Valuation of Fixed Assets

Fixed assets, as a rule, are valued in the balance sheet at cost, regardless of their intrinsic value. The reason for this is obvious. They have been acquired and are retained, not with a view to being sold at a profit in the ordinary course of business, but to being used in operating the business until they are worn out or discarded for some other reason. Fluctuations in value of fixed assets need only be considered when there is a change of ownership of the business. A revaluation is then in order.

If assets tend to depreciate or deteriorate through wear and tear, inadequacy, or obsolescence, it is assumed that such losses are provided for out of current revenues or earnings, and as charges of this character do not increase the amount of investment they are logically classed as revenue expenditures.

The valuation of current assets follows the rule, "cost or market value, whichever is the lower." This means that if any of the current assets have declined in market value below their cost to the business, the difference between the market value and the cost is a loss that is to be charged against current earnings. It has already been shown that the essential feature of current assets is that they are intended for conversion into cash through sale or otherwise at the earliest opportunity. Hence, their market price is an important factor in their valuation. However, the theory governing accounting is that no profit can be realized until property or goods are actually sold, and it is therefore not safe to increase the value or to take credit for any profit thereon until a sale or segregation has been effected. Accordingly, no appreciation in the value of any assets should be brought into the accounts because of a rise in their market value, unless they are disposed of and the profit is actually realized.