Write a detailed note on inflation accounting ppt
Updated Apr 30, What is Inflation Accounting?
Inflation accounting meaning and definition
Misleading reporting under historical cost accounting[ edit ] "In most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued. An additional form of the budget—the requirement budget may need to be prepared, as is presently being done by a few organizations. Inflation accounting is the practice of adjusting financial statements according to price indexes. Such transactions include items like sales, purchase of goods, payment of expenses, etc. For this purpose, any approved price index depicting the changes in the purchasing power of rupee is used to convert the various items of the financial statements. It takes into consideration all the elements of financial statements for reporting. Suppose the general price index was in and it was in AIZ warned in its annual report that the shift to using the U. Non-monetary items those that do not carry a fixed value are updated into figures with a conversion factor equivalent to price index at the end of the period divided by price index at the date of transaction. They are: 1 The financial statements lose their credibility as the objectivity concept is violated. Since assets are shown at current values, Balance Sheet exhibits a fair view of the financial position of a firm. Financial statements are prepared in monetary units i. Need for Inflation Accounting: Accounting is based on the traditional concept of cost and revenue.
Most principles of historical cost accounting were developed after the Wall Street Crash ofincluding the presumption of a stable currency. The basic objective of accounting is the preparation of financial statements in a way that they give a true and fair view of the business.
Write a detail note on inflation accounting
Example 1: A company purchased a plant on for a sum of Rs. This helps business in being somewhat less critically viewed by the general public helps them in their continuous exercise of mobilizing funds for expansion, new investment and also to provide employment. The general weakness of the traditional accounting system is that it fails to reflect the price level changes in the financial statements as it is based on historical cost. Limitations of Inflation Accounting Financial statements prepared on the historical cost basis do not, as a rule, depict the real state of affairs of the organization. Later purchases remain in stock. These cost flow pattern should be kept in mind while using the index numbers for computing conversion factors. The amount of depreciation will be lower in times of deflation.
To counter this issue, in certain cases companies are permitted to use inflation-adjusted figures, restating numbers to reflect current economic values. The amount of depreciation will be lower in times of deflation.
Later purchases remain in stock. To remove the various distortions with which financial statement based on historical cost suffer. Too much calculations make complications. Under the First in First out assumption, the inventories purchased first are issued to production or to customers.
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