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Contents
Capital maintenance Replacement cost accounting and depreciation Current entry values: preliminary appraisal
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Capital maintenance
Profit is defined as the amount generated by the business over and above that necessary to replace the assets Capital maintenance is defined as the maintenance of the capacity to replace the resources of the business HC profit split into:
Operating profit (revenue current replacement cost) Holding gain (current replacement original purchase cost)
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unrealized
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Year 1:
Operating profit Realized holding gain 5 Unrealized holding gain 8 (38-30) 20 0 15
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Year 2:
Operating profit Realized holding gain 10 Unrealized holding gain
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No unrealized gains included All the holding gains, whether realized or unrealized, need to be retained in the business in order to enable it to replace resources as they are used
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Bookkeeping:
Credit of 40 to depreciation provision Debit of 35 to P&L account Debit of 5 to holding gain account
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70
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Net realizable value (NRV): the proceeds after deducting these additional unavoidable expenses or disposal, defined as: Yr = D + (Re Rs) Yr = exit value income D = distributions (less new capital inputs) Re = NRV of the assets at the end of the period Rs = NRV of the assets at the start of the period
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Generally, exit values refer to assets in their existing state sold in the normal course of business, so the exit value for the work in progress would be 10
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Exit value income (Yr) = Realized operating gains + unrealized operating gains + realized non-operating gains + unrealized non-operating gains P&L account also value based and not cost based
e.g. Depreciation = loss in value of the asset
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2.000 2.500
3.000 3.800
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Year 1 () Exit value revenue statements Sales Cost of sales 20.000 11.000 9.000 Depreciation 4.000 5.000 Less operating gain included in previous year 5.000 Add unrealized operating gain Realizable income Exit value balance sheets Fixed assets Inventory Cash 6.000 2.500 12.000 20.500 Capital Realizable income 15.000 5.500 20.500 500 5.500
Year 2 ()
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31.12.8
12.000 6.000 1.000
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Fixed assets
Machine at NRV Current assets Inventory at NRV Bank 6.000 15.500 7.000
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