In this country, if a construction company undertakes to build a railway, it is permitted by law to include in construction expenses "interest on loans effected and on notes issued for construction purposes." A similar practice is allowed in other countries.

From this it has been argued that a company buying land for development purposes is entitled to include in the cost of the land the interest it may pay on loans which it makes in order to raise the purchase money. This, however, does not seem to be a logical position, for if interest is charged on such loans, which are practically a part of the purchase money, why should not interest be charged on the entire price?

It should be remembered that the holdings of a concern dealing in real estate are its stock in trade and form its inventory, and are subject to the basic rules governing any other stock in trade. A merchant would not add interest to the purchase price of his goods when taking their cost value in an inventory, nor is it usual for an investor buying stocks, bonds, or other security, to add the interest thereon to the original price and call this total the cost of the securities. Any merchant following such a course would be anticipating his profits - a practice inconsistent with good business.

The fact that an individual or a corporation, not having sufficient money to pay the full purchase price of an article, must borrow the money, does not in any way change the value of the article bought, although the fact that interest must be paid on borrowed money may apparently increase the cost. On the other hand, if interest on a part of the purchase price is charged to cost, then interest on the whole price should be so charged, for the simple reason that the money which the purchaser invested in property would, presumably, if not so invested, have been used for income-producing purposes.

* "Cost Accounting, Theory and Practice," by J. Lee Nicholson.

The fallacy of charging interest on the borrowed money only, may be shown by an example: Suppose a concern finds at the end of a month that it has $5,000 in bank; that $5,000 on a piece of property purchased a year ago is now due; and that it must also pay salaries to the amount of $5,000. It therefore goes to the bank and borrows $5,000. Is there any good reason why the interest on this loan should be charged to the cost of the property? Both the debts are valid obligations; either one of them could be paid without borrowing, but if the money in bank is used for the payment on the land, a like sum must be borrowed to pay the salaries, and interest on such a loan is chargeable to "Income." Who can say to which purpose the bank balance was devoted, or to which the borrowed money ?

Possibly the fact that interest on money borrowed for current expenses must be deducted from "earnings," while interest on money borrowed to pay for land may be absorbed in the Real Estate account, and thereby apparently increase assets rather than expenses, explains the practice of including such interest in the cost of acquirement.