VALUATION OF ASSETS 47 



adopted as correct according to the conditions and principles 

 employed in determining such values. Accounts receivable 

 and debts owing to the business are part of the assets. 



The right-hand member represents the capital paid in plus the 

 borrowed capital. Debts owed by the business and accounts 

 payable plus borrowed funds constitute the liabilities. 



In balancing the equation, the "value" of assets is first 

 determined. The liabilities are rigid, therefore the balance 

 represents the proprietorship. When this is originally expressed 

 as capital stock, an excess of value is shown as surplus, while a 

 deficit is carried to the left member to balance. 



Changes in the status of the business, which are constantly 

 occurring, take one of two forms; a change in value of capital 

 resulting from net income or loss, or a change in said value 

 independent of such net income or loss. The cash for the pur- 

 chase of assets must come either from the proprietors as addi- 

 tional capital, or from surplus derived from income. On the 

 other hand, sales are mere exchanges, bringing in an equivalent 

 asset in cash. 



It is evident, then, that the assets are increased only by 

 Additional capital invested by proprietors. 

 Net income, from 



Excess of sale value over cost of assets. 

 Revenue from use of assets. 

 Appreciation in value of assets. 



The last item is a potential income, which may or may not be 

 eventually realized. In the same way, assets are decreased by 

 Withdrawal of capital by proprietors. 

 Losses or destruction of assets not insured. 

 Dividends. 

 Expenses. 



All items of current income or expense effect a corresponding 

 change in the net value of the capital, but as the balance sheet 

 is not usually made up of tener than once a year, these items are 

 carried in the profit and loss account, and only the surplus or 

 deficit entered in the balance sheet. 

 The commercial balance sheet attempts to show, first, the 



