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Inflation Accounting

Generally, Trading account, Profit and Loss account and Balance Sheets are prepared for the purpose of presenting the financial position of the concern and displaying the operational  results achieved during an accounting period. But these financial statements are prepared on the basis of traditional concept of cost and revenue. i.e., it is expressed in monetary units or rupees. The recording of business transactions under this assumption that monetary unit is constant is known as historical accounting. But this assumption is not valid, because there have been inflationary as well as deflationary conditions. Purchasing power of rupee in India keeps changing from time to time on account of changes in the general price level.