nominal value and then donating a portion of that issued stock back into the treasury, presumably for sale to provide working capital. The incorporators would undoubtedly retain the required number of shares for this purpose at the time of incorporation. In the event of such a contingency arising, however, I would suggest that the number of donated shares be carried in Treasury Stock account without any money value. The number of shares indicated by this account would then be deducted from the issued shares shown in the Capital account, in order to show on the statement the actual number of shares outstanding in the hands of the public, which is the essential fact.

"When stock of this description is purchased by the company and placed in the treasury, it should be recorded in Treasury Stock account at its purchase price and shown on the statement as a deduction from Capital account at the amount paid therefor. The number of treasury shares would also be deducted from the total shares outstanding.

"In presenting the Capital account in the corporation statements the important thing is to show the number of shares issued and outstanding, with the value of these shares as reflected by the books or the statements in question."

Market Value of Stock. The market value of capital stock may and frequently does vary materially from its par value. The par value is the amount specified in the stock certificate, but the market value is what the stock actually sells for.

Capital Stock Premium Account. Stock selling above par is said to sell at a premium. Such premium should be credited to an account with Premium on Capital Stock. This represents a profit but not an operating profit for it cannot be said that the mere sale of stock above par constitutes an operating profit. Since it does not constitute an earned profit from operations, it is not available for dividends. Financial organizations nearly always consider capital stock premiums as a permanent credit to surplus. Other classes of corporations usually amortize the account by writing it off over a period of years. This is done by simply charging the premium account and crediting Profit and Loss with a proportionate part of the premium each month or year.

Capital Stock Discount Account. In most states it is illegal to sell stock at a discount. Even where it may be done legally there is a tendency to conceal the fact so far as the accounts are concerned. This is done by charging the discount to Organization Expense, or by increasing the book value of property accounts. This policy is to be condemned because to increase the book value of assets is to inflate the net worth or capital of the concern. When this is done the stock (Continued on page 199)

NOTE: The above classification is intended to illustrate the various classes of business enterprises, both public and private, that may be organized in oorporate form. No attempt has been made to make the list exhaustive, but it is complete enough to be fairly illustrative. It is subject to many variations. For instance: Private educational enterprises may be organized as Stock Corporations, in which case they should be classed under business enterprises and as such are conducted for profit. Usually Non-Stock (Private) Corporations are not conducted for profit.

is said to be "watered." Kester*, in discussing Discount on Stock, says:

"In the State of New York the stock of a corporation cannot be sold below par. Where sale below par is allowed, the proper booking of the discount requires consideration. The Interstate Commerce Commission requires that discounts or premiums be shown on the books under those titles, i. e., Discount on Capital Stock and Premium on Capital Stock. This method is to be commended as being true to fact and presenting a full and sufficient record of the facts. In the case of other concerns over whose accounting practices there is no regulation, that method is honored more in the breach than in the observance. A prevalent feeling is that the appearance on a Balance Sheet of such an item as discount on stock is a serious reflection on the standing of the corporation and is to be avoided in any way possible. Discount on stock is not an attractive item on a Balance Sheet, but there is little justification for such sentiment in those states where the sale of stock at a discount is a perfectly legitimate transaction. The Balance Sheet ought to represent facts as they are until they change; then the new conditions should be shown. So long as the discount on stock remains a fact it should be so shown. When the discount has ceased to exist through its absorption against premium on stock or the general surplus, it should no longer be reported because it is then a matter of ancient history with which the present is not concerned.

"A favorite method of charging the discount on stock to organization expense is not approved, not because it is a misnomer, for discount may well be looked upon as one of the expenses of organization, but because it is an item of sufficient importance and interest to require separate record. Charging the discount to some asset account, when payment of stock is made by property instead of by cash, is to be severely condemned. Inflation of asset values to cover up such an item cannot be justified."

Organization Expense Account. The expenses incurred in the organization of a corporation are usually charged to this account and then amortized over a period of years. Such expenses as the following are usually charged to this account:

(a) Incorporation fees, fees of attorneys, accountants, etc. (b) Promoter's services, underwriting expenses, cost of printing and circulating prospectuses, cost of soliciting subscriptions, cost of engraving and printing stock certificates, etc.

