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Abstract
The word ‘capital’ has many meanings, within and beyond business. In accounting, it was originally a credit concept but has many uses related to assets. In economics and tax, it has exclusively asset meanings. This paper investigates the development of the concept of capital, focussing on accounting and related disciplines, especially in the UK. Even as a credit term, ‘capital’ can be as narrow as original equity or wide enough to include debt. A credit/debit confusion can be seen in Pacioli's treatise and through to recent documents by standard setters. At various dates, amounts called ‘capital’ have been shown on different sides of the balance sheet. Capital maintenance is central to the measurement of income for various purposes. It was thrown off course in 1889 by a legal case which seems to have been influenced by the double-account system, which also had echoes in economics. However, the conventional accountants’ view was re-established in 1980 because of an EU Directive. Maintenance of capital (both credit and debit forms) was much discussed in the 1970s in a period of high inflation. The concept of equity began to become clear with the separation of provisions and reserves (in the 1940s) and when liabilities were defined (from the 1960s). However, accounting practice departs from the definition and it measures liabilities in various ways, so that there is still no clear concept of equity capital. A number of policy implications are set out in the paper.
Acknowledgements
The author is grateful to the ICAEW for suggesting this topic. He received helpful advice on previous drafts from Richard Barker, Jane Davison, Alisdair Dobie, J.R. Edwards, David Heald, Andrew Lennard, Richard Macve, Richard D. Morris, Christopher Napier, R.H. Parker, Brian Singleton-Green, Christian Stadler, Stephen Zeff and an anonymous reviewer of this journal. He is also grateful for advice on Italian words from Stefano Zambon; and for the provision of archival financial statements of Marks and Spencer by Paul Rolling and Alan Stewart.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1. This word has the same root as ‘capital’ but comes via the Capitoline in Rome.
2. I have used the version of the Summa as reprinted in Toscolano in Citation1523. Pacioli's word is ‘cauedal' or, sometimes, ‘cauedale', which might now be transliterated as ‘cavedal' or ‘cavedale'. Pacioli (or the printer) seem to use ‘u’ and ‘v’ interchangeably, as was also found in English at the time. However, in other parts of the Summa (e.g. Tractatus 7 (3)), Pacioli uses ‘capitale’ and ‘capital’. Stefano Zambon (letter to me of 23 December 2013) suggests that ‘cavedale’ was used in Sienese texts of the period.
3. This is an English translation which had been published in Dutch and French in Antwerp in 1543.
4. The book was later discovered in Moscow, and Parker (Citation1994, p. 78) confirms the quotation.
5. I hope that readers will accept the word ‘he' as accurate at this date.
6. I have borrowed this observation from Bryer (Citation2000), although Edwards (Citation1989, p. 95) notes that some other companies had permanent stock earlier.
7. I am grateful to Dick Edwards for pointing out that there had been non-company precedents, for example, consolidation of military establishments for the information of the UK parliament in the nineteenth century.
8. The company began on 1 April 1901.
9. As noted, the US company narrowed the term liability in 1943. And, for example, in the 1955 balance sheet of Marks and Spencer, there is no heading for the credit side.
10. This balance sheet (and those shown in and ) was said by the company to be prepared under national law. It was audited by Arthur Andersen.
11. This is the last balance sheet under Italian GAAP produced by the company.
12. In French and Italian, but not German, the words have become nouns as well as being adjectives.
13. ‘Passif' included equity. Various liabilities were shown on balance sheets, for example, ‘provisions' and ‘dettes'. The German version of IFRS uses ‘Schuld’ for ‘liability’, a word that does not appear in the Directive.
14. I have consulted the original Italian but, for English translations given here, I use those of von Gebsattel (Citation1994).
15. This is the case for the entries in the books of account. There were no balance sheets.
16. Stevin's books include Vorstelicke Bouckhouding op de Italiaensche Wyse of 1604. The point about capital being on the left is noted by ten Have (Citation1956, p. 244).
17. First Schedule, No.13.
18. There is one in the 1862 Act but not in the 1908, 1929 or 1948 consolidating Acts.
19. Old French ‘asez’ from Latin ‘satis’.
20. Barker (Citation2010) pointed out the analogous problem for ‘income'.
21. The first quotation is from Section 121 of the standard clauses proposed (by the Companies Clauses Consolidation Act 1845) for any new companies set up by parliament, and the second is the formulation in paragraph 73 of the optional Table A in Schedule 1 to the Companies Act 1862, which was the model form of Articles of Association. Similar wording was found in the Schedule 1 to the 1908, 1929 and 1948 consolidating Acts.
22. in re Exchange Banking Company 21, Ch.D. 518.
23. (1889) 41.Ch.D. 1.
