WHAT OTHER PEOPLE SAY
The discussions on the limitations of historical cost accounting and the way forward has attracted
comments, findings and suggestions from all angles including committees, researchers and
standard setters.
Early accounting scholars such as Solomon (1986) in his book �...
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
, 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.
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller StudyCenter1. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $15.49. You're not tied to anything after your purchase.
