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Cost Accounting

Issues in Contemporary Accounting

Submitted By
MBA General
Section- B
1. Neeraj Kumar
2. Parneet Kaur
3. Prateek Chauhan
4. Ramneet Singh
5. Rupesh Bajwa


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Table of Contents
Accounting Standard (AS) 17 ....................................................................................................................... 2
Segment Reporting........................................................................................................................................ 2
Inflation Accounting12
Human Resource Accounting20
Price Level Accounting..31
Social Accounting..........36

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Accounting Standard (AS) 17

Segment Reporting
Segment reporting is the reporting of the operating segments of a company in the disclosures
accompanying its financial statements. Segment reporting is required for publicly-held entities, and
is not required for privately held ones. Segment reporting is intended to give information to investors
and creditors regarding the financial results and position of the most important operating units of a
company, which they can use as the basis for decisions related to the company.
Consolidated financial statements are prepared and presented to disclose the financial information
on all the different segments of a diversified enterprise. It has been reported that financial statements
user groups find segment information more useful and valuable in assessing an enterprise standing,
its past results and future prospects.

The objective of this Standard is to establish principles for reporting financial information, about the
different types of products and services an enterprise produces and the different geographical areas
in which it operates. Such information helps users of financial statements:
(a) Better understand the performance of the enterprise;
(b) Better assess the risks and returns of the enterprise; and
(c) Make more informed judgments about the enterprise as a whole.
Many enterprises provide groups of products and services or operate in geographical areas that are
subject to differing rates of profitability, opportunities for growth, future prospects, and risks.
Information about different types of products and services of an enterprise and its operations
in different geographical areas - often called segment information - is relevant to assessing the risks
and returns of a diversified or multi-location enterprise but may not be determinable from the
aggregated data. Therefore, reporting of segment information is widely regarded as necessary for
meeting the needs of users of financial statements.

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This statement should be applied in presenting general purpose financial statements.
1. The requirements of this statement are also applicable in the case of consolidated
financial statements.
2. An enterprise should comply with the requirements of this statement fully and not
3. If a single financial report contains both consolidated financial statements and separate
financial statements of the parent, segment information need be presented only on the
basis of the parent, segment information need be presented only on the basis of
consolidated financial statements.
4. The following terms are used in this statement with earnings specified.
a) The nature of the products and services.
b) The nature of the production processes.
c) The type of class of customers for the products and services.
d) The methods used to distribute the products or provide the services.
5. The factors in the previous point for identifying business segments and graphical
segments are not listed in any particular order.
6. A single business segment does not include products and services with significantly
differing risks and returns.
7. Similarly, a single geographical segment does not include operations in economic
environments with significantly differing risks and returns.
8. The predominant sources of risks affects how most enterprises are organized and
managed. Therefore, the organizational structure of an enterprise and its internal financial
reporting system are normally the basis for identifying its segments.
9. Segment revenue, segment expense, segment assets and segment liabilities are
determined before intra-enterprise balances and intra-enterprise transactions are
eliminated as part of the process of preparation of enterprise financial statements, except
to the extent that such intra-enterprise balances and transactions are within a single

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Identifying Reportable Segments

Primary And Secondary Segment Reporting Formats
10. The dominant sources and nature of risks and returns of an enterprise should govern
whether its primary segment reporting format will be business segments or geographical
segments. If the risks and returns of an enterprise are affected predominantly by
differences in the product and services it produces, its primary format for reporting
segment should be business segments with secondary information reported geographical.
Similarly if the risks and returns of the enterprise are affected predominantly by the fact it
operates in different countries or other geographical areas, its primary format for
reporting segment information should be geographical segments, with secondary
information reported or groups of related products and services.
11. For most enterprises, the predominant source of risks and returns determines how the
enterprise is organized and managed. Organizational and management structure of an
enterprise and its internal financial reporting system normally provides the best evidence
of the predominantly risks and returns of an enterprise for the purpose of its segment
reporting. Therefore, except in rare circumstances, an enterprise will report segment
information in its financial statements on the same basis at it reports internally to top
management. Its secondary source of risks and returns becomes its secondary segment
reporting format.
12. A matrix presentation-both business segments and geographical segments as primary
segment reporting format with full segments disclosures on each basis-will often provide
useful information if risks and returns of an enterprise are strongly affected both by
difference in the products and services it produces and by differences in the
geographical areas in which it operates.

Business And Geographical Segments

13. Business and geographical segments of an enterprise for external reporting purposes
should be those organizational units for which information is reported to the board of
directors and to the chief executive officer for the purpose of evaluating the units
performance and for making decisions about the future allocations or resources, except as
14. If the internal organization and management structure of an enterprise and its system of
internal financial reporting to the board of directors and the chief executive officer are
based neither on individual products or services or groups of related products/services
nor on geographical areas, it is required that the directors and management of the
enterprise should choose either business segments or geographical segments as the
primary reporting format of the enterprise based on their assessment of which reflects the

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primary source of the risks and returns of the enterprise, with other as its secondary
reporting format. In that case the directors and management of the enterprise should
determines its business segments and geographical segments for external reporting
purposes based on the factors in the definitions, rather than on the basis of its system of
internal financial reporting to the board of directors and chief executive officer,
consistent with the following:
a) If one or more of the segments reported internally to the directors and
management is a business segment or a geographical segment based on the
factors in the definitions in point 5 but others are not, sub paragraph (b) below
should be applied only to those internal segments that do not meet the definitions
in point 5.
b) For those segments reported internally to the directors and management that do
not satisfy the definitions in point 5, management of the enterprise should look to
the next lower level of the internal segmentation that reports information along
product and service lines or geographical lines, as appropriate under the
definitions under the point 5.
c) If such an internally reported lower-level segment meets the definition of
business segments or geographical segment based on the factors in point 5, the
criteria for identifying reportable segments should be applied to that segment.

Reportable Segments
15. A business segment or geographical segment should be identified as a reportable segment
a) Its revenue from sales to external customers and from transactions with
other segments is 10% or more of the total revenue , external or internal, of
all segments; or
b) Its segment result, whether profit or loss, is 10% or more ofi.

The combined result of all segments in profit, or


The combined result of all segments is loss, whichever is greater in

absolute amount; or


Its segment assets are 10% or more of the total assets of all

16. A business segment or a geographical segment which is not a reportable segment as per
point 16, may be designated as a reportable segment despite its size at the discretion of
the management of the enterprise. If that segment is not designated as reportable
segment, it should be included as an unallocated reconciling item.

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17. If the total external revenue attributable to reportable segments constitutes less than 75
per cent of the total enterprise revenue, additional segments should be identified s
reportable segments, even if they do not meet the 10% thresholds in point 16,until at least
75% of total enterprise revenue is inclined in reportable segments.
18. The 10% thresholds in the statement are not intended to be a guide for determining
materiality for any aspect of financial reporting other than identifying reportable business
and geographical segments.
19. A segment identified as a reportable segment in immediately preceding period because it
satisfied the relevant 10% threshold should continue to be a reportable segment for the
current period notwithstanding that its revenue, result, and assets all no longer meet the
10% threshold.

