Inflation and the balance sheet

Extract

It will be appreciated that inflation is not a purely war-time or post-war phenomenon. The last two wars have considerably increased the rate of inflation, but the process has been more or less continuous for a very long time. Any appreciable degree of inflation can have very far-reaching effects on the accounts of a trading company. It is the intention of this paper to consider the effects of inflation on the Balance Sheet and the Profit and Loss Account and on the interpretation of the figures in these accounts after inflation has done its work, and to consider the extent to which such accounts give a true picture to the Company's Board of Directors and Shareholders.

The preparation of accounts has as its purpose the provision of information to shareholders and to those whose duty it is to control the policy and to undertake the day-to-day management. The needs of the two groups vary to some extent, particularly as regards volume and detail of information. In both cases, however, the immediate aim of accountancy is the provision of a summary record of financial progress during (usually) a year's operations and of financial standing at the end of the period. The standard method of preparing this record uses only actual past figures of income and expenditure, expressed in units of currency.