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In undertaking to define by specific illustrations the distinc-
tion between mere replacement and betterment, it has been ruled
that difference in quality and kind is not a betterment, in the
following instances: Ballast (Cases 148, 297) or ties (Case 562)
or fences or rail (See Classification of Additions and Better-
ments, Account A 8, Note B in which difference in quality is
only recognized to the extent of allowing excess value in that
account when new rails are used to repair track originally laid
with "relay" rails). But quality is a basis for betterment
charge in the following cases, Material used in replacing lining
of tunnels; frogs and switches (when installed under a definite
plan of improvement); track fastenings and appurtenances;
improved crossings; improved interlocking plants; improved
wire of telegraph and telephone lines ; improved machinery and
appurtenance of electric light and power plants; improved
appliances for equipment. (See Classification of Additions and
Betterments, appropriate accounts.)

Difference in quality merges imperceptibly into differences
in types and design in subordinate parts and we find such differ-



216 RAILROAD EXPENSES

ences considered as basis for betterment charge in the following
cases: Bridges, trestles and culverts; shop machinery and
tools; improved plants and buildings for electric light and
power plants; improved machinery and fixtures of grain eleva-
tors and storage warehouses; improved transmission lines for
electric power transmission. From this stage it is but a step
to those improvements of type of large structures such as
bridges, buildings, docks, and the grade, line and drainage of
track and roadway which are universally recognized as better-
ments.

Quantity, throughout the Classification is recognized as a
basis of betterment charge; thus additional yards of ballast,
additional pounds of steel per yard of rail, additional number
of cars or locomotives, or " additional devices and apparatus "
applied, additional miles of line, side track, yards or fencing
are illustrations. The only exception made (and that is optional)
is when the amount of improvement in any particular under-
taking (" comprehensive plan of improvements" Case 571) is
less than $200. But this exception does not apply in case of
right of way and station grounds, real estate, sidings and spur
tracks (Case 572), terminal yards, fencing right of way or in
case of an individual car or locomotive (Case 570), when the
repairs of these cars or locomotives belong with the repairs of
other cars to a specific undertaking of betterments or renewal of
parts. Of course the betterment in all cases is represented by
the excess cost of the improvement over replacement.

The Classification, unfortunately, might be more specific as
to those betterments where an existing unit of equipment is
replaced with another unit of equipment of larger capacity but
of the same class. If of improved design, the betterment prob-
ably would be covered by the provision for "the cost of addi-
tional devices and apparatus applied." If the betterment of
equipment is incidental to raising the type of the equipment
unit from one class to another, such betterment is also provided



ADDITIONS AND BETTERMENTS 217

for. If, however, it is not a conversion of one class to another,
but is a replacement of locomotive or car of a given capacity
with one of a greater capacity, then for our guide we must rely
on the general instructions that Additions and Betterments is
intended "to reflect the net increase or decrease (determined
according to the rules provided) in the investment/** and the
further specification that the replacement in kind which a better-
ment must exceed is replacement by "property substantially
similar in capacity. "t

The value at which these additions and betterments theoretic-
ally should be stated would be the capitalized value of the
added annual product or increment of efficiency derived from
them, at the usual rate of capitalizing income. In theory, any
difference between the annual productivity or increment at its
capitalized value and the actual cost of the addition or better-
ment, which creates this added productivity or increment, should
be absorbed through Profit and Loss, like any other adjustment
between property at its real and at its capitalized value; but
in processes so complex as those of a great railroad plant the
specific contribution to net income of any one part may be very
problematical, and among different parts may vary widely. In
practice any addition or betterment that enhances the net
income to an amount to justify its cost at all, is put into property
account of Additions and Betterments at its cost value like any
other property. When the original property with its improve-
ments has a value either more or less than the sum of the original
value plus the cost of the improvement, then an appraisal of
the property in its improved condition may be in order and the
adjustment made through Additions and Betterments with off-
setting charges or credits to expenses. Such adjustment to real
value must be made at some time, and the substantial revision

* Additions and Betterments, General Instructions, Par. 1, p. 338 of
this book.

t Additions and Betterments, General Instructions, Par. 11, p. 340 of
this book.



