results as the straight-line treatment’’ (P&L 1940, 85). Paton, in Principles of Accounting (Paton and Stevenson 1918, 517–
520), Essentials of Accounting (Paton 1938a, 534–535), Advanced Accounting (Paton 1941, 290–291), and Asset Accounting
(Paton 1952, 272–275), may have been among the few textbook authors who allotted space to the compound-interest method of
depreciation.
In opposition to the tendency to engage in income smoothing, the coauthors wrote, ‘‘ [t]he doctrine that the amount of
periodic depreciation should be related to income is not acceptable, especially if it is employed to make the ‘fat years pay for
the lean’’’ (P&L 1940, 85). Paton (1932a, 261) employed this same figure of speech, ‘‘ fat years pay for the lean,’’ when
criticizing accounting devices, such as an opportunistic interpretation of the output method of recording depreciation, which
deliberately promote the artificial stability of profits. In his Dickinson Lecture, Paton (1940b, 12) referred derisively to the
‘‘ ‘fat-year, lean-year’ depreciation doctrine.’’ One can even trace the discussion of this point to early Paton (Paton and
Stevenson 1918, 509–511).
The coauthors said that, ‘‘ [i]f depreciation has been accrued in full and the property is still functioning, the amount of the
past overstatement—carefully estimated—should be charged to the depreciation allowance and credited to income’’ (P&L
1940, 86–87). In Paton’s (1941, 269) Advanced Accounting, there was a curious difference of view: he would charge the
allowance account but credit surplus, not income. This difference perhaps betrayed a disagreement between the coauthors. They
then devoted a long paragraph to the doctrine in railway and public utility circles that unusual losses from the premature
retirement of equipment should be added to the cost of the superseding equipment, or be set up as a special deferred charge
(P&L 1940, 87–88). In this way, the losses could be recovered through charges to customers in subsequent years. The
coauthors concluded, ‘‘ [t]his doctrine is not in accord with satisfactory accounting standards’’ (P&L 1940, 87). On this
particular practice of capitalizing losses upon premature retirement, Paton (1941, 319) wrote that it ‘‘ is subject to serious
limitation even in fields where rates are regulated.’’ Paton characteristically took up matters relating to accounting regulation in
the railway and public utility fields at some length in his books (Paton and Stevenson 1918; Paton 1922a, 1924, 1941) and in
two of his articles (Paton 1932b, 1944). One can also find only brief such references in Littleton (1934a, 70; 1936a, 14; 1953,
16) and in Littleton and Zimmerman (1962, 159–161).
Under the heading of ‘‘ Significance of Depreciation Charge’’ (P&L 1940, 88–89), the coauthors wrote (similar to pages
67–68 earlier in the chapter), ‘‘ [t]he view persists that depreciation is a hypothetical, arbitrary item, in sharp contrast to the
ordinary ‘out-of-pocket’ costs of operation’’ (P&L 1940, 88). In Essentials of Accounting, using identical wording, Paton
(1938a
, 539) wrote, ‘‘The view persists that the depreciation charge is a hypothetical, somewhat arbitrary item, in sharp contrast
to the ordinary ‘out-of-pocket’ costs of operation.’’ Is this not evidence of Paton’s influence? Of course, the coauthors rejected
that view. Also in this section, the coauthors counseled against confusing the booking of depreciation with the problem of
replacement, a point that Paton (1938a, 541) had made in Essentials, and the coauthors, as well as Paton separately, said that
plant cost, or depreciation, ‘‘ is an extreme form [or example] of prepayment’’ (P&L 1940, 88–89; Paton 1938a, 540). Virtually
the entirety of this section can be found in Paton (1938a, 539–542), with frequently the same phrasing.
In the section entitled ‘‘ Land and Wasting Assets’’ (P&L 1940, 89–91), the coauthors’ two sentences on whether taxes and
other carrying charges are an element in the cost of acquired land were almost identical to two sentences in Paton’s (1938a,
514) Essentials (P&L 1940, 89–90). The coauthors’ advice on possibly revaluing land—curious for a tract that was avowedly a
trumpet of historical cost—was: ‘‘ even if the land account were revised from time to time in terms of estimated market value, it
would be difficult to make a case for the inclusion of the amount of the unrealized gain or loss in the periodic income
statement’’ (P&L 1940, 90). This advice varied from Paton’s (1938a, 515) recommendation in Essentials, which was that a
change in the valuation of land, based on unquestioned values that are greatly above or below the amount of book costs, should
be reported as supplementary financial data. But in his Advanced Accounting (Paton 1941, 376–377), Paton adopted a line
similar to that in the monograph, namely, that any write-up or write-down in the carrying amount of the land, if recorded, was
to be a balance-sheet adjustment. In Accounting, Paton (1924, 367–369) had argued that the appreciation in land, if it were
‘‘ unmistakable,’’ should be credited to a Surplus from Land Appreciation account.
In regard to wasting assets, such as natural resources,
13
the coauthors made a point that few textbook authors, other than
Paton, would have noticed: that, despite the fact that dividends can legally be paid out of net income before deducting depletion
cost, the ‘‘ common practice of reporting depletion as an adjustment of the net rather than as a direct charge to gross revenue is
not satisfactory’’ (P&L 1940, 91). In his Essentials (Paton 1938a, 517), he made the very same point, concluding that the
netting treatment is ‘‘ without valid excuse.’’ Most of the coauthors’ discussion of the depletion of natural resources in the
section closely parallels that in Paton (1938a, 516–518).
13
The coauthors did not here repeat their suggestion on pages 28–29 that, in ‘‘ extreme situations,’’ when a dependable estimate of the value of natural
resources far exceeds the actual outlay needed for their acquisition, ‘‘ it may be necessary to establish formally a new point of departure on the basis of
implied cash cost’’ (P&L 1940, 28–29).
An Introduction to Corporate Accounting Standards: Detecting Paton’s and Littleton’s Influences 57
Accounting Historians Journal
Volume 45, Number 1, 2018