Inflation Accounting Meaning, Methods, Examples & Benefits

For objectives of inflation accounting example, since the Second World War, prices have been on an upward trend. For economic, political, and social reasons, prices are not constant. The new value of the equipment in 2020 would be $20,000 based on the conversion factor of 2 (600/300).

Inflation by which we mean a rise in general price level and a fall in the value of money. Unlike physical units, such as kilogram, meter etc. are stable units in measuring weight and distance, monetary units i.e., rupee is an unstable unit of exchange value. Unrealistic profitability in the financial statements can be eliminated through inflation adjustment.

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2. The conversion rate is found by dividing the index price at the end of the period by the index price at the beginning of the period.
3. These are the two main methods used to adjust financial statement figures in inflation accounting.
4. Various methods have been proposed in accounting to reflect the true changes in the purchasing power of money.
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For Turkish companies, this involves adjusting assets, liabilities, income, and expenses in their financial reports to reflect current values. The adjustments are critical for providing a truthful and fair view of a company’s financial status, which is vital for investors, creditors, and other stakeholders. UK Government departments are required to provide financial statements which measure the resources consumed in achieving their objectives. All costs are included in this requirement, including the cost of using capital assets. These costs must be stated in current price terms to make them comparable across departments and properly reflect the resources consumed. Inflation accounting is used in particular for fixed assets, for example, buildings.

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Both methods can result in very positive impacts on understanding the actual financial value of a company. Inflation accounting is a special technique used to factor in the impact that soaring or plummeting costs of goods in some regions of the world have on the reported figures of international companies. Financial statements are adjusted according to price indexes, rather than relying solely on a cost accounting basis, to paint a clearer picture of a firm’s financial position in inflationary environments.

In the absence of this, workers may claim for higher wages and shareholders too claim for higher dividends. The Projections report is available as a variable format report, which means users can view and manipulate the report data in a number of desktop applications. For example, the information can be downloaded into Microsoft Excel to be sorted and analyzed using familiar spreadsheet features. The report can also be formatted as an HTML file and placed on a Web server.

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1. Unlike physical units, such as kilogram, meter etc. are stable units in measuring weight and distance, monetary units i.e., rupee is an unstable unit of exchange value.
2. Hence, the revaluation cost of the equipment under the CPP method is Rs. 25,000.
3. A company is using inflation accounting to adjust its equipment value in 2020.
4. The system of inflation accounting, if introduced, will help the various parties who have an interest and stake in the business (e.g., shareholders, employees, external users, management, and government).

Consequently, in an inflationary environment, the purchasing power of money falls and the prices of commodities and services rise. With the above considerations in mind, accountants use inflation accounting to convert monetary units with different levels of purchasing power into a single monetary unit. During periods of sustained price increases, historical costs lose their relevance. As a result, they may even become misleading as measurements of economic value.

Selecting Assets for Revaluation Procedure

As inflation rates vary from year to year, an element of uncertainty characterizes the activities of the business. The percent inflation rate is calculated as the CPI at the end of the period divided by the CPI at the beginning of the period multiplied by 100. Hence, the revaluation cost of the equipment under the CPP method is Rs. 25,000.

Current Value Method

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It allows for more realistic and comparable data relative to other companies and historical financial statements of the same company. The Inflation Accounting Inquiry window is accessed from the Oracle Assets View Financial Information window. The View Financial Information window enables users to view historic values for an asset, and the Inflation Accounting Inquiry window displays the impact of inflation accounting on the values. Inflation accounting is not only a business necessity but also a legal requirement under certain circumstances.

Furthermore, this method is also referred to as price-level accounting due to its dependency on price indexes. Since assets are shown at current values, Balance Sheet exhibits a fair view of the financial position of a firm. Rise in general price level, termed inflation erodes the intrinsic value of money, conversely, fall in general prices called deflation, raises its purchasing power. Inflation is a concept which every human being is not only aware of, but also painfully experiencing.

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