4 Methods of Inflation Accounting


Generally, there are 4 methods that are used in Inflation accounting which are as given below: –

  1. Current Purchasing Power (CPP)
  2. Current Value Accounting (CVA)
  3. Current Cost Accounting (CCA)
  4. Replacement Cost Accounting (RCA)

Current Purchasing Power

It is an accounting technique under which companies are required to record and present their financial statements on historical figures. However, supplementary financial statements need to be prepared by the company that is adjusted with the current purchasing power of currency at end of the accounting period. A general price index is used for conversion of various figures of financial statements of company. Purchasing power of money is given due importance under this method whereas rise or fall in item prices are ignored. Historical figures of statements are multiplied by conversion factor for adjusting them in accordance with current purchasing power. 

Current Value Accounting

Current value accounting is a method of inflation accounting under which all assets and liabilities are shown at their current value in the balance sheet. Net assets value at the beginning and at the end of the accounting period is determined and the difference among both these values is termed as profit or loss as case may be. However, under this accounting, it is quite difficult to determine the relevant price index for each asset.

Current Cost Accounting

Under the current cost accounting technique, assets are shown in financial statements i.e. balance sheet and profit & loss account at their current cost instead of recording them at historical cost or original value. Ascertainment of profit is made on the basis of asset cost at the date of sale rather than the actual cost. Depreciation is also charged on current values which prevent any overstatement of profits which keeps capital intact. It is a complete system of inflation accounting as it gives more realistic view about business by efficiently considering all changes in price level.

Replacement Cost Accounting

Replacement cost accounting technique of price level accounting is one in which all assets and liabilities are recorded at their replacement cost in the balance sheet. It is considered as an improvement over the Current purchasing power method as it considers the individual price index relevant to a specific asset of the business.Index that are directly related to particular assets of the company is used for converting them instead of a general price index. However, this accounting technique involves several difficulties as many relevant price indexes need to be determined and used during the conversion of financial statements.