Inflation Accounting

Inflation Accounting
Inflation
inflation is a rise in the general level of prices of goods and services in
an economy over a period of time.
Deflation
Deflation is a decrease in the general level of prices of goods and
services in an economy over a period of time.

Ignoring general price-level changes in financial reporting creates

distortions in financial statements.

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 FY 2018-19 FY 2019-20
Sales = Rs. 1000 Sales = Rs. 1140
Selling Price: Rs.10 Per Unit Selling Price: Rs.12 Per Unit
Units: 100 Units: 95
Growth Rate 14%
Negative Growth Rate = 5%

Mr. Smarty
Inflation Accounting
Inflation Accounting
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 of

high inflation. Inflation accounting requires statements to be adjusted
according to price indexes, rather than rely solely on a cost accounting
basis.

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Objectives of Inflation Accounting
✓ The user or decision-maker gets an information which shows the
real performance.
✓ To facilitate the comparison of the performance of two different
periods.
✓ The monetary items, incomes and expenses do not show the correct
purchasing power of money therefore, their values should be
adjusted for inflation.
✓ To ascertain the current value of assets.

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Impact of Inflation on Corporate Financial Statements
✓ The asset values for inventory, equipment and land do not reflect
their economic value to the business,
✓ Future earnings are not easily projected from historical earnings,
✓ The impact of price changes on monetary assets and liabilities is not
clear,
✓ Future capital needs are difficult to forecast,
✓ When real economic performance is distorted, these distortions lead
to social and political consequences that damage the business,
✓ Reported profits may exceed the earnings that could be distributed
to shareholders without damaging the company's ongoing
operations,