The objectives of general purpose financial reporting are:
Only existing constant real value capital can be maintained. Financial reporting does not and cannot create real value out of nothing as a result of simply passing update entries when no real value actually exists.
An entity has maintained the constant purchasing power of its capital if it has as much equity – expressed in units of constant purchasing power – at the end of the reporting period as it had at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Consequently: a profit is earned only if the constant purchasing power of equity at the end of the period exceeds the constant purchasing power of equity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.
The German economist Werner Sombart (1863–1941) wrote in Medieval and Modern Commercial Enterprise that The very concept of capital is derived from this way of looking at things; one can say that capital, as a category, did not exist before double entry bookkeeping. ^
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