Page 48 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 2: Price Level Accounting

Financial statements that are prepared according to the conventional or historical cost Notes
accounting system, therefore, do not reflect current economic realities, in case of historical
accounting system, accounts are prepared without regard to changes in the price levels.
The following are the key methods of accounting for price level changes:
i. Current Purchasing Power method
ii. Current Cost Accounting method

iii. Hybrid method
Under CPP method, all items in the financial statements are to be restated for changes in
the general price level.

The Current Cost Accounting (CCA) Method attempts to measure the effect of individual
rates of price changes on all assets and liabilities, i.e., stocks, plant and machinery,
investments, loan, creditors and so on.
Hybrid method is a compromise between the Current Purchasing Power and Current
Cost Accounting methods.

The FAS 33 requires companies to compute inflationary effect on profits in two different
ways: (i) constant dollar method, and (ii) current cost accounting method.

2.7 Keywords

Economic Value: It refers to the discounted (present) value of the net income that will be earned
from using the existing assets during the remaining life of the asset.
Historical Accounting: Under historical accounting system, accounts are prepared without regard
to changes in the price levels.
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.
Net Realisable Value: This is the value which is represented by the net cash proceeds if the
existing asset is sold now.

Price Level Accounting: 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.
Replacement Cost: It refers to the money now required to buy a new asset of the type similar to
the existing asset

2.8 Review Questions

1. Why is it necessary these days to account for price-level changes?
2. Explain the concept of Current Cost Accounting.

3. Explain and illustrate monetary and non-monetary items while accounting for price-level
changes?
4. What approaches have generally been recommended for dealing with the problem of
changes in the purchasing power of money? Which one is the best? Why? Give reasons in
brief.
5. Explain and distinguish between holding gains and operating gains. Give examples.

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