ABSTRACT
In financial accounting, according to the revenue-expense approach, book values of assets are not intended to measure their physical productivity or correct “value,” but to enable and facilitate precise profit calculation. To this end, the revenue-expense approach demands that book values reflect past expenditures. In this way, balance sheets are helpful in periodically calculating profits. The expenditures on long-term assets are capitalised and, over time, systematically depreciated in order to match them with current revenues. Balance sheets and income statements work together to document investments and results, ensuring the capital base remains intact and is used efficiently. Prospective calculations, such as valuation and investment appraisal, are essential for decision-making. Enterprises must decide where to invest capital by evaluating potential projects based on present and expected future costs and revenues, which are discounted to net present value. The present values determined by prospective calculations depend on subjective valuations and are usually not identical to market prices. Investment decisions are driven by disagreements between managers and the market on the value of assets. In a certain sense, the market as an ongoing process exists because subjective present values differ from current market prices, allowing investors to seek profits by buying and selling assets.
