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What is Inflation Accounting?

Inflation Accounting

As the name suggests, accounting techniques that are used during the times of high inflation are called Inflation Accounting. It is widely used to counter the effect of historical cost accounting at the times of high inflation. It is also called price Level Accounting.

Inflation has an effect on prices, but corporate finances also become vulnerable due to the rise in prices and financial statements may not show the true value. Adjustments are made to rectify this so the financial statements show a true picture of business.

In developed nations, the inflation rate is generally stabilized. Developing and under-developed nations would generally have a high rate of inflation. Therefore, in the 2nd case, examining the books of accounts is difficult, because historical information is less convincing and relevant as prices increase rapidly.