Segment Accounting Policies

20. Segment information should be prepared in conformity with the accounting policies
adopted for preparing and presenting the financial statements of the financial enterprise
as a whole.
21. Assets and liabilities that relate jointly to two or more segments should be allocated to
segments if, and only if, their related revenues and expenses also are allocated to those

The disclosure requirements in point 24-26 should be applicable to each reportable segments based
on primary reporting format of an Enterprise.
22. An enterprise should disclose the following for each reportable segment:
a) Segment revenue, classified into segment revenue from sales to external
customers and segment revenue from transactions with other segments;
b) Segment result;
c) Total carrying amount of segment assets;
d) Total amount of segment liabilities;
e) Total cost incurred during the period to acquire segment assets that are expected
to be used during more than one period (tangible and intangible fixed assets);
f) Total amount of expense included in the segment result for depreciation and
amortization in respect of segment assets for the period; and

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g) Total amount of significant non-cash expenses, other than depreciation and

amortization in respect of segment assets that we included in segment expense
and, therefore, deducted in measuring segment result.
23. An example of a measure of a segment performance above segment result in the
statement of profit and loss is gross margin on scales.
24. An enterprise that reports the amount of cash flows arising from operating, investing and
financing activities of a segment need not disclose depreciation and amortization expense
and non-cash expenses of such segments pursuant to sub-points f) and g) of point 24.

Segments Defined
1. Business Segment: It is a distinguishable part of an enterprise that is involved in
providing an individual product or a service or a group of related products, or services
and that is subject to risks and returns that are different from those of other business
2. Geographical Segment: It is a distinguishable part of an enterprise that is involved in
providing products or services within a particular economic environment and that is
subject to risks and returns that are different from those of components operating in other
economics environments.
3. Reportable Segment: It is a business or a geographical segment identified based on the
forgoing definition for which segment information is required to be disclosed.

1. Segment Revenue: Revenue reported in statement of profit and loss of an enterprise that is
directly attributable to a segment and the relevant portion of enterprise that can be allocated
on a reasonable basis to a segment ,whether from sales external customers or from
transactions with other segments of the same enterprise. Segment revenue does not include
a) Extraordinary items
b) Interest or dividend income
c) Gain on sales of investment
2. Segment Expense: It is an expense resulting from the operating activities of a segment that
is directly attributed to the segment and the relevant portion of an expense that can be
allocated on the reasonable bases to a segment, including expenses relating to sales to
external customers and expenses related to transactions with other segments of the same
enterprise. Segment expenses does not include.
a) Extraordinary items
b) Interests

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c) Losses on sale of investment

d) Income tax expense
e) General administrative expenses
3. Segment Result: It is segment revenue less segment expenses.
4. Segment Assets: These are those overtaking assets that are used by segments in its operating
activities and that either are directly attributable to the segment or can be allocated to the
segment on a reasonable basis.
5. Segment Liabilities: These are those operating liabilities which result from the operating
activities of a division and either are directly attributable to the division or can be allocated to
the division on a reasonable basis.
6. Segment accounting policies: These are framed for preparing and presenting the financial
statements of the enterprise as well as those accounting policies that relate specifically to
segment reporting.

Need For Segment Reporting

Diversified Companies present a unique type of problems for investment decision making. The
performance of diversified company can be judged from the performance of all several segments.
The success of diversified company depends on success of all segments that is why segment
disclosures in companys annual report are more useful to investors and other user groups.

Segment Disclosures and User Groups

1. Investors. Segment reporting provides investor information about profitability risk and
growth of various segments of enterprises operations. Investors will be in better position to
invest accurately a firms future earnings.
2. Employees: Employees and trade unions are also interested in the performance and prospects
of the enterprise from the standpoint of the wage negotiations and job security
3. Management: Segment reporting is also helpful to the management while taking various
important managerial decisions. Management while taking decision may need information on
segmental performance. Lack of information on segmental performance may lead to
misunderstanding between management and workers.

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4. Government agencies: Government agencies at national and international level in case of

multinational Companies are becoming more concerned about the activities of large
Companies and the balance of payments
5. Consumers: The interest of consumers and the general public may also be promoted by
segment disclosures in the sense that social responsibility in terms of the removal of price
discrimination could be encouraged by segment disclosures regarding profits.

Problems in Segment Reporting

1. Base of segmentation. Basic problem which arises in segment reporting is division of a
diversified company for segment reporting purposes. Every base of segmentation may create
segments differently. Identification of segmentation is also problematic. Segmentation can be
done on the basis of organizational division, industry, market product etc.
2. Allocation problem: In business organizations where more than one product are to be dealt
with, there are likely to be costs which are common to two or more products. Joint costs can
be general administrative expenses and legal expenses. Allocation of these joint costs
become a complex problem while doing segment reporting. However there can be common
costs which can be apportioned on some reasonable basis for e.g. Electricity charges which
can be apportioned on the basis of light points in a particular segment on the other hand there
can be some common costs like salary of a director which can only be apportioned on some
arbitrary basis.
3. Disclosure costs; Segment reporting also involves cost of disclosures. The provision of
additional information along with routine information increases firms operating cost in
terms of cost of collection processing and costs of management control systems.
4. Managerial conservatism: In the absence of some regulatory provisions to disclose segment
reports; voluntary disclosures are likely to be perceived by manager to be beneficial only in
certain situation
5. Inter-segment transactions: In diversified business entity which may have some intersegment transactions. There are no. of methods for intersegment transfers i.e. cost, cost-plus,
market price and negotiated prices
All these methods result in different operating results for operating segment.

Methods of Present Segment Information

There are three ways to present a segment information which are given as under:
1) Within the package of financial statements with explanatory footnotes to the financial
2) Only in the footnotes.

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3) A separate schedule can be prepared as an integral part of the financial statements.

Segment Reporting in India

Segment information in the annual reports such as quantity and value of sales, quantity and value of
units purchased, stocks in quantity and value and purchases in quantity and value are disclosed by
the Indian Companies as per the provisions of India company law. Various researchers have shown
that many diversified Indian Companies develop segment information for management planning and
control. It has also seen that no uniformity is there in presentation of segment information by Indian
It has been observed that while going through the annual reports of the many diversified Indian
Companies, they develop segment information and segment analysis for their management planning
and decision making. It has been found that some of the diversified Companies are disclosing
segment information in Directors report on the performance of various divisions.

Segment Disclosures by Indian Companies

Segment Disclosures by Raymond Ltd.
Operating Divisions (Raymond ltd.) Performance of Divisions.
Textile Divisions: The textile division withstood severe all round competition through product
innovation and vigorous sales promotion aided by its extensive distribution network. However the
turnover of the division was limited due to overall fall in demand in the face of keen global
competition exports fared well.
Steel Division: Output was up 45% and there was commensurate increase in sales overall growth in
domestic demand was modest in the face of increased capacities coming on stream, leading to lower
price realization exports were substantially higher.
Cement Division: Production was up by 17% compared to previous year. Margin were under
pressure during greater part of the year in major markets due to ample supplies.
J.K. Toles and Tools Division: There was general change in the demand pattern for tools from the
engineering industry in India and overseas. This led to reduction in the volume of production and
sales. However higher price realization combined with rigid control on costs resulted in improved
Aviation Division: The development of the fleet was satisfactory and working resulting in a modest

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Sponge Iron
Installed Capacity (TPA)



% Change



Production (tonnes)


Sales volume (Tonnes)


Gross Divisional Turnover






(Rs. crores)
Net Divisional turnover







(Rs. Crores)
Average Realization
Operating margins (%)





% Change

Production (Lac Meters)



(-) 9.5

Sales Volume (Lac Meters)



(-) 16.9

Gross Turnover (Rs. Crores)



(-) 21.8

Average Realisation (Rs./Mtr)



(-) 6.0

Production (Tonnes)
Sales Volume (Tonnes)


Gross Turnover (Rs. Crores)

Average Realisation (Rs./Mtr)



Gross Divisional Turnover




(-) 6.2


(-) 10.6

(Rs. crores)
Net Divisional turnover



(-) 10.6

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(Rs. Crores)
Separation costs (%)



(-) 10.6

Inflation: Definitions
Different economists have defined inflation in different words

a) A state in which the value of money is falling, i.e., prices are rising.
a. Prof. Crowther
b) "Inflation is that state of disequilibrium in which an expansion of purchasing power tends
to cause or is the effect of an increase of the price level."
a. Prof. Paul Einzig
c) Decrease in purchasing power of money due to an increase in the general price level.
d) A process of steadily rising prices resulting in diminishing purchasing power of a given
nominal sum of money
The Penguin Dictionary of Economics

e) Rise in prices brought about by the expansion of the supply of bank money, credit, etc.
Oxford Advanced Learners Dictionary of Current English

The basic factors behind the inflation are either the rising demand or the shortening of supply
due to any reason.

