By law, every company shall have ‘capital’ to be preserved during its tenure. Certain companies, such as banks, are required to maintain the adequate level of capital – capital adequacy requirements are to be observed.
Assets of the business will be revalued at the end of each financial year. A distinction should be drawn between what we call ‘fixed assets’ and circulating or ‘floating assets’.
Fixed assets are those which are to be permanently retained for the purpose of the business as land, premises, machinery, office furniture and equipment. Whereas, circulation or floating assets are those turned over in the course of business as money, trade creditors and stocks. It would be better to mention that whether an item is fixed or floating depends on the inherent nature of the asset.
A ship during construction in a dry dock constitutes part of the floating assets of the shipbuilder, but once its launched and handed over to the ship operator, it becomes part of his fixed assets for accounting purposes, and it ceases to float once it actually floats. The distinction, moreover, is merely one of degree and often arbitrary and difficult to draw. Also, there may be certain assets which are neither fixed nor floating.
An actual revaluation of any fixed asset will not take place each year. For the purpose of calculation of profits or losses it will be assumed to remain constant subject, if the accounts are properly kept, to an annual book keeping adjustment for deprecation. However, as required by the law, the directors’ report which accompanies the annual accounts needs to state any significant changes in the fixed assets.
If, for example, the market value of land differs substantially from the figure in the balance sheet, herein, to indicate the difference with such degree of precision as is practicable, all calculating assets must be revalued annually to obtain any realistic assessment of the annual profit or loss.
This is dependent, not merely on whether trading receipts have exceeded payments or vice versa, but on the difference in value at the beginning and end of the trading year of all the circulating assets such as stocks, cash, trade debts to the firm and the likes, less current liabilities, such as trade debts due from the firm.
I believe, there is a need for professional accountants to put things in order and clear figures, as per the standard accounting general principles.