Some flexibility in the business should be maintained. A balance sheet provides the information for making these comparisons. Asset Valuation One of the most important issues in completing and using the balance sheet is the method used to value assets. The two most common are current market value and cost. Market value is the estimated amount the asset would sell for on the date of the statement, less selling costs.
Cost is the original cost or basis of the asset, less any accumulated depreciation.
The method used to determine asset value affects financial ratios derived from the balance sheet and the amount of deferred taxes. Most importantly, it affects farm equity. The National Farm Financial Standards Council recommends that the balance sheet should be prepared on both a market and a cost basis. The cost basis indicates the amount of earned and contributed owner equity. The market value indicates the additional amount of equity that has resulted from the change in asset values due to inflation or deflation.