Financial Accounting · Key principles and concepts of accounting

Accounting Measurement Bases and Capital Maintenance Explained

Updated 11 October 2026 · Fact-checked

A measurement basis is the way you put a money value on an asset or liability. The main bases are historical cost, current cost, realisable value and fair value. Capital maintenance decides when a profit exists: only after the entity's capital is kept intact. Exam questions ask you to match, compare or calculate.

Understand Accounting Measurement Bases and Capital Maintenance

Every item in the statement of financial position needs a money value. A measurement basis is the rule you use to get that value. Different bases give different numbers for the same asset, so the basis you choose changes assets, equity and profit.

Historical cost is what you paid, or the value of what you gave up, when you acquired the asset. It is reliable and easy to check, because it comes from a real transaction. Its weakness is that it can become out of date when prices change. In times of rising prices, assets look low and profits look high.

Current cost is what you would pay today for an identical or equivalent asset. Realisable value (also called settlement value for liabilities) is what you would get today by selling the asset in an orderly disposal, net of transaction costs, or the amount needed to settle a liability. Fair value is the price you would receive to sell an asset, or pay to transfer a liability, in an orderly transaction between market participants at the measurement date (IFRS 13). Current cost looks at the buying side. Realisable value looks at the selling side, net of the costs of disposal.

Do not treat realisable value as the same thing as net realisable value (NRV). NRV is the IAS 2 measure for inventory. It is the estimated selling price less the estimated costs to complete and the costs to sell. The two ideas are related, because both look at the selling side net of costs, but they are not identical. NRV also deducts costs to complete.

Capital maintenance answers the question: when has a business made a profit? Profit is the increase in capital over a period, after excluding owner contributions and distributions. Under financial capital maintenance, profit is earned only if closing net assets (in money terms) exceed opening net assets. It can be measured in nominal money units or in units of constant purchasing power. Under physical capital maintenance, profit is earned only if the entity's physical operating capacity at the end exceeds that at the start. This needs current cost measures.

Most entities use historical cost, with some items at other bases. Inventory is at the lower of cost and net realisable value. Revalued property and some financial instruments use fair value. The Conceptual Framework does not demand one basis for everything.

Key formulas to remember

Historical cost: Asset value = amount paid (or fair value of consideration given) at acquisition; Not adjusted for price changes. Depreciation still applies to cost.
Inventory measurement (IAS 2): Inventory = lower of cost and net realisable value (NRV); Applied item by item or by groups of similar items.
Net realisable value (IAS 2): NRV = estimated selling price − estimated costs to complete − estimated costs to sell; Use estimates at the reporting date. NRV is an IAS 2 measure. It is related to, but not the same as, realisable value in the Conceptual Framework, which is the amount obtainable on disposal net of transaction costs and has no deduction for costs to complete.
Profit under capital maintenance: Profit = closing capital − opening capital (after removing owner contributions and distributions); The meaning of capital depends on the concept used.
Financial capital maintenance (money): Profit = closing net assets − opening net assets − capital introduced + drawings; Measured in nominal money units, so inflation is ignored.
Financial capital maintenance (constant purchasing power): Profit = closing net assets − opening net assets × (1 + inflation rate) − capital introduced + drawings; Opening capital is restated for general inflation. Drawings and capital introduced are taken at nominal value. This is a simplification, because strictly they would be restated for inflation if made during the year.

How to solve Accounting Measurement Bases and Capital Maintenance questions

Use this method for definition, matching and calculation questions on measurement and capital maintenance.

1Read what the question asks: a definition, a comparison, a calculation of a carrying amount, or a profit figure.
2Identify the basis described. Look for key words: 'paid' means historical cost, 'replace today' means current cost, 'sell today' means realisable value, 'market participants' means fair value.
3Check whether the question is about buying or selling. Current cost uses the buying side. Realisable value uses the selling side, less selling costs.
4For a profit question, find opening and closing capital and identify any owner contributions or drawings.
5Pick the capital maintenance concept: money financial, constant purchasing power, or physical (current cost).
6Calculate: closing capital minus restated opening capital, then adjust for owner transactions.
7Check the answer: when inflation is positive and opening capital is positive, profit under constant purchasing power must be lower than profit under money capital maintenance, and the sign should make sense.
8For multiple response, count the options you must select and eliminate wrong ones first.

Quickest way: Keyword matching and one-line profit test

When to use it: Use it for objective test questions where time is short and options look similar.

