Inflation

Inflation is a phenomenon with which all are more or less familiar. It is reflected in the changes  of price level which in turn affects the purchasing power of money. There is an inverse relationship between price level clangs the purchasing power of money higher the price level, the lower is the purchasing power of money and vice-versa. During inflation, "money" income shows a rise but the "real" income will be reduced 'proportionately by the rise in price level. 

Inflation affects various aspects of a business as it affects the economic conditions of the individuals. An individual will find bat though his money income has secretarial over the years, his real income has gone down or has not proportionately increased vis-vis the inflationary trends bringing in changes in price level. In case of business. under rapidly changing price level conditions towards upper trend, the monetary unit by which various important aspects of a business are presented, loses its uniformity value and fails to give die business, a proper and true evidence about its performance. 

Inflation rakes comparison misleading and erroneous. As an illustration, one can consider the performances of various steel plants or say, power plummets. These were established at different periods of time -time gap being considerable. As a result, investment bases are different. Thus, it is noted that 

-plants established earlier will show a higher return on investment - capital base being lower, and -older misplacement  will have much lower change of depreciation than warranted by the real present value of the assets, 

The inflationary effect on business brings out the necessity of inflation accoutering or inflation adjusted financial statements. This is because inflation phenomenon is widespread. Historical cost basis financial results will continue to be presented. These need to be suppleness  by financial statements adjusted for the increase in price. In UK and USA, proper guidelines are now available through Institute of Chartered Accountants of England  Wales (ICAEW) and the Securities Exchange Commission's respectively for inflation adjusted accounting statements. In India, there is no convulsion as yet to present accounts with supplementary statement showing adjustment of prices. Borne organisations, however, undertake revaluation of assets. 

Inflation account should have the following objectives : 

1. To portray real profit or loss as against that by historical costs. 
2. To set out the real financial position in present day terms and to indicate the real capital employed. 
3. To ensure sufficient funds to replace the various assets when the replacement is due. 
4. To indicate operating results in constant monetary unit having regard to the general movement in the prices.