March
2015
IJMIE Volume 5, Issue 3 ISSN: 2249-0558
_________________________________________________________
INFLATION ACCOUNTING:
MORE QUESTIONS THAN ANSWERS
VINCENT KONADU TAWIAH*
MUHAHERANWA BENJAMIN**
MUKAKIBIBI DOROTHEE***
ABSTRACT
The sole responsibility of accounting is to present what has transpired within a given period
through reporting not what should have occurred or will occur. Despite fitting correctly into the
definition of reporting business event, historical cost accounting in recent times has come under
heavy criticism of lacking behind economic trends due to the use of original cost. Historical cost
accounting has been challenge on principles of uniform monetary measure and matching
concepts. These growing dissatisfaction with historical cost accounting as a method of reporting
financial statements has made it necessary to consider alternative method which is accounting for
price level changes. Unfortunately, this alternative has not been put to practice due to its
unattractiveness. It is against this background that this paper attempts to discuss some novel
questions with recommendations about the existing inflation accounting methods.Aside the
traditional disadvantages of inflation accounting, this article have critically examine the
restatement of items under inflation accounting against basic accounting, economics and finance
principles. In addition the novel questions have been raised on the consistency and rationale
behind the treatment of certain items under price level changes accounting. The article argues
that, inflation accounting is not only inconsistent with accounting principles but also with related
subjects such as economics and finance. In practice inflation accounting creates illusionary or
imaginary profit which does not exist, thus capital maintenance concept is just a paper theory
because much of the profit under inflation accounting is unrealised or holding gain Inflation
*
M.Com, University of Mysore, India, Chartered Accountant, Ghana.
**
Ph.D Scholar, Institute of Management, MMU, Mullana-Ambala, Haryana, India
***
Ph.D scholar, Kampla International University (Uganda )
A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories
Indexed & Listed at: Ulrich's Periodicals Directory ©, U.S.A., Open J-Gage as well as in Cabell’s Directories of Publishing Opportunities, U.S.A.
International Journal of Management, IT and Engineering
http://www.ijmra.us
150
, March
2015
IJMIE Volume 5, Issue 3 ISSN: 2249-0558
_________________________________________________________
accounting distorts the basic objective of reporting what happen within a period or at specific
time. The greatest deterrent to adoption of price level changes accounting is what it is not:
inflation accounting is not present value, net realizable value, or current market values or fair
value and therein lies much of the opposition to its use .In line with these questions, the article
recommends that, inflation accounting can only be meaningful with new accounting system since
the existing system is based on historical cost accounting.
INTRODUCTION
The sole responsibility of accounting is to present what has transpired within a given period
through reporting not what should have occurred or will occur. According to Microsoft Encarta
2009 report means to “give information about something that has happened”. This implies that
financial report should provide information of what happen in a company but not what is
supposed to happen. Simple meaning of report is giving information about past event not
projections. This concept of financial reporting gave birth to historical cost accounting which
reports what has happen in business. Despite fitting correctly into the definition of reporting
business event, historical cost accounting in recent times has come under heavy criticism of
lacking behind economic trends. Different scholars have challenged historical cost accounting on
various accounting principles chiefly on uniform or common monetary unit and matching
concept.
The Uniform or common monetary unit measurement concept holds that all accounting items
should be recorded at constant value of monetary units at the same time. By preparing accounts
we use monetary value usually currency. India rupee is used for recording financial transaction
in India. This rupee has two value face value/nominal and real value. The face value is the
number written on the currency whiles the real value is the purchasing power of the currency.
That is how much of goods the currency can buy. How will a company record the total value of
land such as on 1/4/1981 Rs 1600 per plot, in 16/9/2009 Rs 15000 and in 2/9/2014 Rs 28000?
The historical cost reporting of the sum Rs 44600 does not employ uniform monetary unit
because they are at different price changes. Thus in historical accounting values of incomes and
expenses, assets and liabilities are mix together depending on the date ate which each item was
originally acquired. To apply the uniform monetary unit concept, the individual price must be
restated at a constant monetary unit through price indices. Such treatment will reflect the true
A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories
Indexed & Listed at: Ulrich's Periodicals Directory ©, U.S.A., Open J-Gage as well as in Cabell’s Directories of Publishing Opportunities, U.S.A.
