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Inflation accounting or price level accounting
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
•Objectives of inflation accounting
• To reveal the truth and fair view of the
operational results and financial position of the
• To maintain operational efficiency of the
• To ensure adequate funds for the replacement
of various assets.
• To indicate the real worth of the business.
• To strengthen decision making process.
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
Methods of inflation accounting
• Current purchase power method..
• Replacement cost accounting techniques.
• Current value accounting techniques.
• Current cost accounting techniques.
Current purchase power method
• In this method historical amounts are adjusted
for changes in the general pricelevel.
• This method is known by different names such
as general pricelevel adjustment method or
current purchasing power method or current
• 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
2. Replacement cost accounting
• In this techniques the index used are those
directly relevant to the company ‘s particular
assets and not the general price index.
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.
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 .
1. The fixed assets are shown in the balance sheet
at their current values and not in the historical
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
4. Depreciation of fixed assets is to be calculated at
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
Important adjustment required under
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
• But in case of inventories certain adjustment
will have to made known as cost of sales
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 .