Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

applicable may be stated as valuation on the basis of cost less depreciation. This group of assets represents the properties held for operating and without which operation could not continue. They are the very essence of the enterprise. Disposal of them would mean abandonment of the undertaking. Hence they are not held for realization and conversion into cash, and in a going concern market value has no effect on them. To a going concern they are worth at any time what they cost less the portion used up in operations to date. Therefore valuation at cost less depreciation is the proper basis for showing the fixed assets in the balance sheet. Valuation of Liability Items To the liability items of the balance sheet, principles of valuation are not directly applicable as such, except so far as content or inclusion and measure of quantity or amount may be said to embody considerations of valuation. Over- and Under-Valuation The need for correct valuations requires no comment and can best be appreciated as compared with the effects of over- and undervaluations. Particularly bad and harmful is overvaluation of the assets and undervaluation of the liabilities. The use of the balance sheet as an index of financial condition makes apparent the harm of wrongful content or valuation of the items entering into it. The Balance Sheet an Expression of Opinion It is thus seen that the main problem in connection with the presentation of a true balance sheet is a problem in valuation and content rather than form. From what has been said it will be evident that valuation in the vast majority of cases is not an exact science—a process of definite determination. Rather, from the nature of the data to be handled and the principles of valuation given as applicable to the various groups of data, valuation must almost always be an estimate. The determination of the value of the elements of cost, the proper differentiation between capital and revenue charges, and finally the calculation of the amount of depreciation necessary to the valuation of fixed assets—all are estimates. It is true, they are estimates based on experience, but, from their nature and the influence of local conditions in a given case, no universally applicable law of experience can be formulated. It is safe to say that two men would seldom, if ever, arrive at the same estimate of the values of given assets. Accordingly the conclusion is reached that a balance sheet is not a statement of fact but always an expression of opinion. If estimates are carefully made in the light of all available facts applicable thereto, the expression of opinion in the balance sheet will approximate as nearly as may be to a statement of fact. Because depreciation plays so important a part in making these estimates, it seems necessary, before setting forth the detailed application of the principles of valuation to the various assets, to devote several chapters to a full discussion of the subject, chiefly as it is related to the problem of valuation but also in some of its correlated aspects.