Inflation accounting or price level accounting

price level accounting

1. Inflation accounting or price level accounting

2. Definition of inflating accounting According to Roy A. Foulke Inflation accounting is a method of converting values by means of an index number from the cost or depreciated cost to current economic values.

3. Objectives of inflation accounting To reveal the truth and fair view of the operational results and financial position of the business. To maintain operational efficiency of the business. To ensure adequate funds for the replacement of various assets. To indicate the real worth of the business. To strengthen decision making process.

4. Advantages of inflation accounting Changes in the value of money recognized. Logical application of matching principle concept Reported profits--- a realistic picture. Fixed assets shown at economic value. Ensures funds for replacement of assets Valuation of business at current prices

5. Methods of inflation accounting Current purchase power method.. Replacement cost accounting techniques. Current value accounting techniques. Current cost accounting techniques.

6. Current purchase power method In this method historical amounts are adjusted for changes in the general price level. This method is known by different names such as general price level adjustment method or current purchasing power method or current rupee accounting.

7. Example Suppose the cost of machinery in 2010 is Rs 100,000 and general price index was 200 and current price index is 400 .we calculate 100,000*400/200 = Rs 200,000 so the value of the machine today is Rs 200,000.s

8. 2 . Replacement cost accounting techniques In this techniques the index used are those directly relevant to the company ‘s particular assets and not the general price index.

9. 3.Current value accounting techniques In this techniques all the assets and liabilities are shown in the balance sheet at their current values. The value of the assets at the beginning and at the end of the accounting period is ascertained and the difference in the value in the beginning and the end is termed as profit or loss.

10. 4. Current cost accounting techniques It is recommended by Sandilands committee in th the year 1975. The current cost accounting techniques is the preparation of financial statements on the current values of individual items and not on historical or original cost . Characteristic The fixed assets are shown in the balance sheet at their current values and not in the historical costs.

11. 2. Inventories are shown at market value rather than market or cost price whichever less as in the historical system . 3. Revaluation surplus are transferred to current cost accounting reserve but not distributed as dividend to shareholders . 4. Depreciation of fixed assets is to be calculated at replacement value . 5. Two types of profit i.e. profit from operation and profit from revaluation are calculated . 6. Liabilities are recorded in their original value because there is no any change in monetary un

12. Important adjustment required under CCA techniques Current cost of sales adjustment (COSA) under this CCA techniques cost of sales are calculated on the basis of cost of replacing the goods at the time they are sold. In this current cost must be matched with current revenues . But in case of inventories certain adjustment will have to made known as cost of sales adjustment.

13. 2. Depreciation adjustment Under this method assets are shown in the balance sheet on the current replacement cost after allowing for depreciation. Formula is Opening current value of the assets +closing value of the assets /2*life of the assets .