Inflation affects the actual value of recorded assets and liabilities. If changes in dollar values are ignored, investment in assets can either be understated or income overstated. The accuracy of a company’s books is more affected the more long-term assets it possesses.
Constant Dollar Accounting
Constant dollar accounting is adjusting accounting measurements for changing dollar values. Although some accountants highly favor the practice, in reality, constant dollar data is rarely calculated. Perhaps the reason for resistance to the actual practice of constant dollar accounting is because it ignores all changes in value other than changes in the dollar.
However, if an accountant wanted to apply this procedure, he would need to locate a general price index. A general price index is used to translate historical costs recorded in the books into current dollar values. The Consumer Price Index for All Urban Consumers is published by the Bureau of Labor Statistics of the U.S. Department of Labor. It is a reliable source to use.
Current Cost Accounting
Constant dollar accounting is a rather simple process that some accountants use. Most accountants prefer current cost accounting. However, due to the difficulty and costs involved in determining value adjustments, this practice has been, to a great extent, abandoned.
Current cost accounting adjusts recorded data for all value changes, not just dollar changes alone as with constant dollar accounting. It is no small task attempting to calculate asset value changes by reference to their service and income generating ability.
Frequently, when reference is made to value adjustments, it is rarely by making changes directly to the original date. Instead, it is in the form of supplementary information tacked on to financial statements or in general comments on annual reports.
