INTRODUCTION

Hitherto, we have illustrated the basic financial statements and the underlying system of double entry book-keeping by using the historical cost method of measurement. This method was chosen because it is the one which has been preferred traditionally by accountants and which is most commonly found in practice. However, the pace of changing prices has, in recent years, called into question the relevance of historical costs as a basis for reporting on the current state and performance of a business, and the historical cost convention has been increasingly eroded, e.g., in the UK many companies practise piecemeal revaluation of certain fixed assets and in certain Latin American countries there are requirements for accounts to be prepared on an inflation-adjusted basis (broadly of the type described as CPP (constant purchasing power) in this chapter). This chapter outlines the main methods which are available for incorporating price changes into accounts. This should be useful for two purposes. Firstly, to give the reader some insight into the accounting problems caused by changing prices and the means by which they might be dealt with. Secondly, the methods of price change accounting provide a useful technical exercise in double entry accounting, which should give the reader further insight into the properties of the accounting framework described in earlier chapters.