Final answer:
The tax basis of an asset or liability is its value for tax purposes and may differ from the value listed on a balance sheet, which represents historical cost. A bank's balance sheet shows assets such as cash and loans, liabilities such as deposits, and net worth as bank capital. A T-account simplifies this, with assets on the left and liabilities plus net worth on the right, always balancing.
Step-by-step explanation:
The tax basis of an asset or liability refers to its value for tax purposes, which is used to calculate capital gains, depreciation, and the taxable income of a business. From a balance sheet perspective, assets and liabilities are listed at their historical cost, which may differ from their tax basis. The balance sheet reflects the company’s financial position at a specific point in time, showing its assets, liabilities, and net worth. The income statement, on the other hand, shows the company’s performance over a period, including revenues and expenses, which influence the tax basis of certain assets and liabilities.
A bank's balance sheet, for example, includes assets like cash held in vaults, reserves held at the Federal Reserve, loans made to customers, and securities. The liabilities include customer deposits and any money the bank owes. The bank capital, or net worth, is calculated as the total assets minus total liabilities.
The 'T' in a T-account format separates a firm's assets from its liabilities and is a simplified representation of a balance sheet, where a healthy business will have a positive net worth, and a bankrupt firm will have a negative one. For a bank, the T-account must always balance, with assets equaling liabilities plus net worth.