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sources for that period. With the exception of possibly the
subcaption, Interest on Stocks Borrowed, under Additional
Income, the subheadings should be easily understood.

Some might wonder how stock that is borrowed can net an
income to the borrower. The reason is, as has been explained
before, that whenever stock is borrowed, a cash value is
exchanged. Naturally, the broker loaning the stock has the
use of additional capital, so he pays interest for the use of that
money at an agreed rate, therefore the broker loaning the stock
receives cash from the broker borrowing and for the use of
this additional capital the broker loaning the stock pays the
broker borrowing the stock a certain interest rate for the use
of his money. Hence stocks borrowed are a source of interest.


61. What the Balance Sheet Shows. — The Balance
Sheet is usually said to show facts regarding the accounts as
they stand ; but in any case it is only an approximation, for no
firm with a definite amount of capital invested in sundry ven-
tures, or risks, can with any certainty say just what their true
net worth is at any time, until all accounts outstanding are
closed and the business engaged in has come to an end. In
Wall Street this is especially true ; for the broker is more or
less liable to loss on his customers' accounts, because of the
fluctuations in the market value of securities. Therefore, we
may say that the Balance Sheet shows an approximation to
the net worth of the firm.

62. Manner of Preparation. — As in the preparation of
a balance sheet for a firm engaged in any other business, the
first step is to prepare a Trial Balance, which comprehends a
summary of the debits and credits, taken from the books of
account, namely :

1. Customers' Ledger — For position of customers' accounts
as to Dr. or Cr. balances.

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2. Private Ledger — For position of capital accounts and

3. General Ledger — For position of nominal accounts.

63. Form of Balance Sheet. — The summary obtained
as described will enable the accountant to subdivide the data so

Balance Sheet


1. Capital Assets :

Value of Exchange seats
Value of securities held

on investment'
Furniture and fixtures

2. Current Assets:


Accounts receivable
Notes receivable
Stocks borrowed
Accrued interest receiv-

3. Suspense Debits to Income :

Exchange dues paid in

Rent paid in advance

Insurance paid in ad-

Advertising paid in ad-

Other asset items that
will be charged off to
expense at some later

4. Total Assets

. * Liabilities

1. Current Liabilities:

Stock loans
Accounts payable
Accrued interest payable
Accrued salaries payable

2. Total Liabilities

3. Net Resources, represented

Proprietor's capital ac-
Reserves set aside
Undivided profit

4. Total Liabilities and Re-
sources :

Fig. 17

gathered into the assets and liabilities, and the Balance Sheet
will appear as shown in Fig. 17.


64. Assets. — In the column of assets there are only two
items that demand explanation, for they are somewhat differ-
ent from items handled thus far, namely :

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1. Stocks Borrowed: Naturally one would expect such an
item to be a liability. However, it is not, because for every
stock borrowed there is a che<?k for its market value given to
the loaning broker by the broker borrowing, thus making the
item an asset. Should the stocks borrowed be returned, then
he would have an asset in cash of equal value ; for the market
value would be given for its return. Thus, if Broker A bor-
rows from Broker B stock worth $500 on the Exchange,
Broker A gives Broker B a check for $500 in exchange for
the stock borrowed. Then, when Broker A returns that stock
to Broker B, Broker A receives from Broker B the check for
$500, or the then present market value of the stock. So bor-
rowed stock is in reality an asset.

2. Accrued Interest Receivable: This item refers to inter-
est items on loans due the broker from outside sources around
the street, and all other sources such as loans to customers on
their accounts.

65. Liabilities. — Under the heading of liabilities it will
be noticed that the liabilities are all of a current nature ; that is,
they have an early due date. The other items listed are suffi-
ciently clear to be understood without further elaboration.

66. Net Resources. — To determine the net resources of
the firm, subtract the total liabilities from the total assets. The
net resources include :

1. Investment of the proprietors.

2. Reserves set aside. ,

3. Profit remaining for distribution among the proprietors.



67. Purpose. — The purpose of an audit of the books of a
brokerage firm is the same as that for an audit of any other
concern in any other business; namely, to find out the actual
financial position and earnings or losses of that particular firm,
in order that the proprietors, bankers, and executives may have

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a true knowledge of these conditions as shown by the records
of the firm.

68. Objects. — An audit consists of an examination of the
accounts in the Customers', Private, and General ledgers, and
all vouchers and other records, along with statements of the
business. ,

Its objects are as follows :

1. To analyze and verify the income and operating expenses
for a certain period.

2. To prepare a certified balance sheet, which shows the
true condition of the firm at the time of the audit.

3. To prepare a statement comparing the operating data for
a period of years.

4. To ascertain whether the books have been kept cor-
rectly, by means of an examination for the detection of errors.

In order correctly to interpret the work of others in this case,
it is necessary for the auditor not only to be. a person with a
thorough working knowledge of accountancy, but he must have
a working knowledge of the accounting system as followed in
Wall Street.

