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College of Accountancy: Lesson 1 - Concepts of Capital

This document provides an overview of Module 13 of the Conceptual Framework and Accounting Standards course. The module discusses key concepts related to capital, capital maintenance, profit, and loss. It explains that under the financial concept of capital, capital is synonymous with equity. It also differentiates the financial concept of capital from the physical concept. The module then covers the concepts of capital maintenance under both the financial and physical approaches and how they impact the determination of profit. It notes that capital maintenance adjustments arising from asset revaluations are included directly in equity rather than profit or loss.

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22 views4 pages

College of Accountancy: Lesson 1 - Concepts of Capital

This document provides an overview of Module 13 of the Conceptual Framework and Accounting Standards course. The module discusses key concepts related to capital, capital maintenance, profit, and loss. It explains that under the financial concept of capital, capital is synonymous with equity. It also differentiates the financial concept of capital from the physical concept. The module then covers the concepts of capital maintenance under both the financial and physical approaches and how they impact the determination of profit. It notes that capital maintenance adjustments arising from asset revaluations are included directly in equity rather than profit or loss.

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firestorm rivera
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© © All Rights Reserved
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COLLEGE OF ACCOUNTANCY

C-AE14 Conceptual Framework and Accounting Standards


First Semester | AY 2020-2021

MODULE 13
A. Course Code – Title : C-AE14 – Conceptual Framework and Accounting Standards
B. Module No – Title : MO 13 Concepts of Capital and Capital Maintenance
C. Time Frame : 1 week – 3 hours
D. Materials : Syllabus or course outline, writing materials

1. Overview
This module discusses the concepts of capital, capital maintenance, the determination of
profit and capital maintenance adjustments. You will find that the terms capital, profit and loss are
defined in this particular chapter (Chapter 8) of the Conceptual Framework.

Be sure to read and understand Chapter 8 of the Conceptual Framework. This module only
discusses the salient points and not every paragraph in the chapter. If you have questions
pertaining to some items in Chapter 8, feel free to ask them during the online sessions or through
the Google Classroom or any other previously agreed upon means.

2. Desired Learning Outcomes

Our goal is that, upon completing this module, you will be able to accomplish the following
learning outcomes:
 “I can define the terms capital, profit and loss.”
 “I can differentiate the financial concept of capital from the physical concept of capital.”
 “I can discuss how capital maintenance adjustments are presented in the financial
statements.”

3. Content/Discussion

Lesson 1 – Concepts of capital

In preparing financial statements, most entities adopt the FINANCIAL CONCEPT OF


CAPITAL. When we think about the financial concept of capital, we usually think about “invested
money” or “invested purchasing power”. The financial concept of capital, capital is synonymous
with the net assets or equity of the entity. This probably explains why in the Philippine setup, we
usually refer to equity as “capital”.

Other than the financial concept of capital, we also have the PHYSICAL CONCEPT OF
CAPITAL. Under a physical concept of capital, we usually view capital in terms of its operating
capability. Thus, capital is regarded as the productive capacity of the entity based on units of
measure that reflect this capability, like units of output per day.

Like with all other choices preparers of financial reports must decide upon, the primary
consideration is the needs of the users of the financial statements. Therefore, the choice of concept
adopted indicates the goal to be attained in determining profit, even though there may be some
difficulties in terms of measurement.

Faculty: ROSALINDA E. PEREZ 1 | Page


COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester | AY 2020-2021

Lesson 2 – Concepts of capital maintenance and the determination of profit

The concept of capital maintenance provides the link between the concepts of capital and concepts
of profit because it provides the reference by which profit is measured. It is a prerequisite for
distinguishing between an entity’s return on capital and its return of capital.

 Only inflows of assets in excess of amounts needed to maintain capital may be regarded as
profit and therefore as a return on capital.
 Profit is the residual amount that remains after expenses (including capital maintenance
adjustments, where appropriate) have been deducted from income.
 Loss is the residual amount if expenses exceed income.

The determination of profit is described below under the two concepts of capital maintenance:
1. Financial Capital Maintenance

Profit is earned only if the financial amount of net assets at the end of the period
exceeds the financial amount of net assets at the beginning of the period, after
excluding any distribution to, and contributions from, owners during the period.

