PDF Ebook The Measurement of Business Capital, Income and Performance
"In economics it is di±cult to prove originality; for the germ of every new idea will surely be found over and over again in earlier writers". Irving Fisher[1930; ix] \Capital (I am not the ¯rst to discover) is a very large subject, with many aspects; wherever one starts, it is hard to bring more than a few of them into view. It is just as if one were making pictures of a building; though it is the same building, it looks quite diferent from diferent angles". John Hicks[1973; v] The main topic to be addressed in this paper is how to measure the contribution of capital to periodic business income.
As many economists and accountants have observed over the past century, economic measurement cannot be divorced from the purpose at hand. The main purpose of this paper is to answer the following question: how should capital input be measured in the context of evaluating business performance over a number of accounting periods?
The fundamental problem associated with measuring the contribution of a capital input to the period by period economic performance of a business unit is the durability of capital: a capital input is purchased in an initial accounting period but its contribution to the production of outputs persists over several subsequent periods. Thus the initial purchase cost of the capital input cannot be entirely allocated to the period of purchase but it is dificult to know precisely how the initial cost should be allocated over subsequent periods. This problem of determining the period by period contributions to production and the associated costs is perhaps the fundamental problem in accounting theory. The dificulties associated with this fundamental allocation problem are greatly magnified if the price level is not stable. In this paper, we will not assume stability of prices.
Once the initial purchase cost of a durable capital input has been allocated across accounting periods, period costs can be subtracted from period revenues and accounting period income or profits can be calculated. Thus the measurement of capital goes hand in hand with the measurement of business income: diferent measures for the period by period cost of capital will give rise to diferent income measures.
However, there are still some additional problems to be addressed, associated with timing problems; i.e., exactly when should a revenue or cost item be recognized by the business unit? The following quotation from the accounting literature summarizes these timing and recognition problems:
"In the earlier, simpler days of accounting, the convention called for realization in actual cash, which was later modi¯ed by the assumption that legal transfer of title constituted realization, the resulting account receivable merely representing a deferred change to cash, while still later the mere act of shipment and billing was assumed to be equivalent to the legal transfer of title". Stephen Gilman[1939; 212]
Download
PDF Ebook The Measurement of Business Capital, Income and Performance
Posted in :
