The Accounting Historians Journal Vol. 10, No. 1 Spring 1983
T. A. Lee
UNIVERSITY OF EDINBURGH
THE EARLY DEBATE ON FINANCIAL AND PHYSICAL CAPITAL
Abstract: This paper evidences the contribution of leading writers in the early 1900s to the vexed problems associated with capital maintenance and periodic in-come determination. It reveals that the issues which were then being discussed (such as the treatment of holding gains) remain as unresolved problems for today's accountancy practitioners.
The concept of capital is central to the determination of periodic income, irrespective of whether the latter is based on the principles of economics or accounting. Without adequate and consistent defi-nitions and computations of capital at succeeding points of time, there can be no credible income data. This has been well evidenced in the recent professional prescriptions of current cost accounting for external financial reporting purposes.1 These pronouncements have focused attention on the need to understand the concept of capital which underlies each specific income proposal. In particu-lar, they have identified the existence in practice of two alternative capital maintenance approaches—that is, maintenance based on capital defined in terms either of a specific monetary attribute such as the money unit or the purchasing power unit (hereafter termed financial capital); or a specific attribute of the reporting entity's physical asset structure such as its physical units or operating ca-pacity (hereafter termed physical capital).
The distinction between the two concepts of capital (and their re-lated maintenance functions) is not a new one. Sweeney (1933a), for example, presented one of the best analyses in this area, and his work should be required reading for interested students of capi-tal definition and measurement. However, despite its antecedents, the distinction has provoked a debate in the late 1970s and early 1980s concerning the utility and relevance of the financial and phys-ical approaches for purposes of external financial reporting. In-deed, a recent international symposium has been held on the sub-
This paper has benefited considerably from the comments of its reviewers.