As mentioned in the preceding paragraphs, this is usually the most adopted concept
by entities in preparing their financial statements.

Financial capital maintenance can be measured in either:


a. Nominal monetary units – Historical Cost model
b. Units of constant purchasing power -The Capital Maintenance in Units of
Constant Purchasing Power (CMUCPP) is an alternative to the historical cost
model.

An application of the CMUCPP can be seen through PAS 29 wherein a


hyperinflationary economy, entities preparing financial statements shall restate
the financial statements through constant peso accounting. Constant peso
accounting is also known as the purchasing power or price level accounting.

Constant peso accounting is the restatement of conventional or historical cost


financial statements in terms of the current purchasing power of the peso
through the use of index number.

2. Physical Capital Maintenance

Profit is earned only if the physical productive capacity (or operating capacity) of
the entity(or resources or funds needed to achieve that capacity) at the end of the
period exceeds the physical productive capacity at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the period.

Faculty: ROSALINDA E. PEREZ 2 | Page


COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester | AY 2020-2021

Financial Capital Maintenance Physical Capital Maintenance


-does not require the use of any particular basis -requires the adoption of current cost basis of
of measurement; selection is based on the type measurement
of financial capital that the entity is seeking to
maintain
-where profit is defined in terms of nominal -profit represents the increase in the capital
monetary units, profit represents the increase in over the period
nominal money capital over the period
 Increases in the prices of assets held -all price changes affecting the assets and
over the period (holding gains) are liabilities of the entity are viewed as changes in
conceptually profits that may not be the measurement of the physical productive
recognized as such until the assets are capacity of the entity; these are treated as
disposed of in an exchange transaction. capital maintenance adjustments that are part of
equity and not as profit
-where profit is defined in terms of constant
purchasing power units, profit represents the
increase in invested purchasing power over the
period
 Profit is only that part of the increase in
the prices of assets that exceeds the
increase in the general level of prices
 The rest of the increase is treated as a
capital maintenance adjustment and,
hence as part of equity

Lesson 3 – Capital maintenance adjustments

 When assets and liabilities are revalued or restated, this gives rise to increases or decreases
in equity.
 While these increases or decreases meet the definition of income and expenses, they are not
included in the income statement under certain concepts of capital maintenance.
 These items are included in equity as capital maintenance adjustments or revaluation
reserves.

4. Progress Check:

1. Based on Chapter 8 of the Conceptual Framework, define the following terms:


a. Capital

b. Profit

c. Loss

Faculty: ROSALINDA E. PEREZ 3 | Page


COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester | AY 2020-2021

2. Explain the differences between the financial concept of capital and capital maintenance
from the physical concept of capital and capital maintenance.

3. How are increases or decreases in equity from the revaluation or restatement of assets
and liabilities presented in the financial statements?

After completing the progress check, can you confidently say that you can:
 Define the terms capital, profit and loss.
 Differentiate the financial concept of capital from the physical concept of
capital.
 Discuss how capital maintenance adjustments are presented in the financial
statements.

5. Evaluation – to be uploaded as a separate Google Form

E. References
Cabrera, M. E., Ocampo, R. R., & Cabrera, G. A. (2018). Conceptual Framework and Accounting
Standards. Manila, Philippines: GIC Enterprises & Co., Inc.

Empleo, P. M., & Robles, N. S. (2019). The Philippine Financial Reporting Conceptual
Framework and Accounting Standards. Mandaluyong City, Philippines: Millennium Books,
Inc.

IFRS Foundation. (2017). ifrs.org. Retrieved June 11, 2020, from https://www.ifrs.org/use-
around-the-world/use-of-ifrs-standards-by-jurisdiction/philippines/#participant

International Accounting Standards Board. (2018, March). Conceptual Framework for


Financial Reporting. London, United Kingdom.

Millan, Z. V. (2019). Conceptual Framework and Accounting Standards. Baguio City,


Philippines: Bandolin Enterprise Publishing and Printing.

Valix, C. T., Peralta, J. F., & Valix, C. A. (2019). Conceptual Framework and Accounting
Standards. Manila, Philippines: GIC Enterprises & Co., Inc.

Faculty: ROSALINDA E. PEREZ 4 | Page

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