Capital Maintenance

Updated: Sep 1, 2019

Capital maintenance is a concept which measures whether either financial capital (money and equivalents) or physical productive capital within an entity are maintained within a period. Capital is maintained only when the output/funds at the end of the period are equal to or exceed the inputs/funds at the beginning of the period. If the inputs at the beginning of the period equal the outputs at the end of the period, capital will have been "maintained." Anything in excess of maintaining this capital, is considered profit.


Capital maintenance is important because in order for a business to survive, it must at least preserve the capital that is invested in the company. Therefore, an entity should strive to, at minimum, maintain its capital.


Financial Capital Maintenance: Capital will only be maintained if financial assets (funds) equal or exceed expenses and other financial outflows, at the end of the period. Note that this calculation excludes any distributions and/or contributions to and/or from the owners of the company.


Physical Capital Maintenance: Physical capital will be maintained only if, by the end of the period, the entity maintains or exceeds the level of output/productive capacity it started with at the beginning of the period. Physical capital also excludes any distributions to owners, e.g.: dividends.


There are several bases which can be used to measure whether capital is maintained.


Bases for measurement of capital maintenance include:

  • Nominal Dollar Financial Capital Maintenance: This represents the nominal increase in capital.

Closing Capital - Opening Capital

  • Constant Dollar Financial Capital Maintenance: Income is reported after inflation to ensure purchasing power is maintained.

Closing Capital - (Opening Capital x (1+Inflation Rate))

  • Productive Capacity Capital Maintenance: Income earned is the amount in excess of the cost of replacing the asset.

Closing Capital - Cost to replace inventory


Help improve this article

If you have feedback or questions, please leave a comment in the section below.

Sign Up!

Click our Sign Up button (top of page) to receive updates, additional exam prep information and to connect with our community.



Up Next: Revenue (IFRS) ->

54 views

Recent Posts

See All

Debits and Credits

Debits (Dr.) and credits (Cr.) are used to ensure inflows and outflows of transactions (assets/liabilities) are always balanced. In order balance journal entries, certain types of accounts will increa

Using your Financial Calculator

You may be using a calculator for your work or while studying for your CPA Exams (CFE exams). Understanding how to make full use of your calculator can help increase your efficiency substantially. As

Analyzing Financial Issues

When analyzing financial case studies, always break them down into smaller issues, which can then be addressed individually. If you are writing your CPA Exams (CFE or others), exam time will be const

©2019 Eve Moore

Images from rawpixel.com

  • Facebook