Just as in any other business, an audit provides a benefit,
first, to the proprietors, because it assures them that the books
are being correctly kept; second, to the executives, in that it
assures them of their eflfectrve supervision; third, to the
bookkeepers and clerks, in that it assures them that their
work is being correctly done and relieves them of any sus-
picion which might come upon them.


69. Plan of the Audit. — Since no definite rule can be
given as to the conduct of an audit, it is left wholly to the
auditor to provide his own plan of procedure ; but the experi-
enced auditor usually has a plan, which he may change as con-
ditions demand. He should be provided with a list of the books
used, as well as definite information as to which are the prin-
cipal and which are the subsidiary books. He should also be

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provided with the names of those persons empowered to
receive and pay out cash.

The extent of the audit will be determined by the agreement
entered into between the auditor and his client.

70. Verification of Cash Accounts. — Naturally, the
initial step in the audit consists in auditing the cash account.
The cash on hand plus the bank balances should equal the cash
balance as shown by the cash account.

To verify cash disbursements, as recorded in the cash
account, the entries are checked with the returned vouchers.

To verify the cash receipts, they are checked with the bank
deposits, as recorded in the bank pass book. To check each
individual entry in either case, the cash entry is checked with
the ledger account affected.

71. Verification of the Other Accounts. — Since the
Blotters used in a brokerage business partake of the nature
of a journal as well as of a cash book, they constitute the record
from which all posting is done to any of the ledgers in use;
therefore, to verify any entry to any account in the ledgers,
recourse should 'always be had to the Blotters. Sometimes the
checking is done from the Blotter to the ledger, but frequently
the checking is done from the ledger to the Blotters.

Since the Clearing House Blotter records transactions in
Clearing House stocks, it will only serve as a check upon entries
recording Clearing House stocks of 100-share lots or multiples

Since the Ex-Clearing House Blotter records all transactions
in Clearing House stocks of less than 100 shares, also all other
stocks or bonds, as well as all cash receipts or disbursements, it ,
naturally follows that this record prgvides the supporting data
for entries of this kind in the ledger accounts.

As the entries in the ledgers are checked they should be
marked with a distinguishing mark, and when the checking is
completed the open items not checked should be specially looked
up. The footings of the several accounts should be proved.

72. Verifying Assets and Liabilities. — All assets
and liabilities as set forth in the Balance Sheet should agree

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with the ledger accounts ; and it is up to the auditor to see that
they are neither overestimated nor undervalued and that they
are actually existing. The auditor should personally examine
the securities held either for investment or for customers'
accounts, also all commercial paper and the like. At all times
the auditor must see that all assets and liabilities are included.
Such items as invoices and unpaid bills very often are on file
in the office, but not entered in the proper accounts ; then, too,
certain contingent liabilities, that is, uncertain liabilities, such
as discounted notes receivable at the bank, disputed claims, and
such items, are not incorporated in the Balance Sheet. Should
this be true, the auditor should see that they find their way into
the Balance Sheet.

73. Verifying Income and Expenses. — By turning
back to the form showing the Income Statement, Art. 60, the
sources from which income and expense items come are readily
seen ; knowing these, it will not be difficult to check those items
of income and expense. These items should receive careful
attention, and the various amounts should be carefully checked
to see that the profits are not overstated, also -that the expense
items are all included, along with the income items, in order
that a true statement of profit and loss may be obtained.


74. Two Functions. — The Clearing House for the New
York Stock Exchange may be said to be composed of two
departments; namely, the Distributing Department and the
Auditing Department.

75. The Distributing Department. — The Distribut-
ing Department is the department that arranges for the
exchange of receive tickets and deliver tickets, whereon are
recorded the data regarding the transactions entered into by
the two contracting parties. This department is the medium
through which comparisons of sales data are made.

76. Manner of Operation. — ^To make plain the method
of procedure, the routine connected with the business of

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Ross & Doun as shown by their
Clearing House Sheet, Fig. 18,
will be explained. Such a sheet
must be sent by the broker to
the Clearing House not later
than 7:00 p. m. of the day on
which the business is trans-

The sheet shows on the Re-
ceive side that Ross & Doun
have bought from H. A. Do-
barr 300 shares of Anaconda at
69. When this information
comes to the ticket clerk of
Ross & Doun, he immediately
makes out a receive ticket as
shown in Fig. 19, and sends it
to the Distributing Department
of the Clearing House, where it
is put into the box of H. A.
Dobarr, from which it and
other tickets are collected at
frequent intervals by a clerk
from Dobarr's. When Do-
barr's clerk receives the ticket,
he immediately compares it
with the data that he has on the
transaction. If the ticket is
correct, he stamps it with his
firm's stamp and retains it to be
sent to the Clearing House later
with his Clearing House Sheet.
On the other hand, when Do-
barr's ticket clerk received in-
formation that the sale had been
made, he immediately made out
a Deliver ticket and sent it
through the Distribution De-

I L T 234—10

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partment to Ross & Doun, who compared it with their data,
and, if it was correct, stamped it and kept it to be sent to the

No. i?/^ Our UiM NumbM- / New York, 19

Clearing House of the New York Stock Exchange


Fig. 19

Clearing House with Ross & Doun's sheet that night. In this
way the buying broker and the selling broker each have an
opportunity to check up the other's memoranda of the sale.


