Inflation and Accounting

Abstract

The fundamental approach to the preparation of accounts over many years has been to use the historical cost of each transaction as the monetary amount for recording it in the books and accounts. For many decades this approach worked perfectly well, and whilst it was not correct to say that the accounts gave the “value” of the items shown, the cost recorded for each item was rarely materially different from the contemporary cost at the time the accounts were prepared. Thus the accounts often gave some indication of the current cost of the items shown therein. However, with the development of rapid inflation, especially during the 1970s, this assumption was generally confounded. No longer did the accounts give a reasonable guide to the current cost, let alone the current value of the items shown. This deficiency presented severe problems to companies using accounts for decision making, and also to external users, including banks