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Inflation Accounting a Method of Accounting That

Inflation Accounting a Method of Accounting That

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Published by kinneridhoria
inflation acc'ng
inflation acc'ng

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Published by: kinneridhoria on Feb 21, 2010
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Inflation accounting
A method of accounting that, unlikehistorical-costaccounting, attempts to take account of the fact that a monetary unit (e.g. thepound sterling) does not have a constant value; because of the effects of inflation,successive…
Inflation accountingAlteration of a firm's financial statements to account for changes in the purchasing power of money. With inflation accounting, gains and losses from holding monetary items during periodsof changing prices are recognized. Likewise, long-term assets and liabilities are adjusted for changing price levels. Inflation accounting is used to supplement regular financial statements inorder to illustrate how changing price levels can affect a firm. Also called
 general price level accounting 
Inflation Accounting
Dr. Kirti Jain
R.B.S. College, Agra
Vivek Gupta
INC, Agra
Since we started understanding things around us, we all used to listen from our Grandparents about thethings and articles especially Gold & Ghee being cheaper in their times.That time we used to think that why the things were cheaper in our Grandparents' time and why had theystarted becoming costlier. So this question would keep us puzzled.But now as we have grown in our knowledge and understanding, we have come to know about thephenomenon of Inflation which in layman's language is known as the state of rising pricing or the fallingvalue of money was the greatest reason behind this.Now emerges the question that what exactly is the Inflation?Inflation is a global phenomenon in present day times. There is hardly any country in the capitalist worldtoday which is not afflicted by the spectre of inflation.Different economists have defined inflation in different words like Prof. Crowther has defined inflation "as astate in which the value of money is falling, i.e., prices are rising." In the words of Prof. Paul Einzig,"Inflation is that state of disequilibrium in which an expansion of purchasing power tends to cause or is theeffect of an increase of the price level." Both the definition have emphasized on the rising prices of thegoods.The basic factors behind the inflation are either the rising demand or the shortening of supply due to anyreason.
Effect of Inflation on Business
The impact of inflation on business can be bifurcated into two parts like1. Impact on costs and revenue2. Impact on assets and liabilitiesAs far as impact of inflation on costs and revenues is concerned, definitely both will rise but whether theyresult into extraordinary profits will be determined by that how much opening stock was available at oldprices with the company and how much later the demand for increasing wages is entertained by thecompany.In case of monetary assets and liabilities, a company will lose in case of being creditor and gain in case of being debtor in real terms.If we talk about other assets like building, land and other securities, the company will be having holdinggains in monetary terms but may have neutral impact in real terms due to the rise in prices on the onehand but fall in value of money on the other.
Inflation Accounting and its significance
The impact of inflation comes in the form of rising prices of output and assets. As the financial accountsare kept on Historical cost basis, so they don't take into consideration the impact of rise in the prices of assets and output. This may sometimes result into the overstated profits, under priced assets and

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