The Minehill and Schuylkill Haven Railroad Company (MSH) was one of the first commercial carrier railroads chartered in the U.S. The stock traded on the Philadelphia Stock Exchange and the company managers faithfully issued annual reports to the stockholders beginning in 1828. Fifteen annual reports were discovered at the Library Company of Philadelphia, covering most years from 1844-1864. The purpose of this paper is to conduct a

The Pennsylvania State Assembly granted a charter to establish the Minehill and Schuylkill Haven Railroad Company in 1828, with capital of $25,000 to "constitute a railroad from the canal at Schuylkill Haven, up the valley of the West Branch to the coal seams in the Mine Hill, a distance of nine miles." Initial track construction was completed in 1831 at a cost of $186,000. Coal was hauled in cars pulled by horse and mule teams, 17,559 tons in 1831.

The lines were expanded as new coal fields were opened. Locomotives were first acquired in 1847, requiring improved infrastructure. During 1863 1.5 million tons of coal were hauled, a total 25 million tons over 32 years (1831-63). The end of the line connected to the docks of Schuylkill Navigation Co. or the rail of the Philadelphia & Reading Railroad Company at Schuylkill Haven. Minehill & Schuylkill Haven was acquired by the Philadelphia & Reading in the 1930s. Thus, the MSH continued in existence for over 100 years.

The initial $25,000 in stock (1828) was subscribed by local coal land owners and company managers. As more capital was needed, mortgages were obtained from Philadelphia "capitalists". The mortgages were convertible to common stock. The stock traded on the Philadelphia Stock Exchange, the first stock exchange founded in the U.S. (1790) and the premier stock exchange at the time the company was chartered.

During 1863 the Schuylkill Haven & Lehigh River Railroad was acquired by MSH. MSH managers agreed to lease the railroad to the Philadelphia and Reading Railroad for an annual fee of 8% of total assets, also during 1863. MSH stock price rose from 48½ at the start of 1863 to 62½ in December. No mention was made in the 1864 annual report of the consequences of the Civil War. The 1879 balance sheet of the Philadelphia and Reading showed $175,300 of MSH stock as an asset.

COMPARISON TO THE BALTIMORE AND OHIO RAILROAD

The Baltimore and Ohio Railroad Company (B&O) was the first successful commercial railroad and continued until acquired by the Chesapeake and Ohio in 1962. The B&O was chartered by Maryland in 1827, with great expectations. The merchants that founded the B&O expected a track from Baltimore to the Ohio River, some 300 miles. They wanted to open up the West to Baltimore merchants. The projected cost was $5 million, to be completed in 10 years. The B&O reached the Ohio as expected, but it took 25 years and cost $15 million. They initially used horses to pull passenger and later freight cars. The use of locomotives started in 1831. Not only did the horses have to be replaced, but so did the track and track base. Virtually every phase of construction and operations had to be invented by the railroad. They had a grandiose plan that was accomplished--eventually. The B&O nearly went bankrupt at least twice before completing the line to Wheeling (on the Ohio River) in 1853.

Back to MSH, chartered a year after the B&O. A major difference was the much smaller scale. The initial goal was a small railroad to ship coal from Minehill to Schuylkill Haven, some nine miles, using horse and mule teams. Unlike the B&O, their plan was more or less on time and on budget. They were hauling coal by 1831. MSH did not invent new technology; in fact, did not use locomotives until 1847.

MSH operated exclusively within Pennsylvania and had to get legal approval only once, in 1827. B&O initially planned to operate within three states and had to get approvals and extension several times from various state legislatures. MSH common stock was issued exclusively to individual investors. Much of the B&O stock was issued to the state of Maryland and the city of Baltimore. Thus, considerable B&O funding came directly or indirectly from government funding, both equity and debt obligations. The B&O also borrowed heavily from British bankers.

MSH paid regular cash dividends beginning in 1831, unlike the B&O which sometimes suspended dividends and paid only stock dividends for several years. The two railroads shared certain characteristics. Both continued to construct new track, expand operations, and adapt to new technology. Both faithfully issued annual reports, which presented some financial information and often included one or more financial statements. They both survived into the 20th century--most railroads did not.

