Page 25 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting Dilfraz Singh, Lovely Professional University

Notes Unit 2: Price Level Accounting

CONTENTS
Objectives
Introduction
2.1 Meaning and Scope
2.2 Inflation Accounting
2.3 Major Drawbacks of Historical Cost System
2.4 Methods of Accounting for Changing Prices
2.4.1 Current Purchasing Power (CPP) Method
2.4.2 Current Cost Accounting Method (CCA) Method
2.4.3 Hybrid Method
2.5 Utility and Applications
2.6 Summary
2.7 Keywords
2.8 Review Questions
2.9 Further Readings

Objectives

After studying this unit, you will be able to:

Define price level accounting
Describe the scope of price level accounting
Identify the major drawbacks of historical cost system
Describe the utility and applications of inflation accounting

Introduction

The basic objective of accounting is the preparation of financial statements in a way that the
income statement should disclose the true profit or loss made by the business during a particular
period while the balance sheet must show a true and fair view of the financial position of the
business on a particular date. Financial statements are prepared in monetary units, i.e., rupees,
in our country. They can serve very well the basic objective if the value of such monetary units
remains stable. This is possible only when there is stability in the price levels. However, it has
been our experience that over a period of time, the prices have not remained stable. There have
been inflationary as well as deflationary tendencies. The inflationary tendencies have been
more frequent and since 1931 they have been dominating economies of all the countries of the
world. It is increasingly being accepted that in spite of all fiscal, monetary and fiscal measures,
these tendencies are likely to stay and it seems unlikely that we will return to an era of stable
prices in the near future.

2.1 Meaning and Scope

In view of the above, it has been increasingly felt that the accountant will be failing in his duties
if he continues to remain contented with the time honoured and traditional system of accounting

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