TITLE

A STUDY OF INFLATION
ACCOUNTING
 PROFILE
NAME - SONAWANE OMKAR DEEPAK

CLASS - MCOM II (SEM –IV)

SUBJECT - RECENT ADVANCES IN ACCOUNTING, TAXATION

AND AUDITING

ROLL NO - 1786

GUIDE BY – PROF. GADE

 CONTENTS
1) Introduction
2) Definition
3) Objective Of Inflation Accounting
4) Need Of Inflation Accounting
5) Significance Of Inflation Accounting
6) Methods Of Inflation Accounting
7) Conclusion
 Introduction
Inflation normally refers to the increasing trend in
general price level . In other words , it is a state in which the
purchasing power of money goes down . Inflation accounting is
a system of accounting which shows the effect of changing cost
and prices on affairs of a business unit during an accounting
year. While the cost of in the traditional accounting refers to the
historical cost , in inflation accounting it represents the cost that
prevails at the time of reporting.
However ,this is not true in practice as many countries ,
developed as well as developing , have been experiencing
inflation of high magnitude in recent times . inflation refers to
state of continuous rise in prices
.
 MEANING
Inflation accounting is term describing a range of
accounting models designed to correct problems arising
from historical cost accounting in the presence of high
inflation and hyperinflation. Inflation accounting may be
described as an attempt to portray financial performance of
business enterprises on the basis of current prices.
Special accounting techniques which can be
used during periods or high inflation . Inflation accounting
requires statement to be adjusted according to price
indexes , rather than solely on a cost accounting basis.
 OBJECTIVE OF INFLATION ACCOUNTING
1)To enhance the meaning and measurement of the income and expenditure of the
enterprise, keeping in view the ever-changing purchasing power of the momentary
unit , the specific currency;

2)This , in turn makes the intra-firm comparison of the financial results of the company
more realistic, rational and meaningful:

3)To highlight and specify the effect of inflation on different enterprises , depending
upon their different nature of business as also the operating features.

4)To provide a meaningful and reliable database , facilitating a realistic and rational
decision-making process in the organization.
 NEED FOR INFLATION ACCOUNTING
1) It helps to correct the usually distorted picture of the financial operations and
condition of a company presented by the conventional system of accounts.

2) It facilitates inter-company comparison since inflation hits different firms in different

degrees.

3) It also facilitates inter-company comparisons since inflation hits different firms in

different degrees.

4) Correct measurement of income is possible only with inflation accounting.

 SINGNIFICANCE OF INFLATION
ACCOUNTIG
1. Historical accounts do not consider the unrealized holding gains arising from
the rise in the monetary value of the assets due to inflation.

2. The objective of charging depreciation is to spread the cost of the asset over
its useful life and make reserve for its replacement in the future. But it does not
take into account the impact of inflation over the replacement cost which may
result into the inadequate charge of depreciation.

3. Under historical accounting, inventories acquired at old prices are matched

against revenues expressed at current prices. In the period of inflation, this may
lead to the overstatement of profits due mixing up of holding gains and
operating gains.

4. Future earnings are not easily projected from historical earnings.

 METHODS OF ACCOUNTING FOR PRICE
LEVEL CHANGES
1.Current Purchasing Power (CPP)Method , based on changes
a) conversion factor
b) calculation of net monetary gain/loss.
c) Impact of change in price level on monetary items.
d) calculation of monetary gain/loss.
e) Valuation of Inventory and cost of goods sold.
I) FIFO
II) LIFO
f) Fixed assets and depreciation.
g) Other points.
I) Taxation.
II) Interest on Debentures.
III) Dividends.
IV) Capital.
2.Current Cost Accounting (CCA) Method , Based on changes in prices of specific assets.
3.Replacement Cost Method.

4.Writing-up of fixed Assets.

5.Replacement Cost Method Covering Fixed Assets and Inventories.

6.Present Value Accounting Method.

7.Continuously Contemporary Accounting Method.

 conclusion
Every person on this earth has been affected by Inflation, some positively but
most of the people negatively because the Inflation leads to the erosion of general
purchasing power. The Inflation spares none and it equally influences the Businesses
like the people.
Historical cost accounting does not take into account the changes in the rise in
the value of assets and its impact on Balance Sheet and P&L Account due to inflation
and does not reflect the real worth of the business which is very required for effective
decision making.
Inflation Accounting has removed this drawback by providing methods for
adjusting the figure according to General or Specific Price levels.