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Wednesday, 5 September 2012

NATURAL LAWS OF ACCOUNTING


NATURAL LAWS OF ACCOUNTING

  1. For every debit there is a corresponding credit.
    2. The constant purchasing power of capital is equal to the real value of net assets.

  1. The three basic economic items are
(a)       monetary items,

(b)       variable real value non-monetary items and

(c)       constant real value non-monetary items.

Monetary items are units of local currency held and other monetary items with an underlying monetary nature being substitues of the former.

The three parts of the economy are the

(i)                  monetary economy,

(ii)                 variable item economy and

(iii)                constant item economy.

  1. Inflation only erodes the real value of (and deflation only creates real value in) money and other monetary items.
Inflation and deflation have no effect on the real value of non-monetary items. Measuring all monetary items on a daily basis in terms of a Daily Consumer Price Index under complete co-ordination removes the entire cost of inflation from the economy.

  1. Money is never (assumed to be) perfectly stable during inflation and deflation.
Measurement of constant items is required in units of constant purchasing power in terms of a Daily Consumer Price Index during inflation and deflation.

In the above:

 

Inflation includes low inflation, high inflation and hyperinflation.

Daily Consumer Price Index includes other daily index (or daily parallel rate during hyperinflation).

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.