4 g FOREST VALUATION 



status of the assets, and second, the relation existing, as a result 

 of this status, between assets and proprietors. 



The problem of the balance sheet lies in the treatment of 

 potential income, and its effect on the value of the assets. As 

 long as the assets are entered at cost, and income appears only 

 after it has been actually received, no potential or unearned 

 profits appear in the balance. On this basis, the excess of 

 annual costs over annual income may be added to capital as 

 cost of assets, as is permitted in railroad construction (57), and 

 by the government in computing the income tax ( 162). Un- 

 earned interest on such costs would be excluded in a balance 

 sheet. 



But if the assets are revalued, at "actual" value, based 

 perhaps on present increased sale value, but due entirely to 

 increased prospects of income capitalized as expectation value, 

 the alteration of the value of the assets, thus justified, indicates 

 an apparent profit to the owners exactly equalling this increase, 

 not yet realized nor available for the payment of dividends. 



Not only does the balance sheet fail to distinguish between 

 actual and potential profits, but it entirely ignores the element 

 of time in indicating the relative value of the profits earned, 

 compared with the capital invested. 



The fundamental relations exhibited in the balance sheet, 

 and its connection with the profit and loss account, may be set 

 forth in the following framework. 



BALANCE SHEET 

 Assets Liabilities, 



Proprietorship 



The diagram corresponds to an equation in which the opposite 

 sides may show both plus and minus items. A minus item, by 

 transfer from one side to the other, becomes plus. The items 

 included in each subdivision represent a separate equation. 



