Accounting for the Impact of Inflation on a Business Enterprise.

Abstract ABSTRACT: It is widely accepted that a business entity should be able to distribute all of its net income and yet maintain its productive capacity without requiring additional capital contributions. During inflationary periods this can be accomplished by recognizing the impact of inflation in determining net income. The method suggested here accounts for a loss from. inflation as an expense, with the corresponding credits accumulated in owners' equity. The loss from inflation is calculated by multiplying the beginning balance of owners' equity by an inflation factor, which represents the change in the weighted average of prices of various goods and services used by the entity. It is demonstrated that the proposed method helps the entity to retain resources for maintaining the productive capacity in a systematic manner, and that the other methods suggested in literature (general purchasing power and replacement cost accounting) fail to achieve this purpose.