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Inflation Accounting
The impact of inflation comes in the form of rising prices of output and assets. As the financial
accounts are 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 misleading picture of Business etc.
So, the financial statements prepared under historical accounting are generally proved to
be statements of historical facts and do not reflect the current worth of business. This deprives
the users of accounts like management, shareholders, and creditors etc. to have a right picture of
business to make appropriate decisions.
Hence, this leads towards the need for Inflation Accounting. Inflation accounting is a
term describing a range of accounting systems designed to correct problems arising from
historical cost accounting in the presence of inflation.

Significance of Inflation Accounting

The significance of inflation accounting emerges from the inherent limitations of the historical
cost accounting system. Following are the limitations of historical accounting:

a) Historical accounts do not consider the unrealized holding gains arising from the rise in
the monetary value of the assets due to inflation.
b) 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.

c) 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.
d) Future earnings are not easily projected from historical earnings.

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Need for Inflation Accounting

Inflation, especially when it is prolonged and high, reduces considerably the meaningfulness and
use of the corporate accounts because the various amounts in current rupee values may not
signify proportionate real amounts, as the real worth of the rupee varies in different years.
Moreover, arithmetical operations involving different amounts in rupees having different real
worth become quite misleading. To make the accounts more meaningful, all items should be
expressed in values relating to a common year. This is attempted through inflation accounting,
the following reasons usually being advanced in its favor:

a) It helps to correct the usually distorted picture of the financial operations and condition of
a company presented by the conventional system of accounts;
b) It facilitates inter-company comparisons since inflation hits different firms in different

c) It also facilitates inter-period comparisons of the performance of a firm;

d) Correct measurement of income is possible only with inflation accounting;
e) When some nominal value in the accounts forms the basis of government action, e.g.,
taxation based on profits, determination of controlled price on the basis of nominal profits
and so on, inflation may cause unfair decisions by the government, unless the relevant
nominal value is adjusted for inflation.

History of Inflation Accounting

In the last few years, inflation accounting has been adopted as a supplementary financial
statement in the United States and the United Kingdom. This comes after more than 50 years of
debate about methods of adjusting financial accounts for inflation.
Accountants in the United Kingdom and the United States have discussed the effect of inflation
on financial statements since the early 1900s, beginning with index number theory and
purchasing power. Irving Fisher's 1911 book The Purchasing Power of Money was used as a
source by Henry W. Sweeney in his 1936 book Stabilized Accounting, which was about
Constant Purchasing Power Accounting. This model by Sweeney was used by The American
Institute of Certified Public Accountants for their 1963 research study (ARS6) Reporting the
Financial Effects of Price-Level Changes, and later used by the Accounting Principles Board
(USA), the Financial Standards Board (USA), and the Accounting Standards Steering Committee

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(UK). Sweeney advocated using a price index that covers everything in the gross national
product. In March 1979, the Financial Accounting Standards Board (FASB) wrote Constant
Dollar Accounting, which advocated using the Consumer Price Index for All Urban Consumers
(CPI-U) to adjust accounts because it is calculated every month. During the Great Depression,
some corporations restated their financial statements to reflect inflation. At times during the past
50 years standard-setting organizations have encouraged companies to supplement cost-based
financial statements with price-level adjusted statements. During a period of high inflation in the
1970s, the FASB was reviewing a draft proposal for price-level adjusted statements when the
Securities and Exchange Commission (SEC) issued ASR 190, which required approximately
1,000 of the largest US corporations to provide supplemental information based on replacement
cost. The FASB withdrew the draft proposal.

Still to cater to the needs of an Inflation Accounting, the IASB came out with an Accounting
Standard known as IAS 29.

In India, some companies have been giving inflation-adjusted accounts in India on their own.
Examples from the public sector are Bharat Heavy Electricals Limited (BHEL) and Hindustan
Machine Tools Limited (HMT). The inflation-ad- adjusted accounts, of course, are supplied in
addition to the conventional accounts.

The present position is that though there are very few countries which have officially adopted
inflation accounting, either as a superior substitute for traditional historical cost accounting or as
supplementary to it, there are many other countries which are at least engaged in discussing the
issue seriously and in detail. In the near future a number of countries may actually decide to
adopt inflation accounting officially, if inflationary conditions should continue.

Methods of Inflation Accounting

So far, we have used the term 'inflation accounting' as if it was unambiguous. As a matter of fact,
it is not. One of the reasons why many countries in principle agree that inflation accounting is
desirable but are still unable to implement it, is that the exact method of adjusting the accounts
for inflation is fiercely debated.

As mentioned earlier, historical cost accounts become unsatisfactory during inflation because
they contain values based on both current as well as past values of the unit of money and
calculations are done without paying any attention to this fact. Thus, inflation accounting

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essentially involves identifying any value in the accounts, which is expressed in terms of past
rupees, and updating them in line with the rest. This is conceptually simple, as all one has to do
is to convert the values in past rupees to values in current rupees using a suitable index.
However, it is the choice of a "suitable" index that gives rise to a major controversy.

Some examples of indexes are:

General indexes
Price Index of Gross Domestic Product Cost-of-living Index
Consumer Price Index
Wholesale Price Index
Production Price Index

Special indexes
Industry indexes
Commodity group indexes Commodity indexes

To measure the impact of inflation on financial statements, following are the techniques used:

Current Purchasing Power (CPP) Method

Under this method of adjusting accounts to price changes, all items in the financial statements
are restated in terms of a constant unit of money i.e. in terms of general purchasing power. For
measuring changes in the price level and incorporating the changes in the financial statements we
use General Price Index, which may be considered to be a barometer meant for the purpose. The
index is used to convert the values of various items in the Balance Sheet and Profit and Loss
Account. This method takes into account the changes in the general purchasing power of money
and ignores the actual rise or fall in the price of the given item. CPP method involves the
refurnishing of historical figures at current purchasing power. For this purpose, historical figures
are converted into value of purchasing power at the end of the period. Two index numbers are
required: one showing the general price level at the end of the period and the other reflecting the
same at the date of the transaction.
Profit under this method is an increase in the value of the net asset over a period, all valuations
being made in terms of current purchasing power.