No. Sf^ Our UiM Numbsr L New York,

Clearing House of the New York Stock Exchange

DELIVER n ri^r^^^y

for account of the undersigned. ^^ ~T) Q\


No. 3/^ Our UiM Numbsr 2: New York,-


Clearing House of the New York Stock Exchange

DELIVER TO o^ ^ ^k.^. ^^ -

3oO *han* ^7. <2^. <si^Cl^C^ g, / O O ^ 3 O, QQ Q

for account of the undersigned.

m oj tne unaersignea. ^^^"^^ jff\


Fig. 20

77. The JDeliver side of the sheet shows that Ross & Doun
have bought from R. H. Goodby 400 shares of Anaconda at

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641, and from D. T. Moore & Co. 300 shares of U. S. Steel
at 100.

In this case the ticket clerk sent out to each office, through
the Clearing House, a deliver ticket. Fig. 20 (a) and (b), and
he received in return a receive ticket from them ; the trade was
compared in the manner described, and each broker retained
the other's ticket until that night when he delivered his sheet at
the Clearing House.

78. Balancing: the Sheet for Stock. — ^The trades for
the day having been written up from the tickets exchanged,
the next thing to do is to balance the sheet for stock. As was




^a O

^<^^fa/ :^?\zr^

< -^^f < If

Jl ^7


DATB /"'"i?

/ PC

^ >3fa

Fig. 21

explained under balancing the Clearing House Blotter, all that
IS necessary is to set one entry off against the other; for
instance, referring to the Clearing House Sheet, if we set off
the receive item of 300 Anaconda against the deliver item of
400 Anaconda, it is readily seen that the balance to deliver is
100 Anaconda; whereas, in the case of the entry of the 300
U. S. Steel to deliver, there is no set-off for that, correspond-
ingly, there is a balance to deliver of 300 U. S. Steel, as noted
on the sheet.

A stock balance ticket in the form shown in Fig. 21 is made
out for each stock, the Deliver column being left blank to be
filled in at the Clearing House.

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79. Entering: the Stock Balances. — ^The stock bal-
ances having been determined, they are entered on the Clears-
ing House Sheet, as shown in Fig. 18.

If there is a balance to deliver, as in this case, it is carried to
the Receive side and entered as shown. The price entered in
the price column is the Clearing House price, and the exten-
sion is figured at that price. Should the balance be to receive,
then it is correspondingly carried to the Delivt. side and entered
in a similar manner, all cash entries in the price and amount
columns being figured at the Clearing House settlement price.

80. Balancing: for Cash. — To balance the sheet for
cash, all that is necessary is to foot the amount columns after
all stock balances have been entered completely. Should the
receive footing be greater than the deliver footing, then a loss
has been sustained, and a check must be sent to the Clearing
House for the amount. However, should the deliver footing
be the larger, then a gain has been registered, and a draft for
the balance would be submitted to the Clearing House. This
draft would be signed by one of the managers of that organiza-
tion and returned about noon of the following day after the
sheet has been sent to the Clearing House.

Having balanced the sheet completely, and having satisfied
himself that it is correct, the broker sends it to the Clearing
House, along with the exchange tickets, stock balance tickets,
and the check or draft, as the case may be. The sheet must be
in the Clearing House by not later than 7 :00 p. m. of the day on
which the business recorded was done.

81. The Auditing: Department. — The sheet being
received in the Clearing House, the first operation is that of
checking the stock balance tickets with the stock balances as
noted on the sheet. At the same time, the amount of the
check or draft is checked with the cash balance as recorded on
the sheet.

. Clerks known as examiners then check all the extensions of
the balances of the stocks and prove the amount columns for
addition. While this is being done, the exchange tickets are
taken and sorted so that all the tickets issued by any one broker

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: \

a ^ \

-J I




are in one box. Then every
entry on the sheet is checked
with these tickets, as to cash,
kind of stock, and name of the
broker to whom the stock was
sold or from whom it was

While these other operations
are going on, the balance tickets
are entered on allotment sheets,
which have the form shown in
Fig. 22. As there shown,
Ross & Doun have a stock bal-
ance to deliver of 300 U. S.
Steel, while H. I. Thomas has
a stock balance of 200 U. S.
Steel to receive and D. T. Jones
a balance of 100 U. S. Steel to
receive. Then from the allot-
ment as shown, Ross & Doun
will deliver to No. 1, on the re-
ceive side, 200 U. S. Steel and
to No. 2, 100 U. S. Steel and
these allotments are entered on
their balance ticket.

