Also known as the particular price-stage method, present greenback accounting makes use of a selected index of prices to reflect the current value of sure assets and liabilities held by a company. People may adjust the accounts according to the values most suited to them, thereby, making the financial statements more inaccurate. In the past few years of high inflation, companies have reported very high profits on the one hand but on the other they have faced real financial difficulties.

Method of Price Level Accounting # 1. Current Purchasing Power Technique:

This method helps in maintaining the purchasing power of capital and ensures that financial statements reflect the true economic value of assets and liabilities. The current cost accounting (CCA) technique has been preferred to the current purchasing power (CPP) technique of price level accounting as it is a complete system of inflation accounting. The financial statements prepared under this technique price level accounting provide more realistic information and make a distinction between profits earned from business operations and the gains arising from changes in price levels. Traditional accounting methods record transactions at historical costs, which do not reflect current economic conditions. PLA adjusts these values to account for changes in the purchasing power of money, ensuring that financial statements present a more accurate and current financial position. Choosing the right inflation accounting method is crucial for small businesses to survive in today’s inflationary environment.

Inflation Accounting Methods

1. Price level Accounting converts the values using index numbers from depreciated costs to current values.
2. General Price Level Accounting (GPLA) is a system of accounting in which financial statements are adjusted according to changes in the purchasing power of the currency.
3. CPP stands for current purchasing power; CCA stands for current cost accounting.
4. The use of inflation accounting can help companies better understand their financial performance and make more informed business decisions.
5. The CCA approach values assets at their fair market value (FMV) rather than historical cost, the price incurred during the purchase of the fixed asset.
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7. The cost of goods sold is calculated on the basis of their replacement cost to the business and not on their original cost.

In the RCA technique, the index used is directly related to the company’s assets and not to the general price index. However, using the RCA technique means adopting different price indices for the conversion of items in the financial statements. Therefore, it makes the calculation of the relative price index difficult in a particular case. Furthermore, this method gets criticized by thinkers due to the element of subjectivity in it.

(iii) In a country like India, even the price indices may not be correct and it may further cause inaccurate presentation of the financial statements. However, if we consider money as a commodity, its price level will have a positive correlation while a negative correlation for its demand. The price level changes when the consumer urge for goods changes for a specified period, year or month.

(1) It is not possible to find accurately the replacement cost till the replacement is actually made. Suppose a machine was purchased in 2000 for Rs 1, 00,000 having a life of 10 years. In case depreciation is charged on original cost, after 10 years we shall have Rs 1, 00,000 from the total depreciation provided. But due to inflation the cost of the machine might well have gone up to Rs 2, 00,000 or even more in 2011 when the machine is to be replaced and we may find it difficult to replace the asset.

The current purchasing power method, constant dollar method, and price level accounting method are some of the methods that small businesses can use to account for inflation. Each method has its advantages and disadvantages, and businesses need to consider the method that best suits their needs. By using these methods, small businesses can account for the effects of inflation on their financial statements and make informed business decisions. There are different methods of inflation accounting, including the current purchasing power method and the general price level accounting method. General price level accounting involves the restatement of financial statements for the effects of inflation. This approach requires the adjustment of historical costs to reflect their current value, typically by applying a general price index to the baseline costs.

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1. (1) It enables company to present more realistic view of its profitability because current revenues are matched with current costs.
2. By adding dollar amounts that represent different amounts of purchasing power, the resulting sum is misleading, akin to adding 10,000 dollars to 10,000 Euros to get a total of 20,000.
3. The price level changes as the consumer basket of goods and services changes during a specified period, month or year.
4. Further, if assets and liabilities are converted as stated above, it may be found that a loss or gain arises from the difference of the converted total value of assets and that of liabilities.
5. Traditional accounting records assets, liabilities, revenues, and expenses at historical cost, which can distort the financial position during periods of significant price changes.
6. The current purchasing power technique or CPP of price level accounting make the companies keep the records and show the financial statements on a historical cost basis.
7. PLA helps in maintaining the real value of a company’s capital by ensuring that it is not eroded by inflation.

Inventories or stocks are valued in the balance sheet at their current replacement costs on the date of the balance sheet and not cost or market price whichever is lower. Another problem posed by the price level changes (and more so by inflation) is that how much depreciation should be charged on fixed assets. The following points highlight the four methods of price level accounting, i.e., 1. The price level accounting establishes a realistic price for the shares which also affects the investment market of the company. It refers to the type of financial accounting that seeks to allow for changes in the currency during the various periods of inflation or recession in the economy. Businesses that are expanding rapidly or that have high levels of inventory turnover are most likely to benefit from using inflation accounting.

Moreover, new entrepreneurs get attracted by excessive profits to enter the business. This states that when financial statements are denoted according to the price changes, the profitability can be compared for two concerns developed at different times. IFRS permitted international businesses with subsidiaries in Argentina to continue using the peso for their accounts, provided they restate them to adjust for inflation.

Inflation has always been a concern for businesses, especially for small businesses where even a small increase in prices can significantly impact their operations. Inflation not only affects the cost of goods and services but also impacts the value of money over time. Inflation accounting is a method that helps businesses to account for the effects of inflation on their financial statements. There are different inflation accounting methods, and each method has its advantages and disadvantages. Choosing the right method can be challenging, but it is crucial for businesses to consider the method that best suits their needs.

The major drawback of CPP is that it does not consider the price index individually related to the assets of the company. Lastly, in the deflation period, when the prices fall, adjustments means overstatement of profits and charging lesser depreciation. Depreciation charged on the assets on current values is not acceptable by the Income Tax Act, 1961. As a result, adjusting depreciation to price changes will not serve any practical purpose. Price level accounting appears to have theoretical importance rather than practical due to which the adjustment in the accounts may lead to window dressing because of the element of subjectivity in it.

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