Deducting the deficit;

              90 HASKINS & SELLS December
Deducting the Deficit
EV I D E N C E that accountancy practice
is emerging, figuratively speaking,
from the darkness of the Middle Ages is
plentiful in many quarters. The dawn of
a Renaissance begins to light the profes­sional
sky. Every now and then, during
the past two or three years, the profession
has received a shock from some lawyer,
engineer, credit man, banker, or author,
who has vied with the others in expounding
the philosophy of accountancy. Steeped
in the dogma of tradition, accountants at
first found it difficult to believe that any
one outside of their own ranks could tell
them anything about their chosen subject.
Gradually, if somewhat slowly, has come a
realization that professional accounting
service, in order to succeed, must take
cognizance of substance as well as form,
of collateral as well as direct relations with
clients, and of common sense in the appli­cation
of scientific principles. As a result,
more and more frequently some courageous
progressive startles the professional world
with some novel act of procedure which,
when properly appreciated, makes one
wonder why it was so long forthcoming.
But accountants are still somewhat
stupid about certain things. They are
still too prone to regard a balance sheet as
a contrivance to effect equilibrium instead
of a figure-picture of financial condition.
That the two sides are in agreement, in so
far as the figures are concerned, seems to
be the limit of comprehension. To tell the
story of those relations which are incident
to condition; to set forth facts which will
serve to guide the judgment in policy­making;
to make the statement pulsate
with life and interest; these and other
necessities of constructive procedure seem
never to have made any impression on the
consciousness of some individuals.
Involved in the matter of balance sheet-making
is the question of how a deficit
should be treated. Stated briefly, "Should
a deficit be shown on the asset side as a
balancing item, or deducted on the right-hand
side, or liabilities section, from the
invested capital account?" The question
is more than an academic one, and there­fore
an attempt to answer it may only be
made after consideration from a practical
angle. In other words, "What will be the
meaning, in either form of treatment, to
the reader of the balance sheet?"
Conceptions may differ as to what is a
deficit, and it must be admitted that the
term has different meanings at different
times. For the purpose of this discussion
it may be regarded as that condition where­in,
from one cause or another, there has
been some encroachment on the invested
capital. Deficits from operations may
arise occasionally, or continue over a series
of years, but until there has been an ac­cumulation
of such net operating losses
sufficient to exceed any previously earned