Question

. Give an example (i.e., the name) of an accounting and measurement model based on each type of capital maintenance.

Answer 1

Answer)

Financial Capital Maintainance:

Inthis method,,the profit is recognised if and only the value of assets at the end of period exceeds the value at the beginning of the period without considering any inflows or outflows for the owner.

For example the owner equity of business is $500000 at year beginning and at the end of the year $600000.here,$100000 is considered as profit if there is no capital transactions during the year.

2)Physical capital Maintainance:

In this method,views the capital to genrate profit based on physical level of capabilities i.e sale or services provided.

Here the profit will not be said to be earned if the sale of goods or services are made without considering the cost hikes.

For example the cost of producing and unit is $4000 and it's replacement cost is $5000 and hence the profit won't be recognised if the sale is made for less than $5000.This is because due in this concept price rising is necessary for to rise in cost for asset Maintainance.