The Classification of Capital and Revenue in Accounting and the Definition of Income in the Market-Place

Abstract

Over many years various accounting authorities have grappled with the problem of appropriate recognition and classification of income and expenditure items in the preparation of financial accounts. One obvious case in point is the distinction between the ordinary revenue and capital gain nature of transactions; another is the inter-period allocation of expenditure. To a large extent, accounting attempts to resolve these issues by relying upon the statement preparer's subjective judgements. This approach has implications for other disciplines, such as taxation. Perpetuation of accounting imprecision is attributable to the inadequacy of the criteria used by prevailing accounting statements and conventions. This paper demonstrates that the market place itself can resolve these concerns. In doing so, it renders the accounting doctrine of accrual superfluous. The paper also develops and proves the direct relationship between the traditional; Shanz-Haig-Simons definition of income and the present value formula, which is the foundation of the market approach to classifying transactions correctly.