\
218 RAILROAD EXPENSES

of the property by betterment offers the natural occasion for the
readjustment (Case 553).

As emphasizing the idea that betterments must carry an
added net utility, we have the ruling under Additions and
Betterments, account A 35. " This account should not be
charged with . . . assessments by towns, cities or other govern-
mental authorities against a carrier as a property holder, for
public improvements which do not directly benefit the carrier
in the operation or maintenance of its property."

The Additions and Betterments accounts, as we have seen,
are to provide for property charges that occur incidental to
operation, i.e., " additions to betterments- of and withdrawals
and retirements of property composing the plant and equipment
of existing main and branch lines." A demarcation between the
construction and the operation period of the road is necessary
because like charges under construction go to " Expenditures
for Road and Equipment " directly and not through Additions
and Betterments. The Commission has not specifically defined
that moment at which the construction work ceases, and
operation begins the point where the direct charges to con-
struction account cease, and the subsequent charges to new
property are fir.st carried through Additions and Betterments.
(See case 438.) But as guide to the determination of such point
it has been ruled that " Until such time as a new railway or any
important section of it, constructed as an extension of existing
main or branch lines or as a new project, has reached such a
stage of completion that it is, or may be, regularly operated for
the purposes of a common carrier, expenditures proper to be
included in the accounts representing the cost of road and
equipment should be charged directly to the accounts prescribed
in the Classification of Expenditures for Road and Equip-
ment, and not to the accounts in this classification.* The Com-

* Additions and Betterments, General Instructions, Par. 1, p. 338 of
this book.



ADDITIONS AND BETTERMENTS 219

mission also states that the operations " SHould begin with respect
to any particular portion of a road as soon as that portion has
reached such a stage of completion that the commercial opera-
tions are the main portion of the business . . . However, it
should be understood that any expenditures for unfinished con-
struction work should be charged to 'Expenditures for Koad
and Equipment ' ; ' (Case 115.)

Additions and Betterments being of a miscellaneous character
and occurring coincidently with maintenance, the exact segrega-
tion of the charge must at times be somewhat arbitrary. It has
been the rule that Additions and Betterments must bear the
expense of injuries to persons, incidental to the work (Case
314) ; the repairs of equipment used (Case 483} the rent of
equipment used (Cases 152, 559} the first cost of all equipment
specifically bought for Additions and Betterment work (Cases
235, 480} ; and the estimated actual cost of all transportation of
material used (Cases 476, 559}. But no profit may be charged
to Additions and Betterments on any such service performed
(Case 476}, nor may there be charged any part of the salaries
and expenses of officers and employees, whose assignment and
entire time are not devoted to Additions and Betterments work.
(See case 436, also General Instructions A and B, paragraph
15). Furthermore, Operating Expenses must bear the burden
of keeping tracks passable for traffic, relocating or reconstruct-
ing roads, crossings, watchhouses, telegraph or telephone pole
lines, fences, signs, signals or other structures, when such
expense or expenses occur in the course of betterment work.
Also Operating Expenses must bear the burden of restoring the
conditions of grounds adjacent to buildings and shops after
betterment work has been completed.

The additions and betterments are for the road as a whole,
including property devoted to Outside Operations, incidental to
furnishing transportation, and are not limited to property
devoted to rail operations alone. The distinction between Out-



220 RAILROAD EXPENSES

side Operations and rail operations does not extend to the
division of the property account because the Outside Operations
are an incidental use of a property primarily created for rail-
road purposes.

From the incidental character of additions and betterments
work it follows that the funds are generally currently derived
from earnings and not from the sale of securities. When later
carried over into the permanent capital account, they serve as
the basis for the subsequent issues of securities from the pro-
ceeds of which the working capital funds are reimbursed.

The same principle which charges additions and betterments
to this account under all the above conditions, necessarily
allocates to the same account the credits for values withdrawn
from such property when there are decrements, or reductions of
class instead of additions or betterments. Likewise a charge
includes deductions for any incidental salvage. The changes
in property which are recorded through Additions and Better-
ments, may be either to increase or decrease the final annual
net money out-turn of the property, and it becomes the province
of the accountant to absorb, through Profit and Loss, or its
related accounts, the adjustments that must be made from time
to time in order to preserve the fixed property at its original
efficiency for producing revenue.



