Concepts of Capital Maintenance and the Determination of Profit

Accountants can choose to measure financial capital maintenance in either Nominal monetary units or units of constant purchasing power. Physical capital is maintained when productive capacity at the end is greater than at the start of the period.The main difference between the two concepts is the way asset and liability price change effects are treated.Profit is the excess after the capital at the start of the period has been maintained. When accountants choose nominal monetary units, the profit is the increase in nominal capital. When accountants choose units of constant purchasing power, the profit for the period is the increase in invested purchasing power. Only increases greater than the inflation rate are taken as profit. Increases up to the level of inflation maintain capital and are taken to equity.

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