Capital concepts can be identified into two categories, financial concept and physical concept. The financial concept is related to investment and is identical with net assets or equity as emphasized in the accounting equation.
The physical concept is relative to its operational or productive capacity. The concept of capital maintenance is important because only income that exceeds the amount required to maintain capital may be considered as profit. In financial capital maintenance, the income is called profit only when the financial amount of the net assets at the end of the reporting period exceeds the financial amount of net assets at the beginning of the reporting period. It is excluding any inflow (contribution) from or outflow (distribution) to owners.
Financial capital maintenance can be measured any in nominal financial units or immutability purchasing power units. Financial capital maintenance can be divided into two ways, money financial capital maintenance and real financial capital maintenance. Money financial capital maintenance means that when the ending net assets exceed the beginning net assets, the profit will be measured at historical cost. Real financial capital maintenance means that when the ending net assets exceed the beginning net assets, the profit will be measured at the current price. In the maintenance of physical capital, profits can be made only when the last period of material productivity or operation capacity exceeds the initial period.
Physical capital maintenance is the same as financial capital maintenance and does not include the contribution or distribution of any owner.
