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Physical capital maintenance implies that a return on capital (income) occurs when the physical productive capacity of the enterprise at the end of the period exceeds its physical productive capacity at the beginning of the period, excluding transactions with owners. This concept implies that income is recognized only after providing for the physical replacement of operating assets. Physical productive capacity at a point in time is equal to the current value of the net assets employed to generate earnings. Current value embodies expectations regarding the future earning power of the net assets.


Cover of Financial Accounting Theory and Analysis: Text and Cases, 11th Edition


The productive capacity of the economy can be thought of as the maximum level of production of goods and services that can be generated,