![]() ![]() Further, if assets and liabilities are converted as stated above, it may be found that a loss or gain arises from the difference of the converted total value of assets and that of liabilities. It must be noted that, in the process of conversion, it is only the non monetary items which are adjusted to the current purchasing power of money. (a) Monetary accounts, i.e., money value items (c) Monetary and Non-Monetary Accounts (Gain or Loss on Monetary items):įor the conversion of historical costs in terms of current purchasing power of currency, it is useful to make a distinction between: ![]() And, if the index of the mid year is also not available, then the average of index at the beginning and at the end of the period may be taken. If such an average is not available, the index of the mid-year is taken for this purpose. For conversion of such items, average index of the year can be taken as the one index for all such items. There are several transactions which take place throughout the year such as purchases, sales, expenses, etc. The conversion factor can be calculated with the help of the following formula: For this purpose, historical figures must be multiplied with the conversion factor. The consumer price index or the wholesale price index prepared by the Reserve Bank of India can be taken for conversion of historical costs. In this method, various items of balance sheet and profit loss account are adjusted with the help of recognized general price index. ![]() Mechanism of Preparing Financial Statement under CPP Method: (a) Conversion Technique:Ĭurrent Purchasing Power Method (CPP) requires conversion of historical figures at current purchasing power. (iii) In a country like India, even the price indices may not be correct and it may further cause inaccurate presentation of the financial statements. (ii) The technique seems to be more of theoretical nature than of any practical utility. ![]()
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