Basics of inflation accounting

Inflation accounting is an improvisation of cost accounting in presence of a considerable rate of inflation or deflation.Historical information on financial statements is no longer applicable when a business operates in a country where there is a significant amount of market inflation or deflation. In some cases, companies are allowed to use inflation-adjusted figures to counter this issue, restating the numbers to reflect current economic values.

Advantages of Inflation Accounting

The following are the advantage of Inflation Accounting

  • It reflects the current( market value) and not the historical cost of the balance sheet.
  • It is highly effective in times of general inflation or hyperinflation.
  • Depreciation of the business is valued and cost on the current price and not on the historical or the carrying value of the asset which is the correct method.
  • Profit and loss will be more reliable and true.
  • Financial ratios based on figures, adjusted to the current value, are a good reflection of reliable integrity of the company.

Disadvantages of Inflation Accounting

The following are the disadvantage of Inflation Accounting

  • Changing in price is a never-ending process hence it becomes difficult every time to reinstate the figures of the company and present the financial statements.
  • Inflation accounting is a complicated process and it involves long calculation and the data gathering process thus increased cost incurred