FORM OF INCOME AND PROFIT AND LOSS
STATEMENT FOR STEAM ROADS

FIRST ISSUE EFFECTIVE JULY 1, 1912.
INTRODUCTORY LETTER.

INTERSTATE COMMERCE COMMISSION,

DIVISION OF CARRIERS' ACCOUNTS,

Washington, June 27, 1912.
To CARRIERS CONCERNED:

It has seemed essential, for the completion of the system of accounts to
be used by carriers by rail (exclusive of electric railways), subject to the
act to regulate commerce as amended, that a Form of Income and Profit
and Loss Account Statement be issued for the government of such carriers.

This Form of Income and Profit and Loss Account Statement for Steam
Roads, First Issue, is therefore promulgated for the use of carriers engaged
in transportation by rail (exclusive of electric railways), and, together with
other classifications and accounting forms previously issued and now in
effect, practically completes the system of accounts for such carriers.

It is intended that the accounts provided herein shall be used, so far as
they may be applicable to each, both by lessor companies and by operating
companies.

It is proper to acknowledge the cooperation of the accredited repre-
sentatives of the Association of American Bailway Accounting Officers in
working out the rules in this form. While the rules as now promulgated do
not in all respects conform to the recommendations of that association, the
assistance of its representatives, in the consideration of the questions
involved herein, has been invaluable.

To the end that substantial uniformity in the interpretation of these
rules be maintained, carriers are requested to submit all questions of
doubtful interpretation to this office for consideration and decision.

GENERAL INSTRUCTIONS.

1. INCOME ACCOUNT DEFINED. The Income Account brings together
those accounts that show the total amount of money that a company
receives or becomes entitled to receive from its transportation and other
operations during a given fiscal period, the return accrued during the period

221



222 RAILROAD EXPENSES

upon investments, the disbursements and obligations incurred that affect the
amonts so received or acrued, and the disposition or allocation of the net
income accrued. The net balance shown by the Income Account should be
carried to the Profit and Loss Account.

2. PROFIT AND Loss ACCOUNT DEFINED. The Profit and Loss Account
summarizes the changes in the corporate surplus or deficit during a given
fiscal period resulting from the operations and business transactions during
that period as well as changes effected by appropriations of surplus made
at the option of the company, by accounting adjustments not properly
attributable to the period, or by miscellaneous losses or gains not provided
for elsewhere. The Profit and Loss Account is the connecting link between
the Income Account and the General Balance Sheet. The Profit and Loss
Account balance should be shown in the General Balance Sheet Statement
under account B 27 or account B 50.

3. GENERAL LEDGER ACCOUNTS The titles of the accounts in the general
ledger pertaining to the Income Account and Profit and Loss Account should
substantially conform to the titles of the accounts prescribed herein. Car-
riers may, however, subdivide any of the prescribed accounts, provided that
the subaccounts do not impair the integrity of the accounts prescribed and
that the titles of the subaccounts in the general ledger give reference (by
number, title, or both) to the accounts prescribed herein of which they are
subdivisions.

4. INCOME ACCOUNT ON BASIS OF ACCRUALS. The text in general pro-
vides that items affecting the Income Account shall be stated upon the basis
of accruals. Exceptions will, however, be noted in a few instances in which
it seems that to require the accrual basis would lead to erroneous results,
or perhaps involve unwarranted refinements in accounting.

5. SINKING FUND ACCRUALS. A separate account has been provided in
the Income Account for showing income from securities and other assets
held in sinking and other reserve funds. Entries are to be made in this
account for income accrued on cash, securities, and other assets held in such
funds, with the exception of securities issued or assumed by the accounting
company. No entry is to be made, either in this account or in accounts
representing interest on funded debt or dividends on stock, for interest or
dividends on such securities as are issued or assumed by the company and,
held by or for it.

Accounts are provided both in the Income Account and in the Profit and
Loss Account for appropriations of contributions and of accretions to sink-
ing funds, the amounts of which are to be credited to balance-sheet account
B 49, ' ' Reserves from Income or Surplus. ' '

6. APPROPRIATIONS. Accounts are provided in the Income Account for
the appropriation of net income and in the Profit and Loss Account for the
appropriation of surplus. Whether appropriations shall be charged to
Income or to Profit and Loss is thus left to the discretion of the accounting
company.



