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Advantages And Disadvantages Of Inflation Accounting Pdf

advantages and disadvantages of inflation accounting pdf

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Many private individuals in the UK have been brought up by parents who have stressed the disadvantages of being in debt.

In accounting , an economic item's historical cost is the original nominal monetary value of that item. Consequently, the amounts reported for these balance sheet items often differ from their current economic or market values. While use of historical cost measurement is criticised for its lack of timely reporting of value changes, it remains in use in most accounting systems during periods of low and high inflation and deflation. Various adjustments to historical cost are used, many of which require the use of management judgment and may be difficult to verify.

Advantages of inflation accounting pdf

Reviewed by Anjaneyulu Updated on Jan 29, Inflation accounting is a unique method used to weigh on the published statistics of multinational firms in the effects of soaring or plummeting prices of products in some areas of the world. Financial statements are adjusted as per price indexes to paint a clearer picture of a firm's financial position in inflationary environments, rather than relying solely on cost accounting. This method is also referred to as the price level accounting. Historical information on financial statements is no longer applicable when a business operates in a country where there is a large amount of market inflation or deflation.

Inflation Accounting

Inflation accounting is a special branch of accounting which is used during inflationary periods for showing the accurate financial status of the company. Inflation accounting is also termed as price level accounting. This branch of accounting helps in countering all issues arising from historical cost accounting in times of inflation and hyperinflation. Inflation accounting records transaction of business at present value for analyzing the effect of price changes on cost, revenues, assets and liabilities of the organization. Current Cost accounting and Current purchase power method are two primary methods of inflation accounting. Inflation accounting enable firms to give a fair view of its financial position. It is a process where adjustments are made for matching current revenues with a current cost.

advantages and disadvantages of inflation accounting pdf

Inflation Accounting

Advantages and Disadvantages of Inflation Accounting

In practice inflation accounting creates illusionary or imaginary profit which does not exist. Inflation is a monetary ailment in an economy and it is defined by economists in so many ways. A general price index is used to convert the values of various items. The historical cost concept is a basic accounting concept.

It is a newly introduced concept in the financial world. Inflation accounting refers to the adjustment of the financial statements during inflationary periods. This special accounting technique is only used in inflationary periods where the general level of prices is usually high for three consecutive quarters. It involves the recording of the income and expenditure of the business at the current prices and reinstating all the three statements of the company and analyze the cost and the trend of the current company. There are various kinds of techniques that are involved in inflation accounting and there are various methods attached to it. ASD company is using an inflation accounting technique to reinstate its financial records in the year

High inflation results in more profits and high financial difficulties. The dividend and income taxes are paid on increased profit calculated on the basis of historical cost concept. Therefore a change from historical cost concept to price level or inflation accounting is recommended to show the correct profit and true and fair of balance sheet. Inflation accounting enables the company to present a realistic view of its profitability as current revenues are matched current costs. The correct amount of depreciation be when it is charged on the current values inflated values and thus the replacement of assets will be more reasonable.

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Advantages and disadvantages of inflation accounting pdf

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  1. Vicki B.

    12.05.2021 at 15:05
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