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Tuesday, 26 April 2011

Valuing the three basic economic items

Valuing the three basic economic items

 Economic items are made up of monetary items, variable real value non-monetary items and constant real value non-monetary items. Accountants value, record, classify, summarize and report transactions and events involving economic items in terms of depreciating functional currencies during inflation and appreciating functional currencies during deflation.

 Monetary items

 (1) The real value of the monetary unit and all other monetary items in the monetary economy generally changes every month during low inflation and deflation when the new CPI value is published. Months of zero annual inflation are rare and not sustained over a significant period of time. During hyperinflation the real value of the monetary unit and all other monetary items generally changes once per day, but, during severe hyperinflation it can change every 8 hours or so.

 Variable items

 (2) The real value of variable real value non-monetary items may change all the time, e.g. the price of foreign currencies, precious metals, quoted shares, commodities, properties, finished goods, services, raw materials, etc.

 Constant real value non-monetary items

 (3) The real values of constant real value non-monetary items stay the same (or are supposed to stay the same) all the time – all else except inflation and deflation being equal – e.g. salaries, wages, rentals, issued share capital, retained profits, shareholders equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc.

Accountants have to take all three scenarios - occurring simultaneously - into account over time when they account economic activity and prepare and present financial reports.

Nicolaas Smith

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