FORM OF INCOME AND PROFIT AND LOSS 223

7. CANCELLATION OF CONFLICTING PREVIOUS INSTRUCTIONS. The rules
provided in this Form of Income and Profit and Loss Statement supersede
any conflicting instructions in other classifications and accounting forms
previously issued.

INCOME STATEMENT.

LIST OF ACCOUNTS.

I. RAILWAY OPERATING INCOME: PAGE

I 1. Rail Operations Revenues 224

I 2. Rail Operations Expenses 224

Net Revenue (or Peficit) Rail Operations.

I 3. Auxiliary (or Outside) Operations Revenues 224

I 4. Auxiliary (or Outside) Operations Expenses 224

Net Revenue (or Deficit) Auxiliary Operations.

Net Railway Operating Revenue (or Deficit).
I 5. Railway Tax Accruals 225

Railway Operating Income (or Loss).

II. OTHER INCOME:

I 6. Income from Lease of Road 226

I 7. Hire of Equipment Credit Balance 226

I 8. Joint Facility Rent Income 227

I 9. Miscellaneous Rent Income 227

I 10. Net Profit from Miscellaneous Physical Property 228

I 11. Separately Operated Properties Profit 228

I 1*2. Dividend Income 228

13. Income from Funded Securities ' 229

14. Income from Unfunded Securities and Accounts 229

15. Income from Sinking and Other Reserve Funds 229

16. Release of Premiums on Funded Debt 230

17. Contributions from Other Companies 230

18. Miscellaneous Income 230

Total Other Income.

Gross Income (or Loss).

III. DEDUCTIONS FROM GROSS INCOME:

I 19. Deductions for Lease of Other Roads. . 230

I 20. Hire of Equipment Debit Balance 231

I 21. Joint Facility Rent Deductions 231

I 22. Miscellaneous Rent Deductions 232

I 23. Miscellaneous Tax Accruals 232

I 24. Net Loss on Miscellaneous Physical Property 232

I 25. Separately Operated Properties Loss 232

I 26. Interest Deductions for Funded Debt 233

I 27. Interest Deductions for Unfunded Debt. . . . 233



224 RAILROAD EXPENSES

III. DEDUCTIONS FROM GROSS INCOME Continued. PAGE

I 28. Amortization of Discount on Funded Debt 234

I 29. Transfer of Income to Other Companies 234

I 30. Miscellaneous Deductions 234

Total Deductions.

Net Income (or Loss).

IV. DISPOSITION OF NET INCOME:

I 31. Appropriations of Income to Sinking and Other Reserve

Funds 235

I 32. Dividend Appropriations of Income 235

I 33. Appropriations of Income for Additions and Betterments . 235
I 34. Appropriations of Income for New Lines and Extensions . 236

I 35. Stock Discount Extinguished through Income 236

I 36. Miscellaneous Appropriations of Income 236

Income Balance Transferred to Credit (or Debit) of
Profit and Loss.



TEXT EXPLANATORY OF ACCOUNTS APPEARING IN
THE INCOME STATEMENT FOR STEAM ROADS.

I. EAILWAY OPERATING INCOME:
1 1. KAIL OPERATIONS REVENUES.

This account should include the total operating revenues stated in
accordance with the Classification of Operating Revenues for Steam
Roads.


I 2. RAIL OPERATIONS EXPENSES.

This account should include the total operating expenses stated in
accordance with the Classification of Operating Expenses for Steam
Roads.

I 3. AUXILIARY (OR OUTSIDE) OPERATIONS REVENUES.

This account should include the revenues from auxiliary (or out-
side) operations stated in accordance with the Classification of Rev-
enues and Expenses for Outside Operations.

14. AUXILIARY (OR OUTSIDE) OPERATIONS EXPENSES.

This account should include the expenses of auxiliary (or outside)
operations stated in accordance with the Classification of Revenues and
Expenses for Outside Operations.



FORM OF JXrOMK AND PROFIT AND LOSS 225

I 5. RAILWAY TAX ACCRUALS.