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Following are the advantages of CPP method.

a) CPP method adopts the same unit of measurement by taking into account the price
b) Under CPP method, historical accounts continue to be maintained. CPP statements are
prepared on supplementary basis.
c) CPP method facilitates the calculation of gain or loss in purchasing power due to the
holding of monetary items.
d) CPP method uses common purchasing power as measuring unit. So, the comparative
study is easy.
e) CPP method provides reliable financial information for taking management decision to
formulate plans and policies.
f) CPP method ensures keeping intact the purchasing power of capital contributed by
shareholders. So, this method is of great importance from the point of view of the
Disadvantages Of CPP Method:

a) CPP method considers only the changes in general purchasing power. It does not consider
the changes in the value of individual items.
b) CPP method is based on statistical index number, which cannot be used in an individual
c) It is very difficult to choose a suitable price index.
d) CPP method fails to remove all the defects of historical cost accounting system.
e) The use of general price index for CPP method is questioned. While general price index
deals with consumer goods, business is interested in the price movement of producer

Current Cost Accounting (CCA) Method

Current costing method is an alternative to current purchasing power (CPP) method. CCA
approach was introduced in 1975 to overcome the difficulties of CPP method. Actually the CPP
method applies the retail price index for finding out the conversion factors to restate the income
statement and balance sheet. So the CPP approach was criticized by the business world.
Current costing accounting (CCA) approach recognizes the changes in the price of
individual due to the change in general price level. This is the method which includes the process
of preparing and interpreting financial statement in such a way that relevant change in the price
is considered significantly. In CCA method, the assets are valued in current cost basis. It does
not consider the retail price index. This method considers the replacement value of the assets for

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its real accounting records. The value of assets at which it is to be replaced in future is called the
replacement value. Sometimes it is known as replacement cost accounting approach also. Under
this method, each financial statement is to be restated in terms of the current value of such items.

Features Of Current Cost Accounting (CCA)

a) The fixed assets are recorded at replacement cost value in the balance sheet.
b) Inventories are shown at market value rather than market or cost price whichever less as
in the historical system is.
c) Revaluation surplus are transferred to current cost accounting reserve but not distributed
as dividend to shareholders.
d) Depreciation of fixed assets is to be calculated at replacement value.
e) Two types of profit i.e. profit from operation and profit from revaluation are calculated.
f) Liabilities are recorded in their original value because there is no any change in monetary
g) Used for maintaining the production level of the company
h) Main focus on replacement of production capacity
i) Money is retained as the unit of measurement
j) Different special indexes are applied to different items
k) Work intensive

Objectives Of Current Cost Accounting (CCA) Approach

a) To provide correct and reliable financial information based on the current replacement
b) To calculate the profit without changing the historical profit.
c) To protect the business in the event of normal inflationary situation.
d) To keep level of capital in very balance position by making valuation of assets in proper
value based on replacement value.
e) To provide realistic information to the management, investors, creditors, government and
to other interested parties.
f) To prepare the financial statement at the end of the year on the basis of current value of
such items.

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Suppose a bond was bought by a company in 1975 for Rs 100. In 1982, its market value is, say,
Rs 130. According to CCA, Rs 30 should be shown as holding gain, and the assets should reflect
Rs 130 in place of Rs 100. But, suppose the in flation in the meantime has been 20 per cent.
What Baxter (and others like him) means is that holding gain should be recorded as Rs (13O12O) = Rs 10. The rest of the gain, i.e., Rs 20 should be recorded under a separate head.

Among the countries practicing inflation accounting, Latin American countries have all opted for
CPP, whereas Netherlands uses CCA.

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 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.
Despite a right method of presenting financial statements, Inflation Accounting is still not
widely prevalent due to certain limitations. But with more research and development of
accounting software in this field, there is no doubt that Inflation adjusted accounting is the future
of Financial Accounting.

Limitations of Inflation Accounting

Though Inflation Accounting is more practical approach for the true reflection of financial status
of the company, there are certain limitations, which are not allowing this to be a popular system
of accounting.
Following are the limitations:

Change in the price level is a continuous process.

This system makes the calculations a tedious task because of too many conversions and

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This system has not been given preference by tax authorities.

Accounting for price level changes is not free from prejudice.
During the periods of deflation only lower amount of depreciation will be changed.
Computation of profit under this system may not be a realistic profit.


Human Resource Accounting (HRA):
There were times, when human beings (or employees of the company) were regarded as a
liability to the company, as the company needed to pay them regularly and invest in their training
programs, so that they learn new and better ways to do work continuously. But, then, there came
a change in this view point. Human resource is now considered to be the asset of the company, as
its the hard work and intellect of the human resource, that a company earns profits. If a
company considers its Human Resource as a liability, it is bound to fall in near future.
Recognising and treating the humans as an asset is, what is required. The concept of considering
the human beings as an asset is an old one, as we see today. The importance which Emperor
Akbar gave to the nine jewels (courtiers) is a strong evidence for the same. The history of our
freedom movement will not be complete without mentioning the names of distinguished freedom
fighters such as Shri Motilal Nehru, Mahatma Gandhi, Sardar Vallabh Bhai Patel and several
others but no effort was made to assign any monetary value to such individuals in the Balance
Sheet of the Nation.
Sir William Petty was the pioneer in this direction. The first attempt to value the human
beings in monetary terms was made by him in 1691. Petty considered that labour was the father
of wealth and it must be included in any estimate of national wealth without fail. Further efforts
were made by William Far in 1853, Earnest Eagle in 1883. The real work started only when
behavioral scientists vehemently criticized the conventional accounting practice of not valuing
the human resources along with other resources. As a result, accountants and economists realized
the fact that an appropriate methodology has to be developed for finding the cost and value of the
people to the organization. For a long period of time, a number of experts have worked on it and
produced certain models for evaluating human resources. The important among them are Shultz,
Flamholtz, Lav and Schwartz, and Kennath Sinclare.
These days, many companies recognise their human resource as an asset, but there are no
ways to represent them on the financial statements as an asset. So, theres a lot to research and do
in this regard. From here, stems the very important Human Resource Accounting, which
means, the process of identifying and reporting investments made in the human resources of an
organization that are presently unaccounted for in the conventional accounting practices. It is an
extension of standard accounting principles. Measuring the value of human resources can assist

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organizations in accurately documenting their assets. As someone has very rightly said about the
value of Human Resource for the company:
One asset is omitted and its worth I want to know,
That asset is the value of men who run the show
These lines also reflect that the value of Human Resources is not measured and reflected in the
accounts of the organizations, although the success of the organization largely depends on the
intellect, hard work, ability, efficiency and power of these people. So, it becomes important that
their value be represented like other assets and such accounting generates and presents valuable
and significant information relating to human resources. The traditional accounting systems lack
in representing these values. Accounting of human resources in the financial statements is best
explained by this example:

A firm has started its business with a capital of Rs.10,00,000. It has purchased fixed assets worth
Rs.5,00,000 in cash. It has kept Rs.2,60,000 as working capital and incurred Rs.2,40,000 on
recruiting, training and developing the engineers and few workers. The value of engineers and
workers is assessed at Rs.8,00,000. The above items will be shown in the balance sheet as

Balance Sheet Including Human Resources



Fixed Assets


Human Assets:
Human Assets



1. Individuals value


2. Value of firms


Current Assets


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Definitions of HRA:
1. HRA is an attempt to identify and report investments made in human resource of an
organization. Basically, it is an information system that tells the management what
changes over time are occurring to human resources of the business. By R. L. Woodruff
2. The American Association of Accountants (AAA) defines HRA as follows: HRA is a
process of identifying and measuring data about human resources and communicating
this information to interested parties.
3. Flamhoitz defines HRA as accounting for people as an organizational resource. It
involves measuring the costs incurred by organizations to recruit, select, hire, train, and
develop human assets. It also involves measuring the economic value of people to the
4. According to Stephen Knauf, HRA is the measurement and quantification of human
organizational inputs such as recruiting, training, experience and commitment.
5. A term used to describe a variety of proposals that seek to report and emphasize the
importance of human resources knowledgeable, trained and loyal employees in a
company earning process and total assets By Davidson and Roman L Wheel.

