inflation ccounting

INFLATION CCOUNTING- to develop a mechanizing to incorporate the price related changes is known as IA. IA/ ACCOUNTING for PRICE LEVEL CHANGE INTRODUCTION- the basic obj of acc is the preparation of financial statement in a way that give a true and fair view of the operating results and the financial position of the business. In other word the income statement namele pl a/c should disclos e the true profit or loss made by the bus. During a particular period. While the B/S must show a true and fair picture of financial position of the bus. As we know all the financial stat. are prepared in monetary unit sau rs, pound, dollar etc. The FS can serve very well the basic obj if the value of such monetary unit remain stable and stability in the price level. However it has been experienced that over a period of time the prices have not remain stable. There have been inflationary as well as deflationary tendancy. FS which are prepared according to Historixcal Cost do not reflect current accounting . in this systems A/cs are prepared wit hout regard to changes in p rice levels. The asset s are shown at the values they were purchased less dep. On such value. As a matter of fact there value might have gone up on account of inflationary tendancy. Similarly the sales are recorded at current market prices while the inbventory are recorded at the prices at which they were purchased. Thus neither the B/S nor the income statement shows the correc t operating profit a nd the true financial pos ition of the bus. In view of the above it has been increasingly felt that the accountant will be failing in his duties if he continues to remain contend with the traditional system of ac, thus new system of acc is needed tyo incorporate the price level change. Price level acc mean therefore we defined as that technique of acc by which FS r related to reflect changes in the journal price level. Such changes may be either inflationary or deflationary. Of course inflation has come to stay nd therefore price level acc. Is more concern with inflationary tendancy. LIMITATIOBN OF CONVENTIONAL FS or HISTORICAL ACC SYSTEM The INCOMESTATEMENT nd th BS prepares according to historical cost acc system have been the foll. Limitations 1. Fail to disclos e current worth of enterpr ise- the FS prepared under th e conventional systems are nearly statements of historical facts.they do not show the true current worth of enterprise. 2. Contains Non Comparable Item- the FS contai ns items which r not comparable since they r usually a composite of historical ndcurren t cost.

inflation ccounting

Documents