Inflation accounting- Objectives, Importance, and Features

Meaning of Inflation Accounting

Definition- Inflation Accounting refers to Identify and incorporating the changes in prices of assets and liability of a company over a period of time.

In an economic sense, Inflation refers to a quantitative measure of the rate at which the average price level of goods and services is increasing. Inflation accounting refers to a state in which the purchasing power of money goes down for conversely. there is more money in circulation then is justified by goods and services the general weakness of traditional accounting system is that it falls to reflect the prices level change in the financial statement as it is based on historical cost.

Objectives and Importance of Inflation Accounting

  • Show the true result of the operation
  • To show true financial position in current values
  • To indicate the real capital employed
  • Tum make accounting record reliable for the various uses
  • To provide sufficient depreciation to generate fund for the placement of fixed assets
  • To show the realistic value of fixed assets in the financial statement

Features of Inflation Accounting

  • The unite of measurement is not stable¬†like traditional and historical accounting.
  • Reasonable comparison of profitability
  • Inflation accounting shows current profit based on current prices.
  • Assets are shown at current values, Balance Sheet exhibits a fair view of the financial position of a firm.
  • Check on Mis-leading Deeds