History of Inflation Accounting

History of Inflation Accounting is quite a long one. The alterations in the price index are recorded in the financial statements by the process of inflation accounting. Accounting is a process of keeping track of a business organization’s financial transactions. It has evolved through a long period of time. Many economists have contributed towards the evolution of the accounting process. Same has happened with accounting of inflation.

The history of accounting dates back to the first half of the twentieth century. The accountants of USA and UK have dedicated much of their time in developing the process of inflation accounting. It became important since the time the economies of various countries began to face inflation as a serious impediment to their economic structure. From thereon the effects of inflation on financial statements began to be recorded. This process has faced some changes and has evolved since then.

Historical or normal accounting process assumes the fact that the transactions taking place over a given period of time can be measured by a single stable measuring unit. This unit could be a Pound or a Dollar. This implies that in UK all accounts are prepared in terms of pound and that the balance sheet of one particular year could be compared with another year’s balance sheet. Eventually, if immovable assets were carried over from the last year to the present year then the accountants would count them as fixed assets for the whole of the present year. This process would ensure consistency in the economy but the biggest problem lies in the fact that very few currencies are stable during an inflation. In reality the best most appropriate accounting process ever founded on this subject was withdrawn by UK.

The American Institute of Certified Public Accountants and the American Accounting Association have worked on tracing the effects of inflation on the financial statements. They have been doing the work for over fifty years now. Some of the companies restated their reports during the period of Great Depression to incorporate inflation in their reports. Price-Level Adjusted Statements replaced the Cost-Based Financial Statements. This step was encouraged by the organizations that set the standards. The Financial Accounting Standards Board was planning to pass a proposal during 1970s when due to certain problems they had to withdraw the proposal.