Price Level Accounting

Price Level Accounting

Introduction:-
Prices do not remain constant over a period of time. They tends to change due to various economic , social or political factors. Changes in price levels cause two types of economic conditions ,inflation and deflation. These changes in priced level leads to inaccurate presentation of financial statements which otherwise are prepared to present a true and fair view of the company’s financial health.

Meaning:-
It is a technique of accounting by which the transactions are recorded at current values and the impact of changes in the prices on the accounting transaction is neutralized or at least such impact is pointed out along with transactions recorded on historical cost concept. Price level accounting is also known as “ Inflation Accounting” for the reason that prices are usually changing on the higher side.

Advantages:-
Helps in determining profits:- In historial based accounting, real profits cannot be determined in the profit of changes in price . The real profits can be revealed with the help of accounting for price level changes.
True and fair view reporting:- The problem of non- reporting of true and fair view is solved with the help of inflation accounting. Balance sheet is prepared with the help of current value of items instead of historical acquisition cost.
Real Assessment of performance of an enterprise:- Accounting for price level changes also helps the management and other users of financial statements to have a better look upon real performance of the enterprise in inflationary situations.
More realistic return on Investment:- Current cost are also very helpful in determination of more realistic rate of return on capital employed as effect of inflation is included.
It provide accurate picyure of profitability by matching current revenue with current cost.

Limitations:-
Estimation of replacement cost is difficult:- It is very difficult to determine true replacement cost of any fixed asset. Determination of replacement cost with the help of different alternate methods suffers from problem of subjectivity.
Too many calculation:- All methods of accounting for price level changes involves a number of calculations. Accounting work become more complex and complicated with increased number of calculations.
Elements of subjectivity:- It has been observed that all the methods of accounting for price level changes are subject to personal preference. So, there is an element of subjectivity.
Every person cant understand , analyze and interpret the adjusted financial statements.
Inflation accounting is a complicated , time consuming and confusing process, as it requires heavy work of adjustments and calculations.
This method is not suitable for taxation purpose.

Student of Rai Buisness School-New Delhi
Sanjeev Kumar Singh