This article attempts to describe the essence of stabilized-accounting procedure as the writer has developed it from the rather rudimentary stage in which it was left at the termination of the inflation period in Europe. The stabilizing procedure is based upon the index of the general price level. Stabilized accounting, by its use of price index numbers, estimates the reproductive or replacement costs of merchandise and fixed assets as at any dates for which reliable indexes are available. Stabilized accounting treats common stock and other investments in a business by its equity owners as real-value items, stabilizing them by the general index in order to show the current equivalents of the general purchasing power originally invested. When the accounts of a concern are stabilized, such restatement of capital stock does not mean, of course, that any stock records need be altered in any way. Stabilization on the basis of both original cost and reproductive-cost is shown in order to indicate how the two differ from each other and from accounting figures prepared from the books in the regular way.

Economists and accountants have looked at the prospect of inflation from different basic points of view. Some have thought principally of the effects that inflation will have upon business profits, hence upon employment and power to pay debts. Others have thought principally of effects upon real wages and the standard of living. And others have concentrated their attentions on effects upon accumulated capital, such as savings, or upon stock-market prices or public finance. But none seem to have given any thought at all to the effect that inflation is sure to have upon the ability of the economic key men to choose wise courses of economic action for people. In practical business life these key men are managers of business enterprises, whether large or small. These men may be filling roles of entrepreneurs, or they may be merely paid servants of real entrepreneurs. But in any case the direction of economic activity and the amount and intensity of it, are determined by these men. If they decide to produce more or less of certain products and services, then land, labor and capital will be employed for those purposes.

This article discusses the economic benefits of capital. The preservation of a proper distinction between capital and income is the fundamental problem of accounting and the aspects of capital are a prerequisite to sound accounting development. A distinction between the capital that serves as an agent of production and the capital that serves as a means of directly satisfying the wants of man is considered desirable, the former may be called "production capital", and the latter, "consumption capital." Modern methods of business, accounting, and finance, as previously suggested, requite all capital to be measured in the common standard of value used throughout the economic community. The substance of capital is usually measured with reference to the ability of capital to command some economic goods; and this ability depends upon the relationship between the monetary amount of the capital and the monetary amount of the particular economic goods. When the valuation procedure selects productivity as the principal explanation of the existence of capital and then values the capital at the present worth of the estimated income obtainable, the process is frequently called capitalization.

Income is the economic benefit coming in during a period of time. It consists of current income and of capital gains and losses. The general accounting habit of regarding income as though it were synonymous with realized income, although of some usefulness in practical affairs because it tends to substitute fact for fancy, should be more dearly recognized as both illogical and generally causative of the compilation of false information. All the income--realized, unrealized, and the total thereof--coming into existence during a period should be credited to that period, but the realized should continue to be separated from the unrealized.

If the capital invested in an asset is classified as physical capital, then unrealized "appreciation," which is commonly meant to express the monetary excess of net reproductive cost over net original cost, is all capital. If capital is classified as real capital, then appreciation is capital to the extent of the amount required to express in the current general price level the net original cost of the asset, and the remainder of the appreciation is income. And if capital 18 classified as nominal capital, then the appreciation is all income. Stabilized accounting prefers to restrict the meaning of appreciation to the excess of net reproductive cost over net real cost. If this view is accepted, the orthodox conceptions of appreciation must be rejected. Appreciation becomes converted from unrealized into realized when doubt with respect to its positive existence is dispersed. This happens most often as the result of sale or depreciation of the particular asset. Although the equalized original cost of an asset, and the accumulated depreciation thereon, ought to be shown in some way on the books and financial summaries, the cost of reproduction need not be shown. If, however, as should usually be desirable, it is shown, the excess of the depreciation on reproductive cost over that on real cost is most satisfactorily treated when charged against the unrealized appreciation. But if the depreciation charged to operations must be based upon cost of reproduction, the resulting realized appreciation is, in essence, a correction of current profit and loss although, where necessary, it may satisfactorily be entered in a realized-surplus reserve.

Methods of the usual, present, orthodox type are unstabilized because they ignore all lack of uniformity in the value content of the measuring-unit in which the depreciation is expressed. If, for instance, a building cost $50,000 in 1910 and had an expected life of twenty years, with no final scrap value, the depreciation, according to the customary, straight-line method would be the unstabilized one of $2,500 for each of the twenty years regardless of whether, as thus stated in the dollar value of 1910, it was equivalent to $2,500 in the average general price level of each of such twenty pars. Orthodox calculation of depreciation thus assumes that the original cost, when distributed as depreciation over subsequent periods, will continue to have the same economic significance as it had when incurred-or, in other words, that the monetary standard of measurement remains stable in value. The chief merit of such an unstabilised depreciation method is the greater ease in theory and application resulting from the assumption of a higher degree of simplicity in the measurement of facts than is actually there.

This article focuses on different methods of maintaining capital may well be comprehensively examined and appraised. There are two main views on which maintenance of capital may be based. The first part of this article will briefly judge the more uncommon, less advantageous one. The second part will then evaluate the ramifications of the usual view. According to one viewpoint, the object in maintaining capital should be to preserve the same proportion of the total social capital as was possessed at the time the capital was originally invested. The second objection to relative maintenance of capital is that it is liable to prove unsafe as a practical basis. An ingenious plan that would automatically effect, among other purposes, maintenance of relative capital while utilizing the present system of money is that proposed by one economist. Under such a plan, intended to distribute productive shares in the economic process according to a standard of social justice and business progress would be adequately met by the existing price measuring-unit because changes in the general price level would tend to indicate a productivity change wherein the entire country both should and would share.