24. However, Alisdair Dobie (letter to me of 18 November 2014) notes that monasteries often prepared a ‘status’ at the start of an abbacy, listing all the assets and liabilities of a house, so that comparison could be made of the ‘status’ of the house at the beginning and end of a period of rule by an abbot or prior.
25. Any excess of finance over expenditure (while building was in progress or at completion) was taken to the general balance sheet.
26. (1894) 2. Ch. D. 289.
27. (1896) 2 Ch. D. 279.
28. In the IASB Framework (para. 4.25 of the 2010 version), ‘income' is the antithesis of ‘expenses'. Income comes in two forms: revenue and gains (para. 4.29). The former is gross. There is much confusion here. For example, Haswell and Langfield-Smith (Citation2008) incorrectly accuse the IASB of writing ‘revenue’ when it meant ‘income’, because the words had opposite meanings in the Australian and IASB conceptual frameworks.
29. (1918) 1 Ch. D. 266.
30. (1961) 1. All E.R. 769.
31. Richard Macve has pointed out to me that Hicks (Citation1974, p. 310), at least, was aware of the different views of economists and accountants on this point.
32. This method was proposed as compulsory in the exposure draft. Vestiges of that can be seen in the prohibition of a change from fair value to cost (para. 31) and in the requirement to disclose fair value if cost is used in the balance sheet (paras 32 and 79e).
33. §39 of the 1980 Act; now §830 of the Companies Act 2006.
34. The Companies Act permits this (CA 2006, S.I, Sch. 1, para. 33 (3)), and accounting standards require it (from a revision to SSAP 12 in 1987 onwards).
35. As paragraph 90 of Schedule 1.
36. That is, in the UK, for corporation tax or for income tax on business profits.
37. For example, Law Shipping Co. Ltd. v IRC (1924) and Odeon Associated Theatres Ltd. v Jones CIR (1951) relate to whether repairs are expenses or capital cost when they concern assets purchased in a dilapidated state; and Samuel Jones & Co. (Devondale) Ltd. v CIR (1951) and Brown v Burnley Football and Athletic Co. Ltd. (1980) relate to whether certain costs were repair expenses or additions to assets.
38. Strictly speaking, it is erroneously defined as the increase in net assets (which is a debit). See the analogous discussion on ‘expense’ in Section 2.4.
39. The departures from cost for the measurement of financial assets were introduced by SFAS 115 of 1993.
40. This is mentioned by the DP (para. 9.53) and is explicit in the equivalent former UK standard (FRS 15, III, para. 19).
41. Whether or not they are ‘realised’ is a complex question, as explained in Section 5.
42. Current cost accounting was required in the UK for large companies, in the form of supplementary information, by SSAP 16 which was issued in 1980. The mandatory status was removed in 1985, and the standard was withdrawn in 1988 (Tweedie and Whittington Citation1997).
43. R v Kylsant and Another.
44. I am grateful to Christopher Napier for suggesting these last 10 words, which draw on findings in Brooks (Citation1933, pp. xxviii–xxix).
45. In the 1948 Act, which was current until 1981, these terms were found in paragraph 6 of Schedule 8.
46. IASB (Citation2013, para. 2.11) proposed to change this to ‘a present obligation of the entity to transfer an economic resource as a result of past events’.
47. ‘Non-controlling interests’ is the term used from 2008 in IFRS; now in IFRS 3 and IFRS 10. The previous term, ‘minority interests’ is inappropriate when the scope of consolidation includes entities that are controlled even if less than majority owned.
48. There can be exceptions, for example, if the parent guarantees dividends to NCI holders.
49. The first set of consolidated statements was for U.S. Steel in 1901/1902, though consolidation of less-than-wholly-owned subsidiaries did not begin until the 1920s (Walker Citation1978, p. 296).
50. Sometimes as liabilities and sometimes between equity and liabilities.
51. Walker (Citation1978, p. 49) reports on the 1920s. The Companies Acts formats (e.g. Schedule 4A, para 17 of the 1985 Act) require minority interests to be shown separately. In practice, this was outside of equity (PwC Citation2007, p. 24096).
52. IAS 3 (para. 43) required that minority interest should not be shown as equity. IAS 27, from 1988 until 2003, required it to be shown separately from liabilities and parent's equity, and afterwards within equity, separately from parent's equity.
53. This is of some relevance (see Horton et al. Citation2011, Nobes Citation2011).
54. Depending on the state of the industry, it might be less, but H&W won the contract under competitive conditions.
55. Richard Macve suggests (in a letter to me of 6 November 2014) that the following, inter alia, are relevant: the structure of competition in the market; the degree of uncertainty/risk in performing the contract; what ‘overheads’ H&W is committed to incurring (but that are not yet accounted for) and what previously expensed intangibles (e.g. brand reputation) are being recovered in the price.
56. This is the basis for pension obligations, lease liabilities, provisions and deferred tax. It could also be said to be consistent with the measurement of bank loans and accounts payable.