Inflation means an upward change in the prices of goods & services of general consumption. The basic details and need for inflation accounting is explained in this presentation, as a part of topic “Financial Accounting”. For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/SlideshareFaccounting Join us on Facebook: http://www.facebook.com/welearnindia Follow us on Twitter: https://twitter.com/WeLearnIndia Read our latest blog at: http://welearnindia.wordpress.com Subscribe to our Slideshare Channel: http://www.slideshare.net/welingkarDLP

1. Welingkar’s Distance Learning Division
Financial Accounting
CHAPTER-9. Inflation Accounting
We Learn – A Continuous Learning Forum

2. Chapter Nine - Inflation Accounting
What is Inflation?
Inflation means an upward change in the prices of goods &
services of general consumption.
is due to
the fall in total supply of goods and services.
imbalance in total supply of goods & services.
changes in general prices of basic commodities.

3. Chapter Nine - Inflation Accounting
Need for Inflation Accounting?
Traditional accounting based on historical cost fails to
match current revenue against costs that are current
costs of purchases or depreciation are shown at historical
costs, and are much below current levels

4. Chapter Nine - Inflation Accounting
Need for Inflation Accounting?
Traditional accounting based on historical cost fails to
match current revenue against costs that are current state
profit realistically as costs of purchases, depreciation are
understated, reported profits are high

5. Chapter Nine - Inflation Accounting
Need for Inflation Accounting?
Traditional accounting based on historical cost fails to
- match current revenue against costs that are current
- state profit realistically
- provide adequate depreciation for
replacement of assets
depreciation is calculated on book value of assets that are
way below their current market price.

6. Chapter Nine - Inflation Accounting
Need for Inflation Accounting?
Traditional accounting based on historical cost fails to
- match current revenue against costs that are current
- state profit realistically
- provide adequate depreciation for
replacement of assets
- show true and fair view in the financial
statements

7. Chapter Nine - Inflation Accounting
Methods of Inflation Accounting
Є Current Purchasing Power (CPP)
Є Current Value Systems

8. Chapter Nine - Inflation Accounting
Methods of Inflation Accounting
Є Current Purchasing Power (CPP)
Step # 1 – Convert figures in the balance sheet as of
beginning of the year into purchasing power of beginning
of the year.

9. Chapter Nine - Inflation Accounting
Methods of Inflation Accounting
Є Current Purchasing Power (CPP)
Step # 1 – Convert figures in the balance sheet as of
beginning of the year into purchasing power of beginning
of the year.
Step #2 – Convert the figures derived above into
purchasing power at the end of the year.

10. Chapter Nine - Inflation Accounting
Methods of Inflation Accounting
Є Current Purchasing Power (CPP)
Step # 1 – Convert figures in the balance sheet as of beginning
of the year into purchasing power of beginning of the year.
Step #2 – Convert the figures derived above into purchasing
power at the end of the year.
Step #3 - Convert figures in the balance sheet as of end of
the year into purchasing power of end of the year.

11. Chapter Nine - Inflation Accounting
Methods of Inflation Accounting
Є Current Purchasing Power (CPP)
Step # 1 – Convert figures in the balance sheet as of beginning
of the year into purchasing power of beginning of the year.
Step #2 – Convert the figures derived above into purchasing
power at the end of the year.
Step #3 - Convert figures in the balance sheet as of end of the
year into purchasing power of end of the year.
Final Step – find out difference between equity at step two and
step three to get profit for the year, expressed in terms of
purchasing power at end of the year.

12. Chapter Nine - Inflation Accounting
Methods of Inflation Accounting
Є Current Purchasing Power (CPP)
Є Current Value Systems
Under this method, the current value of an individual asset
is based on the present value of the future cash flows that
are expected to result from the ownership of the asset.

13. Chapter Nine - Inflation Accounting
Methods of Inflation Accounting
Є Current Purchasing Power (CPP)
Є Current Value Systems
Under this method, the current value of an individual asset is based on
the present value of the future cash flows that are expected to result
from the ownership of the asset.
Such present values are calculated from
[a] the estimated cash amount of the future benefits [b] the timing of
these benefits & [c] an appropriate discount factor.

14. Chapter Nine - Inflation Accounting
Methods of Inflation Accounting
Є Current Purchasing Power (CPP)
Є Current Value Systems
Under this method, the current value of an individual asset is based on
the present value of the future cash flows that are expected to result
from the ownership of the asset.
Such present values are calculated from
[a] the estimated cash amount of the future benefits [b] the timing of
these benefits & [c] an appropriate discount factor.
This discount factor usually equals cost of capital to the company.

15. Chapter Nine - Inflation Accounting
Conclusion
Methods of Inflation Accounting are
criticized as
They are subjective
They are based on estimation
They are not free from flaws
Discussion on this subject gained
momentum with the rise in the
price levels and the tempo died
down with the fall in inflation.