# Inflation Accounting

In general accounting data are kept on the basis of historical costing. It is assumed that for the accounting purpose monetary unit is stable and constant. This is a fair concept as it checks accounting manipulation. To check this the real financial position should be measured on the basis of current prices. In case when prices are increasing the historical cost will give a misleading result. In the present day, accountant has taken a serious view of the increase in prices. This system of accounting is known as inflation accounting.

Here an effort is made to explain inflation accounting is not a substitute of the historical cost system. Thus, it is an additional system which is followed in addition to traditional system of historical cost accounting.

In general, every organisation costing data are presented on historical costing system and a comparative study is made to see operating result and financial position of two different periods on the basis of actual price. In this chapter various aspects related to inflation accounting are being discussed in detail.

## Monetary Working Capital Adjustment (MWCA)

Definition Working capital is that part of capital which is required to meet the day to day expenses and for holding current assets for the normal operations of the business. It is referred to as the excess of current assets over current liabilities. The changes in the price levels disturb the working capital position of …

## Backlog Depreciation

Definition of Backlog Depreciation Whenever an asset is revalued, the profit on revaluation is transferred to Revaluation Reserve Account. But, the revaluation also gives rise to a backlog depreciation. This backlog depreciation should be charged to Revaluation Reserve Account. The concept of backlog depreciation can be followed by the help of the below illustration. Formula …

## Calculation of Depreciation Adjustment under Current Cost Accounting Technique

The Current Cost Accounting method assets are shown in the balance sheet on current replacement costs after allowing for depreciation. This will require an adjustment in depreciation too. Formula Current year’s depreciation under CCA can be calculated with the help of following formula: And, Depreciation Adjustment = Current year’s depreciation on CCA – Depreciation on …

## Current Cost of Sales Adjustment (COSA)

Definition The CCA technique, cost of sales are to be calculated on the basis of the cost of replacing the goods at the time they are sold. The important principle is that current costs must be matched with current revenues. Sale is current revenue and out of the costs, all operating expenses are current costs. …

## Current Value Accounting Technique

In Current Value Accounting method, all Assets and liabilities are shown in the balance sheet at current values. The value of Nett Assets in the beginning and at the end of the year the difference is known as profit or loss as the case may bc. The determination of current values is not so easy. …

## Replacement Cost Accounting Technique (RCA)

Replacement Cost Accounting Technique (RCA) is an improvement over current purchase power (CPP) as it suffers from the that it does not take into the individual price index related to the particular assets of a company. The RCA technique uses the index directly relevant to the companies individual assets and not the general price index. …

## Merits and Demerits of Inflation Accounting

High inflation results in more profits and high financial difficulties. The dividend and income taxes are paid on increased profit calculated on the basis of historical cost concept. Therefore a change from historical cost concept to price level or inflation accounting is recommended to show the correct profit and true and fair of balance sheet. …

## Effect of Price Level Changes on Financial Statement

The following are the main effects of price level changes on the financial statements. Effect on profit and loss account The change in price level does not affect profit and loss account items such as: wages and salaries, insurance commission, tax etc. are paid on current values. The items which affect profit and loss accounts …

## Limitations of Historical Cost Accounting

Following are some limitations of historical cost accounting: (i) Failure to disclose current worth of the enterprise. The accounts presented on the basis of historical concept do not show many effects which are due to the inflation gap. Thus, the true and fair view is not shown. (ii) Uncomparable items in financial statements. Sometimes due …

## What is dividend policy?

Meanings of Dividend Dividend is the payment to shareholders in lieu of their share capital. It is that portion of profits of a Company which is distributable among its shareholders according to the resolution passed in the meeting of Directors. This may be a fix percentage on the share capital or at fixed per share. …

## Current Purchasing Power Method (C.P.P.)

Definition Current Purchasing Power Method (C.P.P.) is also known as General Price-Level Accounting. This method is recommended by the Accounting Policy Board and also the Financial Accounting Standards Board (FASB) of USA. This method adjusts historical cost for changes in the general level of prices as measured by the general price-level index. Changes in the general …

## Current Cost Accounting (CCA) Technique

Definition The adoption of Current Cost Accounting Technique in place of Current Purchasing power of Replacement Cost Accounting Technique for price level changes. The crux of the current cost accounting technique is the preparation of financial statements (Balance Sheet and Profit and Loss Account) on the current values of individual items and not on the …

## Inflation Accounting

Definition Inflation is that state of affair when money in circulation is more than the production of commodities and services and purchasing power of money comes down and prices of commodities and services increases. Accounting for changing prices (Inflation Accounting) has become synonymous with accounting for inflation due to the unprecedented pressure of inflationary price …

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