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CHAPTER XXIII.

RESERVES AND SINKING FUNDS.

One of the contingencies that is anticipated by electric railways is the payment of claims for damages to persons and property. Accidents which necessitate the expenditure of various sums in settlement of claims, occur without any regularity, and if these amounts are included in operating expenses as actually disbursed there will be a wide variation in the total operating expenses, and this variation will bear little relation to the volume of traffic or the amount of earnings.

Delay occurs in the settlement of damage claims, for different reasons. So many of the claims are unjust that time is required to separate the extortionate from legitimate demands. Sometimes the aid of the courts is invoked to decide cases, and this causes further delays.

It is not possible to determine the exact amount of the outstanding liability for unpaid claims, but an estimate of the amount payable should be shown, in order that the accounts may reflect true conditions. A common practice is to include each month in expenses, a fixed percentage of the total revenue, for damage claims. The amount is charged to the damages expense account and credited to an account called "Damages Reserve," or something similar. As claims are paid, the amounts are charged against the reserve; the unexpended balance is supposed to represent the liability for claims unsettled. It is usually found necessary to adjust the percentage from time to time, in order to keep the reserve at the proper figure.

In the same manner, some companies build up reserves for insurance against fire and other casualties. Instead of paying premiums to insurance companies, definite amounts are set aside out of earnings and invested in securities, the proceeds of which shall be available for replacements of property damaged by fire. The entire amount of insurance may not be so handled when this plan is first used, but the proportion of insurance written by insurance companies is gradually decreased as the reserve

is built up. As an illustration, we will say that a company which formerly paid $1500 per month for insurance premiums, has built up a reserve which justifies it in carrying its own insurance, and it is doing so. Using the same amount, its monthly journal entry would appear thus:

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During the month a small fire causes the expenditure of $500 to replace the damaged property, and the remaining $1000 is invested for the benefit of the fund. The following entry is then made:

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After these entries have been made the books show a credit of $1000 for contingent losses, and to offset it there are securities on hand valued at the same amount. The reserve fund is usually benefited to a considerable extent by turning into it the income received from securities in the fund.

A sinking fund provision in a mortgage usually provides that a certain amount shall be set aside annually or semi-annually, for payment of the mortage bonds. This results in a gradual amortization if the bonds are retired, or in the accumulation of a fund which is to be eventually used for extinguishment of the debt. Its effect may be likened to the change in values which results when additions and betterments to property are made without increasing the capital liability. The sinking fund payments and the cost of additions and betterments may all be paid from current revenues if that is the financial policy of the company, but it does not necessarily follow that such charges are part of the income account.

There are instances, however, when payments to sinking funds become a charge against income. Some railway leases provide that the lessee company shall pay interest on bonds and make sinking fund payments for the leased line. If these are both considered as part of the rental cost, the sinking fund payments are accrued in the manner similar to bond interest, and grouped with other fixed charges.

CHAPTER XXIV.

CLASSIFICATION OF ACCOUNTS.

The principal reason that the ordinary railway balance-sheet shows so few accounts is the progress that has been made in the uniform grouping of various items. Years of experience have proven that multitudinous transactions may be classified under comparatively few headings, and much attention has been given, by experienced railway accountants, to the scientific arrangement of accounts.

The first concerted action by street and interurban railway accountants, towards securing a uniform classification, was taken at the organization meeting of the Street Railway Accountants Association which was held at Cleveland, Ohio, in March, 1897. At that meeting a committee was appointed to prepare a standard classification of accounts, and form of report. This committee, which was composed of street railway accountants, corresponded with the accounting officers of other American lines, and submitted a plan for a very comprehensive system of accounting, at the Association's convention held in the latter part of the year 1897.

The classification then provided, with some modifications, has since been very widely adopted. In addition to its use by the street and interurban railways of America, it has received the sanction of governmental bodies.

The National Association of Railroad Commissioners, at its convention at Denver, Colorado, in 1899, approved and recommended the use of the classification of operating accounts by the State Railroad Commissions; several States have since adopted it as standard and prescribed its use in making reports to the State. Among others, the States of New York, Massachusetts, Maine, Indiana, and Connecticut took this action.

When the United States Government prepared its 1902 Special Report on Street and Electric Railways, the Association classification was used in procuring the statistics from the street and interurban railways, and in making up the report.

The accounts used most extensively by operating electric railways are those comprised under the general title of "Operating Expenses." The Association classification, as originally adopted, groups all expenses of this character under five general headings, which are further subdivided into thirty-nine separate accounts. These accounts, which were designed to include all charges for operating expenses, have the following titles:

Maintenance of Way and Structures.

1. Maintenance of track and roadway.

2. Maintenance of electric line.

3. Maintenance of buildings and fixtures. Maintenance of Equipment.

4. Maintenance of steam plant.

5. Maintenance of electric plant.

6., Maintenance of cars.

7. Maintenance of electric equipment of cars. 8. Maintenance of miscellaneous equipment. 9. Miscellaneous shop expenses.

Operation of Power Plant.

10. Power Plant wages.

11. Fuel for power.

12. Water for power.

13. Lubricants and waste for Power Plant.

14. Miscellaneous supplies and expenses of Power Plant.

15. Hired power.

Operation of Cars.—

16. Superintendence of transportation.

17. Wages of conductors.

18. Wages of motormen.

19. Wages of miscellaneous car service employees.

20. Wages of car house employees.

21. Car service supplies.

22. Miscellaneous car service expenses.

22a Hired equipment

23. Cleaning and sanding track.

24. Removal of snow and ice.

General Expenses.-

25. Salaries of general officers. 26. Salaries of clerks.

27. Printing and stationery.

28. Miscellaneous office expenses.

29. Stores expenses.

30. Stable expenses.

31. Advertising and attractions.

32. Miscellaneous general expenses.

33. Damages.

34. Legal expenses in connection with damages. 35. Miscellaneous legal expenses.

36. Rent of land and buildings.

37. Rent of tracks and terminals. 38. Insurance.

The use of these accounts, and the others contained in its system of accounting, are more fully described in books issued by the American Street and Interurban Railway Accountants' Association, which is the outgrowth of the Street Railway Accountants' Association of America.

A valuable feature of any system of accounting is its adaptability to the making of comparisons. Not only is it desirable to compare the result secured by one railway during a certain period with that of another for the same period, but the results attained by one company are compared for a number of years in order to form opinions of its worth and earning capacity.

If the system of accounting changes from year to year it is necessary to make detail analyses of the accounts in order to compare the results. For this reason changes in an existing classification of accounts are not made without good reason and after careful consideration. It is thought better to suffer slight inconveniences caused, possibly, by changes in operating conditions, than to complicate the larger question, that of making intelligent comparisons.

The construction of interurban lines during the first decade of the twentieth century, and the linking of small properties into large systems has brought new problems to the electric railway accountants. It was found that the classification of accounts as originally provided, should be amplified in order to take care of the new items of expense introduced by the changed conditions. The Interstate Commerce Commission, also, had requested that the Accountants' Association recommend a system of accounting for the use of interstate electric carriers.

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