2 4 FOREST VALUATION 



of affairs is normal or accidental, expected or unforeseen. If 

 profits should normally be earned annually, failure to do so in 

 any given year would be regarded as a loss by the proprietor, 

 but this would be mentally "written off" against the current 

 year and not carried as a debit to be recovered from the income 

 of a subsequent year. 



If the enterprise is planned to extend several years before 

 realizing profits, as in the case of the voyages of whaling ships, 

 or the production of timber from plantations, the annual interest 

 which remains unpaid is not considered lost, since it is the expec- 

 tation of the owners that this will be more than made up when 

 the "ship comes in." But the profits of the undertaking may 

 still be computed separately from the standard interest "cost" 

 or income. This must be done by calculating compound interest 

 on all cash expenses as long as they remain unpaid, which gives 

 the sum that could be earned by the capital as loans in money 

 form for an equal period. 



The deferred income may greatly exceed the total cash outlay 

 and the enterprise yet fail to earn compound interest at a 

 standard rate. In this case the deferred "profits of the under- 

 taking" disappear, and the status of the venture is the same 

 as that of the business whose annual dividends fall below the 

 standard rate of interest. 



The production of timber as a business is based largely on 

 the theory of deferred profits, and both the determination of 

 these profits and the methods of accounting employed should 

 be made to conform to the essential differences between such a 

 business and one conducted on the basis of annual profits. 



42. Income versus Profits. In determining the amount or 

 rate of profit which should be earned in order to properly com- 

 pensate the enterpriser, the status of interest must be held 

 clearly in mind. It is a "cost" merely for purposes of sepa- 

 rating that portion of the income which his capital could earn 

 from the additional income earned by his personal efforts. In 

 impersonal consideration of the legitimate profits of a business, 

 the distinction between borrowed capital and proprietary capital 

 is rejected, and the interest upon the entire capitalization is 



