Document Type


Publication Date

Fall 1983

Publication Source

International Journal of Accounting


The complexities of accounting for the effects of changing prices on financial statements could be lessened with the use of simpler accounting methods. Because of existing complexities, even industrialized countries require only their larger business entities to provide inflation-adjusted information. Such information is prepared by making numerous adjustments to the traditional, historical cost-based data. For example, in the United Kingdom, inflation-adjusted income is calculated in two stages: operating profit and profit attributable to shareholders. These calculations are based on the concept of value to the business and require complicated adjustments with respect to cost of goods sold, depreciation, monetary working capital, and financial leverage. In the United States, requirements are even more extensive; selected items must be reported under two different methods: current cost and restatement of historical cost in constant dollars. Absence of sophisticated accounting systems to produce the inflation-adjusted information and fear of excessive costs to develop new accounting systems are the main reasons smaller corporations in industrialized nations and business entities in most developing countries are not being asked to report inflation-related information.

Furthermore, it is often observed that when inflation rates are rather low, the interest in inflation accounting declines to a low level. The distorting effect of inflation, whether high or low, on the financial statements of all kinds of businesses, large or small, in all countries, creates the necessity for financial statement users to assess the impact of inflation. It is essential, therefore, that business entities in developing nations, as well as in industrialized countries, possess techniques that allow the reporting of the effects of changing prices on their financial statements to be both feasible and accurate, regardless of the extent of such changes. In the accounting literature, several simple methods based on one-line adjustments of net income and owner’s equity have been proposed.

Although such methods are claimed to be quite effective, they have received little exposure or attention. In his dissent to Statement of Financial Accounting Standards (SFAS) No. 33, David Mosso refers to one such method as deserving more support than it has thus far received. Similarly, in his dissent to Statement of Financial Accounting Concepts (SFAC) No.5, John March suggests that “income must first deduct a provision for maintenance of capital in real terms” and further states that “complex implementation should not be necessary to provide for the erosion of capital caused by the effects of inflation.”

This paper explores and evaluates one-line adjustments as a possible alternative to the more complex methods used previously. The primary purpose of inflation accounting is discussed first, followed by an attempt to develop criteria for the evaluation of inflation accounting methods. Three one-line adjustment methods are then explained, and each is evaluated in terms of these criteria.

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Center for International Education and Research in Accounting, University of Illinois at Urbana-Champaign





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