On The Status Of Capital Preservation Theory

Capital preservation theory is a very important part of modern accounting theory, especially in the case of price changes.

This article attempts to discuss the relationship between capital preservation theory and accounting assumptions, accounting measurement and accounting principles, so as to understand the status and role of capital preservation theory.

In the process of forming financial accounting theory, four basic hypotheses are set up: accounting entity, continuous operation, accounting staging and currency measurement.

Assumption is a regularity phenomenon with universal applicability. As a part of accounting theory, it must be based on accounting assumptions.

However, the theory of capital preservation only relies on three basic assumptions, without relying entirely on the assumption of constant monetary value in the fourth assumptions. Even when the assumption of currency invariance is totally unfounded, capital preservation theory can give full play to its advantages, so it can be said that capital preservation theory is a supplementary part of accounting theory.

　　因為有了會計主體假設，企業作為獨立的經濟實體，必須做到自主經營、自負盈虧，當然就會十分注意所有者投入企業的資本是否能得到保全；因為有了持續經營假設，企業要不斷地持續經營下去，也就必然要求資本得到保全，否則的話，資本不斷受到侵蝕，企業要想持續經營也是根本做不到的；因為有了會計分期假設，將企業持續不斷的經營過程人為地劃分為若干個相等的會計期間，在每一會計期間計量核算企業的資產損益，判斷企業資本是否很好的得以保全，以防止侵蝕資本行為的發生，使資本得到保值增值，這對業主來說才是具有實用價值的，否則的話，等到企業整個經濟活動終結時才得到財務報告，才能判斷企業資本是否得到保全，這對業主來說已無更多的實際意義；而貨幣計量中的幣值不變假設在現實經濟生活中正日益受到嚴重挑戰，從理論

From the point of view, when the hypothesis of currency stability is not yet established, financial capital and physical capital are basically the same. Capital preservation theory only needs to stay at the initial stage of its formation - simply preserving financial capital, and when financial stability hypothesis is negated, financial capital and physical capital deviate from each other. Capital preservation theory can choose a reasonable measurement mode according to its advanced stage - physical capital preservation requirements, accurately measure profits and losses, so that enterprise capital can be fully preserved.

In this way, capital preservation theory has become a necessary supplement to the whole accounting theory, making the modern accounting theory more perfect.

From the above discussions, we can see that the theory of capital preservation is based on three basic assumptions in accounting theory, rather than the establishment of the hypothesis of currency stability.

If the hypothesis of currency stability is established, capital preservation theory runs through the accounting system with its shallow financial capital preservation. If the hypothesis of currency stability is not established, capital preservation theory will meet the special needs of accounting with its deep physical capital preservation theory and method.

In short, the theory of capital preservation is embodied in accounting theory and a necessary supplement to accounting theory.

Two, capital preservation theory and accounting measurement, accounting and measurement, assets and profit and loss measurement is considered to be two very important aspects. Capital preservation theory has a very important impact on the two.

There is no doubt that the theory of capital preservation has a decisive impact on the measurement of profit and loss.

From the beginning of the theory of capital preservation, the issue of capital preservation is closely related to the issue of profit and loss.

The core idea of capital preservation is the theory of real rights and interests in economics. The theory of capital preservation is to embody this core idea in accounting practice, requiring enterprises to measure profits and losses, without prejudice to capital.

When the price change is not significant, the financial capital is basically the same as the physical capital. The preservation of financial capital under the historical cost is sufficient to make the profit and loss measurement of the enterprise real and reliable and not to erode capital.

When price changes significantly, financial capital deviates from physical capital, and the choice of capital preservation has become the focus of debate in the accounting field.

Different concepts of capital preservation have a significant impact on profit and loss measurement. The biggest difference between the two in profit and loss measurement is the confirmation of gains or losses.

In the view of financial capital preservation, income is the increase in net assets represented by currency, whether it comes from non capital economic business or from the influence of environmental change, so long as the increase of net assets can be recognized as revenue.

Therefore, the gains in assets of various assets are also recognized as gains.

In view of the concept of physical capital preservation, the profit is considered as the increment of physical production capacity. Because the impact of environmental changes on production is not recognized as income, it is included in the profit and loss statement. Instead, it is regarded as capital adjustment or preparation, that is, as a factor of maintaining the original production capacity, it is included in the balance sheet.

From the analysis of financial capital preservation, the physical capital preservation is to extract a supplementary capital from earnings. From the analysis of physical capital preservation, financial capital preservation is to extract a profit from capital.

The author thinks that the income of accounting should be understood as the income generated by economic activities. Profits or losses caused by environmental changes should be directly attributable to capital adjustment, that is to say, the choice of physical capital preservation is more reasonable.

However, there are still many difficulties in the application of physical capital preservation in practice.

Therefore, the concept of financial capital preservation still occupies a dominant position, which is still a major obstacle to better measure profit and loss.

Nevertheless, the influence of different capital preservation views on profit and loss measurement can be seen.

The theory of capital preservation also has a significant impact on asset measurement, which is achieved through the choice of accounting measurement models.

The combination of two different concepts of capital preservation and different measurement attributes of the preceding financial capital and physical capital can form a variety of accounting measurement models.