Behavioral scientists concerned with management of

organizations pointed out the following reasons for HRA:
1. Under conventional accounting, there is no information about the human resources of an
organization, and without them, the financial and physical resources cannot be
operationally effective.
2. The expenses related to the human organization are charged to current revenue instead of
being treated as investments, to be amortized over a period of time, with the result that
magnitude of net income is significantly distorted. This makes the assessment of firm and
inter-firm comparison difficult.
3. The productivity and profitability of a firm largely depends on the contribution of human
assets. Two firms having identical physical assets and operating in the same market may
have different returns due to differences in human assets. If the value of human assets is
ignored, the total valuation of the firm becomes difficult. It also becomes difficult to

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compare both the firms, because with the only difference in the human resource assets,
the firms are definitely going to operate differently, and hence, earn differently.
4. If the value of human resources is not duly reported in profit and loss account and balance
sheet, the important act of management on human assets cannot be perceived.
5. Expenses on recruitment, training, etc. are treated as expenses and written off against
revenue under conventional accounting. All expenses on human resources are to be
treated as investments, since the benefits are accrued over a period of time.

Objectives of HRA:
Rensis Likert described the following objectives of HRA:
1. Providing cost value information about acquiring, developing, allocating and maintaining
human resources: The information about acquiring, developing, allocating and
maintaining the human resources is not mentioned in any statements. Since we consider
them as assets, their complete information must be present in proper records of the
2. Enabling management to monitor the use of human resources: The management can make
better decisions about an asset, it has, by knowing the complete information about it. Till
they dont have any proper, or structured information about their human resources, they
wont be able to monitor them; they wont be able to know, how to better allocate them,
to make effective use of these resources.
3. Finding depreciation or appreciation among human resources: An asset is depreciated
over the time. Human resource is such an asset, which may depreciate or appreciate, with
time. To know this, their proper management is necessary. The useful life of human
resource asset is quite large.

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4. Assisting in developing effective management practices: Knowing the complete

knowledge of all the assets of the company, the effective management takes place. And
effective management is necessary to ensure right decisions.
5. Increasing managerial awareness of the value of human resource: Creating awareness
about the value of human resource is very important. Everyone in the organization must
know the value of the assets of its organization.
6. For better planning of the human resource assets: For better planning and better decisionmaking, the human resource accounting is must. Without having any information about
them, any decision made for them wont be a good decision.
7. For better decisions about people, based on improved information system: Only when the
management has structured and proper information about the employees, it can make
proper decisions related to them.
8. Assisting in effective utilization of manpower: For allocating manpower to specific work,
knowing their strengths and weaknesses is the key to start with. Without having the
complete knowledge about them, good decisions cant be taken.

Methods of Valuation of Human Resources:

There are certain methods advocated for valuation of human resources. These methods
include historical method, replacement cost method, present value method, opportunity
cost method and standard cost method. All methods have certain benefits as well as
Approaches to human resource accounting (HRA) were first developed in 1691. The next
approach was developed from 1691-1960, and the third phase was post-1960. There are
two approaches to HRA. Under the cost approach, also called the "human resource cost
accounting method" or model, there is an acquisition cost model and a replacement cost

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model. Under the value approach, there is a present value of future earnings method, a
discounted future wage model, and a competitive bidding model.

Cost Approach
This approach is also called an acquisition cost model. This approach was developed by
Brummet, Flamholtz, and Pyle but the first attempt towards employee valuation was
made by a footwear manufacturing company, R. G. Barry Corporation of Columbus,
Ohio with the help of Michigan University in 1967. This method measures the
organizations investment in employees using the five parameters: recruiting, acquisition,
formal training and familiarization, informal training and informal familiarization, and
experience and development. This model suggests that instead of charging the costs to
profit and loss statement (p&l) accounting, it should be capitalized in the balance sheet.
The process of giving a status of asset to the expenditure item is called capitalization. In
human resource management, it is necessary to amortize the capitalized amount over a
period of time. So, here one will take the age of the employee at the time of recruitment
and at the time of retirement. Out of these, a few employees may leave the organization
before attaining the superannuation. This is similar to a physical asset. e.g.: If a company
spends one lakh on an employee recruited at 25 years, and he leaves the organization at
the age 50, he serves the company for 25 years (his actual retirement age was 55 years).
The company has recovered rupees 83333.33 so the unamortized amount of rupees
16666.66 should be charged to p&l account.
This method is the only method of Human Resource Accounting that is based on sound
accounting principals and policies.

The valuation method is based on the false assumption that the dollar is stable.
2. Since the assets cannot be sold there are no independent checks of valuation.
3. This method measures only the costs to the organization, but ignores completely any
measure of the value of the employee to the organization (Cascio 3).
4. It is too tedious to gather the related information regarding the human values.


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Replacement cost approach

This approach measures the cost of replacing an employee. According to Likert (1985)
replacement cost includes recruitment, selection, compensation, and training cost
(including the income foregone during the training period). The data derived from this
method could be useful in deciding whether to dismiss or replace the staff.

1. Substitution of replacement cost method for historical cost method does little more than
update the valuation, at the expense of importing considerably more subjectivity into the
measure. This method may also lead to an upwardly biased estimate because an
inefficient firm may incur a greater cost to replace an employee (Cascio 3-4).

Present value of future earnings

Lev and Schwartz (1971) proposed an economic valuation of employees based on the
present value of future earnings, adjusted for the probability of employees
death/separation/retirement. This method helps in determining what an employees future
contribution is worth today.
According to this model, the value of human capital embodied in a person who is y years
old, is the present value of his/her future earnings from employment and can be
calculated by using the following formula:

where E (Vy) = expected value of a y year old persons human capital, T = the persons
retirement age, Py (t) = probability of the person leaving the organization, I(t) = expected
earnings of the person in period I, and R = discount rate.

The measure is an objective one because it uses widely based statistics such as census
income return and mortality tables.
b) The measure assigns more weight to averages than to the value of any specific group or
individual (Cascio 4-5).

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Value to the organization

Hekimian and Jones (1967) proposed that when an organization had several divisions
seeking the same employee, the employee should be allocated to the highest bidder and the
bid price incorporated into that divisions investment base. For example, a value of a
professional athletes service is often determined by how much money a particular team,
acting in an open competitive market, is willing to pay him or her.

1. The soundness of the valuation depends wholly on the information, judgment, and
impartiality of the bidder (Cascio 5).

Expense model
According to Mirvis and Mac (1976), this model focuses on attaching dollar estimates to the
behavioural outcomes produced by working in an organization. Criteria such as
absenteeism, turnover, and job performance are measured using traditional organizational
tools, and then costs are estimated for each criterion. For example, in costing labor turnover,
dollar figures are attached to separation costs, replacement costs, and training costs.

