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Unit 2: Price Level Accounting

by historical cost. He should move with the time and evolve a suitable system of accounting to Notes
deal with the changing price levels.
Price level accounting may, therefore, be defined as that technique of accounting by which the
financial statements are restated to reflect changes in the general price level. Such changes, as
stated earlier, may be either inflationary or deflationary. Of course, inflation has come to stay
and, therefore, price level accounting is more concerned with inflationary tendencies.

Did u know? What is historical accounting system?
Under historical accounting system, accounts are prepared without regard to changes in
the price levels.

2.2 Inflation Accounting

Inflation accounting is a term describing a range of accounting systems designed to correct
problems arising from historical cost accounting in the presence of inflation. Inflation accounting
is used in countries experiencing high inflation or hyperinflation. For example, in countries
experiencing hyperinflation the International Accounting Standards Board requires corporate
financial statements to be adjusted for changes in purchasing power using a price index.
“Inflation accounting is a system for accounting that purports to record as a built in mechanism
of all economic events in terms of current cost”.
According to author “Inflation accounting is an accounting technique that aims to record business
transactions at current values and to neutralise the impact of changes in the price on the business
transaction”.
“Inflation accounting is a system of accounting just like historical accounting. The difference lies
in the process of matching cost against revenue. In historical accounting cost represents ‘historical
cost’ whereas in inflation accounting cost represents the cost prevailing at the date of sale or at
the reporting time”.
The distinctive features of inflation accounting are as follows:
The recording procedure is automatic

The unit of measurement is not assumed to be stable
It considers all elements of the financial statements and is not concerned only with fixed
assets or closing stock

Realisation principles are not followed rigidly, particularly, when recording long-term
loans and fixed assets at the current value

Self Assessment

State true or false:
1. Price level accounting may be defined as that technique of accounting by which the financial
statements are restated to reflect changes in the general price level.
2. Under historical accounting system, accounts are prepared without regard to changes in
the price levels.

3. Conventional accounting is a system for accounting that purports to record as a built in
mechanism of all economic events in terms of current cost.

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