Pages

Saturday, 26 February 2011

Three instead of two basic eonomic items


The world only goes round by misunderstanding. Charles Baudelaire


It is generally accepted under the current Historical Cost paradigm that the economy is divided in two parts: the monetary economy and the non-monetary or real economy. It is also generally accepted that there are only two basic economic items in the economy: monetary items and non-monetary items. Monetary items are money held and items with an underlying monetary nature. Non-monetary items are all items that are not monetary items.

No distinction is generally made between the valuation of variable real value non-monetary items, e.g. property, plant, equipment, inventory, etc, valued at Historical Cost under the Historical Cost Accounting model and constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, other items in Shareholders´ Equity and most items in the income statement (excluding items like salaries, wages, rentals, etc. valued in units of constant purchasing power) also valued at Historical Cost under the HCA model.

This is the result of the fact that the economy is based on the Historical Cost paradigm. Historical Cost is the traditional measurement basis in accounting. It is thus generally accepted for accountants to choose to implement their very erosive stable measuring unit assumption (based on a fallacy) and measure financial capital maintenance in nominal monetary units (another complete fallacy) as authorized by the IASB in the Framework, Par 104 (a) during low inflationary periods.

One of the basic principles in accounting is “The Measuring Unit principle:

The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”

Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.

However, non-monetary items are not all fundamentally the same. Non-monetary items are, in fact, subdivided into variable real value non-monetary items and constant real value non-monetary items. The three fundamentally different basic economic items are monetary items, variable real value non-monetary items and constant real value non-monetary items although it is generally accepted under the HC paradigm that there are only two basic economic items, namely, monetary and non-monetary items.

HC accountants regard all non-monetary items stated at HC, whether they are variable real value non-monetary HC items or constant real value non-monetary HC items to be fundamentally the same, namely, simply non-monetary items when they implement their very erosive stable measuring unit assumption as part of the traditional HCA model during low inflationary periods.

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.