Monday, 29 March 2010

Is your accountant looking after your capital?

No, he or she is not!

It is all actually quite simple to understand: your accountant ASSUMES there is NO inflation (that the Rand is PERFECTLY stable) ONLY when he values constant real value non-monetary items, e.g. the actual capital you used to start your company as it is currently accounted in your balance sheet. I assume you have a small business and you don´t own any revaluable fixed assets in your business. Even if you have the biggest business on the JSE you most probably did not invest 100% of all original contributions to your shareholders´ equity in revaluable fixed assets now with an equivalent updated fair value equal to the updated real value of your equity. In doing that he treats your capital the same as CASH and he unknowingly destroys the real value of your capital because he ASSUMES the Rand is perfectly stable ONLY for this purpose. He will never ever advise you to keep your company cash in the bank at zero interest - but, he is doing that with your capital in your company. He and all other accountants.

He has been authorized 21 years ago to update your capital during LOW inflation. He doesn´t do it because he thinks (because everyone in the world thinks) that inflation is doing the destroying. He and they are wrong. Inflation can only destroy the real value of the Rand - nothing else. Inflation has no effect on the real value of non-monetary items: your capital is a constant real value non-monetary item.

It is not inflation doing the destroying: he is unknowingly doing the destroying because he has been authorized 21 years ago to value your capital in UNITS OF CONSTANT PURCHASING POWER (to inflation-adjust your capital) during LOW inflation.

When he values your capital AS WELL AS ALL OTHER constant real value non-monetary items in your business (ONLY constant items) in UNITS OF CONSTANT PURCHASING POWER he will maintain the constant real value of your capital constant forever - as long as your business breaks even forever - whether you have revaluable fixed assets in your business or not. You are not required to pay in more money for extra capital or retain more profits simply to keep the existing real value of your existing capital constant. It is automatically done when he updates ALL constant items (ONLY constant items, but, ALL of them - including trade debtors) in your business - as long as you break even in your business.

It is not the same as inflation, but, it is SIMILAR to him arranging ZERO INFLATION in all your constant items: e.g. your capital.

Kindest regards

Nicolaas Smith

Copyright © 2010 Nicolaas J Smith

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