Inflation accounting or price level accounting

Q: Define inflation accounting or price level accounting ? what are the main method of price level accounting ? What are its main advantages and disadvantages ?

Ans : Definition of inflation

Inflation accounting is recording ,classifying and summarizing of all transaction on current or market cost and update recording amount according to time and changes .In price level accounting ,the value of money is changed , our balance sheet ‘s figure unit also changed .

 Method of price level /Inflation accounting :-

1.Current purchasing power accounting

According to current purchasing power method , we calculate current cost with following method
I Take current price index

II Calculate

Current value of asset


= Value of asset (Actual basis ) X Current index / previous price index

For example

Record value of Rs. 40000 machine on inflation accounting basis if 2005 index 100 and 2006 price index =200
=40000x 200/180 =80000
B/S
Machine 80000

2. current cost accounting

In the current cost accounting following point must take in mind :-
1 value of fixed asset

Will be take on current cost
Not historical cost basis

2. stock will be taken on market cost basis

3. Transfer of difference between historical cost and current cost of asset to revaluation reserve account

4. Calculate current operating profit

3. Replacement cost accounting method

This method is just improvement of current purchasing price method .In replacement cost accounting , we calculate current value basis of respective asset price index
Suppose book value of machinery is 300000and price index of machinery is 2005 is 100 and 2006 is 300 then book value of furniture Rs. 200000 price index of furniture 2005=200 and 2006=400
Current value of machinery =300000x 300/100
Current value of furniture =200000x400/200
1. Current value accounting method
2. In current value accounting method , we take all asset of business in balance sheet on their current value