Model on human resource accounting

This model prescribes the human resource accounting approach for two categories of
Employees, who are at strategic, key decision-making positions such as MD, CEO (Top
2. Employees, who execute the decision taken by Top Executives


Model states the value of human resources as sum of below-mentioned three parts:
1. Real capital cost part
2. Present value of future salary/wages payments
3. Performance evaluation part

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1. Calculation process is lengthy and cumbersome.
2. Lev and Schwartz valuation principles have been used at one point of time, so this model
contains a weakness from the Lev and Schwartz model.
Ravindra Tiwari has prescribed another approach to value human resources at the time of
annual appraisal exercise, which suggests valuation of human resources on different
appraisal parameters.

Benefits of HRA:
There are certain benefits for accounting of human resources, which are explained as
1. The system of HRA discloses the value of human resources, which helps in proper
interpretation of return on capital employed: With the conventional accounting system,
the value of human resources is not known. Hence, the proper return on capital is not
achievable. But with proper accounting, the right value of the employees can be known.
2. Managerial decision-making can be improved with the help of HRA: With proper and
structured accounting of the human resources, the management can make proper
decisions about them and the company, as it would know where it is best to allocate the
manpower, which benefits both the company and the manpower.
3. The implementation of human resource accounting clearly identifies human resources as
valuable assets, which helps in preventing misuse of human resources by the superiors as
well as the management: Accounting of the human resources prevents their misuse as
they hold value, which is recorded in the accounts of the company. Their worth is known
by everyone, and so, everyone is respected.

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4. It helps in efficient utilization of human resources and understanding the evil effects of
labour unrest on the quality of human resources: By knowing their worth, i.e. their
strengths and weaknesses, the human resource can be efficiently utilized. They can be
assigned such work which they can do in a better way than others. This will lead to their
growth as well as companys growth.
5. This system can increase productivity because the human talent, devotion, and skills are
considered valuable assets, which can boost the morale of the employees: Proper
recognition of the values of the employees boost their morale because they can be
effective workers and are recognized for their work.
6. It can assist the management for implementing best methods of wages and salary
administration: By right accounting of the values of the human resource, it becomes
easier to devise ways for better remuneration and salaries, based on ones worth.

Limitations of HRA:
HRA is yet to gain momentum in India due to certain difficulties:
1. The valuation methods have certain disadvantages as well as advantages; therefore, there
is always a bone of contention among the firms that which method is an ideal one: The
companies are in dilemma as to choose which method, which method would be better for
them and the employees. As every method has its advantages and disadvantages, they are
considering all the positives and negatives related to all the methods. Since, to
incorporate the accounting of the workforce, the company needs to pay a lot of attention
in this regard and change a lot of things. So, there are time and money constraints.
Moreover, they dont know if the accounting method would be more beneficial or not.
2. There are no standardized procedures developed so far. So, firms are providing only as
additional information: Its been very difficult to present the human resource information

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in the form of accounting, so some firms just give additional information, related to them
and not the exact accounting information. As such, there are no standard ways of
accounting in this regard, which is the reason certain companies are not going for it.
3. Under conventional accounting, certain standards are accepted commonly, which is not
possible under this method: Standardization is important in the accounting. If we want to
add the human resource accounting in the conventional accounting, it has to follow the
same standards, which is not quite possible.
4. All the methods of accounting for human assets are based on certain assumptions, which
can go wrong at any time: For example, it is assumed that all workers continue to work
with the same organization till retirement, which is far from possible. This needs to be
worked upon by having discussions. Addressing such assumptions and how to deal with
them in reality needs to be thought upon to have HRA efficiently working.
5. It is believed that human resources do not suffer depreciation, and in fact they always
appreciate, which can also prove otherwise in certain firms: Such points must be covered
while devising proper accounting method for human resource. People with high work
values, have appreciating tendencies, while with low work values, have depreciating
tendencies. So, their accounting must be flexible enough for both kinds of people.
6. The lifespan of human resources cannot be estimated. So, the valuation seems to be
unrealistic: This is a big problem, as we cant estimate the life of any human resource, so
their accounting becomes difficult, because we need to know the expected life of the
assets before their accounting.

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Prices do not remain constant over a period of time. They tend to change due to various
economic, social or political factors. Changes in the price levels cause two types of economic
conditions, Inflation and deflation. Inflation may be defined as a period of general increase in the
prices of factors of production whereas deflation means fall in the general price level. These
changes in the price levels lead to inaccurate presentation of financial statements which
otherwise are prepared to present a true and fair view of the company's financial health. This is
so because the financial statements are prepared on historical costs on the assumption that the
unit of account, i.e. rupees in case of India, has static value. But the assumption is not valid
because the value of the unit of account, i.e.,, the purchasing power of the rupee has been
changing ever since the beginning of this century. After the First World, War, during 1918-23,
there was a period of higher inflation in Germany. But it was only after the Second World War
that the prices started rising continuously and it made a non-sense of presenting the financial
statements on historical cost basis.

Types of Prices
1. General Price Changes
General price-level changes reflect the value of the monetary unit over time. The total supply of
money and the total supply of goods and services in the economy fluctuate, but not usually at the
same rate. This disparity leads to inflation or deflation, changing the value of the monetary unit.
Changes in commodity prices or a discrepancy between total supply and demand of goods and
services can also lead to general price changes.

2. Specific Price Changes

Specific price change is the change in the price of a particular commodity, or the change in its
exchange value. Specific price changes are caused by some factors specific to the commodity

3. Relative Price Changes

Normally speaking, prices of different goods and services do not move in sync with each other,
much less in the same direction. A relative price change is defined as the change in the price of a
specific commodity as compared to an index such as the Consumer Price Index. For example, if
the Consumer Price Index increased by 10% over last year and car insurance doubled in the
Maritimes, we can say that the relative price increase in car insurance is approximately 82%.

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Methods or Technique for Price level Accounting


Current Purchasing Power Technique (CPP)

Replacement Cost Accounting Technique (RCA)
Current Value Accounting Technique (CVA)
Current Cost Accounting (CCA)

1. Current Purchasing Power Technique

Current purchasing power technique of accounting requires the company to keep their
records and present the financial statements on conventional and historical cost basis bit
it further requires presentation of supplementary statements in terms of current
purchasing power of currency at the end of the accounting period. In this method the
various items of the financial statements, i.e, balance sheet and profit and loss account are
adjusted with the help of recognized general price index. The consumer price index or the
whole sale price index prepared by the Reserve Bank of India can be taken for conversion
of historical costs.

2. Replacement Cost Accounting Technique

Replacement cost accounting technique is an important over current purchasing
power technique. One of the major weaknesses of the current purchasing power
technique is that it does take into account the individual price index related to the
particular assets of the company. An accounting system that values assets and
liabilities according to their replacement cost rather than their historical cost.
Replacement cost accounting incorporates the effects of changing prices and the
resultant changing values of the items that are listed in a firm's financial statements.

3. Current Value Accounting Technique

Current value accounting is the concept that assets and liabilities be measured at the
current value at which they could be sold or settled as of the current date. This varies
from the historically-used method of only recording assets and liabilities at the amounts
at which they were originally acquired or incurred (which represents a more conservative
viewpoint). The reason for using current value is that it provides information to the
readers of a company's financial statements that most closely relates to current business
conditions. This is a real concern when reviewing the financial statements of older
companies that may have assets and liabilities on their books from many years in the past,
but is less of an issue for newer companies where this is not the case. It is a particular
problem when a business has older inventory or fixed assets.

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4. Current Cost Accounting

The financial accounting term current cost accounting refers to an approach that values assets at
their fair market value rather than historical cost. In practice, current costs can be determined in
a number of ways, including applying a specific price index to the book value of the asset.

