VALUATION OF ASSETS $1 



appropriated from income offsets the loss from this source in the 

 capital account. Item 5, dividends are then appropriated, and 

 the remainder of the annual income (item 6) represents profits 

 remaining in the business. 



A deficit, instead of a net income, occurs if the gross income 

 is insufficient to cancel the first three items. When a regular 

 annual provision is made for depreciation this may also cause 

 a deficit. In case this deficit occurs, it results either in dimin- 

 ishing the surplus, or the value of the proprietor's equity, or 

 else it is considered as a natural and legitimate cost to be added 

 to capital expenditure. This difference in the point of view 

 coincides with the difference between enterprises yielding annual 

 income and investments on which income is naturally deferred 

 for longer periods. 



The failure of the commercial balance sheet to fully inform 

 the investor as to the true economic status of his business, for 

 the reasons mentioned (page 48), suggests a supplementary 

 statement, in which the factor of time, and the increase in value 

 of assets due to future or potential income, may be expressed. 

 Such a statement is merely a prospectus or forecast, but will be 

 of great value if its true character is clearly explained. Its 

 principal use is found in connection with a business in which the 

 actual returns are deferred rather than annual. 



III. PROSPECTUS OR FORECAST 



Debit 



Credit 



To obtain this last balance, the cost of assets must be shifted 

 to the "credit" column, thus comparing cost with capitalized 

 or expectation value and revealing the potential profit by which 

 the true economic status of the business may be gauged. 



The sources of confusion in the treatment of assets by 

 accountants are now revealed. Costs and value are diametri- 