International Journal of Management, IT and Engineering
http://www.ijmra.us
151
2015
IJMIE Volume 5, Issue 3 ISSN: 2249-0558
_________________________________________________________
INFLATION ACCOUNTING:
MORE QUESTIONS THAN ANSWERS
VINCENT KONADU TAWIAH*
MUHAHERANWA BENJAMIN**
MUKAKIBIBI DOROTHEE***
ABSTRACT
The sole responsibility of accounting is to present what has transpired within a given period
through reporting not what should have occurred or will occur. Despite fitting correctly into the
definition of reporting business event, historical cost accounting in recent times has come under
heavy criticism of lacking behind economic trends due to the use of original cost. Historical cost
accounting has been challenge on principles of uniform monetary measure and matching
concepts. These growing dissatisfaction with historical cost accounting as a method of reporting
financial statements has made it necessary to consider alternative method which is accounting for
price level changes. Unfortunately, this alternative has not been put to practice due to its
unattractiveness. It is against this background that this paper attempts to discuss some novel
questions with recommendations about the existing inflation accounting methods.Aside the
traditional disadvantages of inflation accounting, this article have critically examine the
restatement of items under inflation accounting against basic accounting, economics and finance
principles. In addition the novel questions have been raised on the consistency and rationale
behind the treatment of certain items under price level changes accounting. The article argues
that, inflation accounting is not only inconsistent with accounting principles but also with related
subjects such as economics and finance. In practice inflation accounting creates illusionary or
imaginary profit which does not exist, thus capital maintenance concept is just a paper theory
because much of the profit under inflation accounting is unrealised or holding gain Inflation
*
M.Com, University of Mysore, India, Chartered Accountant, Ghana.
**
Ph.D Scholar, Institute of Management, MMU, Mullana-Ambala, Haryana, India
***
Ph.D scholar, Kampla International University (Uganda )
A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories
Indexed & Listed at: Ulrich's Periodicals Directory ©, U.S.A., Open J-Gage as well as in Cabell’s Directories of Publishing Opportunities, U.S.A.
International Journal of Management, IT and Engineering
http://www.ijmra.us
150
, March
2015
IJMIE Volume 5, Issue 3 ISSN: 2249-0558
_________________________________________________________
accounting distorts the basic objective of reporting what happen within a period or at specific
time. The greatest deterrent to adoption of price level changes accounting is what it is not:
inflation accounting is not present value, net realizable value, or current market values or fair
value and therein lies much of the opposition to its use .In line with these questions, the article
recommends that, inflation accounting can only be meaningful with new accounting system since
the existing system is based on historical cost accounting.
INTRODUCTION
The sole responsibility of accounting is to present what has transpired within a given period
through reporting not what should have occurred or will occur. According to Microsoft Encarta
2009 report means to “give information about something that has happened”. This implies that
financial report should provide information of what happen in a company but not what is
supposed to happen. Simple meaning of report is giving information about past event not
projections. This concept of financial reporting gave birth to historical cost accounting which
reports what has happen in business. Despite fitting correctly into the definition of reporting
business event, historical cost accounting in recent times has come under heavy criticism of
lacking behind economic trends. Different scholars have challenged historical cost accounting on
various accounting principles chiefly on uniform or common monetary unit and matching
concept.
The Uniform or common monetary unit measurement concept holds that all accounting items
should be recorded at constant value of monetary units at the same time. By preparing accounts
we use monetary value usually currency. India rupee is used for recording financial transaction
in India. This rupee has two value face value/nominal and real value. The face value is the
number written on the currency whiles the real value is the purchasing power of the currency.
That is how much of goods the currency can buy. How will a company record the total value of
land such as on 1/4/1981 Rs 1600 per plot, in 16/9/2009 Rs 15000 and in 2/9/2014 Rs 28000?
The historical cost reporting of the sum Rs 44600 does not employ uniform monetary unit
because they are at different price changes. Thus in historical accounting values of incomes and
expenses, assets and liabilities are mix together depending on the date ate which each item was
originally acquired. To apply the uniform monetary unit concept, the individual price must be
restated at a constant monetary unit through price indices. Such treatment will reflect the true
A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories
Indexed & Listed at: Ulrich's Periodicals Directory ©, U.S.A., Open J-Gage as well as in Cabell’s Directories of Publishing Opportunities, U.S.A.
International Journal of Management, IT and Engineering
http://www.ijmra.us
151
