PRICE LEVEL ACCOUNTING

PRICE do not remain constant. Price keeps on changing due to

Economic factors Social factors Political factors

 Change in price levels cause two types of economic conditions:-

INFLATION

DEFLATION

 INFLATION :-rise in prices OR Decrease in the value of money

DEFLATION :- Fall in prices OR Increase in the value of money These changes in the price levels lead to inaccurate presentation of financial statements

VARIOUS TRANSACTIONS INCLUDE

Current assets acquired and current liab incurred at different points of time in the accounting period. Various Expenses incurred and incomes earned at different points of time Fixed assets maintained on historical or cost basis.

REASONS FOR THE EMERGENCE OF PRICE LEVEL ACCOUNTING

Inaccurate presentation of financial statements due the changes in price level. Inflated book profits.(depreciation on fixed assets original cost ) Payment of extra dividend due to charging less depreciation. Difficulties in replacement of fixed asset during inflation.

METHODS/TECHNIQUES OF PRICE LEVEL ACCOUNTING

Current Purchasing power technique

Replacement Cost Accounting Technique

Current Value Accounting Technique

Current Cost Accounting

 CPP technique of accounting requires the companies to keep their financial statements on historical cost basis but it further requires presentation of statements in terms of current purchasing power of currency. The financial statements are adjusted with the help of recognized General Price Index.

CUURENT PURCASING POWER TECHNIQUE(CPP)

General price index

a)Consumer price index

b) Wholesale price index

Prepared by the RBI

MECHANISM OF PREPARING FINANCIAL STATEMENT UNDER CPP METHOD

A) Conversion Technique In this method various items of financial statements are adjusted with the help of GENERAL PRICE INDEX. Conversion factor= Current price index previous price index

Converted figure= Historical figure X Conversion factor

 EXAMPLE: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 31-12-2010 when the index stood at 300.

 B) Mid period conversions: For conversion of such items average index of the year can be taken . C) Monetary and Non monetary accounts:-

Monetary - cash -debtors -B/R .

Non monetary -L & B -Plant & Machinery - Stock

 Adjustment of Cost of sales and inventory: LIFO FIFO

A) for current purchases- the average index of the year B) For opening stock-the index at the beginning of the year C) for purchases of previous year:-the average index of the relevant year.

 From the information given below ascertain the cost of sales and closing inventory under CPP method if (i) LIFO and (ii) FIFO Inventory on 1-1-2007 20,000 Purchases during 2007 1,00,000 Inventory on 31-12-2007 30,000 GPI:On 1.1.2007 160 Average for the year 180 On 31-12-2007 200