On the following morning
the balance tickets are returned
to Ross & Doun, who proceed
to deliver the stocks according
to the memoranda there shown.
Thus, according to the ticket
shown in Fig. 21, they would
deliver 200 shares of U. S. Steel
to H. I. Thomas and 100 shares
to D. T. Jones.

From these operations as ex-
plained, it is readily seen that
through the Clearing House

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operation the deliveries on transactions are cut down so that
only balances are necessary to be delivered.

It is also seen that consequently the checks for individual
transactions are not necessary, for checks are used in payment
for stock balances to receive only, thereby reducing the cer-
tifications at the banks as well as reducing the amount of
detail office work.

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(PART 1)



!• The capital stock and bonds of a company are generally
issued for the purpose of constructing and eqtdpping the road
and furnishing the working capital required until the revenues
are sufficient to meet the expense of the operation. The expense
and revenue resulting from a partial operation while a road is
under construction must be included in the construction
accoimts as provided by the classification. The amount of
capital that may be issued for the purpose of construction is not
limited by any federal law, neither is there any power granted
to any federal body for the supervision or control of the issuing
of capital by railroad companies. The cost per mile of line will
vary greatly in accordance with the nature of the cotmtry
traversed and the cost of labor and materials.

2. Payment for Construction. — ^The procedure for
constructing a railroad is not always the same. In some cases,
the road is btult by a contracting party and is turned over to the
railroad company ready for operation; the contracting party in



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this case may receive for the construction work stock and bonds
issued by the raikoad company. Sometimes, companies issue
stock and bonds and, by a cash payment, purchase a road built
by some other company; in this case, if the original records of
the cost of construction are not available, the entire amount
of the purchase price is charged to an account, such as Cost of
Road Purchased. Comparatively few of the larger railroad
systems constructed the entire mileage owned or operated in the
system. In most cases, the system is composed of many small
roads that were consolidated and joined by connecting links.
At present, many of the systems own or operate thousands of
miles of road tinder one management.

3. Some of the original small roads were constructed during
a period when the methods of accotinting were not considered of
such importance as at the present time, and as a consequence
the recor4s of the original cost of construction were, in some
cases, lost or kept in such a way that it is now impossible to
classify the investment in accordance with the present classi-
fications. Therefore, it is impossible to state with any degree
of accuracy the amount of stock and bonds actually issued
for the puipose of original construction. It is known that in
many cases stock was given as a bonus with the bonds sold for
construction purposes, and in other instances stock was issued
free to promotors and the cost of construction was provided for
by the issue of bonds.

A fact that should receive very serious attention and be prop-
erly considered is the market value of sectuities issued by the
constructing company at the time and under conditions when
the actual "construction work was performed.

Some states have enacted laws granting a railroad commission
the power of regulating the issue of the stocks and bonds of
railroad companies.

4. Construction and Equipment Accounts. — ^The con-
struction and eqtdpment accoimts of a railroad are charged as
follows: (1) Cost of the original construction of a new line;
this is usually paid for by an issue of stocks and bonds.
(2) Cost of new lines or extensions of the original line; such cost

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may be paid for by an issue of stocks or bonds, or out of cash,
or from special appropriations; such investments dtiring the
year are included in the total investment. (3) Cost of additions
and betterments to road and eqtdpment; this may be paid for
from cash, special appropriations, or securities issued; invest-
ments for additions and betterments are included in the total
investment in the road and eqtdpment.

The first work performed in the original construction of a
railroad is the purchase of the right of way, grading, ptirchase
and laying of ties, rails, etc., and the erection of btiildings and
the purchase of equipment. Nearly all payments on account
of expenditures for road and equipment are made by vouchers
and the amounts are distributed to the respective accounts*
through the voucher register.

5. After the original construction of a road is finished and
the road is tinned over to the operating company for operation,
any expanse for construction work to extend the original road
or to form a new line should be charged to the construction
accoimts, and the amounts expended dtiring a year must be
stated separately in the carrier's annual report. The total
debit to each construction accotmt is added to the amount
previously debited and a total for each accoimt is shown, as
well as a total for the entire cost of the road.


6, On July 1, 1914, a n^w Classification of Investment of
Road and Equipment 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 Investment in Road and Equipment supersedes
the Classification of Expenditures for Road and Equipment, first revised
issue, effective July 1, 1907, with the Supplement thereto, effective July 1,
1908, and also the Classification of Expenditures for Additions and Better-

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