| I am often asked by business owners why the market | | | | amount is not always easily measurable. If, for |
| value of an asset is not listed on their balance sheet. | | | | example, a company has built a special-purpose |
| This is because in the bookkeeping and accounting | | | | machine in one of its own factories for use in |
| professions we are traditionally reluctant to accept | | | | manufacturing other products, and the project required |
| market value as the basis of asset measurement. | | | | logistical support from all parts of the factory |
| Although assets such as cash or accounts receivable | | | | organization, from purchasing to quality control, then a |
| are usually measured by their value, most other assets | | | | good deal of judgment must be reflected in any |
| are measured at cost. The reason is that it is difficult | | | | estimate of how much of the costs of these logistical |
| to verify the forecasts upon which a generalized value | | | | activities should be capitalized (i.e., placed on the |
| measurement system would have to be based. | | | | balance sheet) as part of the cost of the machine. |
| For example, should you purchase a building today at a | | | | Most commonly the determination is made by |
| certain cost, is it likely its value would increase or | | | | identifying all the costs of the components that make |
| decrease as time goes by? The answer may depend | | | | an asset a useful item. A computer is not very useful |
| upon several unknowns; the real estate market, the | | | | without a monitor; keyboard and operating system, |
| location and the changes in the value of the location, | | | | therefore the cost of all of these items would be |
| for example. As a result, the balance sheet does not | | | | included in the cost of the computer. In summary the |
| pretend to show how much the company's assets are | | | | cost of a fixed asset (an item purchased that is |
| worth; it shows how much the company has invested | | | | expected to have a useful life exceeding one year) is |
| in them. | | | | the actual cost plus any required expenses to put that |
| The historical cost of an asset is the sum of all the | | | | asset to work. |
| expenditures the company made to acquire it. This | | | | |