It is not purposed in this treatment of valuation to set forth the points of variance and sameness with the other types; that is beyond the scope of the present volume. Endeavor will be made to set forth clearly underlying principles and their detailed application to the chief items met in the average balance sheet as viewed from the standpoint of a going concern. Elsewhere, notably in [Chapter XXXV], some principles of another type of valuation will be discussed.

In any consideration of valuation, it is necessary to seek out the sources and kinds of value to determine in the one case its basis, and in the other to establish the type of value applicable to the given conditions. Value is not of spontaneous origin; it cannot be created out of nothing. Here it is not intended to search for causes of value or to inquire into the forces back of them. The author is content to leave that to the economist.

Kinds of Value

Various kinds of value are established facts of the world of business and by their sources, as the term is used here, is meant the information which vouches for or establishes the fact of value, rather than a search for the cause of it. Thus we find, among others, the following kinds of value:

It is to be understood that these various kinds are in no sense mutually exclusive and separate; they are met in the common vocabulary of men of affairs, are construed loosely in most cases, but have quite technical connotations in some places. Any of the terms employed here will, whenever necessary, be defined. Thus, in accounting, by cost value is usually meant full cost of a product or other asset in position ready for its intended use.

Source of Data as to Values

The sources of data as to values are several. Where double-entry books are kept, the original cost of the various assets can usually be secured from the books of account, barring errors of principle and omission in making the record. If not found there (as is often the case where single-entry books are kept), the original purchase invoice gives the chief item of cost, but does not usually show any inward-carrying or placement costs. Where there is a formally established market, this may give the information as to value when no book entries are available. Quoted prices in trade catalogues or lists as of the date of purchase, offer another means of procuring the information. Sometimes, even the memory must be relied upon.

Present values of properties purchased formerly may be determined on the basis of original cost adjusted to take cognizance of depreciation and, sometimes, of appreciation. This adjustment is made in the light of the best available experience. The amount of the adjustment is sometimes called an “experience figure.” Stated otherwise it is an estimate made on the basis of past experience with some regard to future contingencies. This estimate may be made by some one within the organization—manager, owner, etc.—or by regular appraisal companies who specialize on this kind of work. Usually, however, the appraisal company bases its value on present cost less depreciation—a reproduction cost value.

Again, for some purposes the statement of earnings as giving the amount to be capitalized becomes the source of values. As has been seen, however, earnings themselves contain many elements which rest on estimated values. In almost all instances there is an element of speculation—an estimate—in the determination of values.