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 …
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.