Definition and explanation
Price level accounting seeks to adjust financial statements due to fluctuation in the value of the currency. The currency fluctuation may be due to economic effects like recession and inflation. The adjustments under price level accounting aim to provide a more relevant and accurate assessment of the price levels in connection with the prevailing economic conditions.
Suppose the business had purchased goods two months ago. The price level accounting adjusts the price of the goods in today’s terms. It helps to understand how much value can be perceived by the business at present.
It’s important to note that any gains or losses from environmental fluctuations are recorded in the income statement. So, it’s easier to determine the environmental impact on the balances.
Another great advantage of using this approach is the ease of financial planning. Since data is updated to reflect the current economic situation, it can be more helpful in predicting future consumption and demand of the products.
Further, the use of this accounting method allows a more objective basis for assessing financial performance. That’s because external environmental influences have been used in the formation of financial statements.