Sec. 8 INCOME ACCOUNTS 125
of bookkeepers in often entering capital at its cost value.”
In fact it is sometimes said that “liabilities represent money
received by a company, and assets, how it has been ex-
pended.” But this is not strictly true. Since its market
value depends on its suitability to the uses to which it is
put, not on the money sunk in its construction, the house on
which was expended $10,000 for construction may be worth
more or less than $10,000. In this case the income
account should contain $10,000 on the outgo side, and
the capital account should contain a larger or smaller
figure.!
And yet it is undoubtedly true that we instinctively
object to entering the cost of building the house in its
income-and-outgo account; and we express this objection
by calling this cost a “capital cost,” rather than a part of
running expenses. By so classing it we mean that it does
not recur, or, at any rate, only at long intervals. On this
basis Wagner and others have erroneously claimed that
income and outgo should be confined to “regular” items.
At first glance this seems feasible because, in actual prac-
tice, an extraordinary expense in a given year, like the
cost of constructing a house, does not usually reduce the
owner’s net income for that year by that amount. He will
generally contrive to avoid such a result by offsetting
the extraordinary expense of the house by a correspond-
ingly extraordinary income from some other source, such
as a depreciation fund. It is evident that the house owner
! Even in the normal case the value of the house, as is well known,
is not exactly equal to the cost expended in construction, but to that
amount plus interest. A house which costs $10,000, expended through
six months, ought to be worth a few hundred dollars more than this
sum at the time of completion; otherwise the man who expended those
$10,000, and at completion has only $10,000 worth of house to show
for it, has evidently received no interest on his money. The relation
between the value bf capital, and its cost, and interest, will form a
subject to be taken up in a later chapter, where the common error
that accrued, but unpaid, interest is itself a cost will also be dis-
cussed.
