General price level accounting definition
/What is General Price Level Accounting?
General price level accounting involves the restatement of financial statements for the effects of inflation. This approach requires the adjustment of historical costs to reflect their current value, typically by applying a general price index to the baseline costs. This adjustment is useful in periods of high inflation, when it would otherwise be difficult to determine the true financial condition of a business.
Example of General Price Level Accounting
Artemis Corporation purchased a piece of production equipment five years ago for $100,000. Since then, the cumulative inflation rate has been 20%. Under general level price accounting, Artemis would adjust the historical cost of the equipment to reflect the current purchasing power, making it easier to compare with other financial data that is more recent.
This adjustment involves multiplying the historical cost by an inflation adjustment factor of 1.20 (which is 120% of the historical cost, as derived from the cumulative inflation rate). The result is an adjusted cost of $120,000. This amount would be presented at an adjusted value of $120,000 on the balance sheet, rather than the historical $100,000.
Note: The equipment is subject to depreciation, so the company would need to recalculate depreciation based on the adjusted amount.