CHAPTER IV
THE COMPARATIVE BALANCE SHEET
Comparison of Net Worths.—The aim of every business enterprise is to increase its net worth. If James Runyon at the beginning of the year is worth $5,000 and at its close $7,500, it is evident that he has increased his wealth by $2,500. Very little information is given him or anyone else as to the manner in which the increase took place, except that it came about in the ordinary course of business. No criterion is given by which to compare effort with result. An increase of $2,500 may or may not be commensurate with the labor expended in effecting it. However, since a business is not likely to remain stationary, there is a degree of satisfaction in knowing merely the extent of the change in its net worth. The taking of an inventory, the appraising of the value of the assets from time to time, and the setting of the liabilities for the same dates over against them, is the method of determining the corresponding net worths. A comparison of these net worths shows their increase or decrease during the period. A further analysis of the individual items may be made. A comparison of each asset at the beginning of the period with its value at the end of the period, shows the increase or decrease in that item. A similar comparison of each liability item brings out the increase or decrease during the period.
How a Gain or Loss May Be Evidenced.—During a period a gain or increase in net worth may come about in one of four ways:
1. The assets may remain the same and the liabilities may decrease.
2. The liabilities may remain the same and the assets may increase.
3. The assets may decrease but the liabilities suffer a greater decrease.
4. The assets may increase but the liabilities undergo a smaller increase.
Provided no more money has been invested in the business, and none has been withdrawn, there has been in all the above instances an increase in net worth, that is, a profit has resulted. If the reverse of the above relationships obtains, there has been a decrease in net worth, or a loss.
The following statements illustrate the points discussed above.
Aaron Conners
Balance Sheet,
June 30, 1921