inflation accounting

Inflation accounting

Accounting practices allowing for the effects of inflation.

Inflation Accounting

A method of accounting that includes inflation. In inflation accounting, one records price changes that affect the purchasing power of current assets and the value of the company's long-term assets and liabilities. This can provide a more accurate picture of a company's value. It is used to supplement a company's ordinary financial statements. It is less commonly called general price level accounting.

inflation accounting

Alteration of a firm's financial statements to account for changes in the purchasing power of money. With inflation accounting, gains and losses from holding monetary items during periods of changing prices are recognized. Likewise, long-term assets and liabilities are adjusted for changing price levels. Inflation accounting is used to supplement regular financial statements in order to illustrate how changing price levels can affect a firm. Also called general price level accounting.

inflation accounting

adjustments to a firm's accounts to allow for the effects of INFLATION and arrive at a view of the real profitability of the firm. In a period of rising prices when the purchasing power of the money unit is declining, profit calculations based upon the HISTORIC COST of STOCKS and FIXED ASSETS are likely to overstate the real profit position. Various methods of allowing for the effects of inflation on the PROFIT-AND-LOSS ACCOUNT and the BALANCE SHEET have been tried.

One relatively simple method of inflation-adjusting a firm's accounting results is the current purchasing-power method. This uses a PRICE INDEX number to adjust the calculated profit figure from the profit-and-loss account, and to express it in real terms. A more detailed method is the current cost-accounting method. This produces a supplementary current-cost profit-and-loss account and balance sheet. In these current-cost accounts the deduction from revenue for COST OF SALES is based upon the REPLACEMENT COST of the goods sold (cost of sales adjustment); while DEPRECIATION is calculated on the replacement cost of fixed assets used and not on their historic cost (depreciation adjustment). See REVALUATION PROVISION, APPRECIATION, definition 1.

inflation accounting

any adjustments to a firm's accounts to allow for the effects of INFLATION and arrive at a view of the real profitability of the firm. In a period of rising prices when the purchasing power of the money unit is declining, profit calculations based upon the HISTORIC COST of STOCK and FIXED ASSETS are likely to overstate the real profit position in the PROFIT-AND-LOSS ACCOUNT and BALANCE SHEET.