The accounting measurement models of financial capital preservation include: historical cost / nominal money, current cost / nominal currency, replacement / nominal money, historical cost / constant purchasing power, current cost / constant purchasing power, replacement cost / constant purchasing power, current discounted value / constant purchasing power, and accounting measurement models under the concept of physical assets preservation: current cost / nominal currency, replacement cost / nominal currency, current discounted value / nominal currency, current cost / constant purchasing power, replacement cost / constant purchasing power, current off hand value / constant purchasing power.

The theory of capital preservation requires the choice of financial capital preservation and physical capital preservation, and then it has to make a choice in many accounting measurement models. The choice results directly affect the asset measurement in accounting measurement.

Although the current historical cost / nominal money measurement model is the mainstream in practice, some other models have appeared in practice, some exist only in theoretical discussions, but it is undeniable that capital preservation theory has a significant impact on asset measurement.

From the above discussions, we can see that the choice of capital preservation concept in accounting practice has a significant impact on earnings measurement, and then has a significant impact on the choice of accounting measurement mode and asset measurement. We can see that the theory of capital preservation is an important place in modern accounting theory.

Three, capital preservation theory and accounting principles in accounting practice, accounting behavior is governed by conservatism principle, historical cost principle and all auxiliary principles and methods.

However, in accounting theory, many accounting principles such as conservatism and historical cost have been challenged to varying degrees. The establishment and development of capital preservation theory is inseparable from these principles.

In the theoretical research achievements of capital preservation, many accounting measurement models have been established, which are all negation of the historical cost principle.

The fundamental reason for the total negation of the principle of historical cost is that the economic foundation on which it depends has been shaken.

Constant currency value and constant price are prerequisites for the existence of historical cost principle.

According to the principle of historical cost, the unit of accounting measurement only needs the nominal currency, because the value of money is stable or relatively stable. The attribute of accounting measurement can only be the original cost, because the original cost is the actual paction price or cost of the enterprise in the past, and they are more objective and verifiable.

However, due to the change of environment and inflation, the purchasing power of money has changed drastically, so that the amount of money reflected in nominal money reflects the purchasing power of each period, so that the basic assumption that the value of money remains unchanged has been inconsistent with or inconsistent with the reality of social economy.

In this way, it is very difficult to get the right result again by measuring the business of the enterprise on the basis of nominal money.

Based on this reason, the accounting measurement models established in the theory of capital preservation deviate from the basic assumptions of monetary value to varying degrees, or negate this assumption.

At the same time, due to the role of social and economic forces, the acquisition cost of projects that constitute corporate entity assets also has a growing gap with their current or replacement costs or current sales prices.

Therefore, the static reflection of accounting measurement on the basis of historical cost can not be consistent with the current situation.

Compared with the historical cost model, the current value accounting mode can more accurately reflect the present financial situation, financial situation changes and business results of enterprises.

Therefore, they abandon the historical cost measurement attribute and negate the historical cost principle.

The principle of conservatism is often a dominant accounting principle. When other principles conflict with it, they must be subordinated to it. However, they are still considered to be established merely by accounting practice rather than by logical reasoning.

The conservatism principle is also called prudence principle, while the theory of capital preservation gives some new meaning to it while negating it.

In accordance with the principle of conservatism, accountants can only predict possible losses instead of predicting possible gains.

However, many econometric models in the theory of capital preservation negate this principle.

The accounting scheme of general price level, which considers the amount of money purchasing power change as the gain or loss of monetary purchasing power and is included in the income statement, will be included in earnings under the rule of financial capital preservation because of price changes, all of which negate the conservatism principle.

In the theory of capital preservation, the gains or gains after recognition are included in capital gains or after confirmation, and the prudence principle is totally unsure of such gains. This conflict is sharp and almost irreconcilable.

The principle of income realization is another important principle of accounting, but it is also partly negated by the theory of capital preservation.

The general meaning of the principle of income realization is that it is a sign of income realized by commodity sales and labor service performance.

However, the income realization principle will be completely abandoned under the accounting mode of the current disengagement price as the measurement attribute.

Because in this mode, the current earnings of the enterprise are determined by comparing the initial and final amount of the net assets recognized on the basis of the current off hand price. There is no need to pass the matching process, so there is no need to confirm the sales realization.

Other accounting measurement models also deviate from the principle of income realization, because these models can not evade an adjustment procedure.

Whether adjusted by general price level or adjusted at current or replacement costs, there will be a difference between adjusted income and pre adjusted income.

How should this balance be attributable? Should it be recognized as the current income? These problems need to be further explored, but it is sufficient to show that many of the measurement models under capital preservation theory fail to match the principles of income realization.

The matching principle is an important basis for profit and loss measurement, but it is actually based on the principle of historical cost.

The matching principle requires that costs and expenses should be deducted from their related income as much as possible, and this ratio is measured in historical and nominal terms, which is also neglecting currency fluctuations and asset price changes.

However, in the historical cost accounting mode, enterprises always calculate the income derived from the selling price of the goods sold, and when the ratio is used to confirm the proceeds, they are always sold according to the historical cost and expense of the assets that have been consumed or sold.

That is to say, the measurement basis of income is the current price, while the cost cost is based on historical cost, which is the inherent contradiction in the traditional measurement mode and affects the correctness of the determination of the proceeds.

The operating income determined by the historical cost as the basis of assets is inevitably affected by price changes. In fact, when prices rise, they actually yield more profits.