
card shows the date, the train and engine number, the point
of starting and the time of leaving the point of destination and
the time of arriving and the names of the engineer, fireman,
conductor, flagman, and brakeman.

If the run is completed within the time limit allowed foj-
the train run for which the time card is made, no other time
need be entered; Iput if the train is delayed and requires longer
than the regular time allowance, the number of hours of over-
time must be shown on the card and a detailed report made of
each delay and the cause. These time cards are forwarded
at the end of each run to the division superintendent's office,
where the timekeeper enters the time on the pay rolls.

14. Before the time reports from the agents, etc. reach
the superintendent's office, the timekeeper has prepared the
pay rolls from the previous month's rolls showing all the
information such as the names of employes, etc., except the time
worked for the current month. If any employes have left
the service during the month their time will be shown as leav-
ing the service, and on the next rolls the name is dropped and
the names of new employes who were employed during the
month will be added in their proper place on the rolls.

The rolls for the following month are completed as soon as
possible after the rolls for the current month have been for-
warded to the auditor of disbursements. In this way the time
of the trainmen may be entered on the rolls daily on receipt of
the time cards for each run.


15. As soon as the names have been entered on the pay
rolls, the time of the trainmen is entered daily as the time cards
are received in the office. The time is entered for each day
and the train runs are designated by letters that indicate the
points .between which the two. was made. Before entering
the time on the rolls, the time cards are checked against the
train register sheets to see that the train has moved between

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the points shown on the time card and that the time of departure
and arrival are correct; this is very important when overtime
is reported.

On account of the different runs resulting in different rates
of pay, and in cases where a flagman has also made time as a
conductor or a brakemen made time as a flagman, in some cases
considerable work will be required at the close of the month to
compute the amount of yisiges due.

Extra men are usually required to work on the pay rolls so
that they may be prepared and forwarded to the auditor at
the earliest possible date after the close of the month. The com-
putations made by one man are checked by another in order to
insure accuracy, and even after such care has been exercised
errors will sometimes pass tumoticed until found by the auditor,
who at once notifies the superintendent or other ofiicer.

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