Inflation Accounting

Inflation accounting is a method of financial reporting that adjusts a company’s financial statements to account for the effects of inflation on asset values, revenues, and expenses. It recognizes that traditional accounting (based on historical costs) may distort the true financial position and profitability during periods of rising prices. This approach ensures that the real value of assets, equity, and profits is accurately represented by reflecting current replacement costs or purchasing power.

Example: If a company purchased machinery for ₹10 lakh five years ago and its replacement cost is now ₹15 lakh due to inflation, inflation accounting adjusts the asset value to reflect the current cost, providing a more realistic financial picture