Generally speaking, all expenses actually incurred in the organization of a corporation up to the time of actual operation, constitute proper charges to Organization Expense.

The account should undoubtedly be written off in a reasonably short period of time. It is not considered good practice *Accounting-Theory and Practice, Volume Two.

in this country to capitalize such expenditures permanently though it is sometimes done. Montgomery says:

"In some respects sentiment is changing as to the wisdom of spreading these expenses over more than two years. The best practice is to charge off immediately everything which has no tangible or residual value. It is a fallacy to assume that stock certificates, incorporation expenses, etc., have any of the attributes of an asset; and so the sooner the cost appears in the Expense account, the better."

However, it is to be noted that our best authorities do not agree with regard to the time over which these expenses should be distributed. Bennet* says:

"Such expenses are absolutely essential to the creation of the business, and the first year receives no more benefit from the expenditure than the fifth or sixth. It would, therefore, seem more equitable, so far as the statistical feature of bookkeeping is concerned, to write such expenses off over such a period of years as the management may elect. Probably five years would be sufficient for this purpose, in which case onefifth of the total amount should be charged off each year."

Classification of Capital Stock. There are many classes of stock. We shall simply define briefly each of the more common classes.

Preferred Stock. In an attempt to make stock issues an attractive investment, often a certain class of stock is given some preference over another class. Stock may be preferred as to assets or dividends or both. The most common plan is to issue stock preferred as to dividends. By this is meant that the preferred stockholders are entitled to their dividends before the common stockholders share in the profits. If stock is preferred as to assets, in case of dissolution, the preferred stockholders are entitled to their interest ahead of the common stockholders, but in no case do the preferred stockholders' claims rank ahead of any outside claims. All preferred and general outside creditors must first be satisfied. Preferred stock may be either cumulative or non-cumulative.

Cumulative Preferred Stock. Preferred stock designates a certain minimum rate of dividend, but if the net profits of the company are not sufficient to pay the dividend, the preferred stockholders are no better off than the common stockholders. If, however, the stock is designated as cumulative, the holder is entitled to the dividend each year or as soon thereafter as the net earnings of the company justify the distribution of a dividend. The owners of preferred cumulative stock must be satisfied before the owners of common stock may share in the profits at all.

*In his treatise on "Corporation Accounting."

Non-Cumulative Preferred Stock. Ordinarily, preferred stock is cumulative, but it is not infrequent to find a specification to the effect that the preferred stock is non-cumulative. In this case the owners of preferred stock will not receive dividends for the current period unless the net earnings are sufficient to pay the rate of dividend specified.

Common Stock. Stock which is evidence of ordinary ownership in the corporation is known as common stock. After preferred stockholders' claims have been satisfied as to dividends, the common stockholders have a right to the remainder of the net earnings. In dissolution they are only entitled to the residual capital, after all other obligations have been settled. It is seen, therefore, that common stock may be either superior or inferior to preferred stock, depending entirely upon the earning power of the company.

Participating Preferred Stock. In addition to specifying a minimum rate of dividend, preferred stock may also participate in any dividend in excess of its own specified minimum.

Non-Participating Preferred Stock. When preferred stockholders do not share in any dividends in excess of the rate specified, the stock is said to be non-participating. It will be seen that the best possible class of stock, so far described, would be participating, cumulative, preferred stock -stock preferred both as to dividends and assets.

Guaranteed Stock. One company may guarantee the stock of another company. A large company may enter into a contract of lease with a smaller company and guarantee a certain rate of dividend to the stockholders of the smaller company. Such a guarantee constitutes a liability in the form of a lien on the guarantor company, regardless of the amount of the net earnings. Any stock said to be guaranteed by the issuing company is misleading for a company can only legally pay dividends out of earned profits and cannot, therefore, guarantee its own stock.

Founders' Stock. This class of stock does not exist in the United States but in England. Stock is sometimes issued to the promoters and it is specified that this stock shall share dividends out of proportion to the ratio which they bear to the total issue of common stock. For instance, this stock might be entitled to one-half more dividends than shall be given to the other stockholders of common stock.

Debenture Stock. The Public Service Commission of New York defines debenture stocks as "those issued under