FORMAT OF THE ANNUAL REPORTS

MSH had a December 31 fiscal year-end. The annual meetings were early in January at which was presented the "Report by the Board of Managers to the Stockholders of the Mine Hill and Schuylkill Haven Rail Road Company". The report was signed by the president of the railroad. The form of the report was a narrative, usually of the previous year's operations and not much different than a president's letter in a modern annual report. In some years financial statements and supplementary reports

were attached, such as the "Report of Engineer and Superintendent". The trend was to report more information in later years. No audit opinions were included in any of the annual reports. The annual reports available for analysis were: 1844, 1846, 1848, 1849, 1851, 1852, 1854, 1855, 1856, 1857, 1858, 1859, 1860, 1861, and 1864. The managers' reports were written for the annual meetings. It is not clear to what extent the reports were distributed.

Railroading was the first industry to have a large fixed asset base, to require extensive outside capital, and be regulated by governments. Thus, the industry was the first to attempt to value fixed assets, attempt to deal with depreciation and other accrual issues, and report publicly to outside investors and creditors. Early accounting reports were cash based with periodic reporting of receipts and expenditures.

FINANCIAL STATEMENT INFORMATION

Initially, MSH financial statements seemed to represent supplementary information rather than the heart of the annual reports. The discussion differed somewhat from year to year. Operating and construction activity and repairs were discussed, sometimes at great length. Financial activities were usually mentioned briefly. A summary of annual report disclosure by year is presented in Table 1.

The first financial statement, Statement of the Receipts and Payments of Cash, from January 1st to December 31st, appeared in the 1848 report (for the 1847 fiscal year). This "cash statement" appeared in every annual report after 1848 until 1861 (but not the 1864 report). Schedules on railroad operations and taxes began in 1849 and were presented in most years. These included net tonnage of coal, duty performed by engines, and taxes on dividends paid into the Treasury [of Pennsylvania].

"Complete" financial statements were prepared only for two years, fiscal years 1850 and 1851. These included the equivalent of a balance sheet, an income statement, and the cash statement previously mentioned. It was not stated in the annual reports why these were prepared or why the balance sheet was discontinued after 1852. On the other hand, the income statement and cash statement equivalents were included in all years through 1860. The financial statements for fiscal year 1850 are presented in Table 2.

Table 2 forthcoming

BALANCE SHEET

The balance sheet equivalent for fiscal year 1850 was called "Summary of Debits and Credits, or Ledger Balance".⁵ Total assets were $900,000, of which over 90% represented fixed assets, primarily the track and track bed. The term "stock" apparently meant horses and mules. Fixed assets were listed first, followed by cash and other current assets. Presumably, all amounts represented original cost, but this was not mentioned in the annual reports.

The credit side was predominately capital stock, $800,000 or 89% of total assets. The Depreciation Fund at over $30,000 can best be considered a reserve equity account. This was treated as a residual amount (see separate section on depreciation) and was roughly analogous to retained earnings. The remaining items were liabilities. The large use of capital stock was unusual at the time. Most railroads, including the B&O, relied on long-term bonds for the majority of their fixed asset acquisition and construction.

The "Summary of Debts [sic] and Credits" for fiscal year 1851 differed from the prior year. Below the assets on the left side were expense-related accounts; below the equity and liabilities were revenue-related items (these revenue and expense type items also were reported on the income statement). Why the change in format was not stated. The result was a less useful statement.

Only the first summary of debits and credits was similar to a modern balance sheet. Format differs slightly (e.g., fixed assets and equity items were listed first). The information seems relevant and is comprehensible today. Why the managers changed the statement for fiscal year 1851 and discontinued the presentation after 1852 is unknown.

The 1848 annual report of the B&O presented a Statement of Affairs of the Baltimore and Ohio Railroad Company (for the year ended September 30, 1848). This was the only statement for the entire company (operating statements were prepared for the two B&O railroad lines) and resembled the 1851 "balance sheet" of MSH. That is, it included both operating and position statement accounts. Stock (equity) totaled $7 million and liabilities about $5 million. The major assets were cost of road and improvements and stock in subsidiary railroads.

INCOME STATEMENT

Income statement presentation and calculations were substantially different from modern practice. For 1851 the statement was titled: "Statement Showing the Income of the Company for the year 1850, and the Expenditures Chargeable Thereto". The receipts were revenues; when estimated bad debts were deducted ("less tolls likely to be lost"), the result was called net income. The railroad charged tolls for hauling coal by ton mile (2¢ per ton mile in 1843, reduced to 1½¢ in 1847).

From net income expenditures were deducted. However, capital expenditures were not included. Expenditures were essentially payments for the acquisition of goods and services. The major operating categories were wages, fuel, repairs, and head office costs. Payments included dividends and state taxes on dividends. The balance was "appropriated to the depreciation fund". Thus, all financial statements for this year balanced debits with credits.

