Price Level Accounting

1. Price Level
Accounting
Prepared By:
Aijaz Ahmed Rather
I.K Gujral P.T U

2. Meaning
At times of inflation, the value of money is
declining and the step taken for eliminating the impact of
inflation on financial statements is termed as Price level
Accounting.
Also known as Accounting for Inflation or Inflation
Accounting.
Definition-Accounting technique by which transactions
are recorded at current prices and the effect of changes in
price level is made clear along with transactions recorded
at historical costs.

3. Features
• Automatic
• Considers all elements of financial statements
(i.e no limited to fixed assets ,closing stock.)
• Unit of measurement is not assumed to be stable.
• Adjusts Overstated Profit
• Balances the Understatement
of Assets.

4. Objectives
• To correct conventional historical cost accounts for the
understatement of inventory, plant used in production.
• To eliminate the “money illusion” by reducing the accounts
to real terms.

5. Advantages
• Accurate picture of profitability.
• True and fair financial position.
• Correct information to external parties.
• Capital Intact through stopping payment of dividends.
• Realistic prices of shares in the investment market.

6. Disadvantages
• Complicated and Confusing.
• Time Consuming.
• Ordinary person fails to understand & interpret the
adjusted financial statements.
• Proper conversion method should be taken.
• Requires continuous and constant adjustments.

7. Techniques
Current Purchasing Power
(CPP Method)
Replacement Cost
Accounting
(RCA Method)
Current Value Accounting
(CVA Method)
Current Cost Accounting
(CCA Method)

8. Current Purchasing Power Method
• Values of various items of P/L a/c and B/S are changed in tune with
change in price level.
• Done with the help of approved general price index number
(generally prepared by government, financial journals , newspaper)
• Financial statements should be on the basis of historical costs.
• A separate note explaining the base of price changes should be
presented to BOD.

9. • Improvement over current purchasing power method.
• Makes use of individual price index numbers.
• Uses more than one index numbers.
Current Value Accounting Method
• Value of net assets(beginning)-Value of net assets(end)
=Profit or Loss.
• All assets and liabilities are shown at current value
Replacing Cost Accounting Method

10. • It makes a difference between the profits earned from
operations and gains from change in the price level.
• Depreciation is on the current value of the fixed assets.
• Fixed costs are shown at their value to the business and not
at their depreciated original cost.
Current Cost Accounting Method

11. Thank You