Match the key phrase: 'amount paid' = historical cost; 'cost to replace' = current cost; 'sale proceeds less disposal costs' = realisable value; 'exit price in an orderly transaction' = fair value. For inventory, use NRV, which also deducts costs to complete.
For inventory, always compare cost with NRV and take the lower.
For capital maintenance, write: profit = closing − opening (adjusted). Do the adjustment before comparing.
If the question mentions inflation or purchasing power, restate opening capital by the inflation rate.
Remove options that apply the wrong basis, then choose from what remains.

Common mistakes in Accounting Measurement Bases and Capital Maintenance

Treating current cost and realisable value as the same thing.
Both use today's prices, so they sound alike.
Fix: Ask which side of the market. Current cost is the price to buy or replace. Realisable value is the price to sell, after costs.
Saying historical cost is always the basis used.
It is the most common basis, so students assume it is the only one.
Fix: Remember inventory at lower of cost and NRV, revalued assets at fair value, and some financial instruments at fair value.
Ignoring costs of sale when calculating NRV.
Students take the selling price as the NRV.
Fix: Always deduct costs to complete and costs to sell from the expected selling price.
Forgetting owner contributions and drawings in a capital maintenance profit calculation.
Students just subtract opening from closing net assets.
Fix: Use profit = closing net assets − opening net assets + drawings − capital introduced.
Applying inflation to closing capital instead of opening capital.
It feels natural to adjust the latest figure.
Fix: Restate opening capital to today's purchasing power, then compare it with closing capital.
Thinking fair value is what the entity itself expects to get or pay.
The word 'fair' suggests a personal judgement.
Fix: Fair value is a market-based price between market participants, not an entity-specific estimate.

Worked examples

Example 1

A business holds 500 units of inventory that cost $12 each. The expected selling price is $15 per unit. Selling costs are $4 per unit. At what amount should the inventory be shown?

Show the solution

Cost per unit is $12.
NRV per unit = $15 − $4 = $11.
Lower of cost ($12) and NRV ($11) is $11.
Total = 500 × $11 = $5,500.

Answer: $5,500

Example 2

At the start of the year a sole trader's net assets were $80,000. At the end of the year, after deducting drawings of $10,000, net assets were $108,000. The owner introduced no capital. Inflation for the year was 5%. Treat the drawings at nominal value. Calculate profit under (a) financial capital maintenance in money terms and (b) constant purchasing power.

Show the solution

(a) Closing net assets of $108,000 are already after drawings. Closing $108,000 − opening $80,000 = $28,000 increase.
Add back drawings of $10,000, so that the owner's withdrawal is not treated as a loss: profit = $38,000.
(b) Restate opening capital: $80,000 × 1.05 = $84,000.
Closing $108,000 − $84,000 = $24,000.
Add back drawings at nominal value of $10,000 (a simplification, as drawings made during the year would strictly be restated for inflation): profit = $34,000.
Check with the formula: $108,000 − $80,000 × 1.05 − $0 + $10,000 = $34,000.
Check the size: $34,000 is lower than $38,000 by $4,000, which is $80,000 × 5%.

Answer: (a) $38,000; (b) $34,000

Exam tips

Learn one clear sentence for each basis and match the key words in the question stem.
In inventory questions, always compute NRV after deducting selling costs, then take the lower figure.
In multiple response questions, read how many answers you must choose and do not select extra options.
In capital maintenance profit questions, write the working in order: opening restated, closing, owner adjustments.
Do not spend time on advanced inflation accounting; the exam tests the concepts and simple calculations.

Practice questions from Key principles and concepts of accounting

Accounting Measurement Bases and Capital Maintenance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accounting Measurement Bases and Capital Maintenance: frequently asked questions

What is the difference between historical cost and fair value?

Historical cost is the amount paid when the asset was acquired. Fair value is the current market price you would receive to sell it in an orderly transaction. Historical cost is more reliable, while fair value is more up to date.

How is current cost different from realisable value?

Current cost is what it would cost you to buy the same asset today. Realisable value is what you would receive if you sold it today, after disposal costs. One looks at buying, the other at selling.

What is capital maintenance in simple words?

It is the rule for deciding when a profit has been made. You only have profit if the business has more capital at the end than it needed to keep its capital intact at the start, after allowing for owner transactions.

Which measurement basis do companies mostly use?

Most items are carried at historical cost, often with depreciation. Some items use other bases, such as inventory at lower of cost and NRV, and revalued assets or certain financial instruments at fair value.