Capital Maintenance
Categories: Investing, Accounting, Metrics
If only it was as easy to maintain your capital as it is to maintain your car. Just take it in for an oil change or a tire rotation every once in awhile.
The idea behind capital maintenance is that you don't call something a profit unless you keep it throughout the entire period you're looking at. For the accountant, it's just a way of knowing when to recognize something as a profit, rather than calling it "just money we happen to have for now, but will spend soon."
You deposit your paycheck with $1,500 net pay. Now your bank account says you have $1,512.17. But...then there's rent and food and electricity and internet to pay for, not to mention that you have to pay back that money you borrowed from Louis last week...suddenly you're looking at your bank account again, and there's $37.42 left in it. Another paycheck rolls in. Now you've got $1,537.42.
The doctrine of capital maintenance would say that your profit for that last pay period was $25.25 (the $37.42 you had left over after all your expenses, minus the $12.17 you already had in the account when you put that first check in). You only count it after all costs have been paid out. Basically, you only count as profit the stuff that you keep.
