On the Relevance of Price-Level Accounting

Abstract

Accountants have long been frustrated by the inability of the conventional accounting model to cope with changes in prices over time in what they deem to be a satisfactory way. Numerous suggestions have been made for dealing with this problem. Some involve a revision of the formal accounting model itself; other suggestions have been limited to finding means for providing information in supplementary form outside the formal model. In discussing this problem, a distinction is usually made between ways of accounting for price changes involving the specific assets held by the entity in question, and changes in aggregate prices which tend to alter the purchasing power of the monetary unit in which the accounting measurements are expressed. It seems to be generally recognized that while accounting for changes in specific prices and accounting for changes in the price level are not independent, they are logically separable.' For this reason, we are justified in considering the price-level problem by itself, as is done in this paper. The problem is to account for the changes in the general price level between points in time, a change that is viewed as the direct inverse of the change in the purchasing power of the monetary unit. The measurement of this change is almost universally considered accomplishable by use of a weighted average of representative prices.2 Conceptually, the choice of weights and commodities to be included in the index presents an insurmountable problem since most individuals and firms do not usually mix