Price Level Accounting

INTRODUCTION

OBJECTIVE OF PRICE LEVEL ACCOUNTING 

To reveal the true and fair view of the operational results and financial position of the business.

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To maintain operational efficiency of the business.

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To ensure adequate funds for the replacement of various assets.

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To indicate the real worth of the business.

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To strengthen decision making process.

ADVANTAGES 

OF PRICE LEVEL ACCOUNTING

It enables the company to present more realistic view of its profitability because current revenues are matched with current cost.

Depreciation charged on current value of asset in inflation accounting further enables a firm to show accounting profit more nearer to economic profit and replacement of these assets when required.  It enables a company to maintained its real capital by avoiding payment of dividend & taxes out of its capital due to inflated profit in historical accounting. 

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Balance sheet reveals in more realistic and true and fair view of financial position of a concern because assets are shown at current values and not at distorted value as in historical accounting.

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When financial statement are presented, adjusted with the price level changes, it makes possible to compare the profitability of two concern setup at different times.

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Investors, employees and the public at large are not misled by inflated book profits because inflation accounting shows more realistic profits

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The financial statement prepared by the company adjusted to the price level changes also improve its social image.

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Inflation accounting also effects the investment market as it helps to establish a realistic price for the shares of a company

DISADVANTAGES OF INFLATION ACCOUNTING 

Adjusting accounts to price level changes is a never-ending process. It involves constant changes and alteration in the financial statements.

Price level accounting involves many calculations and makes financial statements so complicated and confusing.  The concepts of price level accounting appears to be more theoretical importance than practical. 

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Depreciation charged on current values of fixed assets is not acceptable under the income tax Act 1961.

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During deflation, when the price are falling, adjustment of accounts to price level changes will mean charging lesser depreciation and overstatement of profits.

METHODS OR TECHNIQUES OF PRICE LEVEL ACCOUNTING 

Current Purchasing Power Technique (CPP)

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Replacement Cost Accounting Technique (RCA)

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Current Value Accounting Technique (CVA)

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Current Cost Accounting (CCA)

CURRENT PURCHASING POWER TECHNIQUE (CPP) 

It is require for companies to keep their records and present the financial statements on conventional historical cost basis.

In this method the various items of financial statements, i.e. balance sheet and profit & loss accounts are adjusted with the help of rcognised general price index.  Price level or price index are prepared by the RBI and can be taken for the conversion of historical costs. 

MECHANISM OF PREPARING FINANCIAL STATEMENT UNDER CPP METHOD 

Conversion Technique Conversion Factor  Converted figure 

QUE:

A building was purchased in 2000 at a price of rs.

80,000. the general price index at that time was 150, convert the figure in current rupees on 31.12.2007 when index stood at 300.

DO IT YOURSELF 

Mr. A purchased a land in 2000 for rs 50,000 when the general price index was 125. he sold his land in 2007 for Rs 1,05,000 when the general price index was 300.calculate the profit and loss on the sale of the land keeping a side the price level changes

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Mid- period conversion

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Monetary and non-monetary Accounts

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Adjustment of Cost of sales and inventory

REPLACEMENT COST ACCOUNTING TECHNIQUE

CURRENT VALUE ACCOUNTING TECHNIQUE

CURRENT COST ACCOUNTING TECHNIQUE 

Current cost of sale adjustment (COSA)

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Depriciation adjustment

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Backlog Depreciation

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Monetary working capital adjustment (MWCA)

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Current Cost Operating Profit

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Gearing Adjustment