Advantages Of Price Level Accounting

In the past few years of high inflation, companies have reported very high profits on the one
hand but on the other they have faced real financial difficulties. This is so because in reality
dividends and taxes have been paid out of capital due to overstated figures of profits arrived at
by adopting historical cost concept. Thus a change from historical cost concept to price level or
inflation accounting has been recommended. The major advantages of Inflation Accounting are
as follows:





It enables company to present more realistic view of profitability because

current revenues are
matched with current costs.
It enables a company to maintain its real capital by avoiding payment of
dividend and taxes out of its capital due to inflated profits in its historical
Depreciation charged on current value of its assets in inflation accounting
further enables a firm to show accounting profits more nearer to economic
profits and replacement of these assets when reqired.
Balance Sheet reveals a more realistic and true and fair view of the financial
position of a concern because the assets are shown at current values and not
on distorted values as in historical accounting.
When financial statements are presented, adjusted to the price level changes, it
makes possible to compare the profitability of two concern set up at different

Disadvantages Of Price Level Accounting

Some people are of the opinion that inflation accounting may create more problems than solving
them because of the following inherent disadvantages of the price level accounting:
1. Adjusting accounts to price level changes is a never-ending process. It involves constant
changes and alterations in the financial statements.
2. Price level accounting involves many calculations and makes financial statements so
complicated and confusing that it becomes very difficult for man of ordinary prudence to
understand, analyze and interpret them.
3. The concept of price level accounting appears to have more theoretical importance than
practical because adjusting the accounts to the changes in the price levels may lead to window
dressing of accounts due to the element of subjectivity in it. People may adjust the accounts

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according to the values most suited to them, thereby, making the financial statements more
4. Depreciation charged on current values of fixed assets is not acceptable under the Income Tax
Act. 1961 and hence adjusting it to price level changes does not Serve any practical purpose.
5. During deflation, when the prices are falling, adjustments of accounts to price level changes
will mean charging lesser depreciation and overstatement of profits.

Distortion in Reported Profile

The Accounted would define Business profit as the difference between the business Revenue and
its related cost. However during the inflationary this business profit reveals errors in actual
profit. This distortion is due to following reasons:

Cost of goods sold

Miscellaneous expenses
Purchasing power and gains and losses

Suggested Techniques and Methods

LIFO Method of inventory valuation
Inventory is valued in such a way that helps match current revenue with current cost of goods.
Income statement shows a collection of the most recent purchased cost. However this method is
useful in those cases where raw material purchased at frequent intervals and where all goods
produced are sold during the same period. In many countries this method of inventory valuation
is not allowed as understates the profit and thereby reduces tax liability.

Current value accounting

This method is applied in the case of price rise of the specific commodities. Since a firm is
continually replacing its assets , it is the replacement cost and not the historical cost that should
be taken into account while preparing the income statement or the balance sheet. If the value of
the inventory rises by 40% the equity needs upward revaluation by the same percentage so that
the risen cost of inventory is met increased liabilities

India and Price Level Accounting

The problem of price level changes and its impact on the financial statements has assumed
considerable importance in the last few decades. As a matter of the fact the very need for method
of accounting to take cognizance of changing prices has been often questioned. The choice of an
appropriate method has been widely debated. Keeping in view these facts, the Institute of
Chartered Accountants of India issued in September 1982 a Guidance Note on Accounting for

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Changing Prices in the hope that it will stimulate thought and encourage a wider use of the
method of accounting for price level changes.
The most relevant aspects of the Guidance Note are as follows:
The adoption of a system of accounting for changing prices would require a
considerable amount of time, money and specialized skills. Also the various
techniques are still in the process of development. However, in view of the
importance of the subject, it is recommended that enterprises, particularly the large
enterprises, may develop the necessary systems to prepare and present this
Out of the various methods of accounting for changing prices, the Current Cost
Accounting Method seems to be most appropriate in the context of the economic
environment in India. The periodic revaluations of fixed assets and the adoption of
LIFO formula for inventory valuation are partial responses to the problem of
accounting for changing prices.
Adequate data base has presently not been developed in India for accounting for
changing prices. Every enterprise, therefore, may have to select the price indices
depending on its own circumstances.
Considering the importance of the information regarding the impact of changing
prices it is recommended that while the primary financial statements should continue
to be prepared and presented on the historical cost basis, supplementary information
reflecting the effects of changing prices may also be provided in the financial
statements on a voluntary basis, at least by large enterprises.
Apart from its utility in external reporting, accounting for changing prices may also
provide useful information for internal management purposes. Accounting
information system is designed primarily to provide relevant information to various
levels of management with a view to assist in managerial decision making, control
and evaluation.
In countries like the United Kingdom, there have been some reforms in the tax
structure in the wake of introduction of accounting for changing prices.

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Everything on earth from polar ice caps to the tops of the equatorial mountains and from depth of
the sea to the limits of the stratosphere is useful or of value to the human beings and consequently a
natural resource which are classified into two categories renewable and non-renewable, Industrial
units are considered main consumers of these natural resources. The users of financial statements i.e.
investors, creditors money lenders government research scholars are a part of this society in which
the firm has to operate. Traditional financial accounting mainly focuses on the measurement and
reporting of business transactions between two or more business enterprises .Statements are prepared
under conventional accounting are basically prepared for the use of the investors and management .
There are many definitions of social accounting:Social accounting is the process of communicating the social and environmental effects of
organizations' economic actions to particular interest groups within society and to society at large.
Social accounting can be dened as a set of organizational activities that deals with the measurement
and analysis of the social performance of organizations and the reporting of results to concerned
groups, both within and outside the organization. According to Bebbington and Thomson (2007),
social accounting is an inclusive eld of accounting for social and environmental events which arise
as a result of, and are intimately tied to, the economic actions of organizations
Social accounting is the process of communicating the social and environmental effects of
organizations economic actions to particular interest groups within society and to society at large.
As such, it involves extending the accountability of organisations (particularly corporations) beyond
the traditional role of providing a nancial account of capital, in particular, to shareholders. Such an
extension is predicated upon the assumption that companies do have wider responsibilities beyond
simply making money for their shareholders(Gray et al. (1987, p. 9))
Social accounting is that aspect of accountancy which, while indistinguishable from nancial and
management accounting, deals more specically with environmental concerns; that is, it is an aspect
of the information system that enables data collection and analysis, performance follow-up, decisionmaking and accountability for the management of environmental costs and risks(Gauthier et al.
(1997, p. 1))

Three important parts of social accounting1. Social book-keeping the means by which information is routinely collected during the year of
record performance in relation to the stated social objectives
2. Social audit - the process of reviewing and verifying the social accounts at the end of each social
audit cycle. The term social audit is also used generically for the concept and for the whole process.

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3. Stake holders - those people or groups who are either affected by or who can affect the activities
of an organization.

