mentioned. In this connection it should be borne in mind that interest and rents accrued to the date of the testator's decease are part of the corpus or principal of the estate; that profits realized or losses sustained on the liquidation of legitimate investments are added to or deducted from the principal; that expenses during the period of the executorship are paid out of principal and not from income, excepting expenses connected with improved real estate which are chargeable against the income derived. therefrom; that losses on unauthorized or illegal investments are chargeable to the trustees personally with such interest (usually at the rate of six per cent per annum without compounding) as may be directed by the court; that a trustee is similarly chargeable with interest on funds actively applied to his own use or indirectly so applied by merging them with his own funds, even though he may have balances on deposit to his personal credit in excess of the trust funds for which he is responsible; that, even when investments of a wasting nature are specifically authorized, or form the original principal of the estate, a life tenant does not necessarily receive the entire gross income. When the instrument creating the trust provides that the life tenant and the remainderman shall benefit equally from such investments, it is usual to treat such part of the receipts from the investment as equals, say, five per cent on the appraised value of the investment at the time the trust was created as income for the life tenant and to capitalize the amount received in excess thereof.

The terms of the will or trust deed may, however, modify any of the foregoing rules, and hence the importance of the auditor studying carefully the conditions of the trust.

With regard to premiums paid on securities purchased by the estate, the usual rule is that they come out of the principal of the estate. Discounts on bonds purchased inure to the benefit of the principal. As probably the great majority of investments which are legal for trust funds sell at a premium rather than at a discount, one does not offset the other. From an accounting standpoint, premiums paid on bonds purchased should be amortized over the life of the bonds, and a portion of each interest. payment retained to refund the premium advanced from the principal of the estate, and only the actual income yield on the investment paid over to the life tenant. The accountant must,

however, in this, as in all matters pertaining to trust estates, be guided by the rules laid down by the court, which are not uniform in the different states. It is to be hoped that the courts will in time give effect to a more logical treatment of premiums on bonds than they have in the past.

The division or partition of an estate is frequently quite a complex proceeding. An estate is sometimes left in trust for the children of a family, each to receive his or her respective share of the principal on attaining a specified age. Until such time each beneficiary receives only his or her share of the income. As the specified event would not occur simultaneously in the case of all the beneficiaries, they would not all become entitled to their respective shares at the same time. As soon, however, as any one became entitled to receive his share, he could demand it without having to wait for such time as all the heirs could receive their respective shares of the principal, and, excepting by consent, the estate would have to be forthwith divided. Should the estate consist of securities which are readily divisible, no serious difficulty is encountered, as the beneficiary may then be given his proportion of each of the estate's investments. Should the estate, however, consist of real estate or other nondivisible assets, resort must be had to some other method of determining the beneficiary's share and delivering it to him.

Were all the beneficiaries of age, a mutual agreement could be made, but if any one of the beneficiaries is a minor, he or she cannot give binding consent to such an agreement. The only course left open is to apply to the courts for an order to "partition" the estate; the final order of the court confirming the share determined to be payable to the beneficiary entitled to the partition will be a protection to all parties interested. The payment of his share to the retiring beneficiary forthwith terminates his interest in the estate, and he is not concerned in any fluctuations in the value of the trust investments which may subsequently take place. Such fluctuations would affect only the remaining beneficiaries, for whose benefit the balance of the estate would be administered.

A principle of law which should not be overlooked is that no beneficiary who is under age has power to consent to any changes in the terms of a trust.

EDUCATIONAL INSTITUTIONS

As the greater portion of the income of educational institutions is usually derived from tuition fees, dormitory rents, and board, any failure of the records to control adequately the collection of such income should be reported, and detailed tests should be made (if these records are kept by single entry) to ascertain that all such income is being received and accounted for. Particular attention should be given to cases where no tuition fees, or fees at reduced rates, are received, to ascertain that proper authority therefor has been granted. The collection of extra charges for diplomas, special examinations, laboratory or school supplies, etc., should be given careful attention.

The examination of securities and the verification of the income therefrom are important. The records should show clearly the total amounts of all special funds, the invested and uninvested portion thereof, and, in addition, should enable the auditor to ascertain that the income therefrom has been applied to the purpose designated by the donors.

The annual report will be of material assistance to the auditor in the verification of income from tuition and donations, as the names of students and donors (and the nature and amount of donations) are usually detailed therein. If the report is not published until after the audit, it is desirable for the auditor to verify the proof sheets of the annual report prior to the final printing thereof.

The accounts of most educational institutions are kept only on a cash basis, and uncollected income and outstanding liabilities are usually ignored in stating their financial operations. It would be well for the auditor to recommend changes in the accounting records which will enable accurate statements of operations, as well as of assets and liabilities, to be prepared periodically. These statements will be valuable to the executive officers and trustees and should form part of the annual report.

CHARITABLE ORGANIZATIONS

This class of institutions includes hospitals, asylums, orphanages, relief societies, and all organizations whose aim is to relieve suffering and distress. That respect in which the accounts of

charitable organizations especially differ from ordinary commercial accounts is the receipt of voluntary subscriptions and contributions. The receipts or acknowledgments sent to contributors should be consecutively numbered, and preferably so designed that a carbon copy will remain on file. Entries should be found in the cash book for all donations appearing on the copies of acknowledgments to contributors. The only practical way of insuring an accounting for all contributions received is to include in the annual report a list showing both the names of contributors and the amounts of their donations; then if any donations have not been accounted for, the donors may call attention to the omission thereof from the published list.

In hospitals, asylums, and like institutions considerable income is received from pay patients. This should be thoroughly verified. Keeping a controlling account in the general ledger for the patients' accounts will aid materially in verifying the correctness of the income from patients.

Patients' accounts are similar in theory to those of hotel guests. There is a patients' register in which are recorded the arrival and departure of patients, and the books can be so arranged as to permit of a conclusive audit.

Another item of income is from appropriations made by the State. These are sometimes in round sums and in other cases are based on the number of patients cared for at a fixed amount per patient.

In some States the accounts of charitable institutions receiving State aid are subject to audit by representatives of a State bureau. These official audits are usually restricted to an inquiry into the expenditure of the State appropriation and do not embrace the verification of other items of income and expenditure. Some States also prescribe a classification of expenses which institutions receiving State aid must follow, but these classifications have not as a rule been planned with the thoroughness characteristic of the classifications prescribed for public service corporations.

In the great majority of cases the accounts of charitable institutions are kept on a purely cash basis. The need for keeping and stating the accounts on a true income and expense basis so that actual results of operations may be seen is just as great in

the case of charitable institutions as in business houses. As every accountant knows, a cash statement does not necessarily show the real cost of conducting an institution, and a large deficit may be accruing of which the published reports give no intimation.

In auditing the disbursements, the actual cost of operation should be ascertained as closely as feasible and the per capita cost determined. This will furnish data for comparison with the operations of other institutions of like nature; such comparisons make for increased efficiency.

The use made of trust funds devised to an institution for specific purposes should receive the auditor's attention. If the income from the funds is not being applied to the objects designated by the donors, or if the principal of funds has been encroached upon, when only the income was to have been used, it is clearly the auditor's duty to call attention to the matter.

The comptroller of the city of New York requires charitable institutions which receive public aid to keep uniform accounts, and to submit to him periodical reports, using the following forms: