Inflation Accounting-Part 1.........pptx

Inflation Accounting

1. It is a method of incorporating the changes in price level in accounting so that the financial statements can depict a realistic picture of business. Here the assets, liabilities and all other items are shown in financial statements at their current price rather than historical cost. So it is very helpful in true and fair presentation of financial information. Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 1

2.  इ स म ें व ् य व स ा य क े स ् थ ि त ि व वव र ण अ ि व ा उ स क े ऱ ा भ ह ा त ि में दिखाई गई व्यवसातयक मिो को मौदिक रूप में ऐतिहाससक मल् ू य में दिखािे की बजाय उिके विमत ाि बाजार मल् ू य पर दिखािे का प्रयास ककया जािा है | अि् इसमें सभी मिों को इस प्रकार से व्यवस्थिि अिवा संशोधिि ककया जािा है िाकक वह उिके विमाि बाजार मल् ू य का प्रिशित कर सकें | इस प्रकार ये कहा जा सकिा है कक म ु िाथफीति ऱेखांकि के अंिगित व्यवसाय के स्थिति वववरण और ऱाभ हाति खािे को उिके विमत ाि मल् ू य पर संशोधिि ककया जािा है िाकक वह व्यवसाय की सच्ची एवं उधचि (True and Fair) स्थिति को प्रथिि ु कर सके | Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 2

3.  भ्रामक पररणाम (Misleading Results) :  पंज ू ी की क्रय शस्ति में कमी (Deteriation in Purchasing power of Capital)  बढ़ी ह ु ई ऱाभों की रासश (Inflated Profits)  ववत्तीय वववरणों के िऱ ु िा करिे में कदििाई (Difficulty in Comparison of Financial Statements)  व्यवसाय की सह़ी ऺमिा का प्रिशित ि हो पािा (Unable to Disclose the Actual Position of Business)  माऱ के मल् ू याकं ि में समथया (Problem in Stock Valuation) Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 3

4. Following Techniques are used for Price Level Accounting: Current Purchasing Power (CPP) Method – विमाि क्रय शस्ति ववधि Current Cost Accounting (CCA) Method - विमाि ऱगि ऱखांकिे ववधि Hybrid Method -समधिि ववधि Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 4

5. Also known as General Price Level Accounting or Common Rupee Accounting Method. Emerged in the year 1974 by Institute of Chartered Accountants of Britain. Under this method , all the items in the profit and loss account and the balance sheet are converted according to price level using general price index which are published by Government. Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 5

6. A Land was purchased in year 2014-15 for Rs. 2,00,000. The Index value of 2014-15 is 240. Now in the year 2018-19 the indexed value of land would be (Index factor 2018-19 is 280): 2,00,000X280/240 =2,33,333 So the Converted Value=( Historical Cost * Current Year Index)/ Acquisition Year Index  Mid Price/Average Price Conversion is also used Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 6

7. Monetary Items The items remains unaffected with the price level changes. The receipts and payment of monetary items is made at predetermined and contracted amount. Hence there is no need to convert the monetary items into current price for balance sheet purpose. These are shown at Historical values. Example: Cash, Bank Balance, Debtors, B/R, Creditors, Loan, Interest, B/P, Advance Payment, Redeemable Preference Shares etc. Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 7

8.  In inflationary Condition, Holding of Monetary Assets will results loss, while the holding of Monetary Liabilities will results Profit.  अगर आपिे ककसी को 1,00,000 रुपए का माऱ उिार बेचा (िेििार) अब यदि उस की वैल्य ू बढकर 1,10,000 रूपए भी हो जा य े ि ब भ ी 1 , 00 , 00 रू प ए ह ़ी समऱ ि े ह ै याति 1 , 000 रूपए का ि ु कसाि I Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 8

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13. These assets/Liabilities are changed according to changed value of money. So there would be neither any monetary gain nor any loss due to inflationary conditions. Example: Plant, Machinery, Building, land, Inventory. The historical cost of such assets are converted into current price by using index showing general purchasing power of money. Note: Shareholders’ Funds neither a monetary item nor non-monetary item. It is claim over the surplus remaining. Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 13

14. The following techniques may be used: FIFO, LIFO or Average Method. Conversion Factors Used for inventory items used out of : Opening Stock : Index on date of revaluation/Index at the beginning. Purchase: Index on date of revaluation /Average Index for the period Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 14

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20. Liabilities and Capital Assets All Monetary Items at Actual/ Historical Value All Non-Monetary Items at their adjusted/ Indexed Value Shareholders’ Fund (Balancing Figure) All Monetary Items at Actual/ Historical Value Cash Balance (Actual) All Non-Monetary Items at their adjusted/ Indexed Value Total Total Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 20

21. Solution of Rubber Like behaviour (Inflation/deflation ) of Money. Uniformity and comparability in financial figures Proper Matching of Cost and Revenue Correct Evaluation of Managerial Efficiency Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 21

22. All assets do not change uniformly according to general price level change. Technical Difficulties (Fair index value, classification of monetary and non monetary items). Difficulty in Understanding Confusion from duplication of statements Costly Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 22

23. Thank you Have a Nice Day. Inflation Accounting : Dr. Ishwar S h arm a 18-Apr-20 23