Capital maintenance, also known as capital recovery, is an accounting concept based on the principle that a company’s income should only be recognized after it has fully recovered its costs or its capital has been maintained .
How does capital maintenance concept relate to the profit and loss of the business?
The capital maintenance concept states that a profit should not be recognized unless a business has at least maintained the amount of its net assets during an accounting period . Stated differently, this means that profit is essentially the increase in net assets during a period.
What is capital maintenance IFRS?
According to the IFRS, or International Financial Reporting Standards, financial capital maintenance is defined as the profit that is earned once the amount exceeds the net assets by the end of the period of time selected .
What is the difference between financial capital maintenance and physical capital maintenance?
The difference between financial capital maintenance and physical is the treatment of unrealized holding gains and losses . Financial capital maintenance does not allow for unrealized holding gains and losses.
What is the capital maintenance approach to net income?
A measurement of net income arrived at by comparing the amount of total equity at the end of a period to the amount of total equity at the beginning of the period .
What is capital maintenance rule?
As mentioned above a fundamental doctrine of capital maintenance exists in our company law. This doctrine requires that a company must receive proper consideration for its issued shares and having received that capital it must not repay it back to members except in certain circumstances .
What Philippine Accounting Standards governs the accounting for inventories?
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value.
How does the framework explain the concept of capital maintenance and profit?
When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period .
What are the accounting concepts?
Accounting concepts are the generally accepted rules and assumptions that assist accountants in the preparation of financial statements . It provides the framework for recording the financial transactions of the business.
Why the comprehensive income is consistent with the capital maintenance concept?
4. Comprehensive income is consistent with the concept of financial capital maintenancebecause it includes all reported items that affect net assets during the accounting period .It does not strictly follow historical cost, but it does include holding gains and losses inthe computation of income.
Do revenues increase equity?
Revenues cause owner’s equity to increase . Since the normal balance for owner’s equity is a credit balance, revenues must be recorded as a credit.
What is the difference between capital and financial capital?
Capital refers to assets that are used for producing goods or services. All items, like machinery, tools, and buildings, that are directly used for manufacturing goods or services are called capital goods. Financial capital is the money used for purchasing capital goods .
What do you mean by accounting standard?
Accounting standards are authoritative standards for financial reporting and are the primary source of generally accepted accounting principles (GAAP). Accounting standards specify how transactions and other events are to be recognized, measured, presented and disclosed in financial statements.
What is the primary distinction between revenue and gain?
Gains and losses are the opposing financial results that will be produced through a company’s non-primary operations and production processes. Revenue describes income earned through the provision of a business’s primary goods or services .
Which capital maintenance concept is applied respectively to currently report net income and comprehensive income?
Financial capital maintenance is considered to be an element of both “currently reported net income” and “comprehensive income.” This was a rare instance in which this type of information was asked on the exam.
Which one is not included in capital maintenance concept?
All the inflows such as the sale of stock to shareholders, the addition of capital from owners, and payment of dividends to shareholders payment of bonus to shareholders are excluded. The two measurement units of financial capital maintenance theory are constant purchasing power units and nominal monetary units.
Why is capital maintenance important?
Capital maintenance rules exist so that the capital of a company is preserved for the purpose of paying its creditors in the event of a winding-up procedure. This ensures that only a company’s profit can be distributed to shareholders while business is ongoing .
The main objective of the capital maintenance rules is that the capital of a company must be maintained for the protection of creditors . It was meant to balance the interest of the creditors and the expectation of the shareholders. For the creditors, the capital serves as a security for the debts owed to them.
Does capital maintenance protect creditors?
The capital maintenance rules aim to protect creditors and other company stakeholders by preventing directors from paying dividends or returning capital to members other than in limited circumstances.
What is the principle in Trevor v Whitworth?
Trevor v Whitworth (1887) was the case in which the doctrine of capital maintenance was established. In this case, the House of Lords stated that the company is not permitted to acquire its own shares as it results in reduction in the company’s capital.
What is Philippine accounting standard?
The Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) are the new set of Generally Accepted Accounting Principles (GAAP) issued by the Accounting Standards Council (ASC) to govern the preparation of financial statements .
What is financial reporting framework in the Philippines?
Section 189 of the Amended Insurance Code defines Financial Reporting Framework as “ a set of accounting and reporting principles, standards, interpretations and pronouncements that must be adopted in the preparation and submission of the statutory financial statements and reports required by the commission ”.
How many accounting frameworks are there in the Philippines?
THERE are three standards-setting and interpretation organizations in the Philippines that recommend the standards, rules and interpretative pronouncements on accountancy and auditing.