Social Reporting
While denitions applicable to social accounting vary, most consider reporting to be a subset of
social accounting. In this regard, social reporting deals with the disclosure of information by an
organisation about product and consumer interests, employee interests, community activities and
environmental impactsthis disclosure of information is deemed to be a part of an organisations
responsibility to its stakeholders or a response to stakeholder expectations (Deegan 2002, 2007; Gray
et al. 1995, 1996; Mathews 1995, 1997). Deegan (2007) offers a more comprehensive denition of
social reporting where he addresses broader areas of corporate responsibility. He denes social
reporting as the provision of information about the performance of an organisation in relation to its
interaction with its physical and social environment and includes, but is not limited to (Deegan 2007,
p. 1265):
interaction with the local community; level of support for community projects; level of support for
developing countries; health and safety record; training, employment and education programs; and
environmental performance.
While the various denitions of social accounting and reporting discussed above do not consider
whether the reporting is voluntary or mandatory, in reality it is predominantly a voluntary corporate
practice (Deegan 2002; Mathews 1995). Hence, social reporting is deemed to represent a term that
relates to the voluntary provision of information about the performance of an organisation in relation
to the broader areas and contexts of corporate social responsibility practices.
The term corporate social performance reflects the impact of a corporation activities on society.
This embodies the impact of its economic functions and other actions taken to contribute to quality
of life.
American Accounting Association committee on measurement of social costs supplement to the
accounting review in 1974 has also emphasised on the role of corporate form of organization in
attaining their operational goals such as enhancement of profit by 7% p.a., increase in sales by 21%,
a reduction in pollution levels by 30% and employee mis reflects the mix of minorities in working
class where plants are located

Concept of Social Accounting

Business is a socio economic activity and it draws its inputs from society, hence its objectives should
be the welfare of the society. Changing environment and social parameters have compelled business
enterprise to accountant report information with regard to discharge of their responsibilities. The
concept of social accounting has gained importance as a result of high level of industrialization
which has brought prosperity as well as many problems to the society. Social accounting is

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concerned with the study and Analysis of accounting practice of those activities of an organisation
.Social accounting also known as social responsibility accounting aims to measure and inform
general public about social welfare activities undertaken by the enterprises and their effect on
society. The national association of accountants defined social accounting as identification,
measurement ,monitoring and reporting of the social and economic effects of an institution on
society. It is clear that social accounting is concerned with internal and external reporting of social
costs and benefits both in quantitative as well as qualitative terms by a business enterprise.


1. Periodic measurement and determination of net social benefits in an individual institute which
contains social expenses and internal incomes for the institution and increase of external savings in
social sections
2. Society economic resources are limited, so its necessary to reach maximum productivity in
applying any using them so that the social benefit of their use is more than social expenses.
3. The goods, which were free before, will not be available such free any more. For example, for the
pure water and air heavy expenditure of regulations to control environmental pollution and selfpurification operations is required. So the entity must provide benefits to the community for using it.
4. Its certain right to be aware of social obligation amount of entity to itself and also the amount its
been done and this awareness needs to be according to principles and basics of accounting reporting.
Social accounting includes pollution and environmental issues as one might expect, but many other
issues as well. Some of these issues include:
1. Unsafe products and work places
2. Cost padding and fraud in defense contracting
3. Corporate bulling of communities
4. Racism, and the exploitation of women and other groups


Social accounting is an expression of a companys social responsibilities .

Social accounting is related to the use of social resources.
It emphasize on relationship between firm and society.
It is the application of accounting on social sciences .
It emphasize on social costs as well as social benefits .

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Benefits of Social Accounting

The important benefits of social accounting are as follows
1 A firm fulfills its social obligations and inform its members the government and general public to
enables everybody to form correct opinion.
2 It counters adverse publicity or criticism levelled by hostile media and voluntary social
3 It assists management in formulating appropriate policies and programs.
4Throu social accounting the firm proves that it is not socially unethical in view of moral cultures
and environmental degradation.
5 It acts as an evidence of social commitment.
6 It improves employee motivation.
7 It is necessary from the point of view of public interest, groups, social organizations, investors and
8 Through social accounting the management gets feedback on its policies aimed at the welfare of
the society.
9 It helps in marketing through greater customer support.
10 It improves the confidence of shareholders of the firm.

Scope Of Social Responsibility Accounting

R.L Brummet has identified five areas which an enterprise should cover while doing reporting of
social performance in his topic -Total performance measurement.
(a) Net income contribution.
(b) Human resource contribution
(c) Public contribution.
(d) Environment contribution.
(e) Product or service contribution.

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National Association of Accountants Committee of U.S.A in 1974 has identified following four
areas of social accounting.
(a) Community development
(b) Human resource
(c) Physical resources
(d) Product or service contribution

Social Accounting Approaches

Several accountants , economists, and social scientists have formulated different formulas , different
formats for time purpose of measuring and reporting society information , however there is no single
approach which has been generally accepted .Some of them are:
1. Classical approach: The classical approach asserts that by maximizing the profits within the
constraints of existing legal and ethical framework business corporations are acting in the best
interest of society of large.

2. DescriptiveApproach:This is the simplest and traditional method of reporting social information.

Social activities of business corporations are presented along with financial statements in narrative

3. Integral welfare theoretical approach: This approach advocates the preparation of a social report
compromising social benefits and social costs .

Social Benefits:
a) Products and services provided : The most important benefit which is provided by
business entity to society is goods and services which are being purchased by customers
which are a part of the society.

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b) Payments to other elements of society : Business entities are providing social benefits to
other elements of society ,payments to workers ,whatever business entity pays becomes
social benefit for society.
c) Additional direct employment benefits: Business concerns also provide benefits to their
d) Staff ,equipment and facility donated: When any business enterprise donates services of
employees to other organizations ,provides free accommodation for any cultural event
and provide equipment and facility services to other parts of society i.e providing space
for medical camp without giving any rent.
e) Other benefits :Most of the big business houses such as Tata ,Birla are providing which
are not covered in above categories .

1) Social benefits to staff
1.Housing and township facilities
2.Medical and hospital facilities


1991-92 (In Rs.)





4.Holiday Benefits



5.Educational Facilities



6.Internet concession



7.Provident fund



8.Productivity Incentive



9. Training to staff



10.Welfare activities



11.Other Benefits






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2.Social benefits and cost to community

Social benefits to community :
1.local taxes paid

2. social welfare of community



3. Environmental improvement



4. generation of job potential



5. Generation of business



Total benefits


Social cost to community:





1 Social benefits to general public :
a) Central Government



b) Statement Government



2 Difference between international price

and price received by boil for crude oil


3 Other social benefits






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1 Foreign exchange spent



2 Value of national gas









3 State services consumed

4 Central services consumed
Total cost

Social Corporate Reporting in India:

The government of India appointed a company under the chairmanship of Rajindersachar which is
popularly known as Sachar committee recommended that a provision may be included in company
law to make it mandatory for all the companies to provide a social report along with the director
report, in annual reports ,the committee recommended in 1978 the inclusion of following steps taken
by company in various spheres with a view to discharging its social responsibilities towards different
segments of society, quantifying where possible in monetary terms .
Central government of India w.e.f 1stApril 1989 requires a few companies to provide and disclose
conducted information regarding conservation of technology absorption and foreign exchange .In
1981 ICA conducted a research regarding social disclosure being made by Indian companies . The
sample was taken for 202 companies .The research concluded that 47 companies were disclosing
information of employee welfare, 28 companies were giving donations for social cause 10 were
contributing for spreading education were contributing towards national distress and health and
family planning programs were contributing for employment for employment growth for workers
participation in management . Hence in total only 123 out of 202 were providing some kind of social
disclosure. In recent studies by Porwal and Sarma in 1989 on social responsibility disclosure by
Indian companies revealed that 96% of the public sector undertakings made some sort of disclosures
whereas in Private sector only 35% companies were disclosing information.

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1 Contemporary issues in accounting by SHASHI K. GUPTA

3 Blau, G. (1978). Human resource accounting. Scarsdale, N.Y.: Work in America
2nd. Retrieved September 1, 2015.
4 Referred to articles on
5 Data taken from