This account should include Federal, State, county, municipal,
school, and other taxing-district taxes of all kinds, relating to railway
property, operations, and privileges, whether the assessment is based
on the valuation of the property; on the amount of stocks and bonds
issued or outstanding in respect to such property; on the gross or net
earnings; on dividends; on the number of passengers or the amount
of freight carried; on the length of line operated or owned; on the
rolling stock; or otherwise.

This account should be charged each month with the amount of
taxes accruing during the month. When it is not possible to determine
the actual accruals, the amount of the -annual taxes should be
estimated and one-twelfth of the estimated amount should be charged
to this account monthly. The monthly charges should be adjusted from
time to time during the year as the actual tax levies become known so
as to include as nearly as may be possible the total amount of the taxes
in the accounts of the fiscal year to which they apply.

If the terms of lease obligate the operating company for the taxes
assessed in connection with property leased outright, the accruals of
such taxes should be charged by it to this account. If such taxes are
actually paid to the government authorities by the lessor company, the
payment should bQ charged directly to the lessee and it should not enter
into the taxes account of the lessor.

Accruals of taxes to be paid by the lessor company, if the terms of
the lease do not obligate the lessee company, should be charged by the
lessor company to this account. If such taxes are actually paid to the
government authorities by the operating company, the payment should
be charged directly to the lessor and it should not enter into the taxes
account of the lessee.

NOTE A. If property other than railway property is so intimately con-
nected with railway property that the taxes thereon cannot be separately
ascertained, such* taxes may be included in this account ; also when it is
impossible to ascertain from the taxing authorities the distribution of taxes
between (1) railway property, operations, and privileges, and (2) other
property, operations, and privileges, the taxes on the latter may be included
in this account. When it is possible to ascertain the taxes on other property,
operations, and privileges, they should be charged to account I 23, " Mis-
cellaneous Tax Accruals."

NOTE B. Special assessments for street and other improvements and
special benefit taxes, such as water taxes, drainage taxes, and the like should
not be charged to this account, but should be included in operating expense,
additions and betterments, or road and equipment accounts, as may be
appropriate.

NOTE C. Taxes on new lines under construction or on property acquired
for the extension of existing lines should be charged to road and equipment
account No. 46, " Taxes," until the lines are opened for commercial
operation.

NOTE D. Taxes assessed separately on real estate acquired for Addi-
tions and Betterments should be charged to the appropriate additions and



220 KAILKOAD EXPENSES

betterments accounts until the completion or coming into ser-ice of the
property.

NOTE E. Amounts received in reimbursement of taxes on property
jointly used should be credited to account I 8, " Joint Facility Rent Income."
Amounts paid in reimbursement of such taxes should be charged to account
I 21, " Joint Facility Rent Deductions."

II. OTHER INCOME:

16. INCOME FROM LEASE OF ROAD.

This account should include the amount accrued as rent for road
(including the equipment and other railway property covered by the
contract) owned or controlled by the accounting company and held by
another company under lease or other agreeement granting exclusive
use and control for operating purposes.

This account should include the entire amount of rent (except
taxes) receivable by the lessor according to the terms of lease or other
agreement, whether it is paid to the lessor in cash or is disbursed by
the lessee for the account of the lessor as interest on funded debt, guar-
anteed dividends on stock, or otherwise.

NOTE A. If equipment is included in the lease of road; the rent of such
equipment should be credited to this account and not to Hire of Equipment
account.

NOTE B. If property, the rent of which is charged to account I 19,
" Deductions for Lease of Other Roads," is sublet by the accounting com-
pany, the rent receivable therefor should be credited to this account.

NOTE C. If, under the terms of a lease, the deficit (or any portion of it)
resulting from the lessee company's operations of the property leased is pay-
able by the lessor company, the amount should be charged to this account by
the lessor.

NOTE D. A company owning or controlling steam roads and leasing the
entire railway property to others and performing no railway operations
should charge to this account the cost of maintaining its organization, such
as the salaries of officers, clerks, and attendants; office expenses; law
expenses; cost of stationery, printing, and supplies; and like expenses.

I 7. HIRE OF EQUIPMENT CREDIT BALANCE.

This account should include the net credit balance of (1) amounts



Online LibraryJames Shirley EatonHandbook of railroad expenses → online text (page 19 of 52)