CPP

The current purchasing power technique or CPP of  price level accounting  make
the companies keep the records and show the financial statements on a historical
cost basis. But apart from this, the method needs the presentation of
supplementary financial statements of items at the end of the accounting period
in the current purchasing power of the money/currency.

This method covers the adjustment of the various items in financial statements
like profit and loss and balance sheet with the help of the general price index.
However, the CPI(Consumer Price Index) and WPI(Wholesale Price Index)
prepared by RBI can be chosen for the conversion of historical costs.

The main goal of this method is that it takes into consideration the changes
resulting in the value of money due to the change in the general price levels. It
presents the financial statements in terms of constant value ( a unit of
measurement) when both revenue and costs changes due to the change in price
levels.

Although this method is simple and followed by companies still it is termed as

only the first ladder for inflationary accounting or price level accounting.

Mechanisms Under The CPP Method:

1. Conversion technique
2. Mid- period conversion
3. Non- monetary and monetary accounts
4. Adjustment of cost of inventory and sales
 LIFO method
 FIFO method
5. Ascertainment of profits
 Net change method
 Conversion of income method
Replacement Cost Accounting Technique

Replacement Cost Accounting Technique is referred to as an improved version of

CPP( current purchasing power technique). The major drawback of CPP is that it
does not consider the price index individually related to the assets of the
company.

In the RCA technique, the index used is directly related to the company’s assets
and not to the general price index. However, using the RCA technique means
adopting different price indices for the conversion of items in the financial
statements. Therefore, it makes the calculation of the relative price index difficult
in a particular case. Furthermore, this method gets criticized by thinkers due to
the element of subjectivity in it.

Current Value Accounting 

In this method of price level accounting, all the liabilities and assets are
represented in the balance sheet at the current values. The difference in the net
assets calculated at the beginning and end of the accounting period is
ascertained which is known as the profit or loss.

Similar to the RCA technique, this method also includes an element of

subjectivity. Moreover, it becomes difficult to determine with a relevant price
index.

Current Cost Accounting

The British Government appointed Sandilands Committee with a chairman named

Mr Francis C.P. Sandilands to recommend and consider the price level
accounting. By recommending the adoption of the current cost accounting
technique as the price level accounting in the reports of the committee (in 1975),
it replaced the replacement cost accounting technique.

Therefore, the current cost accounting technique focused on the current values of
individual items in the formation of financial statements and not on the original
cost/historical cost.

Key characteristics are as follows:

 Depreciation charged on fixed assets is on current value.

 Stocks are valued at current replacement costs at the end of the year
or the market price whichever is lower.
 COGS is not calculated on its original cost but the replacement costs
of the business.
 The surplus that arose from revaluation is not distributed rather
transferred to the revaluation account.
 In addition to the financial statements( balance sheet & profit and
loss a/c), a statement of changes and appropriation account is
prepared.