A modern calculation of net income would be approximately the dividends added to the depreciation fund, or $95,000 for fiscal year 1850. This would be a return on capital stock of 12%. Most of this was paid out in dividends ($92,000 or 59% of net revenues). The dividends were paid as a percentage of capital stock par value. The percentage varied from year-to-year, but was as high as 15%. In typical years most available income was paid out as dividends. The only reported taxes were the state taxes on dividends ($4,600 in 1850 or 5% of dividends). No mention was made of state and local property taxes. The focus was close to cash basis accounting, not unexpected almost a century before the beginning of generally accepted accounting principles.

The format of the income statement changed somewhat from year-to-year. For fiscal year 1859 receipts less bad debts was called "making total income" rather than "net income". The amount at $504,000 was triple that of 1851. Payments totaled $496,483, leaving a "balance to repair fund" of $7,800. This was stated as a "bottom line" amount. Dividends of $254,750 were again payments (51% of net receipts).

RECEIPT AND PAYMENT OF CASH

The cash statement was the earliest presented, first appearing in 1848, and reported each year through 1861. In a period of virtually no accruals, this statement represented the most reliable information and, perhaps, useful data to stockholders.

The left side included the beginning cash balance and receipts. The right side presented payments and ending balance. No attempt was made to segment (categorize) the line items. Receipts were revenue ("bills receivable taken for tolls"), new capital ("new stock issued"), and other items (such as "locomotive engines sold"). Payments included expenditures ("expenses of motive power dep't."), capital acquisitions ("engines bought"), and dividends and interest. Several items were difficult to determine if they were expense- or capital-related (such as "iron rails parchased" [sic]). Unfortunately, the specific line items and balances did not articulate from one statement to another.

FIXED ASSETS AND DEPRECIATION

Balance sheets were presented only for two years. To understand fixed assets and depreciation, the available balance sheets, the cash receipts and payments, the narrative discussion of the president, and separate reports such as the Report of Engineer and Superintendent must be reviewed. The analysis is still incomplete.

Accumulated construction costs, rolling stock, real estate, and related items were capitalized on the balance sheet. Cash payments were recorded for capital items (e.g., "engines bought, iron rails purchased") that were not on the income statement. There is no evidence that fixed assets were written up (or down) based on fair value or other calculations, nor that scrapped fixed assets were written off.

Some maintenance and repair costs were expensed. The income statement showed payments for:

(1) "fuel, repairs and other expenses,

(2) ... repair and maintenance of the road" [Report, 1851, p. 13], for example.

New acquisitions and construction replacing outdated fixed assets were capitalized. Some of the replaced or no-longer-needed assets were sold, which was noted in the Reports. For example: " ... the Board was induced ... to sell to the Reading Company the large 8 wheel engine No. 10 ... The sale was made at cost..." [Report, 1851, p. 7].

During the 1845 fiscal year the Board established "The Depreciation Fund". However, the balance sheet of the 1851 Report showed the depreciation fund as an equity item with a balance of over $31,000. The income statement for the same year recorded "Balance appropriated to the depreciation fund, $3,178.62". Thus, the depreciation fund seemed roughly analogous to retained earnings, rather than a contra asset account.

The income statement of the 1852 Report showed a payment to: "depreciation of engines and machinery, $6,842.35". Again, this was the residual balance on the income statement (net earnings); however, the depreciation fund had the same balance ($31,332.58) as the previous year. As previously stated, the summary of debits and credits was no longer a balance sheet in that year. The residual balance was called the "repair fund" in later years. Unfortunately, it was not clear how it was used.

Thus, MSH managers understood some of the problems associated with fixed assets that wear out and need replacing. The railroad experimented with depreciation-related techniques. Since the managers changed procedures, presumably they did not discover a satisfactory procedure. Of course, none of the techniques resemble modern depreciation methods.

CONCLUSIONS

This paper reviewed 15 annual reports of the MSH over a 20 year period from the mid-19th century. The primary focus of the reports was a verbal summary of annual operations and construction activity, with limited fiscal information. The 1848 report was the first to present a financial statement, "Statement of the Receipts and Payments of Cash". The 1851 and 1852 reports presented virtually complete financial statements. The cash statement and income statement continued to be presented through the 1860 fiscal year, but the balance sheet did not. Accounting was cash-based. Although the railroad experimented with a "Depreciation Fund", no depreciation allowance was used. Key points included the lack of obvious articulation across financial statements, a changing format of statements presented over the period analyzed, and a lack of accruals.

[The full article can be found in the April 1998 Accounting Historians Norebook, pp. 9-10, 30-33]